As filed with the Securities and Exchange Commission on January 22, 2019
Securities Act File No. 333-191837
Investment Company Act File No. 811-22903
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION
STATEMENT
UNDER
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THE SECURITIES ACT OF 1933
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 211
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and/or
REGISTRATION STATEMENT
UNDER
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THE INVESTMENT COMPANY ACT OF 1940
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Amendment No. 213
J.P. Morgan
Exchange-Traded Fund Trust
(Exact Name of Registrant as Specified in Charter)
270 Park Avenue
New
York, New York 10017
(Address of Principal Executive Offices) (Zip Code)
Registrants Telephone Number, including Area Code: (800) 480-4111
Gregory S. Samuels, Esq.
J.P. Morgan Investment Management Inc.
270 Park Avenue
New
York, New York 10017
(Name and Address of Agent for Service)
With copies to:
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Zachary Vonnegut-Gabovitch, Esq.
JPMorgan Chase & Co.
270 Park Avenue
New York,
NY 10017
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Jon S. Rand, Esq.
Dechert LLP
1095 Avenue
of the Americas
New York, NY 10036
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It is proposed that this filing
will become effective (check appropriate box):
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immediately upon filing pursuant to paragraph (b)
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on January 23, 2019 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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on (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of rule 485.
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If appropriate, check the following box:
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The post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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Prospectus
J.P. Morgan Exchange-Traded Funds
January 23, 2019
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JPMorgan Core Plus Bond ETF
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Ticker: JCPB
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Listing Exchange: Cboe BZX Exchange, Inc.
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Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange
Commission, paper copies of the Funds annual and semi-annual shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports. Instead, the reports will be made available on the Funds
website www.jpmorganfunds.com and you will be notified by mail each time a report is posted and provided with a website to access the report. If you already elected to receive shareholder reports electronically, you will not be affected by this
change and you need not take any action.
You may elect to receive shareholder reports and other communications from the Fund
electronically anytime by contacting your financial intermediary (such as a broker dealer, bank, or retirement plan).
Alternatively, you may elect to receive paper copies of all future reports free of charge by contacting your financial intermediary. Your
election to receive paper reports will apply to all funds held within your account(s).
The Securities and Exchange
Commission has not approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
CONTENTS
JPMorgan Core Plus Bond ETF
Ticker: JCPB
What is the goal of the Fund?
The Fund seeks a high level of current income by investing
primarily in a diversified portfolio of
high-,
medium-
and
low-grade
debt securities.
Fees and Expenses of the Fund
The
following table describes the fees and expenses that you may pay if you buy and hold Shares of the Fund. Investors purchasing Shares in the secondary market may be subject to costs (including customary brokerage commissions) charged by their broker.
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ANNUAL FUND
OPERATING EXPENSES
(Expenses that you pay each year as a percentage of the value
of your investment)
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Management Fees
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0.30
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%
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Other Expenses
1
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0.37
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Total Annual Fund Operating Expenses
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0.67
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Fee Waivers and/or Expense Reimbursements
2
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(0.27
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Total Annual Fund Operating
Expenses
After Fee Waivers and/or Expense Reimbursements
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0.40
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1
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Other Expenses are based on estimated amounts for the current fiscal year.
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2
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The Funds adviser and/or its affiliates have contractually agreed to waive fees and/or reimburse expenses to the extent Total Annual Fund
Operating Expenses (excluding acquired fund fees and expenses other than certain money market fund fees as described below, dividend and interest expenses related to short sales, interest, taxes, expenses related to litigation and potential
litigation and extraordinary expenses) exceed 0.40% of the average daily net assets of the Fund. The Fund may invest in one or more money market funds advised by the adviser or its affiliates (affiliated money market funds). The Funds adviser
has contractually agreed to waive fees and/or reimburse expenses in an amount sufficient to offset the fees and expenses of the affiliated money market funds incurred by the Fund because of the Funds investment in such money market funds.
These waivers are in effect through 1/31/22, at which time the adviser and/or its affiliates will determine whether to renew or revise them. To the extent that the Fund engages in securities lending, affiliated money market fund fees and expenses
resulting from the Funds investment of cash received from securities lending borrowers are not included in Total Annual Fund Operating Expenses and therefore, the above waivers do not apply to such investments.
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Example
This Example is intended to help
you compare the cost of investing in the Fund with the cost of investing in other funds. The Example does not take into account brokerage commissions that you pay when purchasing or selling Shares of the Fund. The Example assumes that you invest
$10,000 in the Fund for the time periods indicated. The Example also assumes that your
investment has a 5% return each year and that the Funds operating expenses are equal to the total annual fund operating expenses after fee waivers and expense reimbursements shown in the
table through 1/31/22 and total annual fund operating expenses thereafter. Your actual costs may be higher or lower.
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WHETHER OR NOT YOU SELL YOUR SHARES, YOUR
COST WOULD
BE
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1 Year
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3 Years
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SHARES ($)
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41
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128
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Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and
may result in higher taxes when Shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the Example, affect the Funds performance. The Fund has not yet commenced operations as of the
date of this prospectus. Therefore, there is no portfolio turnover rate for the Fund to report at this time.
What are the Funds main
investment strategies?
As part of its main investment strategy, the Fund may principally invest in corporate bonds, U.S. treasury obligations
and other U.S. government and agency securities and asset-backed, mortgage-related and mortgage-backed securities. The Fund also may invest in debt securities rated below investment grade (i.e., high yield or junk bonds) or the unrated equivalent,
including from foreign and emerging markets.
As a matter of non-fundamental policy, the Fund will ordinarily invest at least 80% of its Assets in
bonds. For purposes of this policy, Assets means net assets plus the amount of borrowings for investment purposes. The Fund will provide shareholders at least 60 days prior notice of any change of this policy. The Funds average
weighted maturity will ordinarily range between five and twenty years. The Fund may have a longer or shorter average weighted maturity under certain market conditions and the Fund may shorten or lengthen its average weighted maturity if deemed
appropriate for temporary defensive purposes. Because of the Funds holdings in asset-backed, mortgage-backed and similar securities, the Funds average weighted maturity is equivalent to the average weighted maturity of the cash flows in
the securities held by the Fund given certain prepayment assumptions (also known as weighted average life).
The adviser will invest across the
credit spectrum to provide the Fund exposure to various credit rating categories. Under normal conditions, at least 65% of the Funds Assets will be invested in
JPMorgan Core Plus Bond ETF
(continued)
securities that, at the time of purchase, are rated investment grade by a nationally recognized statistical
rating organization or in securities that are unrated but are deemed by the adviser to be of comparable quality. The balance of the Funds Assets are not required to meet any minimum quality rating although the Fund will not, under normal
circumstances, invest more than 35% of its Assets in below investment grade securities (or the unrated equivalent). Such securities may include so called distressed debt. Distressed debt includes securities of issuers experiencing
financial or operating difficulties, securities where the issuer has defaulted in the payment of interest or principal or in the performance of its covenants or agreements, securities of issuers that may be involved in bankruptcy proceedings,
reorganizations or financial restructurings or securities of issuers operating in troubled industries. As part of its principal investment strategy, the Fund may invest in debt securities structured as private placements, restricted securities and
other unregistered securities.
The Fund may invest a significant portion of its Assets in mortgage-related and mortgage-backed securities at the
advisers discretion. Mortgage-related and mortgage-backed securities may be structured as collateralized mortgage obligations (agency and
non-agency),
stripped mortgage-backed securities (interest-only
or principal-only), commercial mortgage-backed securities, mortgage pass-through securities and cash and cash equivalents. The Fund expects to invest no more than 10% of its assets in
sub-prime
mortgage-related securities at the time of purchase. The Fund may also enter into dollar rolls in which the Fund sells mortgage-backed securities and at the same time contracts to buy back very similar securities on a future date.
Up to 35% of the Funds Assets may be invested in foreign securities, including securities denominated in foreign currencies (some of which
may be below investment grade securities). Foreign securities include securities issued by foreign governments or their agencies and instrumentalities and companies that are incorporated outside the United States, including securities from issuers
in countries whose economies are less developed (emerging markets). The Funds investments in below investment grade securities or the unrated equivalent including below investment grade foreign securities will not, under normal circumstances,
exceed more than 35% of the Funds Assets.
In addition to direct investments in securities, derivatives, which are instruments that have a
value based on another instrument, exchange rate or index, may be used as substitutes for securities in which the Fund can invest. The Fund may use futures contracts, options, swaps and forward contracts as tools in the management of portfolio
assets.
The Fund may use derivatives to hedge various investments, for risk management, for efficient portfolio management
and/
or to increase income or gain to the Fund. In addition to the mortgage dollar rolls as described above, the Fund may utilize other relative value strategies involving credit-oriented trades,
combinations of derivatives, and combinations of derivatives and fixed income securities. The Fund may also utilize foreign currency derivatives such as currency forwards to hedge its non-dollar investments back to the U.S. dollar or use such
derivatives to gain or adjust exposure to particular foreign securities, markets or currencies.
The Fund may use CPI-U swaps to hedge
inflation risk associated with certain debt securities held by the Fund. The Fund may invest in other ETFs in order to gain exposure to particular markets, including foreign and emerging markets, or asset classes.
The adviser allocates the Funds assets among a range of sectors based on strategic positioning and other tactical considerations. In buying and selling
investments for the Fund, the adviser looks for market sectors and securities that it believes will perform well over time. The adviser selects individual securities after performing a risk/reward analysis that includes an evaluation of interest
rate risk, credit risk, currency risk, legal provisions and the structure of the transactions.
As part of its principal investment strategy
and for temporary defensive purposes, any portion of the Funds total assets may be invested in cash and cash equivalents, including affiliated money market funds.
The Funds Main Investment Risks
The Fund is subject to management risk and may not achieve
its objective if the advisers expectations regarding particular instruments or markets are not met.
An investment in this Fund or any other fund may not provide a complete investment program. The suitability
of an investment in the Fund should be considered based on the investment objective, strategies and risks described in this prospectus, considered in light of all of the other investments in your portfolio, as well as your risk tolerance, financial
goals and time horizons. You may want to consult with a financial advisor to determine if this Fund is suitable for you.
The Fund is
subject to the main risks noted below, any of which may adversely affect the Funds NAV, market price, performance and ability to meet its investment objective.
General Market Risk.
Economies and financial markets throughout the world are becoming increasingly interconnected, which increases the likelihood that events or conditions in one country or region
will adversely impact markets or issuers in other countries or regions. Securities in the Funds portfolio may underperform in comparison to securities in the general financial markets, a particular financial market or other asset
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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classes, due to a number of factors, including inflation (or expectations for inflation), interest rates, global demand for particular products or resources, natural disasters or events,
terrorism, regulatory events and government controls.
Interest Rate Risk.
The Funds investments in bonds and other debt securities
will change in value based on changes in interest rates. If rates rise, the value of these investments generally declines. Securities with greater interest rate sensitivity and longer maturities generally are subject to greater fluctuations in
value. The Fund may invest in variable and floating rate debt securities. Although these instruments are generally less sensitive to interest rate changes than fixed rate instruments, the value of floating rate securities may decline if their
interest rates do not rise as quickly, or as much, as general interest rates. Given that the Federal Reserve has been raising interest rates, the Fund may face a heightened level of interest rate risk.
Credit Risk.
The Funds investments are subject to the risk that issuers and/or counterparties will fail to make payments when due or default
completely. If an issuers or counterpartys financial condition worsens, the credit quality of the issuer or counterparty may deteriorate, making it difficult for the Fund to sell such investments.
Government Securities Risk.
The Fund invests in securities issued or guaranteed by the U.S. government or its agencies and instrumentalities (such as
securities issued by Ginnie Mae, Fannie Mae, or Freddie Mac). U.S. government securities are subject to market risk, interest rate risk and credit risk. Securities, such as those issued or guaranteed by Ginnie Mae or the U.S. Treasury, that are
backed by the full faith and credit of the United States are guaranteed only as to the timely payment of interest and principal when held to maturity and the market prices for such securities will fluctuate. Notwithstanding that these securities are
backed by the full faith and credit of the United States, circumstances could arise that would prevent the payment of interest or principal. This would result in losses to the Fund. Securities issued or guaranteed by U.S. government-related
organizations, such as Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. government and no assurance can be given that the U.S. government will provide financial support. Therefore, U.S. government-related
organizations may not have the funds to meet their payment obligations in the future.
Foreign Securities and Emerging Markets Risk.
Investments in foreign currencies and foreign issuers are subject to additional risks, including political and economic risks, civil conflicts and war, greater volatility, expropriation and nationalization risks, sanctions or other measures by the
United States or other governments, currency fluctuations, higher transaction costs, delayed settlement, possible foreign controls on investment, liquidity risks, and less stringent investor protection and disclosure standards of foreign markets. In
certain markets where securities and other instruments are not traded delivery versus payment, the Fund
may not receive timely payment for securities or other instruments it has delivered or receive delivery of securities paid for and may be subject to increased risk that the counterparty will fail
to make payments or delivery when due or default completely.
Events and evolving conditions in certain economies or markets may alter the
risks associated with investments tied to countries or regions that historically were perceived as comparatively stable becoming riskier and more volatile. These risks are magnified in countries in emerging markets. Emerging market
countries typically have less-established market economies than developed countries and may face greater social, economic, regulatory and political uncertainties. In addition, emerging markets typically present greater illiquidity and price
volatility concerns due to smaller or limited local capital markets and greater difficulty in determining market valuations of securities due to limited public information on issuers.
Geographic Focus Risk
. The Fund may focus its investments in one or more regions or small groups of countries. As a result, the Funds performance may be subject to greater volatility than a more
geographically diversified fund.
Sovereign Debt Risk.
The Fund may invest in securities issued or guaranteed by foreign governmental
entities (known as sovereign debt securities). These investments are subject to the risk of payment delays or defaults, due, for example, to cash flow problems, insufficient foreign currency reserves, political considerations, large debt positions
relative to the countrys economy or failure to implement economic reforms. There is no legal or bankruptcy process for collecting sovereign debt.
Currency Risk.
Changes in foreign currency exchange rates will affect the value of the Funds securities and the price of the Funds Shares. Generally, when the value of the U.S. dollar
rises in value relative to a foreign currency, an investment impacted by that currency loses value because that currency is worth less in U.S. dollars. Currency exchange rates may fluctuate significantly over short periods of time for a number of
reasons, including changes in interest rates. Devaluation of a currency by a countrys government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally
are not as regulated as securities markets, may be riskier than other types of investments and may increase the volatility of the Fund. Although currently the Fund anticipates at least 50% of the Funds net assets will be denominated in U.S.
dollars or hedged back to U.S. dollars, the Fund has the flexibility to have greater exposure to non-U.S. dollar investments. In addition, the Funds use of foreign currency derivatives may not be successful in hedging non-dollar investments
back to the U.S. dollar and the use of such strategies may lower the Funds potential returns.
Asset-Backed, Mortgage-Related and
Mortgage-Backed Securities Risk.
The Fund may invest in asset-backed, mortgage-related and mortgage-backed securities including so-called
JPMorgan Core Plus Bond ETF
(continued)
sub-prime mortgages that are subject to certain other risks including prepayment and call risks.
When mortgages and other obligations are prepaid and when securities are called, the Fund may have to reinvest in securities with a lower yield or fail to recover additional amounts (
i.e.
, premiums) paid for securities with higher interest
rates, resulting in an unexpected capital loss and/or a decrease in the amount of dividends and yield. In periods of rising interest rates, the Fund may be subject to extension risk, and may receive principal later than expected. As a result, in
periods of rising interest rates, the Fund may exhibit additional volatility. During periods of difficult or frozen credit markets, significant changes in interest rates, or deteriorating economic conditions, such securities may decline in value,
face valuation difficulties, become more volatile and/or become illiquid. Collateralized mortgage obligations (CMOs) and stripped mortgage-backed securities, including those structured as Interest Only and Principal Only CMOs (IOs and POs), are more
volatile and may be more sensitive to the rate of prepayments than other mortgage-related securities. The risk of default, as described under
Credit Risk
, for sub-prime mortgages is generally higher than other types of
mortgage-backed securities. The structure of some of these securities may be complex and there may be less available information than other types of debt securities.
Prepayment Risk.
The issuer of certain securities may repay principal in advance, especially when yields fall. Changes in the rate at which prepayments occur can affect the return on investment of
these securities. When debt obligations are prepaid or when securities are called, the Fund may have to reinvest in securities with a lower yield. The Fund also may fail to recover additional amounts (
i.e.
, premiums) paid for securities with
higher coupons, resulting in an unexpected capital loss.
High Yield Securities and Loan Risk.
The Fund invests in instruments including
junk bonds, Loans and instruments that are issued by companies that are highly leveraged, less creditworthy or financially distressed. These investments are considered to be speculative and are subject to greater risk of loss, greater sensitivity to
economic changes, valuation difficulties and potential illiquidity. Such investments are subject to additional risks including subordination to other creditors, no collateral or limited rights in collateral, lack of a regular trading market,
extended settlement periods, liquidity risks, prepayment risks, potentially less protection under the federal securities laws and lack of publicly available information. The Fund will not have direct recourse against the issuer of a loan
participation. Loans that are deemed to be liquid at the time of purchase may become illiquid.
No active trading market may exist for some of the
instruments and certain investments may be subject to restrictions on resale. In addition, the settlement period for Loans is uncertain as there is no standardized settlement schedule applicable to
such investments. Certain Loans may take more than seven days to settle. The inability to dispose of the Funds securities and other investments in a timely fashion could result in losses to
the Fund. Because some instruments may have a more limited secondary market, liquidity and valuation risk is more pronounced for the Fund than for funds that invest primarily in other types of fixed income instruments or equity securities. When
Loans and other instruments are prepaid, the Fund may have to reinvest in instruments with a lower yield or fail to recover additional amounts (i.e., premiums) paid for these instruments, resulting in an unexpected capital loss and/or a decrease in
the amount of dividends and yield. Certain Loans may not be considered securities under the federal securities laws and, therefore, investments in such Loans may not be subject to certain protections under those laws. In addition, the adviser may
not have access to material non-public information to which other investors may have access.
Derivatives Risk
. Derivatives, including
foreign forward currency contracts, options, futures contracts and swaps, may be riskier than other types of investments and may increase the volatility of the Fund. Derivatives may be sensitive to changes in economic and market conditions and may
create leverage, which could result in losses that significantly exceed the Funds original investment. Derivatives expose the Fund to counterparty risk, which is the risk that the derivative counterparty will not fulfill its contractual
obligations (and includes credit risk associated with the counterparty). Certain derivatives are synthetic instruments that attempt to replicate the performance of certain reference assets. With regard to such derivatives, the Fund does not have a
claim on the reference assets and is subject to enhanced counterparty risk. Derivatives may not perform as expected, so the Fund may not realize the intended benefits. When used for hedging, the change in value of a derivative may not correlate as
expected with the currency, security or other risk being hedged. In addition, given their complexity, derivatives expose the Fund to risks of mispricing or improper valuation.
Privately Placed Securities Risk.
Privately placed securities generally are less liquid than publicly traded securities and the Fund may not always be able to sell such securities without experiencing
delays in finding buyers or reducing the sale price for such securities. The disposition of some of the securities held by the Fund may be restricted under federal securities laws. As a result, the Fund may not be able to dispose of such investments
at a time when, or at a price at which, it desires to do so and may have to bear expenses of registering these securities, if necessary. These securities may also be difficult to value.
Industry and Sector Focus Risk
. At times the Fund may increase the relative emphasis of its investments in a particular industry or sector. The prices of securities of issuers in a particular industry
or sector may be more susceptible to fluctuations due
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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to changes in economic or business conditions, government regulations, availability of basic resources or supplies, or other events that affect that industry or sector more than securities of
issuers in other industries and sectors. To the extent that the Fund increases the relative emphasis of its investments in a particular industry or sector, the Funds Share values may fluctuate in response to events affecting that industry or
sector.
Repurchase Agreement Risk.
Repurchase agreements involve some risk to the Fund that the counterparty does not meet its obligation
under the agreement.
ETF Shares Trading Risk.
Shares are listed for trading on the Cboe BZX Exchange, Inc. (the Exchange)
and are bought and sold in the secondary market at market prices. The market prices of Shares are expected to fluctuate, in some cases materially, in response to changes in the Funds NAV, the intraday value of the Funds holdings and
supply and demand for Shares. The adviser cannot predict whether Shares will trade above, below or at their NAV. Disruptions to creations and redemptions, the existence of significant market volatility or potential lack of an active trading market
for the Shares (including through a trading halt), as well as other factors, may result in the Shares trading significantly above (at a premium) or below (at a discount) to NAV or to the intraday value of the Funds holdings. During such
periods, you may incur significant losses if you sell your Shares.
The securities held by the Fund may be traded in markets that close at a
different time than the Exchange. Liquidity in those securities may be reduced after the applicable closing times. Accordingly, during the time when the Exchange is open but after the applicable market closing, fixing or settlement times, bid-ask
spreads on the Exchange and the corresponding premium or discount to the Shares NAV may widen.
Authorized Participant Concentration
Risk.
Only an authorized participant may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of intermediaries that act as authorized participants and none of these authorized participants is or
will be obligated to engage in creation or redemption transactions. To the extent that these intermediaries exit the business or are unable to or choose not to proceed with creation and/or redemption orders with respect to the Fund and no other
authorized participant creates or redeems, Shares may trade at a discount to NAV and possibly face trading halts and/or delisting.
Cash
Transactions Risk.
Unlike certain ETFs, the Fund may effect creations and redemptions in cash or partially in cash. Therefore, it may be required to sell portfolio securities and subsequently recognize gains on such sales that the Fund might not
have recognized if it were to distribute portfolio securities in-kind. As such, investments in Shares may be less tax-efficient than an investment in an ETF that distributes portfolio securities entirely in-kind.
CPI-U Strategy Risk.
The Fund may use CPI-U swaps to hedge inflation risk associated with certain debt
securities held by the Fund. There is no guarantee that such strategy will be effective in protecting the return from such securities from inflation risks. In addition, CPI-U swaps are subject to Derivatives Risk.
ETF and Investment Company Risk.
Shareholders bear both their proportionate share of the Funds expenses and similar expenses of an ETF or other
investment company. The price and movement of an index-based ETF may not track the underlying index and may result in a loss. ETFs may trade at a price below their NAV (also known as a discount).
Mortgage Dollar Roll Risk.
The Fund may enter into mortgage dollar rolls involving mortgage pass-through securities including mortgage TBAs and other
mortgage-backed securities. During the period between the sale and repurchase in a mortgage dollar roll transaction, the Fund will not be entitled to receive interest and principal payments on the securities sold. Losses may arise due to changes in
the value of the securities or if the counterparty does not perform under the terms of the agreement. If the counterparty files for bankruptcy or becomes insolvent, the Funds right to repurchase or sell securities may be limited. Short sales
of mortgage TBAs and engaging in mortgage dollar rolls may be subject to leverage risks as described under
Derivatives Risk.
In addition, mortgage dollar rolls may increase interest rate risk and result in an increased portfolio
turnover rate which increases costs and may increase taxable gains.
Investments in the Fund are not deposits or obligations of, or guaranteed or endorsed by, any bank and are
not insured or guaranteed by the FDIC, the Federal Reserve Board or any other government agency.
You could lose money investing in the Fund.
The Funds Past Performance
The Fund has
not commenced operations as of the date of this prospectus and therefore, has no reportable performance history. Once the Fund has operated for at least one calendar year, a bar chart and performance table will be included in the prospectus to show
the performance of the Fund. When such information is included, this section will provide some indication of the risks of investing in the Fund by showing changes in the Funds performance history from year to year and showing how the
Funds average annual total returns compare with those of a broad measure of market performance. Although past performance of the Fund is no guarantee of how it will perform in the future, historical performance may give you some indication of
the risks of investing in the Fund.
JPMorgan Core Plus Bond ETF
(continued)
Management
J.P. Morgan Investment Management Inc.
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Portfolio Manager
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Managed the
Fund Since
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Primary Title
with
Investment Adviser
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Steven Lear
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2019
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Managing Director
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Richard Figuly
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2019
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Managing Director
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J. Andrew Norelli
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2019
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Managing Director
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Purchase and Sale of Shares
The Fund will issue and redeem Shares at NAV only in a large specified number of Shares called a Creation Unit or multiples thereof. A Creation Unit consists of 100,000 Shares. The Fund generally
issues and redeems Creation Units in return for a designated portfolio of securities and an amount of cash.
Except
when aggregated in
Creation Units,
Shares are not redeemable securities of the
Fund.
Individual
Shares of the Fund may only be purchased and sold in secondary market transactions through brokers. Shares of the Fund are listed for trading on the Exchange, and because Shares trade at market prices rather than NAV, Shares of the Fund may trade at
a price greater than or less than NAV. Certain affiliates of the Fund and the adviser may purchase and resell Shares pursuant to this prospectus.
Tax Information
To the extent the Fund makes distributions, those distributions will be taxed as ordinary income or capital gains, except when your investment is in an IRA, 401(k) plan or other
tax-advantaged
investment plan, in which case you may be subject to federal income tax upon withdrawal from the
tax-advantaged
investment plan.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase Shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the adviser and its related companies may pay the financial intermediary for the sale of Shares
and related services. These payments may create a conflict of interest by influencing the broker-dealer or financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial
intermediarys website for more information.
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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More About the Fund
ADDITIONAL INFORMATION ABOUT THE FUNDS INVESTMENT STRATEGIES
The Fund is an ETF, which is a fund that trades like other publicly-traded securities. The Fund is not an index fund. The Fund is actively
managed and does not seek to replicate the performance of a specified index.
The name, investment objective and policies of the Fund are similar
to other funds advised by the adviser or its affiliates. However, the investment results of the Fund may be higher or lower than, and there is no guarantee that the investment results of the Fund will be comparable to, any other of these funds. A
new fund or a fund with fewer assets under management may be more significantly affected by purchases and redemptions of its Creation Units than a fund with relatively greater assets under management would be affected by purchases and redemptions of
its shares. As compared to a larger fund, a new or smaller fund is more likely to sell a comparatively large portion of its portfolio to meet significant Creation Unit redemptions, or invest a comparatively large amount of cash to facilitate
Creation Unit purchases, in each case when the fund otherwise would not seek to do so. Such transactions may cause funds to make investment decisions at inopportune times or prices or miss attractive investment opportunities. Such transactions may
also accelerate the realization of taxable income if sales of securities resulted in gains and the fund redeems Creation Units for cash, or otherwise cause a fund to perform differently than intended. While such risks may apply to funds of any size,
such risks are heightened in funds with fewer assets under management. In addition, new funds may not be able to fully implement their investment strategy immediately upon commencing investment operations, which could reduce investment performance.
Main Investment Strategies
For
purposes of the Funds non-fundamental policy to ordinarily invest at least 80% of its Assets in bonds, a bond is a debt security with a maturity of 90 days or more at the time of its issuance. Some examples of bonds include
securities issued or guaranteed by the U.S. government or its agencies and instrumentalities, a domestic or a foreign corporation or a municipality, securities issued or guaranteed by a foreign government or its agencies and instrumentalities,
securities issued or guaranteed by domestic and supranational banks, mortgage-related and mortgage-backed securities, collateralized mortgage obligations, asset-backed securities, convertible bonds, stripped government securities and zero-coupon
obligations.
The Fund may invest a significant portion of its Assets in mortgage-related and mortgage-backed securities at the advisers
discretion. Mortgage-related and mortgage-backed securities may be structured as collateralized mortgage obligations (agency and
non-agency),
stripped mortgage-backed securities (interest-only or
principal-only), commercial
mortgage-backed securities, mortgage pass-through securities and cash and cash equivalents. The Fund expects to invest no more than 10% of its assets in
sub-prime
mortgage-related securities at the time of purchase. The Fund may also enter into dollar rolls in which the Fund sells mortgage-backed securities and at the same time
contracts to buy back very similar securities on a future date.
Up to 35% of the Funds Assets may be invested in foreign securities,
including securities denominated in foreign currencies (some of which may be below investment grade securities). Foreign securities include securities issued by foreign governments or their agencies and instrumentalities and companies that are
incorporated outside the United States, including securities from issuers in countries whose economies are less developed (emerging markets). The Funds investments in below investment grade securities or the unrated equivalent including below
investment grade foreign securities will not, under normal circumstances, exceed more than 35% of the Funds Assets.
The Fund may use
derivatives, including futures, options, and swaps, to hedge various investments, for risk management, for efficient portfolio management and/or to increase income or gain to the Fund. In addition to the mortgage dollar rolls as described above, the
Fund may utilize other relative value strategies involving credit-oriented trades, combinations of derivatives, and combinations of derivatives and fixed income securities. The Fund may also utilize foreign currency derivatives such as currency
forwards to hedge its non-dollar investments back to the U.S. dollar or use such derivatives to gain or adjust exposure to particular foreign securities, markets or currencies. The Fund may use
CPI-U
swaps to
hedge inflation risk associated with certain debt securities held by the Fund.
The Fund may invest in other ETFs in order to gain exposure to
particular markets including foreign and emerging markets, or asset classes. ETFs, which are pooled investment vehicles whose ownership interests are purchased and sold on a securities exchange, may be passively or actively managed. Passively
managed ETFs generally seek to track the performance of a particular market index, including broad-based market indexes, as well as indexes relating to particular sectors, markets, regions or industries. Actively managed ETFs do not seek to track
the performance of a particular market index. Ordinarily, a Fund must limit its investments in a single non-affiliated ETF to 5% of its total assets and in all non-affiliated ETFs to 10% of its total assets. The price movement of an index-based ETF
may not track the underlying index and may result in a loss. In addition, ETFs may trade at a price above (premium) or below (discount) their net asset value, especially during periods of significant market volatility or stress, causing investors to
pay significantly more or less than the value of the ETFs underlying portfolio.
More About the Fund
(continued)
The adviser allocates the Funds Assets among a range of sectors based on strategic positioning and other
tactical considerations. The Funds allocations will be reviewed and rebalanced periodically, if appropriate. Individual portfolio managers will be responsible for
day-to-day
investment management decisions on the assets that are allocated to their respective sleeves; provided, however, the remaining credit of the portfolio,
excluding distressed debt, will be managed across the ratings continuum. In buying and selling investments for the Fund, the adviser looks for market sectors and individual securities that it believes will perform well over time. The adviser selects
individual securities after performing a risk/reward analysis that includes an evaluation of interest rate risk, credit risk, currency risk, legal provisions and the structure of the transactions.
As part of its principal investment strategy and for temporary defensive purposes, any portion of the Funds total assets may be invested in cash and
cash equivalents, including affiliated money market funds.
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NON-FUNDAMENTAL INVESTMENT
OBJECTIVES
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An investment objective is fundamental if it
cannot be changed without the consent of a majority of the outstanding Shares of the Fund. The Funds investment objective is not fundamental and may be changed without the consent of a majority of the outstanding Shares of the
Fund.
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Credit Quality.
The Fund may invest in investment grade securities or the unrated equivalent as well as in below
investment grade securities (also known as junk bonds). Investment grade securities carry a minimum rating of Baa3, BBB, or BBB by Moodys Investor Service, Inc. (Moodys), Standard & Poors Corporation (S&P) or
Fitch Ratings (Fitch), respectively, or the equivalent by another nationally recognized statistical rating organization (NRSRO), or are unrated but deemed by the adviser to be of comparable quality. A junk bond is a debt security that is
rated below investment grade. Junk bonds also include unrated securities that the adviser believes to be of comparable quality to debt securities that are rated below investment grade. Junk bonds are also called high yield bonds and
non-investment grade bonds. These securities generally are rated in the fifth or lower rating categories (for example, BB+ or lower by S&P and Ba1 or lower by Moodys). These securities generally offer a higher yield than
investment grade securities, but involve a high degree of risk. A securitys quality is determined at the time of purchase and securities that are rated investment grade or the unrated equivalent may be downgraded or decline in credit quality
such that subsequently they would be deemed to be below investment grade. The adviser will consider such an event in determining whether the Fund should continue to hold a security.
As indicated in the Fund summary, the Fund may invest in sub-prime mortgage-related securities. Sub-prime loans,
which have higher interest rates, are made to borrowers with low credit ratings or other factors that increase the risk for default. In general, these borrowers have impaired or limited credit
history.
The frequency with which the Fund buys and sells securities will vary from year to year, depending on market conditions.
Securities Lending.
The Fund may engage in securities lending to increase its income. Securities lending involves the lending of
securities owned by the Fund to financial institutions such as certain broker-dealers in exchange for cash collateral. The Fund may invest cash collateral in one or more money market funds advised by the adviser or its affiliates and from which the
adviser or its affiliates may receive fees. During the term of the loan, the Fund is entitled to receive amounts equivalent to distributions paid on the loaned securities as well as the return on the cash collateral investments. Upon termination of
the loan, the Fund is required to return the cash collateral to the borrower plus any agreed upon rebate. Cash collateral investments will be subject to market depreciation or appreciation, and the Fund will be responsible for any loss that might
result from its investment of cash collateral. If the adviser determines to make securities loans, the value of the securities loaned may not exceed 33
1
/
3
% of the value of total assets of the Fund. Loan collateral (including any investment of
that collateral) is not subject to the percentage limitations regarding the Funds investments described elsewhere in this Prospectus.
ADDITIONAL STRATEGIES
Although not part of its principal investment
strategy, the Fund may invest in preferred shares, convertible securities including contingent convertible securities, loan participations and assignments (Loans), preferred stock and common stock. With respect to common stock, the Fund
may invest in common stock directly or in connection with the conversion of convertible securities or in connection with the reorganization and restructuring of an issuer.
The Fund may also invest from time to time in municipal securities.
The Fund may engage in
short selling in which it must borrow a security it wants to sell short. This type of short selling is not currently a principal investment strategy of the Fund.
The Fund also may use other non-principal strategies that are not described herein, but which are described in Investment Practices later in the prospectus and/or in the Statement of Additional
Information.
INVESTMENT RISKS
There can be no assurance that the Fund will achieve its investment objective.
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The main risks associated with investing in the Fund are summarized in Risk/Return Summary at the
front of this prospectus. More detailed descriptions of certain of the main risks and additional risks of the Fund are described below.
The Fund
is subject to management risk and may not achieve its objective if the advisers expectations regarding particular instruments or markets are not met.
An investment in this Fund or any other fund may not provide a complete investment program. The suitability
of an investment in the Fund should be considered based on the investment objective, strategies and risks described in this prospectus, considered in light of all of the other investments in your portfolio, as well as your risk tolerance, financial
goals and time horizons. You may want to consult with a financial advisor to determine if this Fund is suitable for you.
The Fund is
subject to the main risks noted below, any of which may adversely affect the Funds NAV, market price, performance and ability to meet its investment objective.
MAIN RISKS
General Market Risk.
Economies and financial markets
throughout the world are becoming increasingly interconnected, which increases the likelihood that events or conditions in one country or region will adversely impact markets or issuers in other countries or regions. Securities in the Funds
portfolio may underperform in comparison to securities in the general financial markets, a particular financial market or other asset classes, due to a number of factors, including inflation (or expectations for inflation), interest rates, global
demand for particular products or resources, natural disasters or events, terrorism, regulatory events and government controls.
Interest Rate
Risk.
The Funds fixed income securities will increase or decrease in value based on changes in interest rates. If rates increase, the value of the Funds investments generally declines. On the other hand, if rates fall, the value of
the investments generally increases. Your investment will decline in value if the value of these investments decreases. Securities with greater interest rate sensitivity and longer maturities generally are subject to greater fluctuations in value.
The Fund invests in variable and floating rate securities. Although these instruments are generally less sensitive to interest rate changes than fixed rate instruments, the value of floating rate securities may decline if their interest rates do not
rise as quickly, or as much, as general interest rates. Securities with greater interest rate sensitivity and longer maturities generally are subject to greater fluctuations in value. Usually, changes in the value of fixed income securities will not
affect cash income generated, but may affect the value of your investment. Many factors can cause interest rates to rise. Some examples include central bank monetary policy, rising inflation
rates and general economic conditions. Given that the Federal Reserve has been raising interest rates, the Fund may face a heightened level of interest rate risk.
Credit Risk.
There is a risk that issuers and/or counterparties will not make payments on securities held by the Fund. Such default could result in
losses to the Fund. In addition, the credit quality of securities held by the Fund may be lowered if an issuers financial condition changes.
Lower credit quality may lead to greater volatility in the price of a security and in Shares of the Fund. Lower credit quality also may affect liquidity and
make it difficult for the Fund to sell the security.
Government Securities Risk.
The Fund invests in securities issued or guaranteed by
the U.S. government or its agencies and instrumentalities (such as securities issued by Ginnie Mae, Fannie Mae, or Freddie Mac). U.S. government securities are subject to market risk, interest rate risk and credit risk. Securities, such as those
issued or guaranteed by Ginnie Mae or the U.S. Treasury, that are backed by the full faith and credit of the United States are guaranteed only as to the timely payment of interest and principal when held to maturity and the market prices for such
securities will fluctuate. Notwithstanding that these securities are backed by the full faith and credit of the United States, circumstances could arise that would prevent the payment of interest or principal. This would result in losses to the
Fund. Securities issued or guaranteed by U.S. government-related organizations, such as Fannie Mae and Freddie Mac, are not backed by the full faith and credit of the U.S. government and no assurance can be given that the U.S. government will
provide financial support. Therefore, U.S. government-related organizations may not have the funds to meet their payment obligations in the future. U.S. government securities include zero-coupon securities, which tend to be subject to greater market
risk than interest-paying securities of similar maturities.
Foreign Securities and Emerging Markets Risk.
Because the Fund invests in U.S.
dollar denominated foreign securities, it is subject to special risks in addition to those applicable to U.S. investments. These risks include political and economic risks, civil conflicts and war, greater volatility, expropriation and
nationalization risks, sanctions or other measures by the United States or other governments, currency fluctuations, higher transaction costs, delayed settlement, possible foreign controls on investment, liquidity risks and less stringent
investor protection and disclosure standards of foreign markets. The securities markets of many foreign countries are relatively small, with a limited number of companies representing a small number of industries. In certain markets where securities
and other instruments are not traded delivery versus payment, the Fund may not receive timely payment for securities or other instruments it has delivered or receive delivery of securities paid for and may be subject to increased risk
that
More About the Fund
(continued)
the counterparty will fail to make payments or delivery when due or default completely
.
Events and
evolving conditions in certain economies or markets may alter the risks associated with investments tied to countries or regions that historically were perceived as comparatively stable becoming riskier and more volatile.
The risks associated with foreign securities are magnified in emerging markets. While emerging markets risk is not a principal risk of the Fund,
the Fund may invest in emerging markets from time to time. These countries may have relatively unstable governments and less-established market economies than developed countries. Emerging markets may face greater social, economic, regulatory and
political uncertainties. These risks make emerging market securities more volatile and less liquid than securities issued in more developed countries and you may sustain sudden, and sometimes substantial, fluctuations in the value of your
investments. The Funds investments in foreign and emerging market securities may also be subject to foreign withholding and/or other taxes, which would decrease the Funds yield on those securities.
Geographic Focus Risk.
The Fund may focus its investments in one or more regions or small groups of countries. As a result, the Funds
performance may be subject to greater volatility than a more geographically diversified fund.
Sovereign Debt Risk.
The Fund may invest all
or substantially all of its assets in sovereign debt securities. These securities are issued or guaranteed by foreign governmental entities. These investments are subject to the risk that a governmental entity may delay or refuse to pay interest or
repay principal on its sovereign debt, due, for example, to cash flow problems, insufficient foreign currency reserves, political considerations, the relative size of the governmental entitys debt position in relation to the economy or other
failure to put in place economic reforms required by the International Monetary Fund or other multilateral agencies. If a governmental entity defaults, it may ask for more time in which to pay or further loans. There is no legal process for
collecting sovereign debts that a government does not pay nor are there bankruptcy proceedings through which all or part of the sovereign debt that a governmental entity has not repaid may be collected.
Currency Risk.
The Fund may invest in U.S. dollar-denominated securities of foreign issuers or U.S. affiliates of foreign issuers. Although these
securities are not subject to all of the risks of foreign and emerging markets securities summarized above, they may be subject to additional risks not faced by domestic issuers. These risks include political and economic risks, civil conflicts and
war, greater volatility, expropriation and nationalization risks, and regulatory issues facing issuers in such foreign countries. The Fund may also invest in non-dollar denominated securities in foreign and emerging markets. Currency exchange rates
may fluctuate significantly over short
periods of time for a number of reasons, including changes in interest rates. Although the Fund may attempt to minimize currency exposure to foreign currencies through hedging, it may not always
do so. In addition, the Funds use of foreign currency derivatives may not be successful in hedging non-dollar investments back to the U.S. dollar and the use of such strategies may lower the Funds potential returns.
Asset-Backed, Mortgage-Related and Mortgage-Backed Securities Risk.
Asset-backed, mortgage-related and mortgage-backed securities are subject to
certain other risks. The value of these securities will be influenced by the factors affecting the housing market and the assets underlying such securities. As a result, during periods of difficult or frozen credit markets, significant changes in
interest rates, or deteriorating economic conditions, mortgage-related and asset-backed securities may decline in value, face valuation difficulties, become more volatile and/or become illiquid. Additionally, during such periods and also under
normal conditions, these securities are also subject to prepayment and call risk. Gains and losses associated with prepayments will increase or decrease the Funds yield and the income available for distribution by the Fund. When mortgages and
other obligations are prepaid and when securities are called, the Fund may have to reinvest in securities with a lower yield or fail to recover additional amounts (
i.e.
, premiums) paid for securities with higher interest rates, resulting in
an unexpected capital loss and/or a decrease in the amount of dividends and yield. In periods of rising interest rates, the Fund may be subject to extension risk, and may receive principal later than expected. As a result, in periods of rising
interest rates, the Fund may exhibit additional volatility. Some of these securities may receive little or no collateral protection from the underlying assets and are thus subject to the risk of default described under
Credit
Risk
. The risk of such defaults is generally higher in the case of mortgage-backed investments that include so-called sub-prime mortgages. The structure of some of these securities may be complex and there may be less available
information than other types of debt securities.
The Fund may invest in CMOs. CMOs are issued in multiple classes, and each class may have its
own interest rate and/or final payment date. A class with an earlier final payment date may have certain preferences in receiving principal payments or earning interest. As a result, the value of some classes in which the Fund invests may be
particularly sensitive to changes in prevailing interest rates. The values of IO and PO mortgage-backed securities are more volatile than other types of mortgage-related securities. They are very sensitive not only to changes in interest rates, but
also to the rate of prepayments. A rapid or unexpected increase in prepayments can significantly depress the price of interest-only securities, while a rapid or unexpected decrease could have the same effect on principal-only securities. In
addition, because there may be a
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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drop in trading volume, an inability to find a ready buyer, or the imposition of legal restrictions on the resale of securities, these instruments may be illiquid.
Prepayment Risk.
The issuer of certain securities may repay principal in advance, especially when yields fall. Changes in the rate at which
prepayments occur can affect the return on investment of these securities. When debt obligations are prepaid or when securities are called, the Fund may have to reinvest in securities with a lower yield. The Fund also may fail to recover additional
amounts (
i.e.
, premiums) paid for securities with higher coupons, resulting in an unexpected capital loss.
High Yield Securities
Risk.
The Fund may invest up to 100% of its total assets in high yield, high risk securities (also known as junk bonds) which are considered to be speculative. These investments may be issued by companies which are highly leveraged, less
creditworthy or financially distressed. Non-investment grade debt securities can be more sensitive to short-term corporate, economic and market developments. During periods of economic uncertainty and change, the market price of the Funds
investments and the Funds NAV may be volatile. Furthermore, though these investments generally provide a higher yield than higher-rated debt securities, the high degree of risk involved in these investments can result in substantial or total
losses. These securities are subject to greater risk of loss, greater sensitivity to economic changes, valuation difficulties, and a potential lack of a secondary or public market for the securities. The market price of these securities can change
suddenly and unexpectedly. As a result, the Fund is intended for investors who are able and willing to assume a high degree of risk.
Derivatives Risk.
The Fund may use
derivatives
in connection with its investment strategies. Derivatives may be riskier than other types of
investments because they may be more sensitive to changes in economic or market conditions than other types of investments and could result in losses that significantly exceed the Funds original investment. Derivatives are subject to the risk
that changes in the value of a derivative may not correlate perfectly with the underlying asset, rate or index. The use of derivatives may not be successful, resulting in losses to the Fund and the cost of such strategies may reduce the Funds
returns. Certain derivatives also expose the Fund to counterparty risk (the risk that the derivative counterparty will not fulfill its contractual obligations), including credit risk of the derivative counterparty. Certain derivatives are synthetic
instruments that attempt to replicate the performance of certain reference assets. With regard to such derivatives, the Fund does not have a claim on the reference assets and is subject to enhanced counterparty risk. In addition, the Fund may use
derivatives for non-hedging purposes, which increases the Funds potential for loss.
Investing in derivatives will result in a form of
leverage. Leverage involves special risks. The Fund may be more volatile than
if the Fund had not been leveraged because leverage tends to exaggerate any effect on the value of the Funds portfolio securities. Registered investment companies are limited in their
ability to engage in derivative transactions and are required to identify and earmark assets to provide asset coverage for derivative transactions.
The possible lack of a liquid secondary market for derivatives and the resulting inability of the Fund to sell or otherwise close a derivatives position
could expose the Fund to losses and could make derivatives more difficult for the Fund to value accurately.
The Funds transactions in
futures contracts, swaps and other derivatives could also affect the amount, timing and character of distributions to shareholders which may result in the Fund realizing more short-term capital gain and ordinary income subject to tax at ordinary
income tax rates than it would if it did not engage in such transactions, which may adversely impact the Funds after-tax return.
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WHAT IS A DERIVATIVE?
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Derivatives are securities or contracts (for
example, futures and options) that derive their value from the performance of underlying assets or securities.
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Privately Placed Securities Risk.
Privately placed securities generally are less liquid than publicly traded
securities and the Fund may not always be able to sell such securities without experiencing delays in finding buyers or reducing the sale price for such securities. The disposition of some of the securities held by the Fund may be restricted under
federal securities laws. As a result, the Fund may not be able to dispose of such investments at a time when, or at a price at which, it desires to do so and may have to bear expenses of registering these securities, if necessary. These securities
may also be difficult to value.
Industry and Sector Focus Risk.
At times the Fund may increase the relative emphasis of its investments in
a particular industry or sector. The prices of securities of issuers in a particular industry or sector may be more susceptible to fluctuations due to changes in economic or business conditions, government regulations, availability of basic
resources or supplies, or other events that affect that industry or sector more than securities of issuers in other industries and sectors. To the extent that the Fund increases the relative emphasis of its investments in a particular industry or
sector, the Shares values may fluctuate in response to events affecting that industry or sector.
Repurchase Agreement Risk.
Repurchase agreements are subject to
Credit Risk
. In addition, in the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities would not be owned by the Fund, but
would only constitute collateral for the sellers
More About the Fund
(continued)
obligation to pay the repurchase price. Therefore, the Fund may suffer time delays and incur costs in
connection with the disposition of the collateral. These risks may be magnified to the extent that a repurchase agreement is secured by collateral other than cash and government securities (Non-Traditional Collateral). For example, repurchase
agreements secured by below investment grade securities and equity securities may or may not be subject to an automatic stay in bankruptcy proceedings. As a result of the automatic stay, to the extent applicable, the Fund could be prohibited from
selling the collateral in the event of a counterpartys bankruptcy unless the Fund is able to obtain the approval of the bankruptcy court. In addition, the value of Non-Traditional Collateral may be more volatile or less liquid thereby
increasing the risk that the Fund will be unable to recover fully in the event of a counterpartys default. Below investment grade securities are considered to be speculative and are subject to greater risk of loss, greater sensitivity to
interest rate and economic changes, valuation difficulties and potential illiquidity. Equity securities are subject to stock market risk and the price of such securities may rise or fall, sometimes rapidly or unpredictably.
Market Trading Risk
Risk that Shares of
the Fund May Trade at Prices Other Than NAV.
Shares of the Fund may trade on the Exchange at prices above, below or at their most recent NAV. The NAV of the Funds Shares, which is calculated at the end of each business day, will
generally fluctuate with changes in the market value of the Funds holdings. The market prices of the Shares will also fluctuate, in some cases materially, in accordance with changes in NAV and the intraday value of the Funds holdings, as
well as the relative supply of and demand for the Shares on the Exchange. Differences between secondary market prices of Shares and the intraday value of the Funds holdings may be due largely to supply and demand forces in the secondary
market, which may not be the same forces as those influencing prices for securities held by the Fund at a particular time.
Given the fact that
Shares can be created and redeemed by authorized participants in Creation Units, the adviser believes that large discounts or premiums to the NAV of Shares should not be sustained in the long-term. While the creation/redemption feature is designed
to make it likely that Shares normally will trade close to the value of the Funds holdings, market prices are not expected to correlate exactly to the Funds NAV due to timing reasons, supply and demand imbalances and other factors. In
addition, disruptions to creations and redemptions, adverse developments impacting market makers, authorized participants or other market participants, or high market volatility may result in market prices for Shares of the Fund that differ
significantly from its NAV or to the intraday value of the Funds holdings.
As a result of these factors, among others, the Funds Shares may trade at a
premium or discount to NAV, especially during periods of significant market
volatility.
Given the nature of the relevant markets for certain of the securities for the Fund, Shares may trade at a
larger premium or discount to NAV than shares of other kinds of ETFs. In addition, the securities held by the Fund may be traded in markets that close at a different time than the Exchange. Liquidity in those securities may be reduced after the
applicable closing times. Accordingly, during the time when the Exchange is open but after the applicable market closing, fixing or settlement times, bid/ask spreads and the resulting premium or discount to the Shares NAV may widen.
Cost of Buying or Selling Shares.
When you buy or sell Shares of the Fund through a broker, you will likely incur a brokerage commission
or other charges imposed by brokers. In addition, the market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the market makers or other participants that trade the particular
security. The spread of the Funds Shares varies over time based on the Funds trading volume and market liquidity and may increase if the Funds trading volume, the spread of the Funds underlying securities, or market liquidity
decrease. In times of severe market disruption, including when trading of the Funds holdings may be halted, the bid-ask spread may increase significantly. This means that Shares may trade at a discount to the Funds NAV, and the discount
is likely to be greatest during significant market volatility.
Short Selling Risk.
Shares of the Fund, similar to shares of other issuers
listed on a stock exchange, may be sold short and are therefore subject to the risk of increased volatility and price decreases associated with being sold short.
No Guarantee of Active Trading Market Risk.
While Shares are listed on the Exchange, there can be no assurance that active trading markets for the Shares will be maintained by market makers or by
authorized participants. JPMorgan Distribution Services, Inc., the distributor of the Funds Shares (the Distributor), does not maintain a secondary market in the Shares.
Trading Issues Risk.
Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable. In addition, trading
in Shares on the Exchange is subject to trading halts caused by extraordinary market volatility pursuant to the Exchange circuit breaker rules. If a trading halt or unanticipated early closing of the Exchange occurs, a Shareholder may be
unable to purchase or sell Shares of the Fund. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of the Fund will continue to be met or will remain unchanged.
Authorized Participant Concentration Risk.
Only an authorized participant may engage in creation or redemption transactions directly with the Fund.
The Fund has a limited number of intermediaries that act as authorized participants
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and none of these authorized participants is or will be obligated to engage in creation or redemption transactions. To the extent that these intermediaries exit the business or are unable to or
choose not to proceed with creation and/or redemption orders with respect to the Fund and no other authorized participant creates or redeems, Shares may trade at a discount to NAV and possibly face trading halts and/or delisting.
Cash Transactions Risk.
Unlike certain ETFs, the Fund may effect its creations and redemptions in cash or partially in cash. As a result, an
investment in the Fund may be less tax-efficient than an investment in an ETF that distributes portfolio securities entirely in-kind. Other ETFs generally are able to make in-kind redemptions and avoid realizing gains in connection with transactions
designed to raise cash to meet redemption requests. If the Fund effects a portion of redemptions for cash, it may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds, which involves
transaction costs. If the Fund recognizes gain on these sales, this generally will cause the Fund to recognize gain it might not otherwise have recognized if it were to distribute portfolio securities in-kind, or to recognize such gain sooner than
would otherwise be required. The Fund generally intends to distribute these gains to shareholders to avoid being taxed on this gain at the Fund level and otherwise comply with the special tax rules that apply to it. This strategy may cause
shareholders to be subject to tax on gains they would not otherwise be subject to, or at an earlier date than, if they had made an investment in a different ETF.
CPI-U Strategy Risk.
The Fund may use CPI-U swaps to hedge inflation risk associated with certain debt securities held by the Fund. There is no guarantee that such strategy will be effective in
protecting the return from such securities from inflation risks. In addition, CPI-U swaps are subject to
Derivatives Risk
.
ETF and Investment Company Risk.
Shareholders bear both their proportionate share of the Funds expenses and similar expenses of an ETF or other
investment company. The price and movement of an index-based ETF may not track the underlying index and may result in a loss. ETFs may trade at a price below their NAV (also known as a discount).
Mortgage Dollar Roll Risk.
The Fund may enter into mortgage dollar rolls involving mortgage pass-through securities including mortgage TBAs and other
mortgage-backed securities. During the period between the sale and repurchase in a mortgage dollar roll transaction, the Fund will not be entitled to receive interest and principal payments on the securities sold. Losses may arise due to changes in
the value of the securities or if the counterparty does not perform under the terms of the agreement. If the counterparty files for bankruptcy or becomes insolvent, the Funds right to repurchase or sell securities may be limited. Short sales
of mortgage TBAs and mortgage dollar rolls may be subject to leverage risks as described under
Derivatives Risk
. In addition, mortgage dollar rolls may increase interest rate risk and result in an increased portfolio turnover rate
which increases costs and may increase taxable gains.
ADDITIONAL RISKS
Inverse Floater Risk.
Inverse floaters and inverse IOs are debt securities structured with interest rates that reset in the opposite direction from the market rate to which the security is indexed.
Generally, interest rates on these securities vary inversely with a short-term floating rate (which may be reset periodically). They are more volatile and more sensitive to interest rate changes than other types of debt securities. Interest rates on
inverse floaters and inverse IOs will decrease when the rate to which they are indexed increases, and will increase when the rate to which they are indexed decreases. In response to changes in market interest rates or other market conditions, the
value of an inverse floater or inverse IO may increase or decrease at a multiple of the increase or decrease in the value of the underlying securities. If interest rates move in a manner not anticipated by the adviser, the Fund could lose all or
substantially all of its investment in inverse IOs.
Foreign Issuer Risk.
The Fund invests in U.S. dollar-denominated securities of foreign
issuers or U.S. affiliates of for issuers. Although, these securities are not subject to all of the risks summarized in
Foreign Securities and Emerging Markets Risk
, they may be subject to additional risks not faced by domestic
issuers. These risks include political and economic risks, civil conflicts and war, greater volatility, expropriation and nationalization risks, and regulatory issuers facing issuers in such foreign countries.
Structured Investment Risk.
Certain structured investments including Credit Linked Notes are synthetic instruments that attempt to replicate the
performance of certain reference assets. With regard to such instruments, the Fund does not have a claim on the reference assets and is subject to enhanced counterparty risk.
Inflation-Linked and Inflation-Protected Security Risk.
Inflation-linked debt securities are subject to the effects of changes in market interest rates caused by factors other than inflation (real
interest rates). In general, the price of an inflation-linked security tends to decrease when real interest rates increase and can increase when real interest rates decrease. Interest payments on inflation-linked securities are unpredictable and
will fluctuate as the principal and interest are adjusted for inflation. Any increase in the principal amount of an inflation-linked debt security will be considered taxable ordinary income, even though the Fund will not receive the principal until
maturity.
There can also be no assurance that the inflation index used will accurately measure the real rate of inflation in the prices of goods
and services. The Funds investments in inflation-linked securities may lose value in the event that the actual rate of inflation is different than the rate of the inflation index. In addition, inflation-linked securities are subject to the
risk that the
CPI-U
or other relevant pricing index may be discontinued, fundamentally altered in a manner materially adverse to the interests of an investor in the securities, altered by legislation or
Executive Order
More About the Fund
(continued)
in a materially adverse manner to the interests of an investor in the securities or substituted with an
alternative index.
Zero-Coupon, Pay-In-Kind and Deferred Payment Securities Risk.
The market value of a zero-coupon, pay-in-kind or
deferred payment security is generally more volatile than the market value of, and is more likely to respond to a greater degree to changes in interest rates and credit quality than, other fixed income securities with similar maturities and credit
quality that pay interest periodically. In addition, federal income tax law requires that the holder of a zero-coupon security accrue a portion of the discount at which the security was purchased as taxable income each year even though the holder
receives no interest payments on the note during the year. The Fund must distribute substantially all of its net income (including non-cash income attributable to zero-coupon securities) to its share holders each year to maintain its status as a
regulated investment company and to eliminate tax at the Fund level. Accordingly, such accrued discount must be taken into account in determining the amount of taxable distributions to shareholders. The Fund may consequently have to dispose of
portfolio securities under disadvantageous circumstances to generate cash to satisfy such distribution requirements. These actions may reduce the assets to which the Funds expenses could otherwise be allocated and may reduce the Funds
rate of return.
In addition, (1) the higher yields and interest rates on certain pay-in-kind securities (PIK) reflect the payment deferral
and increased credit risk associated with such instruments and such investments may represent a significantly higher credit risk than coupon loans; (2) PIK securities may have higher price volatility because their continuing accruals require
continuing judgments about the collectability of the deferred payments and the value of any associated collateral; (3) PIK interest has the effect of generating investment income; and (4) the deferral of PIK interest may also reduce the
loan-to-value ratio at a compounding rate.
High Portfolio Turnover Risk.
The Fund will likely engage in active and frequent trading
leading to increased portfolio turnover, higher transaction costs and the possibility of increased capital gains, including short-term capital gains that will generally be taxable to shareholders as ordinary income.
Convertible Securities Risk.
A convertible security generally entitles the holder to receive interest paid or accrued on debt securities or 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 debt 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 underlying securities. 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 nonconvertible 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. Contingent
convertible securities are subject to additional risks factors. A contingent convertible security is a hybrid debt security typically issued by a non-U.S. bank that may be convertible into equity or may be written down if a pre-specified trigger
event such as a decline in capital ratio below a prescribed threshold occurs. If such a trigger event occurs, the Fund may lose the principal amount invested on a permanent or temporary basis or the contingent convertible security may be converted
to equity. Coupon payments on contingent convertible securities may be discretionary and may be cancelled by the issuer. Holders of contingent convertible securities may suffer a loss of capital when comparable equity holders do not.
Transactions and Liquidity Risk.
The Fund could experience a loss when selling securities to meet redemption requests by shareholders and its
liquidity may be negatively impacted. The risk of loss increases if the redemption requests are large or frequent, occur in times of overall market turmoil or declining prices for the securities sold, or when the securities the Fund wishes to or is
required to sell are illiquid. To the extent a large proportion of Shares are held by a small number of shareholders (or a single shareholder) including funds or accounts over which the adviser or its affiliates have investment discretion, the Fund
is subject to the risk that these shareholders will purchase or redeem Shares in large amounts rapidly or unexpectedly, including as a result of an asset allocation decision made by the adviser or its affiliates. To the extent these larger
shareholders transact in the secondary market, such transactions may account for a large percentage of the Funds trading volume on the Exchange, which may have a material effect (upward or downward) on the market price of Shares. In addition
to the other risks described in this section, these transactions could adversely affect the ability of the Fund to conduct its investment program. The Fund may be unable to sell illiquid securities at its desired time or price or the price at which
the securities have been valued for purposes of the Funds NAV. Illiquidity can be caused by a drop in overall market trading volume, an inability to find a ready buyer, or legal restrictions on the securities resale. Other market
participants may be attempting to sell debt securities at the same time as the Fund, causing downward pricing pressure and contributing to illiquidity. The capacity for bond dealers to engage in trading or make a market in debt
securities has not kept pace with the growth of bond markets. Liquidity and valuation risk may be magnified in a rising interest rate environment, when credit quality is deteriorating or in other circumstances where
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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investor redemptions from fixed income funds may be higher than normal. Certain securities that were liquid when purchased may later become illiquid, particularly in times of overall economic
distress. Similarly, large purchases of Shares may adversely affect the Funds performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. Large
redemptions also could accelerate the realization of capital gains, increase the Funds transaction costs and impact the Funds performance.
Volcker Rule Risk.
Pursuant to Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and certain rules promulgated thereunder known as the Volcker Rule, if the adviser and/or
its affiliates own 25% or more of the outstanding ownership interests of the Fund after the permitted seeding period from the implementation of the Funds investment strategy, the Fund could be subject to restrictions on trading that would
adversely impact the Funds ability to execute its investment strategy. Generally, the permitted seeding period is three years from the implementation of the Funds investment strategy. As a result, the adviser and/or its affiliates may be
required to reduce their ownership interests in the Fund at a time that is sooner than would otherwise be desirable, which may result in the Funds liquidation or, if the Fund is able to continue operating, may result in losses, increased
transaction costs and adverse tax consequences as a result of the sale of portfolio securities.
Municipal Securities Risk.
Changes in a
municipalitys financial health may make it difficult for the municipality to make interest and principal payments when due. A number of municipalities have had significant financial problems recently, and these and other municipalities could,
potentially, continue to experience significant financial problems resulting from lower tax revenues and/or decreased aid from state and local governments in the event of an economic downturn. This could decrease the Funds income or hurt the
ability to preserve capital and liquidity.
Under some circumstances, municipal securities might not pay interest unless the state legislature or
municipality authorizes money for that purpose. Some securities, including municipal lease obligations, carry additional risks. For example, they may be difficult to trade or interest payments may be tied only to a specific stream of revenue.
Since some municipal securities may be secured or guaranteed by banks and other institutions, the risk to the Fund could increase if the banking
or financial sector suffers an economic downturn and/or if the credit ratings of the institutions issuing the guarantee are downgraded or at risk of being downgraded by a national rating organization. If such events were to occur, the value of the
security could decrease or the value could be lost entirely, and it may be difficult or impossible for the Fund to sell the security at the time and the price that normally
prevails in the market. Interest on municipal obligations, while generally exempt from federal income tax, may not be exempt from federal alternative minimum tax.
Securities Lending Risk.
The Fund may engage in
securities lending. Securities lending involves counterparty risk,
including the risk
that the loaned securities may not be returned
or returned in a timely manner and/or a loss of rights in the collateral if the borrower or the lending agent defaults. This risk is
increased when the Funds loans are concentrated
with a single
or limited number of borrowers. In addition, the Fund bears the
risk of loss in connection with its investments of the cash
collateral it receives from the borrower. To the extent that the
value or return of
the Funds investments of the cash collateral
declines below the amount owed to a borrower, the Fund may
incur losses that exceed the amount it earned on lending the
security. In situations where the adviser does not
believe that it
is prudent to sell the cash collateral investments in the market,
the Fund may borrow money to repay the borrower the amount
of cash collateral owed to the borrower upon return of the
loaned securities.
This will result in financial leverage, which may
cause the Fund to be more volatile because financial leverage
tends to exaggerate the effect of any increase or decrease in the
value of the Funds portfolio securities.
Loan Risk.
The Fund may invest in Loans including
Loans that are rated below investment grade or the unrated
equivalent.
Like other high yield, corporate debt instruments,
such Loans are subject to an increased risk of default in the
payment of principal and interest as well as the other risks
described under
Interest Rate Risk
,
Credit Risk
,
High Yield Securities Risk
,
and
Foreign Securities and Emerging Markets Risk
. Although certain Loans are secured by collateral, the Fund could experience delays or
limitations in realizing on such collateral or have its interest subordinated to other indebtedness of the obligor. Loans are vulnerable to market sentiment such that economic conditions or other events may reduce the demand for Loans and cause
their value to decline rapidly and unpredictably. Although the Fund limits its investments in illiquid securities to no more than 15% of the Funds net assets at the time of purchase, Loans that are deemed to be liquid at the time of purchase
may become illiquid.
No active trading market may exist for some of the Loans and certain Loans may be subject to restrictions on resale. The
inability to dispose of Loans in a timely fashion could result in losses to the Fund. In addition, the settlement period for Loans is uncertain as there is no standardized settlement schedule applicable to such investments. Certain Loans may take
more than seven days to settle. Because some Loans that the Fund invests in may have a more limited secondary market, liquidity and valuation risk is more pronounced for the Fund than for funds that invest primarily in other types of fixed income
instruments or equity securities. Typically, Loans are not registered securities and are not listed on any national securities exchange. Consequently, there may be less public information
More About the Fund
(continued)
available about the Funds investments and the market for certain Loans may be subject to irregular
trading activity, wide bid/ask spreads and extended trade settlement periods. As a result, the Fund may be more dependent upon the analytical ability of its adviser.
When the Fund acquires a loan participation, the Fund typically enters into a contractual relationship with the lender or third party selling such participations, but not the borrower. As a result, the Fund
assumes the credit risk of the seller of the loan participation and any other parties interpositioned between the Fund and the borrower. Under a loan participation, the Fund may have no direct rights to enforce the terms of the loan against the
borrower. The Fund may not benefit directly from the collateral supporting the load in which it has purchased the loan participations or assignments.
Affiliates of the adviser may participate in the primary and secondary market for Loans. Because of limitations imposed by applicable law, the presence of the advisers affiliates in the Loan market may
restrict the Funds ability to acquire some Loans, affect the timing of such acquisition or affect the price at which the Loan is acquired. Also, because the adviser may wish to invest in the publicly traded securities of an obligor, it may not
have access to material
non-public
information regarding the obligor to which other investors have access. The Fund will not have direct recourse against the issuer of a loan participation.
Loans are subject to prepayment risks. Gains and losses associated with prepayments will increase or decrease a Funds yield and the income available
for distribution by the Fund. When Loans are prepaid, the Fund may have to reinvest in securities with a lower yield or fail to recover additional amounts (i.e., premiums) paid for Loans, resulting in an unexpected capital loss and/or a decrease in
the amount of dividends and yield.
For more information about risks associated with the types of investments that the Fund purchases, please
read the Risk/Return Summary and the Investment Practices sections later in the prospectus and the Statement of Additional Information.
CONFLICTS OF INTEREST
An investment in a Fund is subject to a number
of actual or potential conflicts of interest. For example, the Adviser and/or its affiliates provide a variety of different services to a Fund, for which the Fund compensates them. As a result, the Adviser and/or its affiliates have an incentive to
enter into arrangements with a Fund, and face conflicts of interest when balancing that incentive against the best interests of a Fund. The Adviser and/or its affiliates also face conflicts of interest in their service as investment adviser to other
clients, and, from time to time, make investment decisions that differ from and/or negatively impact those made by the Adviser on behalf of a Fund. In addition, affiliates of the Adviser provide a broad range of services and products to their
clients and are major participants in the global currency, equity, commodity,
fixed-
income and other markets in which a Fund invests or will invest. In certain circumstances by providing services and products to their clients, these affiliates activities will disadvantage
or restrict the Funds and/or benefit these affiliates. The Adviser may also acquire material non-public information which would negatively affect the Advisers ability to transact in securities for a Fund. JPMorgan and the Funds have adopted
policies and procedures reasonably designed to appropriately prevent, limit or mitigate conflicts of interest. In addition, many of the activities that create these conflicts of interest are limited and/or prohibited by law, unless an exception is
available. For more information about conflicts of interest, see the
Potential Conflicts of Interest
section in the SAI.
TEMPORARY DEFENSIVE AND CASH POSITIONS
For liquidity and to respond to unusual market conditions, the Fund may invest all or most of its
total assets in cash and cash equivalents for temporary defensive purposes. In addition, the Fund may invest in cash and cash equivalents as a principal investment strategy. These investments may result in a lower yield than lower-quality or
longer-term investments.
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WHAT IS A CASH EQUIVALENT?
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Cash equivalents are highly liquid,
high-quality instruments with maturities of three months or less on the date they are purchased. They include securities issued by the U.S. government, its agencies and instrumentalities, repurchase agreements, certificates of deposit, bankers
acceptances, commercial paper, variable rate master demand notes, money market mutual funds, and bank deposit accounts.
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While the Fund is engaged in a temporary defensive position, it may not meet its investment objective. These investments may
also be inconsistent with the Funds main investment strategies. Therefore, the Fund will pursue a temporary defensive position only when market conditions warrant.
DISCLOSURE OF PORTFOLIO HOLDINGS
A description of the policies and
procedures with respect to the disclosure of the Funds portfolio securities is available in the Funds Statement of Additional Information.
ADDITIONAL FEE WAIVER AND/OR EXPENSE REIMBURSEMENT
Service providers
to the Fund may, from time to time, voluntarily waive all or a portion of any fees to which they are entitled and/or reimburse certain expenses as they may determine from time to time. The Funds service providers may discontinue or modify
these voluntary actions at any time without notice. Performance for the Fund, when available, will reflect the voluntary waiver of fees and/or the reimbursement of expenses, if any. Without these voluntary waivers and/or expense reimbursements,
performance would be less favorable.
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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The Funds Management and Administration
The Funds Management and Administration
The Fund is a series of J.P. Morgan Exchange-Traded Fund Trust, a Delaware statutory trust (the Trust). The Trust is governed by trustees who are responsible for overseeing all business activities of the
Fund.
The Funds Investment Adviser
J.P. Morgan Investment Management Inc. (JPMIM) is the investment adviser to the Fund. JPMIM is located at 270 Park Avenue, New York, NY 10017.
JPMIM is a wholly-owned subsidiary of JPMorgan Asset Management Holdings Inc., which is a wholly-owned subsidiary of JPMorgan Chase & Co. (JPMorgan Chase), a bank holding company.
The Fund will pay the adviser a management fee of 0.30% of average daily net assets.
A discussion of the basis the Board of Trustees of the Trust used in approving the investment advisory agreement for the Fund will be available in the first shareholder report for the Fund.
The Portfolio Managers
The lead portfolio
managers who are primarily responsible for the day-to-day management of the Fund are listed below. As part of that responsibility, the portfolio managers establish and monitor the overall duration, yield curve, and sector allocation strategies for
the Fund. The portfolio managers are assisted by multiple sector and research teams who help formulate duration and allocation recommendations and support the strategies of the Fund within the parameters established by the portfolio managers.
The portfolio management team for the Fund consists of Steven S. Lear, Managing Director and CFA charterholder, Richard Figuly, Managing
Director, and J. Andrew Norelli, Managing Director. Mr. Lear is a member of the Global Fixed Income Currency & Commodities (GFICC) team and is responsible for overseeing U.S. broad market strategies. Mr. Figuly has been an employee of JPMIM
or predecessor firms since 1993 and is a member of the GFICC team with an emphasis on securitized assets for purposes of this Fund. Mr. Norelli has been with the adviser since 2012 and is a portfolio manager within the GFICC team, where he
focuses on multi-asset class
portfolios, asset allocation, macroeconomic strategy, and global market dynamics.
The
Statement of Additional Information provides additional information about the portfolio managers compensation, other accounts managed by the portfolio managers and the portfolio managers ownership of securities.
The Funds Administrator
JPMIM
provides administrative services for and oversees the other service providers of the Fund. JPMIM receives the following annual fee on behalf of the Fund for administrative services: 0.075% of average daily net assets of the Fund.
The Funds Distributor
JPMorgan
Distribution Services, Inc. (the Distributor) is the distributor of the Funds Shares. The Distributor or its agent distributes Creation Units for the Fund on an agency basis. The Distributor does not maintain a secondary market in Shares of
the Fund. The Distributor has no role in determining the investment policies of the Fund or the securities that are purchased or sold by the Fund. The Distributors principal address is 1111 Polaris Parkway, Columbus, OH 43240.
Payments to Financial Intermediaries
JPMIM
and, from time to time, other affiliates of JPMorgan Chase may, at their own expense and out of their own legitimate profits, provide cash payments to Financial Intermediaries whose customers invest in Shares of the Fund. For this purpose, Financial
Intermediaries include financial advisors, investment advisers, brokers, financial planners, banks, insurance companies, retirement or 401(k) plan administrators and others, including various affiliates of JPMorgan Chase, that may enter into
agreements with JPMIM and/or its affiliates. These cash payments may relate to marketing activities and presentations, educational training programs, the support of technology platforms and/or reporting systems, or the Financial Intermediaries
making Shares of the Fund available to their customers. Such compensation may provide such Financial Intermediaries with an incentive to favor sales of Shares of the Fund over other investment options they make available to their customers. See the
Statement of Additional Information for more information.
Purchase and Redemption of Shares
BUYING AND SELLING SHARES
In the Secondary Market.
Most investors will buy and sell Shares of the Fund in secondary market transactions through brokers. Shares of the Fund are
listed and traded on the secondary market on the Exchange. Shares can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum investment. Although Shares are generally purchased and sold in round
lots of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller odd lots, at no per-Share price differential. When buying or selling Shares through a broker, you will incur customary brokerage
commissions and charges, and you may pay some or all of the spread between the bid and the offered price in the secondary market on each leg of a round trip (purchase and sale) transaction. The spread varies over time for Shares of the Fund based on
the Funds trading volume and market liquidity, and is generally lower if the Fund has a lot of trading volume and market liquidity.
Shares
of the Fund trade on the Exchange at prices that may differ to varying degrees from the daily NAV of the Shares.
Directly with the Fund.
The Funds Shares are issued or redeemed by the Fund at NAV per Share only in Creation Units. Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with the Fund must have entered into an
authorized participant agreement with the Distributor, or purchase through a dealer that has entered into such an agreement. Set forth below is a brief description of the procedures applicable to purchases and redemptions of Creation Units. For more
detailed information, see Creation and Redemption of Creation Unit Aggregations in the Funds Statement of Additional Information.
Beneficial Ownership.
The Depository Trust Company (DTC) serves as securities depository for the Shares. (The Shares may be held only in book-entry
form; stock certificates will not be issued.) DTC, or its nominee, is the record or registered owner of all outstanding Shares. Beneficial ownership of Shares will be shown on the records of DTC or its participants (described below). Beneficial
owners of Shares are not entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, to
exercise any rights of a holder of Shares, each beneficial owner must rely on the procedures of: (i) DTC; (ii) DTC Participants,
i.e.
, securities brokers and dealers, banks, trust companies, clearing corporations and
certain other organizations, some of whom (and/or their representatives) own DTC; and (iii) Indirect Participants,
i.e.
, brokers, dealers, banks and trust companies that clear through or maintain a custodial relationship with
a DTC Participant, either directly or indirectly, through which such beneficial owner holds its interests. The Trust understands that under existing industry
practice, in the event the Trust requests any action of holders of Shares, or a beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to
take, DTC would authorize the DTC Participants to take such action and that the DTC Participants would authorize the Indirect Participants and beneficial owners acting through such DTC Participants to take such action and would otherwise act upon
the instructions of beneficial owners owning through them. As described above, the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. For more detailed information, see Book Entry Only System in the
Funds Statement of Additional Information.
PREMIUM/DISCOUNT INFORMATION
The Fund has not commenced operations as of the date of this prospectus, and, therefore, does not have information about the differences between the
Funds daily market price on the Exchange and its NAV. When available, information regarding how often the Shares of the Fund traded on the Exchange at a price above (
i.e.
, at a premium) or below (
i.e.
, at a discount) the NAV of
the Fund during the past four calendar quarters, as applicable, can be found at www.jpmorganfunds.com.
PRICING
SHARES
The trading price of the Funds Shares on the Exchange may differ from the Funds daily NAV and can be affected by
market forces of supply and demand, economic conditions and other factors.
The Exchange disseminates the approximate value of Shares of the
Fund every fifteen seconds. This approximate value should not be viewed as a real-time update of the NAV per Share of the Fund because the approximate value may not be calculated in the same manner as the NAV, which is computed only once
a day. The approximate value is generally determined by using both current market quotations and/or price quotations obtained from broker-dealers and other market intermediaries that may trade in the portfolio securities held by the Fund. The Fund
is not involved in, or responsible for, the calculation or dissemination of the approximate value and the Fund does not make any representation or warranty as to its accuracy.
NAV is calculated each business day as of the close of the Cboe BZX Exchange, Inc. (Exchange), which is typically 4:00 p.m. ET. On occasion, the Exchange will close before 4:00 p.m. ET. When that happens,
NAV will be calculated as of the time the Exchange closes. The Fund will not treat an intraday unscheduled disruption or closure in the Exchange trading as a closure of the Exchange and will calculate NAV as of 4:00 p.m. ET if the particular
disruption or closure directly affects only the Exchange. The price at which a purchase of a Creation Unit is effected is based on the next calculation of NAV after the order is received in proper form in accordance with this
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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prospectus. To the extent the Fund invests in securities that are primarily listed on foreign exchanges or other markets that trade on weekends or other days when the Fund does not price its
Shares, the value of the Funds Shares may change on days when you will not be able to purchase or redeem your Shares. The NAV per share of the Fund is equal to the value of all its assets minus its liabilities, divided by the number of
outstanding shares.
Securities for which market quotations are readily available are generally valued at their current market value. Other
securities and assets, including securities for which market quotations are not readily available, market quotations are determined not to be reliable, or, their value has been materially affected by events occurring after the close of trading on
the exchange or market on which the security is principally traded but before the Funds NAV is calculated, may be valued at fair value in accordance with policies and procedures adopted by the Trusts Board of Trustees. Fair value
represents a good faith determination of the value of a security or other asset based upon specifically applied procedures. Fair valuation may require subjective determinations. There can be no assurance that the fair value of an asset is the price
at which the asset could have been sold during the period in which the particular fair value was used in determining the Funds NAV.
Equity
securities listed on a North American, Central American, South American or Caribbean securities exchange are generally valued at the last sale price on the exchange on which the security is principally traded. Other foreign equity securities are
fair valued using quotations from independent pricing services, as applicable. The value of securities listed on the NASDAQ Stock Market, Inc. is generally the NASDAQ official closing price.
Fixed income securities are valued using prices supplied by an approved independent third party or affiliated pricing services or broker/dealers. Those prices are determined using a variety of inputs and
factors as more fully described in the Statement of Additional Information.
Assets and liabilities initially expressed in foreign currencies are
converted into U.S. dollars at the prevailing market rates from an approved independent pricing service as of 4:00 p.m. ET.
Shares of ETFs are
generally valued at the last sale price on the exchange on which the ETF is principally traded. Shares of
other open-end investment companies are valued at their respective NAVs.
Options traded
on U.S. securities exchanges are valued at the composite mean price, using the National Best Bid and Offer quotes.
Options traded on foreign
exchanges are valued at the settled price, or if no settled price is available, at the last sale price available prior to the calculation of the Funds NAV and will be fair valued by applying fair value factors provided by independent pricing
services, as applicable, for any options involving equity reference obligations listed on exchanges other than North American, Central American, South American or Caribbean securities exchanges.
Exchange traded futures are valued at the last sale price available prior to the calculation of the Funds NAV. Any futures involving equity reference
obligations listed on exchanges other than North American, Central American, South American or Caribbean securities exchanges will be fair valued by applying fair value factors provided by independent pricing services, as applicable.
Non-listed over-the-counter futures are valued utilizing market quotations provided by approved pricing services.
Swaps and structured notes are priced generally by an approved independent third party or affiliated pricing service or at an evaluated price provided by a
counterparty or broker/dealer.
Any derivatives involving equity reference obligations listed on exchanges other than North American, Central
American, South American or Caribbean securities exchanges will be fair valued by applying fair value factors provided by independent pricing services, as applicable.
FREQUENT PURCHASES AND REDEMPTIONS
The Fund imposes no restrictions
on the frequency of purchases and redemptions. The Board of Trustees evaluated the risks of market timing activities by the Funds shareholders when they considered that no restriction or policy was necessary. The Board considered that, unlike
mutual funds, the Fund issues and redeems its Shares at NAV only in Creation Units, and the Funds Shares may be purchased and sold on the Exchange at prevailing market prices.
Shareholder Information
TAXES ON DISTRIBUTIONS
The Fund intends to elect to be treated and to qualify each taxable year as a regulated investment company. A regulated investment company is not subject to
tax at the corporate level on income and gains from investments that are distributed to shareholders. The Funds failure to qualify as a regulated investment company would result in corporate-level taxation and, consequently, a reduction in
income available for distribution to shareholders.
The Fund can earn income and realize capital gain. The Fund deducts any expenses and then pays
out the earnings, if any, to shareholders as distributions.
The Fund generally declares and distributes net investment income, if any, at least
monthly. The Fund will distribute net realized capital gain, if any, at least annually. For each taxable year, the Fund will distribute substantially all of its net investment income and net realized capital gain.
Distributions of net investment income generally are taxable as ordinary income. Dividends of net investment income paid to a non-corporate U.S. shareholder
that are properly reported as qualified dividend income generally will be taxable to such shareholder at a maximum individual federal income tax rate applicable to qualified dividend income of either 15% or 20%, depending on whether the
individuals income exceeds certain threshold amounts. The amount of dividend income that may be so reported by the Fund generally will be limited to the aggregate of the eligible dividends received by the Fund. In addition, the Fund must meet
certain holding period and other requirements with respect to the shares on which the Fund received the eligible dividends, and the non-corporate U.S. shareholder must meet certain holding period and other requirements with respect to the Fund. The
amount of a Funds distributions that would otherwise qualify for this favorable tax treatment may be reduced as a result of a Funds securities lending activities or high portfolio turnover rate. Dividends of net investment income that
are not reported as qualified dividend income and dividends of net short-term capital gain will be taxable to a U.S. shareholder as ordinary income. Given the investment strategies of the Fund, it is not anticipated that a significant portion of the
distributions paid by the Fund will be eligible to be designated as qualified dividend income.
Distributions of net capital gain (that is,
the excess of the net gains from the sale of investments that the Fund owned for more than one year over the net losses from investments that the Fund owned for one year or less) that are properly reported by the Fund as capital gain dividends will
be taxable as long-term capital gain, regardless of how long you have held your Shares in the Fund. The maximum individual federal income tax rate applicable to long-term capital gains is generally either 15% or 20%, depending on whether the
individuals income exceeds certain threshold amounts. Distributions of net short-term capital gain (that is, the excess of any net short-term capital gain over
net long-term capital loss), if any, will be taxable to U.S. shareholders as ordinary income. Capital gain of a corporate shareholder is taxed at the same rate as ordinary income.
An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the
Fund and net gains from redemptions or other taxable dispositions of 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.
If you buy Shares of the Fund just before a
distribution, you will be subject to tax on the entire amount of the taxable distribution you receive. Distributions are taxable to you even if they are paid from income or gain earned by the Fund before your investment (and thus were included in
the price you paid for your Shares). Any gain resulting from the sale or exchange of Shares generally will be taxable as long-term or short-term gain, depending upon how long you have held the Shares.
The Fund is generally subject to foreign withholding or other foreign taxes, which in some cases can be significant, on any income or gain from investments
in foreign stocks or securities. In that case, the Funds total return on those securities would be decreased. The Fund may generally deduct these taxes in computing its taxable income. Rather than deducting these foreign taxes, if the Fund
invests more than 50% of its assets in the stock or securities of foreign corporations or foreign governments at the end of its taxable year it may make an election to treat a proportionate amount of eligible foreign taxes as constituting a taxable
distribution to each shareholder, which would, subject to certain limitations, generally allow the shareholders to either (i) credit that proportionate amount of taxes against U.S. federal income tax liability as a foreign tax credit or
(ii) take that amount as an itemized deduction. Any foreign taxes withheld on payments made in lieu of dividends or interest with respect to loaned securities will not qualify for the pass-through of foreign tax credits to
shareholders. Although in some cases the Fund may be able to apply for a refund of a portion of such taxes, the ability to successfully obtain such a refund may be uncertain.
The Fund may invest a significant portion of its net assets in below investment grade instruments. Investments in these types of instruments may present
special tax issues for the Fund. U.S. federal income tax rules are not entirely clear about issues such as when the Fund 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 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 Fund to the extent necessary in order to seek to ensure
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20
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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that it distributes sufficient income that it does not become subject to U.S. federal income or excise tax.
The Funds investment in certain debt obligations and derivative instruments may require the Fund to accrue and distribute income not yet received. In order to generate sufficient cash to make the
requisite distributions, the Fund may be required to liquidate other investments in its portfolio that it otherwise would have continued to hold, including at times when it is not advantageous to do so.
The Funds transactions in futures contracts, swaps and other derivatives will be subject to special tax rules, the effect of which may be to accelerate
income to the Fund, defer losses to the Fund, cause adjustments in the holding periods of the Funds securities, and convert short-term capital losses into long-term capital losses. These rules could therefore affect the amount, timing and
character of distributions to shareholders. The Funds use of these types of transactions may result in the Fund realizing more short-term capital gain and ordinary income subject to tax at ordinary income tax rates than it would if it did not
engage in such transactions.
Please see the Statement of Additional Information for additional discussion of the tax consequences of the
above-described and other investments to the Fund and its shareholders.
The dates on which dividends and capital gain, if any, will be
distributed are available online at www.jpmorganfunds.com.
Early in each calendar year, you will receive a notice showing the amount of
distributions you received during the preceding calendar year and the tax status of those distributions.
The Fund is not intended for foreign
shareholders. Any foreign shareholder would generally be subject to U.S. tax-withholding on distributions by the Fund, as discussed in the Statement of Additional Information.
Any investor for whom the Fund does not have a valid Taxpayer Identification Number may be subject to backup withholding.
The tax considerations described in this section do not apply to tax-deferred accounts or other non-taxable entities.
TAXES ON EXCHANGE-LISTED SHARES SALES
Currently, any capital gain or
loss realized upon a sale of Shares is generally treated as long-term capital gain or loss if the Shares have been held for more than one year and as short-term capital gain or loss if the Shares have been held for one year or less. Capital loss
realized on the sale or exchange of Shares held for six months or less will be treated as long-term capital loss to the extent of any capital gain dividends received by the shareholder. The ability to deduct capital losses may be limited.
TAXES ON PURCHASE AND REDEMPTION OF CREATION UNITS
At the time of purchase, an Authorized Participant who exchanges equity securities for Creation Units generally will
recognize a gain or loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and the exchangers aggregate basis in the securities
surrendered and the cash paid. At redemption, a person who exchanges Creation Units for equity securities will generally recognize a gain or loss equal to the difference between the exchangers basis in the Creation Units and the aggregate
market value of the securities received and the cash received in connection with the redemption. The Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently
under the rules governing wash sales on the basis that there has been no significant change in economic position. Persons exchanging securities should consult their own tax advisor with respect to whether the wash sale rules apply
and when a loss might be deductible.
Under current federal tax laws, any capital gain or loss realized upon redemption of Creation Units is
generally treated as long-term capital gain or loss if the Shares have been held for more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less.
If you purchase or redeem Creation Units, you will be sent a confirmation statement showing how many and at what price you purchased or sold Shares.
The above is a general summary of tax implications of investing in the Fund. Because each investors tax consequences are unique, please
consult your tax advisor to see how investing in the Fund and, for individuals and S corporations, selection of a particular cost method of accounting will affect your own tax situation.
AVAILABILITY OF PROXY VOTING RECORD
The Trustees have delegated the authority to vote proxies for securities owned by the Fund to JPMIM. When available, a copy of the Funds voting record for the most recent 12-month period ended
June 30 will be available on the SECs website at www.sec.gov or on the Funds website at www.jpmorganfunds.com no later than August 31 of each year. The Funds proxy voting record will include, among other things, a brief
description of the matter voted on for each portfolio security, and will state how each vote was cast, for example, for or against the proposal.
OTHER INFORMATION
For purposes of the Investment Company Act of 1940 (1940 Act), the Fund is treated as a registered investment company. Section 12(d)(1) of the 1940
Act restricts investments by investment companies in the securities of other investment companies, including Shares of the Fund. Registered investment companies are permitted to invest in the Fund beyond the limits set forth in Section 12(d)(1)
subject to certain terms and conditions set forth in an SEC exemptive order issued to the Trust, including that such investment companies enter into an agreement with the Fund.
Investment Practices
The table discusses the types of investments which can be held by the Fund. In
each case, the related types of risk are also listed.
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INSTRUMENT
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RISK TYPE
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Adjustable Rate Mortgage Loans (ARMs):
Loans in a mortgage pool which provide for a fixed initial mortgage interest rate for a specified
period of time, after which the rate may be subject to periodic adjustments.
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Credit
Interest Rate
Liquidity
Market
Political
Prepayment
Valuation
|
Asset-Backed Securities:
Securities secured by company receivables, home equity loans, truck and auto loans, leases and credit card
receivables or other securities backed by other types of receivables or other assets.
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Credit
Interest Rate
Liquidity
Market
Political
Prepayment
Valuation
|
Bank Obligations:
Bankers acceptances, certificates of deposit and time deposits. Bankers acceptances are bills of exchange
or time drafts drawn on and accepted by a commercial bank. Maturities are generally six months or less. Certificates of deposit are negotiable certificates issued by a bank for a specified period of time and earning a specified return. Time deposits
are non-negotiable receipts issued by a bank in exchange for the deposit of funds.
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Credit
Currency
Interest Rate
Liquidity
Market
Political
|
Brady Bonds:
Securities created through the exchange of existing commercial bank loans to public and private entities in certain emerging
markets for new bonds in connection with debt restructurings.
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Credit
Currency
Foreign Investment
Interest Rate
Market
Political
|
Call and Put Options:
A call option gives the buyer the right to buy, and obligates the seller of the option to sell a security at a
specified price at a future date. A put option gives the buyer the right to sell, and obligates the seller of the option to buy a security at a specified price at a future date. The Fund will sell only covered call and secured put
options.
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Credit
Interest Rate
Leverage
Liquidity
Management
Market
|
Commercial Paper:
Secured and unsecured short-term promissory notes issued by corporations and other entities. Maturities generally vary
from a few days to nine months.
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Credit
Currency
Interest Rate
Liquidity
Market
Political
Valuation
|
Common Stock:
Shares of ownership of a company.
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Market
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Common Stock Warrants and Rights:
Securities, typically issued with preferred stock or bonds, that give the holder the right to buy a
proportionate amount of common stock at a specified price.
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Credit
Market
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22
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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INSTRUMENT
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RISK TYPE
|
Convertible Securities:
Bonds or preferred stock that can convert to common stock including contingent convertible
securities.
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Credit
Currency
Foreign Investments Interest Rate
Liquidity
Market
Political
Valuation
|
Corporate Debt Securities:
May include bonds and other debt securities of domestic and foreign issuers, including obligations of
industrial, utility, banking and other corporate issuers.
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Credit
Currency
Interest Rate
Liquidity
Market
Political
Valuation
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Credit Default Swaps (CDSs):
A swap agreement between two parties pursuant to which one party pays the other a fixed periodic coupon for
the specified life of the agreement. The other party makes no payment unless a credit event, relating to a predetermined reference asset, occurs. If such an event occurs, the party will then make a payment to the first party, and the swap will
terminate.
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Credit
Currency
Interest Rate
Leverage
Liquidity
Management
Market
Political
Valuation
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Custodial Receipts:
The Fund may acquire securities in the form of custodial receipts that evidence ownership of future interest
payments, principal payments or both on certain U.S. Treasury notes or bonds in connection with programs sponsored by banks and brokerage firms. These are not considered to be U.S. government securities. These notes and bonds are held in custody by
a bank on behalf of the owners of the receipts.
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Credit
Liquidity
Market
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Demand Features:
Securities that are subject to puts and standby commitments to purchase the securities at a fixed price (usually with
accrued interest) within a fixed period of time following demand by the Fund.
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Liquidity
Management
Market
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Emerging Market Securities:
Securities issued by issuers or governments in countries with emerging economies or securities markets which
may be undergoing significant evolution and rapid development.
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Foreign Investment
Credit
Currency
Interest Rate
Market
Liquidity
Political
|
Exchange-Traded Funds (ETFs):
Ownership interest in unit investment trusts, depositary receipts, and other pooled investment vehicles
that hold a portfolio of securities or stocks designed to track the price performance and dividend yield of a particular broad-based, sector or international index. ETFs include a wide range of investments.
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Investment Company
Market
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Foreign Currency Transactions:
Strategies used to hedge against currency risks, for other risk management purposes or to increase income
or gain to the Fund. These strategies may consist of use of any of the following: options on currencies, currency futures, options on such futures, forward foreign currency transactions (including non-deliverable forwards (NDFs)),
forward rate agreements and currency swaps, caps and floors.
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Credit
Foreign Investment
Leverage
Liquidity
Management
Market
Prepayment
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Investment Practices
(continued)
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INSTRUMENT
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RISK TYPE
|
Foreign Investments:
Equity and debt securities (
e.g.
, bonds and commercial paper) of foreign entities and obligations of foreign
branches of U.S. banks and foreign banks. Foreign securities may also include American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) and American Depositary Securities (ADSs).
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Foreign Investment
Interest Rate
Liquidity
Market
Political
Prepayment
|
High Yield/High Risk Securities/Junk Bonds:
Securities that are generally rated below investment grade by the primary rating agencies or
are unrated but are deemed by the Funds adviser to be of comparable quality.
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Credit
Currency
High Yield
Securities
Interest Rate
Liquidity
Market
Political
Portfolio Quality
Valuation
|
Inflation-Linked Debt Securities:
Includes fixed and floating rate debt securities of varying maturities issued by the U.S. government as
well as securities issued by other entities such as corporations, foreign governments and foreign issuers.
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Credit
Currency
Interest Rate
Political
|
Inverse Floating Rate Instruments:
Leveraged variable debt instruments with interest rates that reset in the opposite direction from the
market rate of interest to which the inverse floater is indexed.
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Credit
Leverage
Market
|
Investment Company Securities:
Shares of other investment companies, including money market funds for which the adviser and/or its
affiliates serve as investment adviser or administrator. The adviser will waive certain fees when investing in funds for which it serves as investment adviser, to the extent required by law or by contract.
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Investment Company
Market
|
Loan Assignments and Participations:
Assignments of, or participations in, all or a portion of loans to corporations or to governments,
including governments of less developed countries.
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Credit
Currency
Extension
Foreign Investment
Interest Rate
Liquidity
Market
Political
Prepayment
|
Mortgages (Directly Held):
Debt instruments secured by real property.
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Credit
Environmental
Extension
Interest Rate
Liquidity
Market
Natural Event
Political
Prepayment
Valuation
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24
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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INSTRUMENT
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RISK TYPE
|
Mortgage-Backed Securities:
Debt obligations secured by real estate loans and pools of loans such as collateralized mortgage obligations
(CMOs), commercial
mortgage-backed
securities (CMBSs) and other asset-backed structures.
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Credit
Currency
Extension
Interest Rate
Leverage
Liquidity
Market
Political
Prepayment
Tax
Valuation
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Mortgage Dollar Rolls
1
:
A transaction in which the Fund sells securities for delivery in a current month and simultaneously contracts with
the same party to repurchase similar but not identical securities on a specified future date.
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Currency
Extension
Interest Rate
Leverage
Liquidity
Market
Political
Prepayment
|
Municipal Securities:
Securities issued by a state or political subdivision to obtain funds for various public purposes. Municipal
securities include, among others, private activity bonds and industrial development bonds, as well as general obligation notes, tax anticipation notes, bond anticipation notes, revenue anticipation notes, other short-term
tax-exempt
obligations, municipal leases, obligations of municipal housing authorities and single family revenue bonds.
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Credit
Interest Rate
Market
Natural Event
Political
Prepayment
Tax
|
New Financial Products:
New options and futures contracts and other financial products continue to be developed and the Fund may invest
in such options, contracts and products.
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Credit
Liquidity
Management
Market
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Obligations of Supranational Agencies:
Obligations which are chartered to promote economic development and are supported by various
governments and governmental agencies.
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Credit
Foreign Investment
Liquidity
Political
Valuation
|
Options and Futures Transactions:
The Fund may purchase and sell (a) exchange traded and over-the-counter put and call options on
securities, indexes of securities and futures contracts on securities, indexes of securities, interest rate futures contracts and interest rate swaps and (b) futures contracts on securities and indexes of securities.
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Credit
Interest Rate
Leverage
Liquidity
Management
Market
|
Preferred Stock:
A class of stock that generally pays a dividend at a specified rate and has preference over common stock in the payment
of dividends and in liquidation.
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Interest Rate
Market
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Private Placements, Restricted Securities and Other Unregistered Securities:
Securities not registered under the Securities Act of 1933,
such as privately placed commercial paper and Rule 144A securities.
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Liquidity
Market
Valuation
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1
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All forms of borrowing (including mortgage dollar rolls) are limited in the aggregate and may not exceed 33
1
/
3
% of
the Funds total assets except as permitted by law.
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Investment Practices
(continued)
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INSTRUMENT
|
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RISK TYPE
|
Real Estate Investment Trusts (REITs):
Pooled investment vehicles which invest primarily in income producing real estate or real estate
related loans or interest.
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Credit
Interest Rate
Liquidity
Management
Market
Political
Prepayment
Tax
Valuation
|
Repurchase Agreements:
The purchase of a security and the simultaneous commitment to return the security to the seller at an agreed upon
price on an agreed upon date. This is treated as a loan.
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Credit
Liquidity
Market
|
Reverse Repurchase Agreements
1
:
The sale of a security and the simultaneous commitment to buy the security back at an agreed upon price on an
agreed upon date. This is treated as a borrowing by a Fund.
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Credit
Leverage
Market
|
Securities Lending:
The lending of up to
33
1
/
3
% of a Funds total assets. In return, a Fund will receive cash, other securities, and/or letters of credit as collateral.
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Credit
Leverage
Market
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Securities Issued in Connection with Reorganizations and Corporate Restructurings:
In connection with reorganizing or restructuring of an
issuer, an issuer may issue common stock or other securities to holders of its debt securities.
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Market
|
Short-Term Funding Agreements:
Agreements issued by banks and highly rated U.S. insurance companies such as Guaranteed Investment
Contracts (GICs) and Bank Investment Contracts (BICs).
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Credit
Liquidity
Market
|
Sovereign Obligations:
Investments in debt obligations issued or guaranteed by a foreign sovereign government or its agencies,
authorities or political subdivisions.
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Credit
Foreign Investment
Interest Rate
Liquidity
Political
Valuation
|
Stripped Mortgage-Backed Securities:
Derivative multi-class mortgage securities which are usually structured with two classes of shares
that receive different proportions of the interest and principal from a pool of mortgage assets. These include Interest-Only (IO) and Principal-Only (PO) securities issued outside a Real Estate Mortgage Investment Conduit (REMIC) or CMO
structure.
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Credit
Interest Rate
Liquidity
Market
Political
Prepayment
Valuation
|
Structured Investments:
A security having a return tied to an underlying index or other security or asset class. Structured investments
generally are individually negotiated agreements and may be traded
over-the-counter.
Structured investments are organized and operated to restructure the investment
characteristics of the underlying security.
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Credit
Foreign Investment
Liquidity
Management
Market
Valuation
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26
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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INSTRUMENT
|
|
RISK TYPE
|
Swaps and Related Swap Products:
Swaps involve an exchange of obligations by two parties. Caps and floors entitle a purchaser to a
principal amount from the seller of the cap or floor to the extent that a specified index exceeds or falls below a predetermined interest rate or amount. The Fund may enter into these transactions to manage its exposure to changing interest rates
and other factors.
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Credit
Currency
Interest Rate
Leverage
Liquidity
Management
Market
Political
Valuation
|
Synthetic Variable Rate Instruments:
Instruments that generally involve the deposit of a long-term tax exempt bond in a custody or trust
arrangement and the creation of a mechanism to adjust the long-term interest rate on the bond to a variable short-term rate and a right (subject to certain conditions) on the part of the purchaser to tender it periodically to a third party at
par.
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Credit
Liquidity
Market
|
Temporary Defensive Positions:
To respond to unusual circumstances the Fund may invest in cash and cash equivalents for temporary
defensive purposes.
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Credit
Interest Rate
Liquidity
Market
|
Treasury Receipts:
The Fund may purchase interests in separately traded interest and principal component parts of U.S. Treasury
obligations that are issued by banks or brokerage firms and that are created by depositing U.S. Treasury notes and U.S. Treasury bonds into a special account at a custodian bank. Receipts include Treasury Receipts (TRs), Treasury Investment Growth
Receipts (TIGRs), and Certificates of Accrual on Treasury Securities (CATS).
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Market
|
Trust Preferreds:
Securities with characteristics of both subordinated debt and preferred stock. Trust preferreds are generally long term
securities that make periodic fixed or variable interest payments.
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Credit
Currency
Interest Rate
Liquidity
Market
Political
Valuation
|
U.S. Government Agency Securities:
Securities issued or guaranteed by agencies and instrumentalities of the U.S. government. These
include all types of securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, including funding notes, subordinated benchmark notes, CMOs and REMICs.
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Credit
Government
Securities
Interest Rate
Market
|
U.S. Government Obligations:
May include direct obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all of which
are backed as to principal and interest payments by the full faith and credit of the United States, and separately traded principal and interest component parts of such obligations that are transferable through the Federal book-entry system known as
Separate Trading of Registered Interest and Principal of Securities (STRIPS) and Coupons Under Book Entry Safekeeping (CUBES).
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Interest Rate
Market
|
Variable and Floating Rate Instruments:
Obligations with interest rates which are reset daily, weekly, quarterly or some other frequency
and which may be payable to the Fund on demand or at the expiration of a specified term.
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Credit
Liquidity
Market
Valuation
|
When-Issued Securities, Delayed Delivery Securities and Forward Commitments:
Purchase or contract to purchase securities at a fixed price
for delivery at a future date.
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Credit
Leverage
Liquidity
Market
Valuation
|
Investment Practices
(continued)
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INSTRUMENT
|
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RISK TYPE
|
Zero-Coupon,
Pay-in-Kind
and Deferred Payment Securities:
Zero-coupon securities are securities that are sold at a discount to par value and on which interest payments are not made during the life of the security.
Pay-in-kind
securities are securities that have interest payable by delivery of additional securities. Deferred payment securities are zero-coupon debt securities which convert on a specified date to interest bearing debt securities.
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Credit
Currency
Interest Rate
Liquidity
Market
Political
Valuation
Zero-Coupon
Securities
|
Risk related to certain investments held by the Fund:
Credit risk
The risk that a financial obligation will not be met by the issuer of a security or the counterparty to a contract, resulting in a loss to
the purchaser.
Currency risk
The risk that currency exchange rate fluctuations may reduce gains or increase losses on foreign investments.
Environmental risk
The risk that an owner or operator of real estate may be liable for the costs associated with hazardous or toxic
substances located on the property.
Extension risk
The risk that a rise in interest rates will extend the life of a security to a date
later than the anticipated prepayment date, causing the value of the investment to fall.
Foreign investment risk
The risk associated with
higher transaction costs, delayed settlements, currency controls and adverse economic developments. This also includes the risk that fluctuations in the exchange rates between the U.S. dollar and foreign currencies may negatively affect an
investment. Adverse changes in exchange rates may erode or reverse any gains produced by foreign currency denominated investments and may widen any losses. Exchange rate volatility also may affect the ability of an issuer to repay U.S. dollar
denominated debt, thereby increasing credit risk.
Government securities risk
The Fund may invest in securities issued or guaranteed by the
U.S. government or its agencies or instrumentalities (such as securities issued by Fannie Mae, Ginnie Mae or Freddie Mac securities). U.S. government securities are subject to market risk, interest rate risk and credit risk. Securities, such as
those issued or guaranteed by Ginnie Mae or the U.S. Treasury, that are backed by the full faith and credit of the United States are guaranteed only as to the timely payment of interest and principal when held to maturity and the market prices for
such securities will fluctuate. Notwithstanding that these securities are backed by the full faith and credit of the United States, circumstances could arise that would prevent the payment of interest or principal. This would result in losses to the
Fund. Securities issued or guaranteed by U.S. government-related organizations, such as Fannie Mae and Freddie Mac, are not backed by the full faith of the U.S. government and no assurance can be given that the U.S. government will provide financial
support. Therefore, U.S. government-related organizations may not have the funds to meet their payment obligations in the future.
High yield
securities risk
The risk that the Fund may invest in high yield, high risk securities (also known as junk bonds) which are considered to be speculative. These investments may be issued by companies which are highly leveraged, less creditworthy
or financially distressed. Non-investment grade debt securities can be more sensitive to short-term corporate, economic and market developments. During periods of economic uncertainty and change, the market price of the Funds investments and
the Funds NAV may be volatile. Furthermore, though these investments generally provide a higher yield than higher-rated debt securities, the high degree of risk involved in these investments can result in substantial or total losses. These
securities are subject to great risk of loss, greater sensitivity to economic changes, valuation difficulties, and a potential lack of a secondary or public market for securities. The market price of these securities can change suddenly and
unexpectedly.
Interest rate risk
The risk that a change in interest rates will adversely affect the value of an investment. The value of
fixed income securities generally
moves in the opposite direction of interest rates (decreases when interest rates rise and increases when interest rates fall).
Investment company risk
If the Fund invests in shares of another investment company, shareholders would bear not only their proportionate share of the Funds expenses, but also similar expenses
of the investment company. The price movement of an investment company that is an ETF may not track the underlying index and result in a loss.
Leverage risk
The risk that gains or losses will be disproportionately higher than the amount invested.
Liquidity risk
The risk that the holder may not be able to sell the security at the time or price it desires.
Management risk
The risk that a strategy used by the Funds management may fail to produce the intended result. This includes the risk that
changes in the value of a hedging instrument will not match those of the asset being hedged. Incomplete matching can result in unanticipated risks.
Market risk
The risk that when the market as a whole declines, the value of a specific investment will decline proportionately. This systematic risk
is common to all investments and the mutual funds that purchase them.
Natural event risk
The risk that a natural disaster, such as a
hurricane or similar event, will cause severe economic losses and default in payments by the issuer of the security.
Political risk
The
risk that governmental policies or other political actions will negatively impact the value of the investment.
Portfolio quality risk
The
risk associated with below investment grade securities including greater risk of default, greater sensitivity to interest rate and economic changes, potential valuation difficulties, and sudden and unexpected changes in credit quality.
Prepayment risk
The risk that declining interest rates will result in unexpected prepayments, causing the value of the investment to fall.
Tax risk
The risk that the issuer of the securities will fail to comply with certain requirements of the Internal Revenue Code, which could cause
adverse tax consequences. Also the risk that the tax treatment of municipal or other securities could be changed by Congress thereby affecting the value of outstanding securities.
Valuation risk
The risk that the estimated value of a security does not match the actual amount that can be realized if the security is sold.
Zero-Coupon securities risk
The risk that the market value of a zero-coupon, pay-in-kind or deferred payment security is generally more volatile than the market value of, and is more likely to respond
to a greater degree to changes in interest rates than, other fixed income securities with similar maturities and credit quality that pay interest periodically. In addition, federal income tax law requires that the holder of a zero-coupon security
accrue a portion of the discount at which the security was purchased as taxable income each year even though the holder receives no interest payments on the note during the year. The Fund must distribute substantially all of its net income
(including non-cash income attributable to zero-coupon securities). These actions may reduce the assets to which the Funds expenses could otherwise be allocated and may reduce the Funds rate of return.
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28
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J.P. MORGAN EXCHANGE-TRADED FUNDS
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Financial Highlights
This section would ordinarily include Financial Highlights. The Financial
Highlights table is intended to help you understand the Funds performance for the Funds periods of operations. Because the Fund has not yet commenced operations as of the date of this prospectus, no Financial Highlights are shown.
HOW TO REACH US
MORE INFORMATION
For investors who want more information on the Fund the following documents are available free upon request:
ANNUAL AND SEMI-ANNUAL REPORTS
The Funds annual and semi-annual reports, when available,
will contain more information about the Funds investments and performance. The annual report will also include details about the market conditions and investment strategies that have a significant effect on the Funds performance.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI contains more detailed information about the Fund and its policies. It is incorporated by reference into this prospectus. This means, by law, it is considered to be part of this prospectus.
You can get a free copy of these documents and other information, or ask us any questions, by calling us at
1-844-457-6383 (844-4JPM ETF) or writing to:
J.P.
Morgan Exchange-Traded Funds
270 Park Avenue
NY1-K108
New York, NY 10017
If you buy your shares through a Financial Intermediary, you should contact that Financial Intermediary
directly for more information. You can also find information online at www.jpmorganfunds.com.
You can write or e-mail the SECs Public
Reference Section and ask them to mail you information about the Fund, including the SAI. They will charge you a copying fee for this service.
Public Reference Section
Washington,
DC 20549-1520
1-202-551-8090
Email: publicinfo@sec.gov
Reports, a copy of
the SAI and other information about the Fund are also available on the EDGAR Database on the SECs website at http://www.sec.gov.
Investment Company Act File No. for the Fund is 811-22903.
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©
JPMorgan Chase & Co., 2019. All rights reserved.
January 2019.
PR-CPBETF-119
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STATEMENT OF ADDITIONAL INFORMATION
PART I
January 23, 2019
J.P. MORGAN EXCHANGE-TRADED FUND TRUST (the Trust)
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Fund Name
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Ticker
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Listing Exchange
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JPMorgan Core Plus Bond ETF (the Core Plus Bond ETF or
the Fund)
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JCPB
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Cboe BZX Exchange, Inc.
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This Statement of Additional Information (SAI) is not a prospectus, but contains
additional information which should be read in conjunction with the prospectus for the Fund, dated January 23, 2019, as supplemented from time to time (the Prospectus). The Prospectus is available without charge upon request by
contacting JPMorgan Distribution Services, Inc. (JPMDS or the Distributor), the Funds distributor, at 1111 Polaris Parkway, Columbus, OH 43240.
This SAI is divided into two Parts Part I and Part II. Part I of this SAI contains information that is particular to the Fund.
Part II of this SAI contains additional information that more generally applies to the Trusts funds.
For more
information about the Fund, simply write or call:
J.P. Morgan Exchange-Traded Funds
270 Park Ave
NY1-K108
New York, NY 10017
1-844-457-6383
(844-4JPM
ETF)
SAI-CPBETF-119
TABLE OF CONTENTS
PART I
PLEASE SEE PART II OF THIS SAI FOR ITS TABLE OF CONTENTS
GENERAL
The Trust and the Fund
The Fund is a series of J.P. Morgan Exchange-Traded Fund Trust (the Trust), an
open-end,
management investment company formed as a statutory trust under
the laws of the State of Delaware on February 25, 2010 and governed by a Declaration of Trust as amended and restated on February 19, 2014.
The Fund will offer and issue shares at net asset value (NAV) only in aggregations of a specified number of shares (each a Creation Unit or a Creation Unit
Aggregation). The shares of the Fund are collectively referred to as the Shares in this SAI. The Funds Shares will be listed and traded on the Cboe BZX Exchange, Inc. (the Exchange). Fund Shares will trade on the
Exchange at market prices that may be below, at or above NAV. Shares are redeemable only in Creation Unit Aggregations. The Fund generally issues and redeems Creation Units in return for a designated portfolio of securities and an amount of cash.
The amount of Shares in a Creation Unit for the Fund is 100,000 Shares.
In the event of the liquidation of the Fund, the
Trust may lower the number of Shares in a Creation Unit. When the Fund issues and redeems Creation Units in kind, the Trust nonetheless reserves the right to permit or require a full or partial cash option for creations and/or
redemptions of Fund Shares. Fund Shares may be issued in advance of receipt of a basket of securities and other investments (Deposit Instruments) subject to various conditions. See the Creation and Redemption of Creation
Units section in Appendix A. In each instance of such cash creations or redemptions, transaction fees may be imposed that will be higher than the transaction fees associated with
in-kind
creations or
redemptions. In all cases, such fees will be limited in accordance with the requirements of the Securities and Exchange Commission (the SEC) applicable to management investment companies offering redeemable securities.
Miscellaneous
This SAI describes the financial history, investment strategies and policies, management and operation of the Fund in order to enable investors to determine whether the Fund best suits their needs.
This SAI provides additional information with respect to the Fund and should be read in conjunction with the Funds
current Prospectus. Capitalized terms not otherwise defined herein have the meanings accorded to them in the Prospectus. The Funds executive offices are located at 270 Park Avenue, New York, NY 10017.
The Trusts Board of Trustees is referred to herein as the Board of Trustees or Board, and each trustee is
referred to as a Trustee. J.P. Morgan Investment Management Inc. (JPMIM or Adviser) is the investment adviser to the Fund. Investments in the Fund are not deposits or obligations of, nor guaranteed or endorsed by,
JPMorgan Chase Bank, N.A. (JPMorgan Chase Bank), an affiliate of the Adviser, or any other bank. Shares of the Fund are not federally insured or guaranteed by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any
other governmental agency. An investment in the Fund is subject to risks that may cause the value of the investment to fluctuate, and when the investment is redeemed, the value may be higher or lower than the amount originally invested by the
investor.
The Fund is not subject to registration or regulation as a commodity pool operator as defined in the
Commodity Exchange Act because the Fund has claimed an exclusion from that definition.
INVESTMENT POLICIES
The following investment policies have been adopted by the Trust with respect to the Fund. The investment policies listed below under the heading Fundamental Investment Policies are
fundamental policies which, under the Investment Company Act of 1940, as amended (the 1940 Act), may not be changed without the vote of a majority of the outstanding voting securities of the Fund, as such term is defined in
the Additional Information section in Part II of this SAI. All other investment policies of the Fund (including its investment objective) are
non-
fundamental, unless otherwise designated in the
Prospectus or herein, and may be changed by the Trustees of the Fund without shareholder approval.
Except for the restriction
on borrowings set forth in the fundamental investment policies below, the percentage limitations contained in the policies below apply at the time of purchase of the securities. If a percentage or rating restriction on investment or use of assets
set forth in a fundamental investment policy or a
non-fundamental
investment policy or in the Prospectus is adhered to at the time of investment, later changes in percentage resulting from any cause other than
actions by the Fund will not be considered a violation. If the value of the Funds holdings
Part I - 1
of illiquid securities at any time exceeds the percentage limitation applicable at the time of acquisition due to subsequent fluctuations in value or other reasons, the Funds Adviser, or
persons designated by the Board to make such determination, will consider what actions, if any, are appropriate to maintain adequate liquidity. With respect to the fundamental investment policy on borrowing, the 1940 Act generally limits the
Funds ability to borrow money on a
non-temporary
basis if such borrowings constitute senior securities. As noted in Investment Strategies and Policies Miscellaneous Investment
Strategies and Risks Borrowings in SAI Part II, in addition to temporary borrowing, the Fund may borrow from any bank, provided that immediately after any such borrowing there is an asset coverage of at least 300% for all borrowings by
the Fund and provided further, that in the event that such asset coverage shall at any time fall below 300%, the Fund shall, within three days (not including Sundays or holidays) thereafter or such longer period as the SEC may prescribe by rules and
regulations, reduce the amount of its borrowings to such an extent that the asset coverage of such borrowing shall be at least 300%. The Fund may also borrow money or engage in economically similar transactions if those transactions do not
constitute senior securities under the 1940 Act. Under current pronouncements, certain Fund positions (e.g., reverse repurchase agreements) are excluded from the definition of senior security so long as the Fund maintains
adequate cover, segregation of assets or otherwise. Similarly, a short sale will not be considered a senior security if the Fund takes certain steps contemplated by SEC staff pronouncements, such as ensuring the short sale transaction is adequately
covered. If the value of the Funds holdings of illiquid securities at any time exceeds the percentage limitation applicable at the time of acquisition due to subsequent fluctuations in value or other reasons, the Funds Adviser will
consider what actions, if any, are appropriate to maintain adequate liquidity.
For purposes of the Funds fundamental
investment policy regarding industry concentration, to concentrate generally means to invest more than 25% of the Funds total assets, taken at market value at the time of investment. This fundamental investment policy regarding
concentration does not apply to securities issued by other investment companies, securities issued or guaranteed by the U.S. government, any state or territory of the U.S., its agencies, instrumentalities, or political subdivisions, or repurchase
agreements secured thereby, and futures and options transactions issued or guaranteed by any of the foregoing. For purposes of the fundamental investment policy involving industry concentration, group of industries means a group of
related industries, as determined in good faith by the Adviser, based on published classifications or other sources. For purposes of the fundamental investment policy regarding industry concentration, the Adviser may classify issuers by industry in
accordance with classifications set forth in the Directory of Companies Filing Annual Reports with the SEC or other sources. In the absence of such classification or if the Adviser determines in good faith based on its own information that the
economic characteristics affecting a particular issuer make it more appropriate to be considered engaged in a different industry, the Adviser may classify an issuer accordingly. Accordingly, the composition of an industry or group of industries may
change from time to time.
Finally, the Fund is subject to the fundamental and
non-fundamental
investment policies and investment restrictions applicable to the Fund that are described herein and by any restrictions imposed by applicable law.
Fundamental Investment Policies.
The
Fund:
(1) May not purchase any security which would cause the Fund to concentrate more than 25% of its
investments in the securities of issuers primarily engaged in any particular industry or group industries;
(2) May
not issue senior securities, except as permitted under the 1940 Act or any rule, order or interpretation thereunder;
(3) May not borrow money, except to the extent permitted by applicable law;
(4) May not underwrite securities of other issuers, except to the extent that the Fund, may be deemed an underwriter under
certain securities laws in disposing of portfolio securities or in connection with investments in other investment companies;
(5) May not invest directly in real estate unless it is acquired as a result of ownership of securities or other instruments.
This restriction shall not prevent the Fund from investing in securities or other instruments (a) issued by companies that invest, deal or otherwise engage in transactions in real estate, or (b) backed or secured by real estate or
interests in real estate;
(6) May not purchase or sell commodities or commodity contracts except as may be
permitted by the 1940 Act or unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell
Part I - 2
commodities or commodities contracts; but this shall not prevent the Fund from purchasing, selling and entering into financial futures contracts (including futures contracts on indices of
securities, interest rates and currencies), options on financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts
or other derivative instruments including derivatives related to physical commodities;
(7) May make loans to other
persons, in accordance with the Funds investment objective and policies and to the extent permitted by applicable law;
(8) May not make an investment inconsistent with its classification as a diversified investment company under the 1940 Act.
The Fund may invest in types of investments and engage in transactions that are considered lending transactions. The types of
investments and strategies that the Fund may use are described in further detail in the Prospectus and this SAI.
Non-Fundamental
Investment Policies.
The Fund:
(1) May not acquire the securities of registered
open-end
investment companies or
registered unit investment trusts in reliance on Section
12(d)(1)(F) or 12(d)(1)(G) of the 1940 Act.
INVESTMENT PRACTICES
The Fund invests in a variety of securities and employs a number of investment techniques. What follows is a list of some of the
securities and techniques which may be utilized by the Fund. For a more complete discussion, see the Investment Strategies and Policies section in Part II of this SAI.
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Instrument
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Part II
Section
Reference
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Adjustable Rate Mortgage Loans (ARMs):
Loans in a mortgage pool which
provide for a fixed initial mortgage interest rate for a specified period of time, after which the rate may be subject to periodic adjustments.
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Mortgage-Related Securities
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Asset-Backed Securities:
Securities secured by company receivables, home equity
loans, truck and auto loans, leases, and credit card receivables or other securities backed by other types of receivables or other assets.
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Asset-Backed Securities
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Bank Obligations:
Bankers acceptances, certificates of deposit and time
deposits. Bankers acceptances are bills of exchange or time drafts drawn on and accepted by a commercial bank. Maturities are generally six months or less. Certificates of deposit are negotiable certificates issued by a bank for a specified
period of time and earning a specified return. Time deposits are non-negotiable receipts issued by a bank in exchange for the deposit of funds.
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Bank Obligations
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Brady Bonds:
Securities created through the exchange of existing commercial bank
loans to public and private entities in certain emerging markets for new bonds in connection with debt restructurings.
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Foreign Investments (including Foreign Currencies)
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Call and Put Options:
A call option gives the buyer the right to buy, and obligates
the seller of the option to sell, a security at a specified price at a future date. A put option gives the buyer the right to sell, and obligates the seller of the option to buy, a security at a specified price at a future date.
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Options and Futures Transactions
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Commercial Paper:
Secured and unsecured short-term promissory notes issued by
corporations and other entities. Maturities generally vary from a few days to nine months.
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Commercial Paper
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Common Stock:
Shares of ownership of a company.
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Equity Securities, Warrants and Rights
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Common Stock Warrants and Rights:
Securities, typically issued with preferred stock
or bonds that give the holder the right to buy a proportionate amount of common stock at a specified price.
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Equity Securities, Warrants and
Rights
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Part I - 3
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Instrument
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Part II
Section
Reference
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Convertible Securities:
Bonds or preferred stock that can convert to common
stock.
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Convertible Securities
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Corporate Debt Securities:
May include bonds and other debt securities of domestic
and foreign issuers, including obligations of industrial, utility, banking and other corporate issuers.
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Debt Instruments
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Credit Default Swaps (CDSs):
A swap agreement between two parties
pursuant to which one party pays the other a fixed periodic coupon for the specified life of the agreement. The other party makes no payment unless a credit event, relating to a predetermined reference asset, occurs. If such an event occurs, the
party will then make a payment to the first party, and the swap will terminate.
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Swaps and Related Swap Products
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Custodial Receipts:
A Fund may acquire securities in the form of custodial receipts
that evidence ownership of future interest payments, principal payments or both on certain U.S. Treasury notes or bonds in connection with programs sponsored by banks and brokerage firms. These are not considered to be U.S. government securities.
These notes and bonds are held in custody by a bank on behalf of the owners of the receipts.
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Custodial Receipts
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Demand Features:
Securities that are subject to puts and standby commitments to
purchase the securities at a fixed price (usually with accrued interest) within a fixed period of time following demand by the Fund.
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Demand Features
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Emerging Market Securities:
Instruments issued by issuers or governments in countries
with emerging economies or securities markets which may be undergoing significant evolution and rapid developments.
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Foreign Investments (including Foreign Currencies)
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Exchange-Traded Funds (ETFs):
Ownership interest in unit investment
trusts, depositary receipts, and other pooled investment vehicles that hold a portfolio of securities or stocks designed to track the price performance and dividend yield of a particular broad-based, sector or international index. ETFs include a
wide range of investments.
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Investment Company Securities and Exchange-Traded Funds
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Foreign Currency Transactions
: Strategies used to hedge against currency risks, for
other risk management purposes or to increase income or gain to the Fund. These strategies may consist of use of any of the following: options on currencies, currency futures, options on such futures, forward foreign currency transactions (including
non-deliverable
forwards (NDFs)), forward rate agreements and currency swaps, caps and floors.
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Foreign Investments (including Foreign Currencies)
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Foreign Investments:
Equity and debt securities (e.g., bonds and commercial paper) of
foreign entities and obligations of foreign branches of U.S. banks and foreign banks. Foreign securities may also include American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts
(EDRs) and American Depositary Securities (ADSs).
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Foreign Investments (including Foreign Currencies)
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High Yield/High Risk Securities/Junk Bonds:
Securities that are generally rated below
investment grade by the primary rating agencies or are unrated but are deemed by the Funds adviser to be of comparable quality.
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Debt Instruments
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Inflation-Linked Debt Securities:
Includes fixed and floating rate debt securities of
varying maturities issued by the U.S. government as well as securities issued by other entities such as corporations, foreign governments and foreign issuers.
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Debt Instruments
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Inverse Floating Rate Instruments:
Leveraged variable debt instruments with interest
rates that reset in the opposite direction from the market rate of interest to which the inverse floater is indexed.
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Inverse Floaters and Interest Rate Caps
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Investment Company Securities:
Shares of other investment companies, including money
market funds for which the Adviser and/or its affiliates serve as investment adviser or administrator. The Adviser will waive certain fees when investing in funds for which it serves as investment adviser, to the extent required by law or by
contract.
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Investment Company Securities and Exchange-Traded
Funds
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Part I - 4
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Instrument
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Part II
Section
Reference
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Loan Assignments and Participations
: Assignments of, or participations in, all or a
portion of loans to corporations or to governments, including governments in less developed countries.
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Loans
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Mortgages (Directly Held):
Debt instruments secured by real property.
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Mortgage-Related Securities
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Mortgage-Backed Securities:
Debt obligations secured by real estate loans and pools
of loans.
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Mortgage-Related Securities
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Mortgage Dollar Rolls:
A transaction in which the Fund sells securities for delivery
in a current month and simultaneously contracts with the same party to repurchase similar but not identical securities on a specified future date.
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Mortgage-Related Securities
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Municipal Securities:
Securities issued by a state or political subdivision
(including securities issued by a foreign state or subdivision) to obtain funds for various public purposes. Municipal securities include, among others, private activity bonds and industrial development bonds, as well as general obligation notes,
tax anticipation notes, bond anticipation notes, revenue anticipation notes, other short-term
tax-
exempt obligations, municipal leases, obligations of municipal housing authorities and single family revenue
bonds.
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Municipal Securities
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New Financial Products
: New options and futures contracts and other financial
products continue to be developed and the Fund may invest in such options, contracts and products.
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Miscellaneous Investment Strategies and Risks
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Obligations of Supranational Agencies:
Obligations which are chartered to promote
economic development and are supported by various governments and governmental agencies.
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Foreign Investments (including Foreign Currencies)
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Options and Futures Transactions
: The Fund may purchase and sell (a) exchange
traded and
over-the-counter
put and call options on securities, indexes of securities and futures contracts on securities and indexes of securities and (b) futures
contracts on securities and indexes of securities.
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Options and Futures Transactions
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Preferred Stock:
A class of stock that generally pays a dividend at a specified rate
and has preference over common stock in the payment of dividends and in liquidation.
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Equity Securities, Warrants and Rights
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Private Placements, Restricted Securities and Other Unregistered Securities:
Securities not registered under the Securities Act of 1933, such as privately placed commercial paper and Rule 144A securities.
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Miscellaneous Investment Strategies and Risks
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Real Estate Investment Trusts (REITs):
Pooled investment vehicles which
invest primarily in income producing real estate or real estate related loans or interest.
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Real Estate Investment Trusts (REITs)
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Repurchase Agreements:
The purchase of a security and the simultaneous commitment to
return the security to the seller at an agreed upon price on an agreed upon date. This is treated as a loan.
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Repurchase Agreements
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Reverse Repurchase Agreements:
The sale of a security and the simultaneous commitment
to buy the security back at an agreed upon price on an agreed upon date. This is treated as a borrowing by a Fund.
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Reverse Repurchase Agreements
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Securities Issued in Connection with Reorganizations and Corporate Restructurings:
In
connection with reorganizing or restructuring of an issuer, an issuer may issue common stock or other securities to holders of its debt securities.
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Miscellaneous Investment Strategies and Risks
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Securities Lending:
The lending of up to 33
1
/
3
%
of a Funds total assets. In return a Fund will receive cash as collateral.
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Securities Lending
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Short-Term Funding Agreements:
Agreements issued by banks and highly rated U.S.
insurance companies such as Guaranteed Investment Contracts (GICs) and Bank Investment Contracts (BICs).
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Short-Term Funding
Agreements
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Part I - 5
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Instrument
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Part II
Section
Reference
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Sovereign Obligations:
Investments in debt obligations issued or guaranteed by a
foreign sovereign government or its agencies, authorities or political subdivisions.
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Foreign Investments (including Foreign Currencies)
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Stripped Mortgage-Backed Securities:
Derivative multi-class mortgage securities which
are usually structured with two classes of shares that receive different proportions of the interest and principal from a pool of mortgage assets. These include Interest-Only (IO) and Principal-Only (PO) securities issued
outside a Real Estate Mortgage Investment Conduit (REMIC) or CMO structure.
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Mortgage-Related Securities
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Structured Investments:
A security having a return tied to an underlying index or
other security or asset class. Structured investments generally are individually negotiated agreements and may be traded
over-the-counter.
Structured investments are
organized and operated to restructure the investment characteristics of the underlying index, currency, commodity or financial instrument.
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Structured Investments
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Swaps and Related Swap Products:
Swaps involve an exchange of obligations by two
parties. Caps and floors entitle a purchaser to a principal amount from the seller of the cap or floor to the extent that a specified index exceeds or falls below a predetermined interest rate or amount. The Fund may enter into these transactions to
manage its exposure to changing interest rates and other factors.
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Swaps and Related Swap Products
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Synthetic Variable Rate Instruments:
Instruments that generally involve the deposit
of a long-term tax exempt bond in a custody or trust arrangement and the creation of a mechanism to adjust the long-term interest rate on the bond to a variable short-term rate and a right (subject to certain conditions) on the part of the purchaser
to tender it periodically to a third party at par.
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Synthetic Variable Rate Instruments
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Temporary Defensive Positions:
To respond to unusual circumstances the Fund may
invest in cash and cash equivalents for temporary defensive purposes.
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Miscellaneous Investment Strategies and Risks
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Treasury Receipts:
The Fund may purchase interests in separately traded interest and
principal component parts of U.S. Treasury obligations that are issued by banks or brokerage firms and that are created by depositing U.S. Treasury notes and U.S. Treasury bonds into a special account at a custodian bank. Receipts include Treasury
Receipts (TRs), Treasury Investment Growth Receipts (TIGRs), and Certificates of Accrual on Treasury Securities (CATS).
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Treasury Receipts
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Trust Preferreds:
Securities with characteristics of both subordinated debt and
preferred stock. Trust preferreds are generally long term securities that make periodic fixed or variable interest payments.
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Trust Preferred Securities
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U.S. Government Agency Securities:
Securities issued or guaranteed by agencies and
instrumentalities of the U.S. government. These include all types of securities issued by the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae) and the Federal Home
Loan Mortgage Corporation (Freddie Mac), including funding notes, subordinated benchmark notes, CMOs and REMICs.
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Mortgage-Related Securities
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U.S. Government Obligations:
May include direct obligations of the U.S. Treasury,
including Treasury bills, notes and bonds, all of which are backed as to principal and interest payments by the full faith and credit of the United States, and separately traded principal and interest component parts of such obligations that are
transferable through the Federal book-entry system known as Separate Trading of Registered Interest and Principal of Securities (STRIPS) and Coupons Under Book Entry Safekeeping (CUBES).
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U.S. Government Obligations
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Variable and Floating Rate Instruments:
Obligations with interest rates which are
reset daily, weekly, quarterly or some other frequency and which may be payable to the Fund on demand or at the expiration of a specified term.
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Debt
Instruments
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Part I - 6
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Instrument
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Part II
Section
Reference
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When-Issued Securities, Delayed Delivery Securities and Forward Commitments:
Purchase
or contract to purchase securities at a fixed price for delivery at a future date.
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When-Issued Securities, Delayed Delivery Securities and Forward
Commitments
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Zero-Coupon,
Pay-in-Kind
and Deferred Payment Securities:
Zero-coupon securities are securities that are sold at a discount to par value and on which interest payments are not
made during the life of the security.
Pay-in-kind
securities are securities that have interest payable by delivery of additional securities. Deferred payment securities
are
zero-coupon
debt securities which convert on a specified date to interest bearing debt securities.
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Debt Instruments
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DIVERSIFICATION
The Trust is a registered management investment company. The Fund is a diversified series of the Trust. The Fund intends to meet the
diversification requirements of the 1940 Act. For a more complete discussion, see the Diversification section in Part II of this SAI.
PORTFOLIO TURNOVER
A portfolio turnover rate
is, in summary, the percentage computed by dividing the lesser of the Funds purchases or sales of securities (excluding short-term securities) by the average market value of the Fund. The Adviser intends to manage the Funds assets by
buying and selling securities to help attain its investment objective. A rate of 100% indicates that the equivalent of all of the Funds assets have been sold and reinvested in a year. High portfolio turnover may affect the amount, timing and
character of distributions, and, as a result, may increase the amount of taxes payable by shareholders. Higher portfolio turnover also results in higher transaction costs. To the extent that net short-term capital gains are realized by the Fund, any
distributions resulting from such gains are considered ordinary income for federal income tax purposes. For a more complete discussion, see the Distributions and Tax Matters section in Part II of this SAI. The Fund has not commenced
operations as of the date of this SAI. Therefore, there is no portfolio turnover rate for the Fund to report at this time.
TRUSTEES
Standing Committees
There are two standing committees of the Board of Trustees: the Audit and Valuation Committee and the Governance and nominating Committee.
During the fiscal year ended February 28, 2018, the Audit and Valuation Committee met 4 times and the Governance and Nominating Committee met 2 times. For a more complete discussion, see the Trustees section in Part II of this SAI.
Part I - 7
Ownership of Securities
The following table shows the dollar range of each Trustees beneficial ownership of equity securities in the Fund and each
Trustees aggregate dollar range of ownership in the funds that the Trustee oversees in the Family of Investment Companies as of December 31, 2017:
|
|
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of
Equity Securities in
Core Plus Bond ETF
|
|
Aggregate Dollar Range of Equity
Securities in All
Registered
Investment Companies Overseen by
the Trustee in Family of Investment
Companies
1
|
|
Independent Trustees
|
|
|
|
|
|
|
Gary L. French
|
|
None
|
|
|
$50,001$100,000
|
|
Robert J. Grassi
|
|
None
|
|
|
$50,001$100,000
|
|
Thomas P. Lemke
|
|
None
|
|
|
Over $100,000
|
|
Lawrence R. Maffia
|
|
None
|
|
|
Over $100,000
|
|
Emily A. Youssouf
|
|
None
|
|
|
$10,001$50,000
|
|
|
|
|
Interested Trustee
|
|
|
|
|
|
|
Robert Deutsch
|
|
None
|
|
|
Over $100,000
|
|
1
|
A Family of Investment Companies means any two or more registered investment companies that share the same investment adviser or principal
underwriter and hold themselves out to investors as related companies for purposes of investment and investor services. The Family of Investment Companies for which the Board of Trustees currently serves includes, 36 Funds and one Trust.
|
Trustee Compensation
Trustee aggregate compensation paid by the Trust for the calendar year ended December 31, 2017, is set forth below:
|
|
|
|
|
Name of Trustee
|
|
Total Compensation Paid by the Fund Complex
1
|
|
Independent Trustees
|
|
|
|
|
Gary L. French
|
|
|
$72,500
|
|
Robert J. Grassi
|
|
|
65,000
|
|
Thomas P. Lemke
|
|
|
73,000
|
|
Lawrence Maffia
|
|
|
65,000
|
|
Emily Youssouf
|
|
|
71,000
|
|
|
|
Interested Trustee
|
|
|
|
|
Robert Deutsch
2
|
|
|
0
|
|
1
|
A Fund Complex means two or more registered investment companies that (i) hold themselves out to investors as related companies for
purposes of investment and investor services or (ii) have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies. The J.P. Morgan
Funds Complex for which the Board of Trustees currently serves includes, 36 Funds and one Trust.
|
2
|
Mr. Deutsch received no compensation directly from the Trust.
|
See TRUSTEES Trustee Compensation in Part II of this SAI for more information.
INVESTMENT ADVISER
Investment Advisory Fees
Since the Fund has
not commenced operations as of the date of this SAI, the Fund has not paid any investment advisory fees. For more information about the Adviser, see the Investment Adviser section in Part II of this SAI.
Part I - 8
PORTFOLIO MANAGERS
Portfolio Managers Other Accounts Managed*
The following table shows information regarding all of the other accounts for which advisory fees are not based on the performance of the
accounts that are managed by the Funds portfolio managers as of November 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Performance
Based Fee Advisory Accounts
|
|
|
|
Registered Investment
Companies
|
|
|
Other Pooled Investment
Vehicles
|
|
|
Other Accounts
|
|
|
|
Number of
Accounts
|
|
|
Total
Assets
($ thousands)
|
|
|
Number of
Accounts
|
|
|
Total Assets
($ thousands)
|
|
|
Number of
Accounts
|
|
|
Total Assets
($ thousands)
|
|
Core Plus Bond ETF
|
|
Steven Lear
|
|
|
5
|
|
|
$
|
15,125,858
|
|
|
|
2
|
|
|
$
|
3,557,152
|
|
|
|
15
|
|
|
$
|
5,041,945
|
|
Richard Figuly
|
|
|
17
|
|
|
|
60,536,241
|
|
|
|
10
|
|
|
|
6,167,154
|
|
|
|
15
|
|
|
|
6,192,961
|
|
J. Andrew Norelli
|
|
|
2
|
|
|
|
13,981,313
|
|
|
|
2
|
|
|
|
3,528,264
|
|
|
|
1
|
|
|
|
1,060,086
|
|
The following table shows information on the other accounts managed by the Funds portfolio
managers that have advisory fees wholly or partly based on performance as of November 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Based Fee Advisory Accounts
|
|
|
|
Registered Investment
Companies
|
|
|
Other Pooled Investment
Vehicles
|
|
|
Other Accounts
|
|
|
|
Number of
Accounts
|
|
|
Total Assets
($
thousands)
|
|
|
Number of
Accounts
|
|
|
Total Assets
($
thousands)
|
|
|
Number of
Accounts
|
|
|
Total Assets
($ thousands)
|
|
Core Plus Bond ETF
|
|
Steven Lear
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
Richard Figuly
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1,058,872
|
|
J. Andrew Norelli
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
*
|
The total value and number of accounts managed by a portfolio manager may include
sub-accounts
of
asset allocation, multi-managed and other accounts.
|
Portfolio Managers Ownership of
Securities
Since the Fund has not commenced operations as of the date of this SAI, the portfolio managers do not own any
Shares of the Fund.
Portfolio Managers Compensation
In evaluating each portfolio managers performance with respect to the funds he or she manages, the Adviser uses the following index
as benchmarks to evaluate the performance of the portfolio manager with respect to the Fund:
|
|
|
Name of Fund
|
|
Benchmark
|
Core Plus Bond ETF
|
|
Bloomberg Barclays U.S. Aggregate Index
|
Please see Portfolio Manager Compensation section in Part II of this SAI for a
description of the structure and method of determining the compensation of the portfolio managers identified above.
ADMINISTRATOR
Administrator Fees
Since the Fund has not commenced operations as of the date of this SAI, the Fund has not paid any administrator fees. For more information
about the Administrator, see the Administrator section in Part II of this SAI.
Part I - 9
FUND ACCOUNTING AGENT
Fund Accounting Fees
Since the Fund has not commenced operations as of the date of this SAI, the Fund has not paid any accounting fees. For more information about the Fund Accounting Agent, see the Fund Accounting
Agent section in Part II of this SAI.
BROKERAGE
Brokerage Commissions
Since the Fund has not commenced operations as of the date of this SAI, the Fund has not paid any brokerage commissions.
Broker Research
Since the Fund has not
commenced operations as of the date of this SAI, there has been no allocation of brokerage commissions to brokers who provided broker research including third party broker research for the Fund.
Securities of Regular Broker-Dealers
Since the Fund has not commenced operations as of the date of this SAI, the Fund did not own securities of its regular broker-dealers (or parents).
For a more complete discussion, see the Portfolio Transactions section in Part II of this SAI.
PURCHASE AND REDEMPTION OF CREATION UNITS
The Trust will issue and sell its Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at
the NAV next determined after receipt of an order in proper form as described in Placement of Creation Orders Outside NSCC Clearing Process-Foreign Funds in Appendix A to Part II of this SAI.
|
|
|
|
|
|
|
|
|
Fund
|
|
Creation*
|
|
|
Redemption*
|
|
Core Plus Bond ETF
|
|
|
100,000
|
|
|
|
100,000
|
|
*
|
May be revised at any time without notice.
|
CREATION AND REDEMPTION TRANSACTION FEES.
A
transaction fee, as set forth in the table below, is imposed for the transfer and other transaction costs associated with the purchase or redemption of Creation Units, as applicable. Investors who are authorized to deal in Creation Units
(Authorized Participants) will be required to pay a fixed creation transaction fee and/or a fixed redemption transaction fee, as applicable, on a given day regardless of the number of Creation Units created or redeemed on that day. The
Fund may adjust the transaction fee from time to time. An additional charge or a variable charge (discussed below) will be applied to certain creation and redemption transactions, including
non-standard
orders
and whole or partial cash purchases or redemptions. With respect to creation orders, Authorized Participants are responsible for the costs of transferring the securities constituting the Deposit Instruments to the account of the Trust and with
respect to redemption orders, Authorized Participants are responsible for the costs of transferring the securities received on redemption from the Trust to their account or on their order. Investors who use the services of a broker or other such
intermediary may also be charged a fee for such services.
|
|
|
|
|
Fund
|
|
Transaction Fee*, **
|
|
Core Plus Bond ETF
|
|
$
|
400
|
|
*
|
From time to time, the Fund may waive all or a portion of its applicable transaction fee(s).
|
**
|
In addition to the transaction fees listed above, the Fund may charge an additional variable fee for creations and redemptions in cash of up
to 3% of the amount of a creation transaction and of up to 2% of the amount of a redemption transaction to offset brokerage and impact expenses associated with the cash transaction.
|
PURCHASE BY OTHER INVESTMENT COMPANIES
For purposes of the 1940 Act, the Fund is treated as a registered investment company. Section 12(d)(1) of the 1940 Act restricts
investments by investment companies in the securities of other investment companies, including Shares of the Fund.
Part I - 10
FINANCIAL INTERMEDIARIES
Compensation Payments
Since the Fund has not commenced operations as of the date of this SAI, neither JPMIM nor any other affiliates of JPMorgan Chase & Co. (JPMorgan Chase) made any compensation payments to
intermediaries with respect to the Fund. For a more complete discussion, see the Compensation to Intermediaries section in Part II of this SAI.
TAX MATTERS
Capital Loss
Carryforwards
Since the Fund has not commenced operations as of the date of this SAI, the Fund has not had any capital
loss carryforwards. For more information on tax matters, see the Distributions and Tax Matters section in Part II of this SAI.
SHARE OWNERSHIP
Trustees
and Officers
Since the Fund has not commenced operations as of the date of this SAI, the officers and Trustees do not own
any Shares of the Fund.
Principal Holders
No Shares of the Fund have been issued as of the date of this SAI.
FINANCIAL STATEMENTS
Since the Fund has not commenced operations as of the date of this SAI, there are no financial statements for the Fund. When they become available, financial statements will be available without charge
upon request by calling
1-844-457-6383
(844-4JPM
ETF).
Part I - 11
J.P. Morgan Exchange-Traded Fund Trust
STATEMENT OF ADDITIONAL INFORMATION
PART II
Part II of this SAI describes
policies and practices that apply to each of the J.P. Morgan Exchange-Traded Fund Trust’s funds (“ETF Funds”), for which Part I precedes this Part II. Part II is not a standalone document and must be read in conjunction with Part
I. References in this Part II to a “Fund” mean each of the ETF Funds, unless noted otherwise. Capitalized terms used and not otherwise defined in this Part II have the meanings given to them in Part I of this SAI.
Part II
Table of Contents
|
1
|
|
1
|
|
2
|
|
2
|
|
3
|
|
3
|
|
4
|
|
4
|
|
8
|
|
8
|
|
8
|
|
9
|
|
18
|
|
18
|
|
19
|
|
23
|
|
27
|
|
35
|
|
38
|
|
43
|
|
44
|
|
44
|
|
45
|
|
45
|
|
46
|
|
47
|
|
47
|
|
48
|
|
50
|
|
51
|
|
51
|
|
51
|
|
52
|
|
53
|
|
53
|
|
53
|
|
53
|
|
54
|
|
56
|
|
57
|
|
57
|
|
58
|
|
59
|
|
60
|
|
61
|
|
61
|
|
61
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|
61
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|
63
|
|
63
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|
65
|
|
65
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|
69
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|
69
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|
70
|
|
71
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72
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|
72
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|
72
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|
73
|
|
73
|
|
73
|
|
76
|
|
78
|
|
78
|
|
80
|
|
80
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|
82
|
|
82
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83
|
|
87
|
|
88
|
|
89
|
|
89
|
|
89
|
|
92
|
|
92
|
|
93
|
|
93
|
|
94
|
|
94
|
|
94
|
|
95
|
|
95
|
|
96
|
|
96
|
|
96
|
|
96
|
|
98
|
|
98
|
|
99
|
|
100
|
|
102
|
|
A-1
|
INVESTMENT STRATEGIES AND POLICIES
As noted in the applicable
Prospectuses for each of the Funds, in addition to the main investment strategy and the main investment risks described in the Prospectuses, each Fund may employ other investment strategies and may be subject to other risks, which are described
below. The Funds may engage in the practices described below to the extent consistent with their investment objectives, strategies, policies and restrictions. Because the following is a combined description of investment strategies of all of the
Funds, certain matters described herein may not apply to particular Funds.
For a list of investment strategies
and policies employed by each Fund, see “INVESTMENT PRACTICES” in Part I of this SAI.
Asset-Backed Securities
Asset-backed securities
consist of securities secured by company receivables, home equity loans, truck and auto loans, leases, or credit card receivables. Asset-backed securities also include other securities backed by other types of receivables or other assets, including
collateralized debt obligations (“CDOs”), which include collateralized bond obligations (“CBOs”), collateralized loan obligations (“CLOs”) and other similarly structured securities. Such assets are generally
securitized through the use of trusts or special purpose corporations. Asset-backed securities are backed by a pool of assets representing the obligations often of a number of different parties. Certain of these securities may be illiquid.
Asset-backed securities are
generally subject to the risks of the underlying assets. In addition, asset-backed securities, in general, are subject to certain additional risks including depreciation, damage or loss of the collateral backing the security, failure of the
collateral to generate the anticipated cash flow or in certain cases more rapid prepayment because of events affecting the collateral, such as accelerated prepayment of loans backing these securities or destruction of equipment subject to equipment
trust certificates. In addition, the underlying assets (for example, the underlying credit card debt) may be refinanced or paid off prior to maturity during periods of declining interest rates. Changes in prepayment rates can result in greater price
and yield volatility. If asset-backed securities are pre-paid, a Fund may have to reinvest the proceeds from the securities at a lower rate. Potential market gains on a security subject to prepayment risk may be more limited than potential market
gains on a comparable security that is not subject to prepayment risk. Under certain prepayment rate scenarios, a Fund may fail to recover additional amounts paid (i.e., premiums) for securities with higher interest rates, resulting in an unexpected
loss.
A CBO is a trust or
other special purpose entity (“SPE”) which is typically backed by a diversified pool of fixed income securities (which may include high risk, below investment grade securities). A CLO is a trust or other SPE that is typically
collateralized by a pool of loans, which may include, among others, domestic and non-U.S. senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated
loans. Although certain CDOs may receive credit enhancement in the form of a senior-subordinate structure, over-collateralization or bond insurance, such enhancement may not always be present and may fail to protect a Fund against the risk of loss
on default of the collateral. Certain CDOs may use derivatives contracts to create “synthetic” exposure to assets rather than holding such assets directly, which entails the risks of derivative instruments described elsewhere in this
SAI. CDOs may charge management fees and administrative expenses, which are in addition to those of a Fund.
For both CBOs and CLOs, the
cash flows from the SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the “equity” tranche, which bears the first loss from defaults from the bonds or loans in the SPE and serves
to protect the other, more senior tranches from default (though such protection is not complete). Since it is partially protected from defaults, a senior tranche from a CBO or CLO typically has higher ratings and lower yields than its underlying
securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, downgrades of the underlying collateral by rating agencies, forced
liquidation of the collateral pool due to a failure of coverage tests, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults, as well as investor aversion to CBO or CLO
securities as a class. Interest on certain tranches of a CDO may be paid in kind or deferred and capitalized (paid in the form of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such
payments.
The risks of an
investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which a Fund invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus are not registered under the securities laws.
As a result, investments in CDOs may be
characterized by a Fund as illiquid securities. However, an
active dealer market may exist for CDOs, allowing a CDO to qualify for Rule 144A transactions. In addition to the normal risks associated with fixed income securities and asset-backed securities generally discussed elsewhere in this SAI, CDOs carry
additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the risk that the collateral may default or decline in value or be
downgraded, if rated by a nationally recognized statistical rating organization (“NRSRO”); (iii) a Fund may invest in tranches of CDOs that are subordinate to other tranches; (iv) the structure and complexity of the transaction and the
legal documents could lead to disputes among investors regarding the characterization of proceeds; (v) the investment return achieved by the Fund could be significantly different than those predicted by financial models; (vi) the lack of a readily
available secondary market for CDOs; (vii) risk of forced “fire sale” liquidation due to technical defaults such as coverage test failures; and (viii) the CDO’s manager may perform poorly.
Total Annual Fund Operating
Expenses set forth in the fee table and Financial Highlights section of each Fund’s Prospectuses do not include any expenses associated with investments in certain structured or synthetic products that may rely on the exception for the
definition of “investment company” provided by Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940, as amended (the “1940 Act”).
Auction Rate Securities
Auction rate securities
consist of auction rate municipal securities and auction rate preferred securities sold through an auction process issued by closed-end investment companies, municipalities and governmental agencies. For more information on risks associated with
municipal securities, see “Municipal Securities” below.
Provided that the auction
mechanism is successful, auction rate securities usually permit the holder to sell the securities in an auction at par value at specified intervals. The dividend is reset by “Dutch” auction in which bids are made by broker-dealers and
other institutions for a certain amount of securities at a specified minimum yield. The dividend rate set by the auction is the lowest interest or dividend rate that covers all securities offered for sale. While this process is designed to permit
auction rate securities to be traded at par value, there is the risk that an auction will fail due to insufficient demand for the securities. Since February 2008, numerous auctions have failed due to insufficient demand for securities and have
continued to fail for an extended period of time. Failed auctions may adversely impact the liquidity of auction rate securities investments. Although some issuers of auction rate securities are redeeming or are considering redeeming such securities,
such issuers are not obligated to do so and, therefore, there is no guarantee that a liquid market will exist for a Fund’s investments in auction rate securities at a time when the Fund wishes to dispose of such securities.
Dividends on auction rate
preferred securities issued by a closed-end fund may be designated as exempt from federal income tax to the extent they are attributable to tax-exempt interest income earned by the closed-end fund on the securities in its portfolio and distributed
to holders of the preferred securities. However, such designation may be made only if the closed-end fund treats preferred securities as equity securities for federal income tax purposes and the closed-end fund complies with certain requirements
under the Internal Revenue Code of 1986, as amended (the “Code”).
A Fund’s investment in
auction rate preferred securities of closed-end funds is subject to limitations on investments in other U.S. registered investment companies, which limitations are prescribed under the 1940 Act. Except as permitted by rule or exemptive order (see
“Investment Company Securities and Exchange-Traded Funds” below for more information), a Fund is generally prohibited from acquiring more than 3% of the voting securities of any other such investment company, and investing more than 5%
of a Fund’s total assets in securities of any one such investment company or more than 10% of its total assets in securities of all such investment companies. A Fund will indirectly bear its proportionate share of any management fees paid by
such closed-end funds in addition to the advisory fee payable directly by the Fund.
Bank Obligations
Bank obligations consist of
bankers’ acceptances, certificates of deposit, bank notes and time deposits.
Bankers’ acceptances are
negotiable drafts or bills of exchange typically drawn by an importer or exporter to pay for specific merchandise, which are “accepted” by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the
instrument on maturity.
Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank or a savings and loan association for a definite period of time and earning a specified return. Certificates of deposit may also include those issued by foreign banks
outside the United States (“U.S.”). Such certificates of deposit include Eurodollar and Yankee certificates of deposit. Eurodollar certificates of deposit are U.S. dollar-denominated certificates of deposit issued by branches of foreign
and domestic banks located outside the U.S. Yankee certificates of deposit are certificates of deposit issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the U.S. Certain Funds may also invest in obligations (including
bankers’ acceptances and certificates of deposit) denominated in foreign currencies (see “Foreign Investments (including Foreign Currencies)”) herein. With regard to certificates of deposit issued by U.S. banks and savings and loan
associations, to be eligible for purchase by a Fund, a certificate of deposit must be issued by (i) a domestic or foreign branch of a U.S. commercial bank which is a member of the Federal Reserve System or the deposits of which are insured by the
Federal Deposit Insurance Corporation, or (ii) a domestic savings and loan association, the deposits of which are insured by the Federal Deposit Insurance Corporation.
Time deposits are
interest-bearing non-negotiable deposits at a bank or a savings and loan association that have a specific maturity date. A time deposit earns a specific rate of interest over a definite period of time. Time deposits cannot be traded on the secondary
market and those exceeding seven days and with a withdrawal penalty are considered to be illiquid.
The Funds will not invest in
obligations for which a Fund’s Adviser, or any of its affiliated persons, is the ultimate obligor or accepting bank, provided, however, that the Funds maintain demand deposits at their affiliated custodian, JPMorgan Chase Bank, N.A.
(“JPMorgan Chase Bank”).
Subject to the Funds’
limitations on concentration in a particular industry, there is no limitation on the amount of a Fund’s assets which may be invested in obligations of banks which meet the conditions set forth herein.
Commercial Paper
Commercial paper is defined as
short-term obligations, generally with maturities from 1 to 270 days issued by banks or bank holding companies, corporations and finance companies. Although commercial paper is generally unsecured, the Funds may also purchase secured commercial
paper. In the event of a default of an issuer of secured commercial paper, a Fund may hold the securities and other investments that were pledged as collateral even if it does not invest in such securities or investments. In such a case, the Fund
would take steps to dispose of such securities or investments in a commercially reasonable manner. Commercial paper includes master demand obligations. See “Variable and Floating Rate Instruments” below.
Certain Funds may also invest
in Canadian commercial paper, which is commercial paper issued by a Canadian corporation or a Canadian counterpart of a U.S. corporation, and in Europaper, which is U.S. dollar denominated commercial paper of a foreign issuer. See “Risk
Factors of Foreign Investments” below.
Convertible Securities
Certain Funds may invest in
convertible securities. Convertible securities include any debt securities or preferred stock which may be converted into common stock or which carry the right to purchase common stock. Generally, convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock, usually of the same company, at specified prices within a certain period of time.
The terms of any convertible
security determine its ranking in a company’s capital structure. In the case of subordinated convertible debentures, the holders’ claims on assets and earnings are subordinated to the claims of other creditors, and are senior to the
claims of preferred and common shareholders. In the case of convertible preferred stock, the holders’ claims on assets and earnings are subordinated to the claims of all creditors and are senior to the claims of common shareholders.
Convertible securities have
characteristics similar to both debt and equity securities. Due to the conversion feature, the market value of convertible securities tends to move together with the market value of the underlying common stock. As a result, selection of convertible
securities, to a great extent, is based on the potential for capital appreciation that may exist in the underlying stock. The value of convertible securities is also affected by prevailing interest rates, the credit quality of the issuer, and any
call provisions. In some cases, the issuer may cause a convertible security to convert to common stock. In other
situations, it may be advantageous for a Fund to cause the
conversion of convertible securities to common stock. If a convertible security converts to common stock, a Fund may hold such common stock in its portfolio even if it does not ordinarily invest in common stock.
Certain Funds invest in
contingent securities structured as contingent convertible securities also known as CoCos. Contingent convertible securities are typically issued by non-U.S. banks and are designed to behave like bonds in times of economic health yet absorb losses
when a pre-determined trigger event occurs. A contingent convertible security is a hybrid debt security either convertible into equity at a predetermined share price or written down in value based on the specific terms of the individual security if
a pre-specified trigger event occurs (the “Trigger Event”). Unlike traditional convertible securities, the conversion of a contingent convertible security from debt to equity is “contingent” and will occur only in the case of
a Trigger Event. Trigger Events vary by instrument and are defined by the documents governing the contingent convertible security. Such Trigger Events may include a decline in the issuer’s capital below a specified threshold level, increase in
the issuer’s risk weighted assets, the share price of the issuer falling to a particular level for a certain period of time and certain regulatory events.
Contingent convertible
securities are subject to the credit, interest rate, high yield security, foreign security and markets risks associated with bonds and equities, and to the risks specific to convertible securities in general. Contingent convertible securities are
also subject to additional risks specific to their structure including conversion risk. Because Trigger Events are not consistently defined among contingent convertible securities, this risk is greater for contingent convertible securities that are
issued by banks with capital ratios close to the level specified in the Trigger Event.
In addition, coupon payments on
contingent convertible securities are discretionary and may be cancelled by the issuer at any point, for any reason, and for any length of time. The discretionary cancellation of payments is not an event of default and there are no remedies to
require re-instatement of coupon payments or payment of any past missed payments. Coupon payments may also be subject to approval by the issuer’s regulator and may be suspended in the event there are insufficient distributable reserves. Due to
uncertainty surrounding coupon payments, contingent convertible securities may be volatile and their price may decline rapidly in the event that coupon payments are suspended.
Contingent convertible
securities typically are structurally subordinated to traditional convertible bonds in the issuer’s capital structure. In certain scenarios, investors in contingent convertible securities may suffer a loss of capital ahead of equity holders or
when equity holders do not. Contingent convertible securities are also subject to extension risk. Contingent convertible securities are perpetual instruments and may only be callable at pre-determined dates upon approval of the applicable regulatory
authority. There is no guarantee that a Fund will receive return of principal on contingent convertible securities.
Convertible contingent
securities are a newer form of instrument and the regulatory environment for these instruments continues to evolve. Because the market for contingent convertible securities is evolving, it is uncertain how the larger market for contingent
convertible securities would react to a Trigger Event or coupon suspension applicable to a single issuer.
The value of contingent
convertible securities is unpredictable and will be influenced by many factors such as: (i) the creditworthiness of the issuer and/or fluctuations in such issuer’s applicable capital ratios; (ii) supply and demand for contingent convertible
securities; (iii) general market conditions and available liquidity; and (iv) economic, financial and political events that affect the issuer, its particular market or the financial markets in general.
Custodial Receipts
Certain Funds may acquire
securities in the form of custodial receipts that evidence ownership of future interest payments, principal payments or both on certain U.S. Treasury notes or bonds in connection with programs sponsored by banks and brokerage firms. These are not
considered U.S. government securities and are not backed by the full faith and credit of the U.S. government. These notes and bonds are held in custody by a bank on behalf of the owners of the receipts.
Debt Instruments
Below Investment Grade
Securities.
Securities that were rated investment grade at the time of purchase may subsequently be rated below investment grade (BB+ or lower by Standard & Poor’s Corporation (“S&P”) and
Bal or lower by Moody’s Investors Service, Inc. (“Moody’s”)). Certain Funds that do not invest in below investment grade securities as a main investment strategy may nonetheless continue to hold such securities if the Adviser
believes it is advantageous for the Fund to do so. The high
degree of risk involved in these investments can result in
substantial or total losses. These securities are subject to greater risk of loss, greater sensitivity to interest rate and economic changes, valuation difficulties, and a potential lack of a secondary or public market for securities. The market
price of these securities also can change suddenly and unexpectedly.
Corporate Debt Securities.
Corporate debt securities may include bonds and other debt securities of U.S. and non-U.S. issuers, including obligations of industrial, utility, banking and other corporate issuers. All debt securities are subject to
the risk of an issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to such factors as market interest rates, market perception of the creditworthiness of the issuer and
general market liquidity.
High Yield/High Risk
Securities/Junk Bonds.
Certain Funds may invest in high yield securities, to varying degrees. High yield, high risk bonds are securities that are generally rated below investment grade by the primary rating agencies
(BB+ or lower by S&P and Bal or lower by Moody’s) or unrated but determined by the Fund’s Adviser to be of comparable quality. Other terms used to describe such securities include “lower rated bonds,”
“non-investment grade bonds,” “below investment grade bonds,” and “junk bonds.” These securities are considered to be high-risk investments.
High yield securities are
regarded as predominately speculative. There is a greater risk that issuers of lower rated securities will default than issuers of higher rated securities. Issuers of lower rated securities generally are less creditworthy and may be highly indebted,
financially distressed, or bankrupt. These issuers are more vulnerable to real or perceived economic changes, political changes or adverse industry developments. In addition, high yield securities are frequently subordinated to the prior payment of
senior indebtedness. If an issuer fails to pay principal or interest, a Fund would experience a decrease in income and a decline in the market value of its investments. A Fund may also incur additional expenses in seeking recovery from the
issuer.
The income and
market value of lower rated securities may fluctuate more than higher rated securities. Non-investment grade securities are more sensitive to short-term corporate, economic and market developments. During periods of economic uncertainty and change,
the market price of the investments in lower rated securities may be volatile. The default rate for high yield bonds tends to be cyclical, with defaults rising in periods of economic downturn.
It is often more difficult to
value lower rated securities than higher rated securities. If an issuer’s financial condition deteriorates, accurate financial and business information may be limited or unavailable. The lower rated investments may be thinly traded and there
may be no established secondary market. Because of the lack of market pricing and current information for investments in lower rated securities, valuation of such investments is much more dependent on the judgment of the Adviser than is the case
with higher rated securities. In addition, relatively few institutional purchasers may hold a major portion of an issue of lower-rated securities at times. As a result, a Fund that invests in lower rated securities may be required to sell
investments at substantial losses or retain them indefinitely even where an issuer’s financial condition is deteriorating.
Credit quality of non-investment
grade securities can change suddenly and unexpectedly, and even recently issued credit ratings may not fully reflect the actual risks posed by a particular high-yield security.
Future legislation may have a
possible negative impact on the market for high yield, high risk bonds. As an example, in the late 1980’s, legislation required federally-insured savings and loan associations to divest their investments in high yield, high risk bonds. New
legislation, if enacted, could have a material negative effect on a Fund’s investments in lower rated securities.
Inflation-Linked Debt
Securities.
Inflation-linked securities include fixed and floating rate debt securities of varying maturities issued by the U.S. government, its agencies and instrumentalities, such as Treasury Inflation Protected
Securities (“TIPS”), as well as securities issued by other entities such as corporations, municipalities, foreign governments and foreign issuers, including foreign issuers from emerging markets. See also “Foreign Investments
(including Foreign Currencies).” Typically, such securities are structured as fixed income investments whose principal value is periodically adjusted according to the rate of inflation. The following two structures are common: (i) the U.S.
Treasury and some other issuers issue inflation-linked securities that accrue inflation into the principal value of the security and (ii) other issuers may pay out the Consumer Price Index (“CPI”) accruals as part of a semi-annual
coupon. Other types of inflation-linked securities exist which use an inflation index other than the CPI.
Inflation-linked securities
issued by the U.S. Treasury, such as TIPS, have maturities of approximately five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. Typically, TIPS pay interest on a semi-annual basis
equal to a fixed percentage of the inflation-adjusted principal amount. For example, if a Fund purchased an inflation-indexed bond with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5% semi-annually), and the rate of inflation
over the first six months was 1%, the mid-year par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation during the second half of the year resulted in the whole year’s
inflation of 3%, the end-of-year par value of the bond would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate
measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the
original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of TIPS, even during a period of deflation, although the inflation-adjusted principal received could be less than the inflation-adjusted principal that had
accrued to the bond at the time of purchase. However, the current market value of the bonds is not guaranteed and will fluctuate. Other inflation-related bonds exist which may or may not provide a similar guarantee. If a guarantee of principal is
not provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-linked
securities is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster
rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-linked securities.
While inflation-linked
securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency
exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
The periodic adjustment of U.S.
inflation-linked securities is tied to the Consumer Price Index for All Urban Consumers (“CPI-U”), which is not seasonally adjusted and which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing, food, transportation and energy. Inflation-linked securities issued by a foreign government are generally adjusted to reflect a comparable inflation index calculated by that
government. There can be no assurance that the CPI-U or a foreign inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be no assurance that the rate of inflation in a foreign
country will be correlated to the rate of inflation in the U.S.
Any increase in the principal
amount of an inflation-linked security will be considered taxable ordinary income, even though investors do not receive their principal until maturity.
Variable and Floating Rate
Instruments.
Certain obligations purchased by the Funds may carry variable or floating rates of interest, may involve a conditional or unconditional demand feature and may include variable amount master demand
notes. Variable and floating rate instruments are issued by a wide variety of issuers and may be issued for a wide variety of purposes, including as a method of reconstructing cash flows.
Subject to their investment
objective policies and restrictions, certain Funds may acquire variable and floating rate instruments. A variable rate instrument is one whose terms provide for the adjustment of its interest rate on set dates and which, upon such adjustment, can
reasonably be expected to have a market value that approximates its par value. Certain Funds may purchase extendable commercial notes. Extendable commercial notes are variable rate notes which normally mature within a short period of time (e.g., 1
month) but which may be extended by the issuer for a maximum maturity of thirteen months.
A floating rate instrument is
one whose terms provide for the adjustment of its interest rate whenever a specified interest rate changes and which, at any time, can reasonably be expected to have a market value that approximates its par value. Floating rate instruments are
frequently not rated by credit rating agencies; however, unrated variable and floating rate instruments purchased by a Fund will be determined by the Fund’s Adviser to be of comparable quality at the time of purchase to rated instruments
eligible for purchase under the Fund’s investment policies. In making such determinations, a Fund’s Adviser will consider the earning power, cash flow and other liquidity ratios of the issuers of such instruments (such issuers include
financial, merchandising, bank holding and other companies) and will continuously monitor their financial condition. There may be no active secondary market with respect to a particular
variable or floating rate instrument purchased by a Fund. The
absence of such an active secondary market could make it difficult for the Fund to dispose of the variable or floating rate instrument involved in the event the issuer of the instrument defaulted on its payment obligations, and the Fund could, for
this or other reasons, suffer a loss to the extent of the default. Variable or floating rate instruments may be secured by bank letters of credit or other assets. A Fund may purchase a variable or floating rate instrument to facilitate portfolio
liquidity or to permit investment of the Fund’s assets at a favorable rate of return.
As a result of the floating and
variable rate nature of these investments, the Funds’ yields may decline, and they may forego the opportunity for capital appreciation during periods when interest rates decline; however, during periods when interest rates increase, the
Funds’ yields may increase, and they may have reduced risk of capital depreciation.
Past periods of high inflation,
together with the fiscal measures adopted to attempt to deal with it, have seen wide fluctuations in interest rates, particularly “prime rates” charged by banks. While the value of the underlying floating or variable rate securities may
change with changes in interest rates generally, the nature of the underlying floating or variable rate should minimize changes in value of the instruments. Accordingly, as interest rates decrease or increase, the potential for capital appreciation
and the risk of potential capital depreciation is less than would be the case with a portfolio of fixed rate securities. A Fund’s portfolio may contain floating or variable rate securities on which stated minimum or maximum rates, or maximum
rates set by state law limit the degree to which interest on such floating or variable rate securities may fluctuate; to the extent it does, increases or decreases in value may be somewhat greater than would be the case without such limits. Because
the adjustment of interest rates on the floating or variable rate securities is made in relation to movements of the applicable banks’ “prime rates” or other short-term rate securities adjustment indices, the floating or variable
rate securities are not comparable to long-term fixed rate securities. Accordingly, interest rates on the floating or variable rate securities may be higher or lower than current market rates for fixed rate obligations of comparable quality with
similar maturities.
Variable Amount Master Notes.
Variable amount master notes are notes, which may possess a demand feature, that permit the indebtedness to vary and provide for periodic adjustments in the interest rate according to the terms of the instrument.
Variable amount master notes may not be secured by collateral. To the extent that variable amount master notes are secured by collateral, they are subject to the risks described under the section “Loans— Collateral and Subordination
Risk.”
Because master notes are
direct lending arrangements between a Fund and the issuer of the notes, they are not normally traded. Although there is no secondary market in the notes, a Fund may demand payment of principal and accrued interest. If the Fund is not repaid such
principal and accrued interest, the Fund may not be able to dispose of the notes due to the lack of a secondary market.
While master notes are not
typically rated by credit rating agencies, issuers of variable amount master notes (which are normally manufacturing, retail, financial, brokerage, investment banking and other business concerns) must satisfy the same criteria as those set forth
with respect to commercial paper, if any, in Part I of this SAI under the heading “Diversification”. A Fund’s Adviser will consider the credit risk of the issuers of such notes, including its earning power, cash flow, and other
liquidity ratios of such issuers and will continuously monitor their financial status and ability to meet payment on demand. In determining average weighted portfolio maturity, a variable amount master note will be deemed to have a maturity equal to
the period of time remaining until the principal amount can be recovered from the issuer.
Limitations on the Use of
Variable and Floating Rate Notes.
Variable and floating rate instruments for which no readily available market exists (e.g., illiquid securities) will be purchased in an amount which, together with securities with
legal or contractual restrictions on resale or for which no readily available market exists (including repurchase agreements providing for settlement more than seven days after notice), exceeds 15% of a Fund’s net assets only if such
instruments are subject to a demand feature that will permit the Fund to demand payment of the principal within seven days after demand by the Fund. There is no limit on the extent to which a Fund may purchase demand instruments that are not
illiquid or deemed to be liquid in accordance with the Adviser’s liquidity determination procedures. If not rated, such instruments must be found by the Fund’s Adviser to be of comparable quality to instruments in which a Fund may
invest. A rating may be relied upon only if it is provided by an NRSRO that is not affiliated with the issuer or guarantor of the instruments.
Zero-Coupon, Pay-in-Kind and
Deferred Payment Securities.
Zero-coupon securities are securities that are sold at a discount to par value and on which interest payments are not made during the life of the security. Upon maturity, the holder is
entitled to receive the par value of the security. Pay-in-kind securities are securities that have interest payable by delivery of additional securities. Upon maturity, the holder is
entitled to receive the aggregate par value of the securities. A
Fund accrues income with respect to zero-coupon and pay-in-kind securities prior to the receipt of cash payments. Deferred payment securities are securities that remain zero-coupon securities until a predetermined date, at which time the stated
coupon rate becomes effective and interest becomes payable at regular intervals. While interest payments are not made on such securities, holders of such securities are deemed to have received “phantom income.” Because a Fund will
distribute “phantom income” to shareholders, to the extent that shareholders elect to receive dividends in cash rather than reinvesting such dividends in additional shares, the applicable Fund will have fewer assets with which to
purchase income-producing securities. Zero-coupon, pay-in-kind and deferred payment securities may be subject to greater fluctuation in value and lesser liquidity in the event of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
Impact of Market Conditions on the Risks associated
with Debt Securities
Investments in certain debt
securities will be especially subject to the risk that, during certain periods, the liquidity of particular issuers or industries, or all securities within a particular investment category, may shrink or disappear suddenly and without warning as a
result of adverse economic, market or political events, or adverse investor perceptions, whether or not accurate.
Current market conditions pose
heightened risks for Funds that invest in debt securities. While the U.S. is experiencing historically low interest rate levels, signs of economic recovery and the end of the Federal Reserve Board’s quantitative easing program have increased
the risk that interest rates may rise in the near future. Any future interest rate increases or other adverse conditions (e.g., inflation/deflation, increased selling of certain fixed-income investments across other pooled investment vehicles or
accounts, changes in investor perception, or changes in government intervention in the markets) could cause the value of any Fund that invests in debt securities to decrease. As such, debt securities markets may experience heightened levels of
interest rate and liquidity risk, as well as increased volatility. If rising interest rates cause a Fund to lose value, the Fund could also face increased shareholder redemptions, which would further impair the Fund’s ability to achieve its
investment objectives.
The capacity for traditional
dealers to engage in fixed-income trading for certain fixed income instruments has not kept pace with the growth of the fixed income market, and in some cases has decreased. As a result, because dealers acting as market makers provide stability to a
market, the significant reduction in certain dealer inventories could potentially lead to decreased liquidity and increased volatility in the fixed income markets. Such issues may be exacerbated during periods of economic uncertainty or market
volatility.
Demand Features
Certain Funds may acquire
securities that are subject to puts and standby commitments (“Demand Features”) to purchase the securities at their principal amount (usually with accrued interest) within a fixed period (usually seven days) following a demand by the
Fund. The Demand Feature may be issued by the issuer of the underlying securities, a dealer in the securities or by another third party and may not be transferred separately from the underlying security. The underlying securities subject to a put
may be sold at any time at market rates. Applicable Funds expect that they will acquire puts only where the puts are available without the payment of any direct or indirect consideration. However, if advisable or necessary, a premium may be paid for
put features. A premium paid will have the effect of reducing the yield otherwise payable on the underlying security. Demand Features provided by foreign banks involve certain risks associated with foreign investments. See “Foreign Investments
(including Foreign Currencies)” for more information on these risks.
Under a “stand-by
commitment,” a dealer would agree to purchase, at a Fund’s option, specified securities at a specified price. A Fund will acquire these commitments solely to facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes. Stand-by commitments may also be referred to as put options.
The purpose of engaging in
transactions involving puts is to maintain flexibility and liquidity to permit a Fund to meet redemption requests and remain as fully invested as possible.
Equity Securities, Warrants and Rights
Common Stock.
Common stock represents a share of ownership in a company and usually carries voting rights and may earn dividends. Unlike preferred stock, common stock dividends are not fixed but are declared at the discretion of the
issuer’s board of directors. Common stock occupies the most junior
position in a company’s capital structure. As with all
equity securities, the price of common stock fluctuates based on changes in a company’s financial condition, including those that result from management’s performance or changes to the business of the company, and overall market and
economic conditions.
Common
Stock Warrants and Rights.
Common stock warrants entitle the holder to buy common stock from the issuer of the warrant at a specific price (the “strike price”) for a specific period of time. The market
price of warrants may be substantially lower than the current market price of the underlying common stock, yet warrants are subject to similar price fluctuations. As a result, warrants may be more volatile investments than the underlying common
stock. If a warrant is exercised, a Fund may hold common stock in its portfolio even if it does not ordinarily invest in common stock.
Rights are similar to warrants
but normally have a shorter duration and are typically distributed directly by the issuers to existing shareholders, while warrants are typically attached to new debt or preferred stock issuances.
Warrants and rights generally
do not entitle the holder to dividends or voting rights with respect to the underlying common stock and do not represent any rights in the assets of the issuer company. Warrants and rights will expire if not exercised on or prior to the expiration
date.
Preferred Stock.
Preferred stock is a class of stock that generally pays dividends at a specified rate and has preference over common stock in the payment of dividends and liquidation. Preferred stock generally does not carry voting
rights. As with all equity securities, the price of preferred stock fluctuates based on changes in a company’s financial condition and on overall market and economic conditions. Because preferred stocks generally pay dividends only after the
issuing company makes required payments to holders of its bonds and other debt, the value of preferred stocks is more sensitive than bonds and other debt to actual or perceived changes in the company’s financial condition or
prospects.
Initial
Public Offerings (“IPOs”).
The Funds may purchase securities in IPOs. These securities are subject to many of the same risks as investing in companies with smaller market capitalizations. Securities
issued in IPOs have no trading history, and information about the companies may be available for very limited periods. The prices of securities sold in IPOs may be highly volatile. At any particular time or from time to time, a Fund may not be able
to invest in securities issued in IPOs, or invest to the extent desired, because, for example, only a small portion (if any) of the securities being offered in an IPO may be made available to the Fund. In addition, under certain market conditions, a
relatively small number of companies may issue securities in IPOs. Similarly, as the number of Funds to which IPO securities are allocated increases, the number of securities issued to any one Fund may decrease. The investment performance of a Fund
during periods when it is unable to invest significantly or at all in IPOs may be lower than during periods when the Fund is able to do so. In addition, as a Fund increases in size, the impact of IPOs on the Fund’s performance will generally
decrease.
Foreign Investments (including
Foreign Currencies)
Some
of the Funds may invest in certain obligations or securities of foreign issuers. For purposes of a Fund’s investment policies and unless described otherwise in a Fund’s prospectus, an issuer of a security will be deemed to be located in
a particular country if: (i) the principal trading market for the security is in such country, (ii) the issuer is organized under the laws of such country or (iii) the issuer derives at least 50% of its revenues or profits from such country or has
at least 50% of its total assets situated in such country. Possible investments include equity securities and debt securities (e.g., bonds and commercial paper) of foreign entities, obligations of foreign branches of U.S. banks and of foreign banks,
including, without limitation, eurodollar certificates of deposit, eurodollar time deposits, eurodollar bankers’ acceptances, canadian time deposits and yankee certificates of deposit, and investments in canadian commercial paper, and
europaper. Securities of foreign issuers may include sponsored and unsponsored American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”), and Global Depositary Receipts (“GDRs”). Sponsored ADRs
are listed on the New York Stock Exchange; unsponsored ADRs are not. Therefore, there may be less information available about the issuers of unsponsored ADRs than the issuers of sponsored ADRs. Unsponsored ADRs are restricted securities. EDRs and
GDRs are not listed on the New York Stock Exchange. As a result, it may be difficult to obtain information about EDRs and GDRs.
Risk Factors of Foreign Investments.
The following is a summary of certain risks associated with foreign investments:
Political and Exchange Risks.
Foreign investments may subject a Fund to investment risks that differ in some respects from those related to investments in obligations of U.S. domestic issuers. Such risks include potential future adverse political and
economic developments, sanctions or other measures by the United States or other governments, possible imposition of withholding taxes on interest or other income, possible seizure, nationalization or expropriation of foreign deposits, possible
establishment of exchange controls or taxation at the source, greater fluctuations in value due to changes in exchange rates, or the adoption of other foreign governmental restrictions which might adversely affect the payment of principal and
interest on such obligations.
Higher Transaction Costs.
Foreign investments may entail higher custodial fees and sales commissions than domestic investments.
Accounting and Regulatory
Differences.
Foreign issuers of securities or obligations are often subject to accounting treatment and engage in business practices different from those of domestic issuers of similar securities or obligations. In
addition, foreign issuers are usually not subject to the same degree of regulation as domestic issuers, and their securities may trade on relatively small markets, causing their securities to experience potentially higher volatility and more limited
liquidity than securities of domestic issuers. Foreign branches of U.S. banks and foreign banks are not regulated by U.S. banking authorities and may be subject to less stringent reserve requirements than those applicable to domestic branches of
U.S. banks. In addition, foreign banks generally are not bound by accounting, auditing, and financial reporting standards comparable to those applicable to U.S. banks. Dividends and interest paid by foreign issuers may be subject to withholding and
other foreign taxes which may decrease the net return on foreign investments as compared to dividends and interest paid to a Fund by domestic companies.
Currency Risk.
Foreign securities may be denominated in foreign currencies, although foreign issuers may also issue securities denominated in U.S. dollars. The value of a Fund’s investments denominated in foreign currencies and
any funds held in foreign currencies will be affected by changes in currency exchange rates, the relative strength of those currencies and the U.S. dollar, and exchange-control regulations. Changes in the foreign currency exchange rates also may
affect the value of dividends and interest earned, gains and losses realized on the sale of securities and net investment income and gains, if any, to be distributed to shareholders by a Fund. The exchange rates between the U.S. dollar and other
currencies are determined by the forces of supply and demand in foreign exchange markets and the relative merits of investments in different countries, actual or anticipated changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates may fluctuate significantly over short periods of time. Currency exchange rates also can be affected by intervention (or lack of intervention) by the United States or foreign governments or central
banks or by currency controls or political developments in the United States or elsewhere. Accordingly, the ability of a Fund that invests in foreign securities as part of its principal investment strategy to achieve its investment objective may
depend, to a certain extent, on exchange rate movements. In addition, while the volume of transactions effected on foreign stock exchanges has increased in recent years, in most cases it remains appreciably below that of domestic securities
exchanges. Accordingly, a Fund’s foreign investments may be less liquid and their prices may be more volatile than comparable investments in securities of U.S. companies. In buying and selling securities on foreign exchanges, purchasers
normally pay fixed commissions that are generally higher than the negotiated commissions charged in the U.S. In addition, there is generally less government supervision and regulation of securities exchanges, brokers and issuers located in foreign
countries than in the U.S.
Settlement Risk.
The settlement periods for foreign securities and instruments are often longer than those for securities or obligations of U.S. issuers or instruments denominated in U.S. dollars. Delayed settlement may affect the
liquidity of a Fund’s holdings. Certain types of securities and other instruments are not traded “delivery versus payment” in certain markets (e.g., government bonds in Russia) meaning that a Fund may deliver securities or
instruments before payment is received from the counterparty. In such markets, the Fund may not receive timely payment for securities or other instruments it has delivered and may be subject to increased risk that the counterparty will fail to make
payments when due or default completely.
Brady Bonds.
Brady bonds are securities created through the exchange of existing commercial bank loans to public and private entities in certain emerging markets for new bonds in connection with debt restructurings. Brady bonds have
been issued since 1989. In light of the history of defaults of countries issuing Brady bonds on their commercial bank loans, investments in Brady bonds may be viewed as speculative and subject to the same risks as emerging market securities. Brady
bonds may be fully or partially collateralized or uncollateralized, are issued in various currencies (but primarily the U.S. dollar) and are actively traded in over-the-counter (“OTC”) secondary markets. Incomplete collateralization
of
interest or principal payment obligations results in increased
credit risk. Dollar-denominated collateralized Brady bonds, which may be either fixed-rate or floating rate bonds, are generally collateralized by U.S. Treasury securities.
Global Depositary Notes.
Foreign securities and emerging markets securities include Global Depositary Notes (“GDNs”). A GDN is a debt instrument created by a bank that evidences ownership of local currency-denominated debt
securities. GDNs reflect the terms of particular local currency-denominated bonds. GDNs trade, settle, and pay interest and principal in U.S. dollars but typically are restricted securities that do not trade on an exchange. Any distributions paid to
the holders of GDNs are usually subject to a fee charged by the depositary bank. In addition to the risks associated with foreign investments, a Fund’s investments in GDNs is subject to the risks associated with the underlying local
currency-denominated bond and derivative instruments including credit risk, default or similar event risk, counterparty risk, interest rate risk, leverage risk, liquidity risk, and management risk. Holders of GDNs may have limited rights, and
investment restrictions in certain countries may adversely impact the value of GDNs because such restrictions may limit the ability to convert the bonds into GDNs and vice versa. Such restrictions may cause bonds of the underlying issuer to trade at
a discount or premium to the market price of the GDN.
Obligations of Supranational
Entities.
Obligations of supranational entities include securities designated or supported by governmental entities to promote economic reconstruction or development of international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction and Development (the “World Bank”), the European Coal and Steel Community, the Asian Development Bank and the Inter-American Development Bank. Each
supranational entity’s lending activities are limited to a percentage of its total capital (including “callable capital” contributed by its governmental members at the entity’s call), reserves and net income. There is no
assurance that participating governments will be able or willing to honor their commitments to make capital contributions to a supranational entity.
Sukuk.
Foreign securities and emerging market securities include sukuk. Sukuk are certificates, similar to bonds, issued by the issuer to obtain an upfront payment in exchange for an income stream. Such income stream may or
may not be linked to a tangible asset. For sukuk that are not linked to a tangible asset, the sukuk represents a contractual payment obligation of the issuer or issuing vehicle to pay income or periodic payments to the investor, and such contractual
payment obligation is linked to the issuer or issuing vehicle and not from interest on the investor’s money for the sukuk. For sukuk linked to a tangible asset, the Fund will not have a direct interest in the underlying asset or pool of
assets. The issuer also makes a contractual promise to buy back the certificate at a future date at par value. Even when the certificate is linked to the returns generated by certain assets of the issuer, the underlying assets are not pledged as
security for the certificates, and the Fund (as the investor) is relying on the creditworthiness of the issuer for all payments required by the sukuk. The issuer may be a special purpose vehicle (“SPV”) with no other assets. Investors do
not have direct legal ownership of any underlying assets. In the event of default, the process may take longer to resolve than conventional bonds. Changing interpretations of Islamic law by courts or prominent scholars may affect the free
transferability of sukuk in ways that cannot now be foreseen. In such an event, the Fund may be required to hold its sukuk for longer than intended, even if their condition is deteriorating.
Issuers of sukuk may include
international financial institutions, foreign governments and agencies of foreign governments. Underlying assets may include, without limitation, real estate (developed and undeveloped), lease contracts and machinery and equipment. Although the
sukuk market has grown significantly in recent years, there may be times when the market is illiquid and where it is difficult for a Fund to make an investment in or dispose of sukuk at the Fund’s desired time. Furthermore, the global sukuk
market is significantly smaller than conventional bond markets, and restrictions imposed by the Shariah board of the issuing entity may limit the number of investors who are interested in investing in particular sukuk. The unique characteristics of
sukuk may lead to uncertainties regarding their tax treatment within a Fund.
Investors’ ability to
pursue and enforce actions with respect to these payment obligations or to otherwise enforce the terms of the sukuk, restructure the sukuk, obtain a judgment in a court of competent jurisdiction, and/or attach assets of the obligor may be limited.
Sukuk are also subject to the risks associated with developing and emerging market economies, which include, among others, the risk of sanctions and inconsistent accounting and legal principles.
Emerging Market Securities.
Investing in companies domiciled in emerging market countries may be subject to potentially higher risks than investments in developed countries. These risks include: (i) less social, political, and economic stability;
(ii) greater illiquidity and price volatility due to smaller or limited local capital markets for such securities, or low non-existent trading volumes; (iii) less scrutiny and regulation by local authorities of the foreign exchanges and
broker-dealers; (iv) the seizure or confiscation by local governments of securities held by foreign investors, and the possible suspension or limiting by local governments of an issuer’s ability to make dividend or interest payments; (v)
limiting or entirely restricting repatriation of invested capital, profits, and dividends by local governments; (vi) possible local taxation of capital gains, including on a retroactive basis; (vii) the attempt by issuers facing restrictions on
dollar or euro payments imposed by local governments to make dividend or interest payments to foreign investors in the local currency; (viii) difficulty in enforcing legal claims related to the securities and/or local judges favoring the interests
of the issuer over those of foreign investors; (ix) bankruptcy judgments being paid in the local currency; (x) greater difficulty in determining market valuations of the securities due to limited public information regarding the issuer, and (xi)
difficulty of ascertaining the financial health of an issuer due to lax financial reporting on a regular basis, substandard disclosure and differences in accounting standards.
Emerging country securities
markets are typically marked by a high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of ownership of such securities by a limited
number of investors. Although some emerging markets have become more established and tend to issue securities of higher credit quality, the markets for securities in other emerging countries are in the earliest stages of their development, and these
countries issue securities across the credit spectrum. Even the markets for relatively widely traded securities in emerging countries may not be able to absorb, without price disruptions, a significant increase in trading volume or trades of a size
customarily undertaken by institutional investors in the securities markets of developed countries. The limited size of many of these securities markets can cause prices to be erratic for reasons apart from factors that affect the soundness and
competitiveness of the securities issuers. For example, prices may be unduly influenced by traders who control large positions in these markets. Additionally, market making and arbitrage activities are generally less extensive in such markets, which
may contribute to increased volatility and reduced liquidity of such markets. The limited liquidity of emerging country securities may also affect a Fund’s ability to accurately value its portfolio securities or to acquire or dispose of
securities at the price and time it wishes to do so or in order to meet redemption requests.
Many emerging market countries
suffer from uncertainty and corruption in their legal frameworks. Legislation may be difficult to interpret and laws may be too new to provide any precedential value. Laws regarding foreign investment and private property may be weak or
non-existent. Sudden changes in governments may result in policies which are less favorable to investors, such as policies designed to expropriate or nationalize “sovereign” assets. Certain emerging market countries in the past have
expropriated large amounts of private property, in many cases with little or no compensation, and there can be no assurance that such expropriation will not occur in the future.
Foreign investment in the
securities markets of certain emerging countries is restricted or controlled to varying degrees. These restrictions may limit a Fund’s investment in certain emerging countries and may increase the expenses of the Fund. Certain emerging
countries require governmental approval prior to investments by foreign persons or limit investment by foreign persons to only a specified percentage of an issuer’s outstanding securities or to a specific class of securities, which may have
less advantageous terms (including price) than securities of the company available for purchase by nationals.
Many developing countries lack
the social, political, and economic stability characteristics of the U.S. Political instability among emerging market countries can be common and may be caused by an uneven distribution of wealth, social unrest, labor strikes, civil wars, and
religious oppression. Economic instability in emerging market countries may take the form of: (i) high interest rates; (ii) high levels of inflation, including hyperinflation; (iii) high levels of unemployment or underemployment; (iv) changes in
government economic and tax policies, including confiscatory taxation; and (v) imposition of trade barriers.
Currencies of emerging market
countries are subject to significantly greater risks than currencies of developed countries. Many emerging market countries have experienced steady declines or even sudden devaluations of their currencies relative to the U.S. dollar. Some emerging
market currencies may not be internationally traded or may be subject to strict controls by local governments, resulting in undervalued or overvalued currencies.
Some emerging market countries
have experienced balance of payment deficits and shortages in foreign exchange reserves. Governments have responded by restricting currency conversions. Future restrictive exchange controls could prevent or restrict a company’s ability to make
dividend or interest payments in the original currency of the obligation (usually U.S. dollars). In addition, even though the currencies of some emerging market countries may be convertible into U.S. dollars, the conversion rates may be artificial
to their actual market values.
A Fund’s income and, in
some cases, capital gains from foreign stocks and securities, will be subject to applicable taxation in certain of the countries in which it invests and treaties between the U.S. and such countries may not be available in some cases to reduce the
otherwise applicable tax rates. Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making
it difficult to conduct such transactions. Such delays in settlement could result in temporary periods when a portion of the assets of a Fund remains uninvested and no return is earned on such assets. The inability of the Fund to make intended
security purchases or sales due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio securities, in the Fund deeming those securities to be illiquid, or, if the Fund has entered into a
contract to sell the securities, in possible liability to the purchaser.
In the past, governments within
the emerging markets have become overly reliant on the international capital markets and other forms of foreign credit to finance large public spending programs which cause huge budget deficits. Often, interest payments have become too overwhelming
for a government to meet, representing a large percentage of total gross domestic product (“GDP”). These foreign obligations have become the subject of political debate and have served as fuel for political parties of the opposition,
which pressure the government not to make payments to foreign creditors, but instead to use these funds for social programs. Either due to an inability to pay or submission to political pressure, foreign governments have been forced to seek a
restructuring of their loan and/or bond obligations, have declared a temporary suspension of interest payments or have defaulted. These events have adversely affected the values of securities issued by foreign governments and corporations domiciled
in emerging market countries and have negatively affected not only their cost of borrowing, but their ability to borrow in the future as well.
Sovereign Obligations.
Sovereign debt includes investments in securities issued or guaranteed by a foreign sovereign government or its agencies, authorities or political subdivisions. An investment in sovereign debt obligations involves
special risks not present in corporate debt obligations. The issuer of the sovereign debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and a Fund may have
limited recourse in the event of a default. During periods of economic uncertainty, the market prices of sovereign debt may be more volatile than prices of U.S. debt obligations. In the past, certain emerging markets have encountered difficulties in
servicing their debt obligations, withheld payments of principal and interest and declared moratoria on the payment of principal and interest on their sovereign debts.
A sovereign debtor’s
willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the
relative size of the debt service burden, the sovereign debtor’s policy toward principal international lenders and local political constraints. Sovereign debtors may also be dependent on expected disbursements from foreign governments,
multilateral agencies and other entities to reduce principal and interest arrearages on their debt. The failure of a sovereign debtor to implement economic reforms, achieve specified levels of economic performance or repay principal or interest when
due may result in the cancellation of third-party commitments to lend funds to the sovereign debtor, which may further impair such debtor’s ability or willingness to service its debts.
Foreign Currency Transactions.
Certain Funds may engage in foreign currency transactions which include the following, some of which also have been described elsewhere in this SAI: options on foreign currencies, currency futures, options on such
futures, forward foreign currency transactions, forward rate agreements and currency swaps, caps and floors. Certain Funds may engage in such transactions in both U.S. and non-U.S. markets. To the extent a Fund enters into such transactions in
markets other than in the U.S., the Fund may be subject to certain currency, settlement, liquidity, trading and other risks similar to those described above with respect to the Fund’s investments in foreign securities including emerging
markets securities. Certain Funds may engage in such transactions to hedge against currency risks, as a substitute for securities in which the Fund invests, to increase or decrease exposure to a foreign currency, to shift exposure from one foreign
currency to another, for risk management purposes or to increase income or gain to the Fund. To the extent that a Fund uses foreign currency transactions for hedging purposes, the Fund may hedge either specific transactions or portfolio
positions.
While a Fund’s use of
hedging strategies is intended to reduce the volatility of the net asset value (“NAV”) of Fund shares, the NAV of the Fund will fluctuate. There can be no assurance that a Fund’s hedging transactions will be effective. Furthermore,
a Fund (other than the Europe Currency Hedged ETF and International Currency Hedged ETF which intends to engage in hedging on a regular basis) may only engage in hedging activities from time to time and may not necessarily be engaging in hedging
activities when movements in currency exchange rates occur.
Certain Funds are authorized
to deal in forward foreign exchange between currencies of the different countries in which the Fund will invest and multi-national currency units as a hedge against possible variations in the foreign exchange rate between these currencies. This is
accomplished through contractual agreements entered into in the interbank market to purchase or sell one specified currency for another currency at a specified future date (up to one year) and price at the time of the contract.
Transaction Hedging.
Generally, when a Fund engages in transaction hedging, it enters into foreign currency transactions with respect to specific receivables or payables of the Fund generally arising in connection with the purchase or sale
of its portfolio securities. A Fund may engage in transaction hedging when it desires to “lock in” the U.S. dollar price (or a non-U.S. dollar currency (“reference currency”)) of a security it has agreed to purchase or sell,
or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. By transaction hedging, a Fund attempts to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar or
other reference currency and the applicable foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are made or
received.
A Fund
may purchase or sell a foreign currency on a spot (or cash) basis at the prevailing spot rate in connection with the settlement of transactions in portfolio securities denominated in that foreign currency. Certain Funds reserve the right to purchase
and sell foreign currency futures contracts traded in the U.S. and subject to regulation by the Commodity Futures Trading Commission (“CFTC”).
For transaction hedging
purposes, a Fund may also purchase U.S. exchange-listed call and put options on foreign currency futures contracts and on foreign currencies. A put option on a futures contract gives a Fund the right to assume a short position in the foreign
currency futures contract until expiration of the option. A put option on currency gives a Fund the right to sell a currency at an exercise price until the expiration of the option. A call option on a futures contract gives a Fund the right to
assume a long position in the futures contract until the expiration of the option. A call option on currency gives a Fund the right to purchase a currency at the exercise price until the expiration of the option.
Position Hedging.
When engaging in position hedging, a Fund will enter into foreign currency exchange transactions to protect against a decline in the values of the foreign currencies in which their portfolio securities are denominated or
an increase in the value of currency for securities which a Fund’s Adviser expects to purchase. In connection with the position hedging, the Fund may purchase or sell foreign currency forward contracts or foreign currency on a spot basis. A
Fund may purchase U.S. exchange-listed put or call options on foreign currency and foreign currency futures contracts and buy or sell foreign currency futures contracts traded in the U.S. and subject to regulation by the CFTC.
The precise matching of the
amounts of foreign currency exchange transactions and the value of the portfolio securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in
the value of those securities between the dates the currency exchange transactions are entered into and the dates they mature.
Forward Foreign Currency
Exchange Contracts.
Certain Funds may purchase forward foreign currency exchange contracts, sometimes referred to as “currency forwards” (“Forward Contracts”), which involve an obligation to
purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract as agreed by the parties in an amount and at a price set at the time of the contract. In the case of a cancelable Forward
Contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their
customers, so no intermediary is required. A Forward Contract generally has no deposit requirement, and no commissions are charged at any stage for trades.
At the maturity of a Forward
Contract, a Fund may either accept or make delivery of the currency specified in the contract or, at or prior to maturity, enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect
to forward contracts are usually effected with the currency trader who is a party to the original forward contract. For forward foreign currency
contracts (other than Non-Deliverable Forwards) that require
physical settlement, the Funds will segregate or earmark liquid assets equal to the current notional value of each contract. In calculating the notional value, the Funds may net long and short contracts with the same currency and the same settlement
date. With respect to trades that do not settle through CLS Bank International, the Funds may only net long and short contracts if the contracts are with the same counterparty. Certain Funds may also engage in non-deliverable forwards which are cash
settled and which do not involve delivery of the currency specified in the contract. For more information on Non-Deliverable Forwards, see “Non-Deliverable Forwards” below.
Foreign Currency Futures
Contracts.
Certain Funds may purchase foreign currency futures contracts. Foreign currency futures contracts traded in the U.S. are designed by and traded on exchanges regulated by the CFTC, such as the New York
Mercantile Exchange. A Fund may enter into foreign currency futures contracts for hedging purposes and other risk management purposes as defined in CFTC regulations. Certain Funds may also enter into foreign currency futures transactions to increase
exposure to a foreign currency, to shift exposure from one foreign currency to another or to increase income or gain to the Fund.
At the maturity of a futures
contract, the Fund may either accept or make delivery of the currency specified in the contract, or at or prior to maturity enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect
to futures contracts are effected on a commodities exchange; a clearing corporation associated with the exchange assumes responsibility for closing out such contracts.
Positions in the foreign
currency futures contracts may be closed out only on an exchange or board of trade which provides a secondary market in such contracts. There is no assurance that a secondary market on an exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to close a futures position; in the event of adverse price movements, the Fund would continue to be required to make daily cash payments of variation margin.
For more information on futures
contracts, see “Futures Contracts” under the heading “Options and Futures Transactions” below.
Foreign Currency Options.
Certain Funds may purchase and sell U.S. exchange-listed and over the counter call and put options on foreign currencies. Such options on foreign currencies operate similarly to options on securities. When a Fund
purchases a put option, the Fund has the right but not the obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate on a specified date. When a Fund sells or writes a call option, the Fund has the
obligation to exchange money denominated in one currency into another currency at a pre-agreed exchange rate if the buyer exercises option. Some of the Funds may also purchase and sell non-deliverable currency options (“Non-Deliverable
Options”). Non-Deliverable Options are cash-settled, options on foreign currencies (each a “Option Reference Currency”) that are non-convertible and that may be thinly traded or illiquid. Non-Deliverable Options involve an
obligation to pay an amount in a deliverable currency (such as U.S. Dollars, Euros, Japanese Yen, or British Pounds Sterling) equal to the difference between the prevailing market exchange rate for the Option Reference Currency and the agreed upon
exchange rate (the “Non-Deliverable Option Rate”), with respect to an agreed notional amount. Options on foreign currencies are affected by all of those factors which influence foreign exchange rates and investments
generally.
A Fund
is authorized to purchase or sell listed foreign currency options and currency swap contracts as a short or long hedge against possible variations in foreign exchange rates, as a substitute for securities in which a Fund may invest, and for risk
management purposes. Such transactions may be effected with respect to hedges on non-U.S. dollar denominated securities (including securities denominated in the Euro) owned by the Fund, sold by the Fund but not yet delivered, committed or
anticipated to be purchased by the Fund, or in transaction or cross-hedging strategies. As an illustration, a Fund may use such techniques to hedge the stated value in U.S. dollars of an investment in a Japanese yen-dominated security. In such
circumstances, the Fund may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the dollar relative to
the yen will tend to be offset by an increase in the value of the put option. To offset, in whole or in part, the cost of acquiring such a put option, the Fund also may sell a call option which, if exercised, requires it to sell a specified amount
of yen for dollars at a specified price by a future date (a technique called a “collar”). By selling the call option in this illustration, the Fund gives up the opportunity to profit without limit from increases in the relative value of
the yen to the dollar. Certain Funds may also enter into foreign currency futures transactions for non-hedging purposes including to increase or decrease exposure to a foreign currency, to shift exposure from one foreign currency to another or to
increase income or gain to the Fund.
Certain differences exist
among these foreign currency instruments. Foreign currency options provide the holder thereof the right to buy or to sell a currency at a fixed price on a future date. Listed options are third-party contracts (i.e., performance of the parties’
obligations is guaranteed by an exchange or clearing corporation) which are issued by a clearing corporation, traded on an exchange and have standardized strike prices and expiration dates. OTC options are two-party contracts and have negotiated
strike prices and expiration dates. Options on futures contracts are traded on boards of trade or futures exchanges. Currency swap contracts are negotiated two-party agreements entered into in the interbank market whereby the parties exchange two
foreign currencies at the inception of the contract and agree to reverse the exchange at a specified future time and at a specified exchange rate.
The value of a foreign currency
option is dependent upon the value of the foreign currency and the U.S. dollar and may have no relationship to the investment merits of a foreign security. Because foreign currency transactions occurring in the interbank market involve substantially
larger amounts than those that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market (generally consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than those for round lots.
There is no systematic
reporting of last sale information for foreign currencies and there is no regulatory requirement that quotations available through dealer or other market sources be firm or revised on a timely basis. Available quotation information is generally
representative of very large transactions in the interbank market and thus may not reflect relatively smaller transactions (less than $1 million) where rates may be less favorable. The interbank market in foreign currencies is a global,
around-the-clock market. To the extent that the U.S. options markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place in the underlying markets that cannot be reflected in
the options market.
In
addition to writing call options on currencies when a Fund owns the underlying currency, the Funds may also write call options on currencies even if they do not own the underlying currency as long as the Fund segregates cash or liquid assets that,
when added to the amounts deposited with a futures commission merchant or a broker as margin, equal the market value of the currency underlying the call option (but not less than the strike price of the call option). The Funds may also cover a
written call option by owning a separate call option permitting the Fund to purchase the reference currency at a price no higher than the strike price of the call option sold by the Fund. In addition, a Fund may write a non-deliverable call option
if the Fund segregates an amount equal to the current notional value (amount obligated to pay). Netting is generally permitted of long and short positions of a specific country (assuming long and short contracts are similar). If there are securities
or currency held in that specific country at least equal to the current notional value of the net currency positions, no segregation is required.
Non-Deliverable Forwards.
Some of the Funds may also invest in non-deliverable forwards (“NDFs”). NDFs are cash-settled, short-term forward contracts on foreign currencies (each a “Reference Currency”) that are
non-convertible and that may be thinly traded or illiquid. NDFs involve an obligation to pay an amount (the “Settlement Amount”) equal to the difference between the prevailing market exchange rate for the Reference Currency and the
agreed upon exchange rate (the “NDF Rate”), with respect to an agreed notional amount. NDFs have a fixing date and a settlement (delivery) date. The fixing date is the date and time at which the difference between the prevailing market
exchange rate and the agreed upon exchange rate is calculated. The settlement (delivery) date is the date by which the payment of the Settlement Amount is due to the party receiving payment.
Although NDFs are similar to
forward foreign currency exchange contracts, NDFs do not require physical delivery of the Reference Currency on the settlement date. Rather, on the settlement date, the only transfer between the counterparties is the monetary settlement amount
representing the difference between the NDF Rate and the prevailing market exchange rate. NDFs typically may have terms from one month up to two years and are settled in U.S. dollars.
NDFs are
subject to many of the risks associated with derivatives in general and forward currency transactions including risks associated with fluctuations in foreign currency and the risk that the counterparty will fail to fulfill its obligations. The Funds
will segregate or earmark liquid assets in an amount equal to the marked to market value of each NDF contract on a daily basis of the NDF. In calculating the mark-to-market value, the Funds may net opposing NDF contracts with the same currency and
the same settlement date. With respect to trades that do not settle through CLS Bank International, the Funds may only net opposing NDF contracts if the contracts are with the same counterparty.
The Funds will typically use
NDFs for hedging purposes, but may also use such instruments to increase income or gain. The use of NDFs for hedging or to increase income or gain may not be successful, resulting in losses to the Fund, and the cost of such strategies may reduce the
Funds’ respective returns.
Under the
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), NDFs are regulated as swaps and are subject to rules requiring central clearing and mandatory trading on an exchange or facility that is regulated by the
CFTC for certain swaps. NDFs traded in the over-the-counter market are subject to margin requirements that were implemented with respect to the Funds beginning in 2017. Implementation of the regulations regarding clearing, mandatory trading and
margining of NDFs may increase the cost to the Fund of hedging currency risk and, as a result, may affect returns to investors in the Fund.
Foreign Currency Conversion.
Although foreign exchange dealers do not charge a fee for currency conversion, they do realize a profit based on the difference (the “spread”) between prices at which they are buying and selling various
currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer.
Other Foreign Currency Hedging
Strategies.
New options and futures contracts and other financial products, and various combinations thereof, continue to be developed, and certain Funds may invest in any such options, contracts and products as may
be developed to the extent consistent with the Fund’s investment objective and the regulatory requirements applicable to investment companies, and subject to the supervision of the Trust’s Board of Trustees.
Risk Factors in Foreign Currency
Transactions.
The following is a summary of certain risks associated with foreign currency transactions:
Imperfect Correlation.
Foreign currency transactions present certain risks. In particular, the variable degree of correlation between price movements of the currency instruments and price movements in the substituted securities creates the
possibility that losses on the currency transaction may be greater than gains in the value of a Fund’s securities.
Liquidity.
Currency instruments may not be liquid in all circumstances. As a result, in volatile markets, the Funds may not be able to dispose of or offset a transaction without incurring losses. The use of these instruments could
tend to limit any potential gain which might result from an increase in the value of the substituted security.
Leverage and Volatility Risk.
Derivative instruments, including foreign currency derivatives, may sometimes increase or leverage a Fund’s exposure to a particular market risk. Leverage enhances the price volatility of derivative instruments
held by a Fund.
Strategy Risk.
Certain Funds may use foreign currency derivatives for hedging as well as non-hedging purposes including to gain or adjust exposure to currencies and securities markets or to increase income or gain to a Fund. There is
no guarantee that these strategies will succeed and their use may subject a Fund to greater volatility and loss. Foreign currency transactions involve complex securities transactions that involve risks in addition to direct investments in securities
including leverage risk and the risks associated with derivatives in general, currencies, and investments in foreign and emerging markets.
Judgment of the Adviser.
Successful use of foreign currency transactions by a Fund depends upon the ability of the Adviser to predict correctly movements in the direction of interest and currency rates and other factors affecting markets for
securities. If the expectations of the Adviser are not met, a Fund would be in a worse position than if a foreign currency transaction had not been pursued. For example, if a Fund has hedged against the possibility of an increase in interest rates
which would adversely affect the price of securities in its portfolio and the price of such securities increases instead, the Fund will lose part or all of the benefit of the increased value of its securities because it will have offsetting losses
in its hedging positions. In addition, when utilizing instruments that require variation margin payments, if the Fund has insufficient cash to meet daily variation margin requirements, it may have to sell securities to meet such
requirements.
Other
Risks.
Such sales of securities may, but will not necessarily, be at increased prices which reflect the rising market. Thus, a Fund may have to sell securities at a time when it is disadvantageous to do
so.
It is
impossible to forecast with precision the market value of portfolio securities at the expiration or maturity of a forward contract or futures contract. Accordingly, a Fund may have to purchase additional foreign currency on the spot market (and bear
the expense of such purchase) if the market value of the security or securities being hedged is less than the amount of foreign currency a Fund is obligated to
deliver and if a decision is made to sell the security or
securities and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security or securities if the market value of such security or
securities exceeds the amount of foreign currency the Fund is obligated to deliver.
Transaction and position
hedging do not eliminate fluctuations in the underlying prices of the securities which a Fund owns or expects to purchase or sell. Rather, the Adviser may employ these techniques in an effort to maintain an investment portfolio that is relatively
neutral to fluctuations in the value of the U.S. dollar relative to major foreign currencies and establish a rate of exchange which one can achieve at some future point in time. Additionally, although these techniques tend to minimize the risk of
loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain which might result from the increase in the value of such currency. Moreover, it may not be possible for a Fund to hedge against a devaluation that
is so generally anticipated that the Fund is not able to contract to sell the currency at a price above the anticipated devaluation level.
Inverse Floaters and Interest Rate Caps
Inverse floaters are
instruments whose interest rates bear an inverse relationship to the interest rate on another security or the value of an index. The market value of an inverse floater will vary inversely with changes in market interest rates and will be more
volatile in response to interest rate changes than that of a fixed rate obligation. Interest rate caps are financial instruments under which payments occur if an interest rate index exceeds a certain predetermined interest rate level, known as the
cap rate, which is tied to a specific index. These financial products will be more volatile in price than securities which do not include such a structure.
Investment Company Securities and Exchange-Traded
Funds
Investment Company
Securities.
A Fund may acquire the securities of other investment companies (“acquired funds”) to the extent permitted under the 1940 Act and consistent with its investment objective and strategies. As a
shareholder of another investment company, a Fund would bear, along with other shareholders, its pro rata portion of the other investment company’s expenses, including advisory fees. These expenses would be in addition to the advisory and
other expenses that a Fund bears directly in connection with its own operations. Except as described below, the 1940 Act currently requires that, as determined immediately after a purchase is made, (i) not more than 5% of the value of a Fund’s
total assets will be invested in the securities of any one investment company, (ii) not more than 10% of the value of its total assets will be invested in the aggregate in securities of investment companies as a group and (iii) not more than 3% of
the outstanding voting stock of any one investment company will be owned by a Fund.
The limitations described above
do not apply to investments in money market funds subject to certain conditions. The Funds may invest in affiliated and unaffiliated money market funds without limit under Rule 12d1-1 under the 1940 Act subject to the acquiring fund’s
investment policies and restrictions and the conditions of the Rule.
Exchange-Traded Funds
(“ETFs”).
ETFs are pooled investment vehicles whose ownership interests are purchased and sold on a securities exchange. ETFs may be structured investment companies, depositary receipts or other pooled
investment vehicles. As shareholders of an ETF, the Funds will bear their pro rata portion of any fees and expenses of the ETFs. Although shares of ETFs are traded on an exchange, shares of certain ETFs may not be redeemable by the ETF. In addition,
ETFs may trade at a price below their net asset value (also known as a discount).
Certain Funds may use ETFs to
gain exposure to various asset classes and markets or types of strategies and investments By way of example, ETFs may be structured as broad based ETFs that invest in a broad group of stocks from different industries and market sectors; select
sector; or market ETFs that invest in debt securities from a select sector of the economy, a single industry or related industries; or ETFs that invest in foreign and emerging markets securities. Other types of ETFs continue to be developed and the
Fund may invest in them to the extent consistent with such Funds’ investment objectives, policies and restrictions. The ETFs in which the Funds invest are subject to the risks applicable to the types of securities and investments used by the
ETFs (e.g., debt securities are subject to risks like credit and interest rate risks; emerging markets securities are subject risks like currency risks and foreign and emerging markets risk; derivatives are subject to leverage and counterparty
risk).
ETFs may be
actively managed or index-based. Actively managed ETFs are subject to management risk and may not achieve their objective if the ETF’s manager’s expectations regarding particular securities or markets are not met. An index based
ETF’s objective is to track the performance of a specified index.
Index based ETFs may invest in a securities portfolio that
includes substantially all of the securities in substantially the same amount as the securities included in the designated index or a representative sample. Because passively managed ETFs are designed to track an index, securities may be purchased,
retained and sold at times when an actively managed ETF would not do so. As a result, shareholders of a Fund that invest in such an ETF can expect greater risk of loss (and a correspondingly greater prospect of gain) from changes in the value of
securities that are heavily weighted in the index than would be the case if ETF were not fully invested in such securities. This risk is increased if a few component securities represent a highly concentrated weighting in the designated index.
Unless permitted by the 1940
Act or an order or rule issued by the Securities and Exchange Commission (“SEC”) (see “Investment Company Securities” above for more information), the Fund’s investments in unaffiliated ETFs that are structured as
investment companies as defined in the 1940 Act are subject to certain percentage limitations of the 1940 Act regarding investments in other investment companies. As a general matter, these percentage limitations currently require a Fund to limit
its investments in any one issue of ETFs to 5% of the Fund’s total assets and 3% of the outstanding voting securities of the ETF issue. Moreover, a Fund’s investments in all ETFs may not currently exceed 10% of the Fund’s total
assets under the 1940 Act, when aggregated with all other investments in investment companies. ETFs that are not structured as investment companies as defined in the 1940 Act are not subject to these percentage limitations.
SEC exemptive orders granted to
various ETFs and their investment advisers permit the Funds to invest beyond the 1940 Act limits, subject to certain terms and conditions, including a finding of the Board of Trustees that the advisory fees charged by the Adviser to the Fund are for
services that are in addition to, and not duplicative of, the advisory services provided to those ETFs.
Loans
Some of the Funds may invest in
fixed and floating rate loans (“Loans”). Loans may include senior fixed and floating rate loans (“Senior Loans”) and secured and unsecured loans, second lien or more junior loans (“Junior Loans”) and bridge loans
or bridge facilities (“Bridge Loans”). Loans are typically arranged through private negotiations between borrowers in the U.S. or in foreign or emerging markets which may be corporate issuers or issuers of sovereign debt obligations
(“Obligors”) and one or more financial institutions and other lenders (“Lenders”). Generally, the Funds invest in Loans by purchasing assignments of all or a portion of Loans (“Assignments”) or Loan participations
(“Participations”) from third parties although certain Funds may originate Loans.
A Fund has direct rights
against the Obligor on the Loan when it purchases an Assignment. Because Assignments are arranged through private negotiations between potential assignees and potential assignors, however, the rights and obligations acquired by a Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held by the assigning Lender. With respect to Participations, typically, a Fund will have a contractual relationship only with the Lender and not with the Obligor. The
agreement governing Participations may limit the rights of a Fund to vote on certain changes which may be made to the Loan agreement, such as waiving a breach of a covenant. However, the holder of a Participation will generally have the right to
vote on certain fundamental issues such as changes in principal amount, payment dates and interest rate. Participations may entail certain risks relating to the creditworthiness of the parties from which the participations are obtained.
Assignments and Participations
are typically originated, negotiated and structured by a U.S. or foreign commercial bank, insurance company, finance company or other financial institution (the “Agent”) for a group of Loan investors. The Agent typically administers and
enforces the Loan on behalf of the other Loan investors in the syndicate. The Agent’s duties may include responsibility for the collection of principal and interest payments from the Obligor and the apportionment of these payments to the
credit of all Loan investors. The Agent is also typically responsible for monitoring compliance with the covenants contained in the Loan agreement based upon reports prepared by the Obligor. In addition, an institution, typically but not always the
Agent, holds any collateral on behalf of the Loan investors. In the event of a default by the Obligor, it is possible, though unlikely, that the Fund could receive a portion of the borrower’s collateral. If the Fund receives collateral other
than cash, any proceeds received from liquidation of such collateral will be available for investment as part of the Fund’s portfolio.
In the process of buying,
selling and holding Loans, a Fund may receive and/or pay certain fees. These fees are in addition to interest payments received and may include facility fees, commitment fees, commissions and prepayment penalty fees. When a Fund buys or sells a Loan
it may pay a fee. In certain circumstances, a Fund may receive a prepayment penalty fee upon prepayment of a Loan.
Additional Information
concerning Senior Loans.
Senior Loans typically hold the most senior position in the capital structure of the Obligor, are typically secured with specific collateral and have a claim on the assets and/or stock of the
Obligor that is senior to that held by subordinated debtholders and shareholders of the Obligor. Collateral for Senior Loans may include (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/or (iv) security interests in shares of stock of subsidiaries or affiliates.
Additional Information
concerning Junior Loans.
Junior Loans include secured and unsecured loans including subordinated loans, second lien and more junior loans, and bridge loans. Second lien and more junior loans (“Junior Lien
Loans”) are generally second or further in line in terms of repayment priority. In addition, Junior Lien Loans may have a claim on the same collateral pool as the first lien or other more senior liens or may be secured by a separate set of
assets. Junior Loans generally give investors priority over general unsecured creditors in the event of an asset sale.
Additional Information
concerning Bridge Loans.
Bridge Loans are short-term loan arrangements (e.g., 12 to 36 months) typically made by an Obligor in anticipation of intermediate-term or long-term permanent financing. Most Bridge Loans are
structured as floating-rate debt with step-up provisions under which the interest rate on the Bridge Loan rises the longer the Loan remains outstanding. In addition, Bridge Loans commonly contain a conversion feature that allows the Bridge Loan
investor to convert its Loan interest to senior exchange notes if the Loan has not been prepaid in full on or prior to its maturity date. Bridge Loans typically are structured as Senior Loans but may be structured as Junior Loans.
Additional Information
concerning Unfunded Commitments.
Unfunded commitments are contractual obligations pursuant to which the Fund agrees to invest in a Loan at a future date. Typically, the Fund receives a commitment fee for entering
into the Unfunded Commitment.
Additional Information
concerning Synthetic Letters of Credit.
Loans include synthetic letters of credit. In a synthetic letter of credit transaction, the Lender typically creates a special purpose entity or a credit-linked deposit account
for the purpose of funding a letter of credit to the borrower. When a Fund invests in a synthetic letter of credit, the Fund is typically paid a rate based on the Lender’s borrowing costs and the terms of the synthetic letter of credit.
Synthetic letters of credit are typically structured as Assignments with the Fund acquiring direct rights against the Obligor.
Additional
Information concerning Loan Originations.
In addition to investing in loan assignments and participations, the Global Bond Opportunities ETF may originate Loans in which the Fund would lend money directly to a
borrower by investing in limited liability companies or corporations that make loans directly to borrowers. The terms of the Loans are negotiated with borrowers in private transactions. Such Loans would be collateralized, typically with tangible
fixed assets such as real property or interests in real property. Such Loans may also include mezzanine loans. Unlike Loans secured by a mortgage on real property, mezzanine loans are collateralized by an equity interest in a SPV that owns the real
property.
Limitations on Investments in
Loan Assignments and Participations.
If a government entity is a borrower on a Loan, the Fund will consider the government to be the issuer of an Assignment or Participation for purposes of a Fund’s fundamental
investment policy that it will not invest 25% or more of its total assets in securities of issuers conducting their principal business activities in the same industry (i.e., foreign government).
Limited Federal Securities Law
Protections.
Certain Loans may not be considered securities under the federal securities laws. In such circumstances, fewer legal protections may be available with respect to a Fund’s investment in those Loans.
In particular, if a Loan is not considered a security under the federal securities laws, certain legal protections normally available to investors under the federal securities laws, such as those against fraud and misrepresentation, may not be
available.
Multiple Lender Risk.
There may be additional risks associated with Loans, including loan originations, when there are Lenders or other participants in addition to the Fund. For example, a Fund could lose the ability to consent to certain
actions taken by the Borrower if certain conditions are not met. In addition, for example, certain governing agreements that provide the Fund with the right to consent to certain actions taken by a Borrower may provide that the Fund will no longer
have the right to provide such consent if another Lender makes a subsequent advance to the Borrower.
Risk Factors of Loans.
Loans are subject to the risks associated with debt obligations in general including interest rate risk, credit risk and market risk. When a Loan is acquired from a Lender, the risk includes the credit risk associated
with the Obligor of the underlying Loan. The Fund may incur additional
credit risk when the Fund acquires a participation in a Loan
from another lender because the Fund must assume the risk of insolvency or bankruptcy of the other lender from which the Loan was acquired. To the extent that Loans involve Obligors in foreign or emerging markets, such Loans are subject to the risks
associated with foreign investments or investments in emerging markets in general. The following outlines some of the additional risks associated with Loans.
High Yield
Securities Risk.
The Loans that a Fund invests in may not be rated by an NRSRO, will not be registered with the SEC or any state securities commission and will not be listed on any national securities exchange. To
the extent that such high yield Loans are rated, they typically will be rated below investment grade and are subject to an increased risk of default in the payment of principal and interest as well as the other risks described under
“High Yield/High Risk Securities/Junk Bonds.”
Loans are vulnerable to market sentiment such that economic conditions or other events may reduce the demand for Loans and cause their value to decline
rapidly and unpredictably.
Liquidity
Risk.
Although the Funds limit their investments in illiquid securities to no more than 15% of a Fund’s net assets at the time of purchase, Loans that are deemed to be liquid at the time of purchase may become
illiquid or less liquid. No active trading market may exist for certain Loans and certain Loans may be subject to restrictions on resale or have a limited secondary market. Certain Loans may be subject to irregular trading activity, wide bid/ask
spreads and extended trade settlement periods. The inability to dispose of certain Loans in a timely fashion or at a favorable price could result in losses to a Fund.
Collateral
and Subordination Risk.
With respect to Loans that are secured, a Fund is subject to the risk that collateral securing the Loan will decline in value or have no value or that the Fund’s lien is or will become
junior in payment to other liens. A decline in value of the collateral, whether as a result of market value declines, bankruptcy proceedings or otherwise, could cause the Loan to be under collateralized or unsecured. In such event, the Fund may have
the ability to require that the Obligor pledge additional collateral. The Fund, however, is subject to the risk that the Obligor may not pledge such additional collateral or a sufficient amount of collateral. In some cases (for example, in the case
of non-recourse Loans), there may be no formal requirement for the Obligor to pledge additional collateral. In addition, collateral may consist of assets that may not be readily liquidated, and there is no assurance that the liquidation of such
assets would satisfy an Obligor’s obligation on a Loan. If the Fund were unable to obtain sufficient proceeds upon a liquidation of such assets, this could negatively affect Fund performance.
If an
Obligor becomes involved in bankruptcy proceedings, a court may restrict the ability of the Fund to demand immediate repayment of the Loan by Obligor or otherwise liquidate the collateral. A court may also invalidate the Loan or the Fund’s
security interest in collateral or subordinate the Fund’s rights under a Senior Loan or Junior Loan to the interest of the Obligor’s other creditors, including unsecured creditors, or cause interest or principal previously paid to be
refunded to the Obligor. If a court required interest or principal to be refunded, it could negatively affect Fund performance. Such action by a court could be based, for example, on a “fraudulent conveyance” claim to the effect that the
Obligor did not receive fair consideration for granting the security interest in the Loan collateral to a Fund. For Senior Loans made in connection with a highly leveraged transaction, consideration for granting a security interest may be deemed
inadequate if the proceeds of the Loan were not received or retained by the Obligor, but were instead paid to other persons (such as shareholders of the Obligor) in an amount which left the Obligor insolvent or without sufficient working capital.
There are also other events, such as the failure to perfect a security interest due to faulty documentation or faulty official filings, which could lead to the invalidation of a Fund’s security interest in Loan collateral. If the Fund’s
security interest in Loan collateral is invalidated or a Senior Loan were subordinated to other debt of an Obligor in bankruptcy or other proceedings, the Fund would have substantially lower recovery, and perhaps no recovery on the full amount of
the principal and interest due on the Loan, or the Fund could have to refund interest. Lenders and investors in Loans can be sued by other creditors and shareholders of the Obligors. Losses can be greater than the original Loan amount and occur
years after the principal and interest on the Loan have been repaid.
Agent Risk.
Selling Lenders, Agents and other entities who may be positioned between a Fund and the Obligor will likely conduct their principal business activities in the banking, finance and financial services industries.
Investments in Loans may be more impacted by a single economic, political or regulatory occurrence affecting such industries than other types of investments. Entities engaged in such industries may be more susceptible to, among other things,
fluctuations in interest rates, changes in the Federal Open Market Committee’s monetary policy, government regulations
concerning such industries and concerning
capital raising activities generally and fluctuations in the financial markets generally. An Agent, Lender or other entity positioned between a Fund and the Obligor may become insolvent or enter Federal Deposit Insurance Corporation
(“FDIC”) receivership or bankruptcy. The Fund might incur certain costs and delays in realizing payment on a Loan or suffer a loss of principal and/ or interest if assets or interests held by the Agent, Lender or other party positioned
between the Fund and the Obligor are determined to be subject to the claims of the Agent’s, Lender’s or such other party’s creditors.
Regulatory
Changes.
To the extent that legislation or state or federal regulators that regulate certain financial institutions impose additional requirements or restrictions with respect to the ability of such institutions to
make Loans, particularly in connection with highly leveraged transactions, the availability of Loans for investment may be adversely affected. Furthermore, such legislation or regulation could depress the market value of Loans held by the
Fund.
Inventory
Risk.
Affiliates of the Adviser may participate in the primary and secondary market for Loans. Because of limitations imposed by applicable law, the presence of the Adviser’s affiliates in the Loan market may
restrict a Fund’s ability to acquire some Loans, affect the timing of such acquisition or affect the price at which the Loan is acquired.
Information
Risk.
There is typically less publicly available information concerning Loans than other types of fixed income investments. As a result, a Fund generally will be dependent on reports and other information provided by
the Obligor, either directly or through an Agent, to evaluate the Obligor’s creditworthiness or to determine the Obligor’s compliance with the covenants and other terms of the Loan Agreement. Such reliance may make investments in Loans
more susceptible to fraud than other types of investments. In addition, because the Adviser may wish to invest in the publicly traded securities of an Obligor, it may not have access to material non-public information regarding the Obligor to which
other Loan investors have access.
Junior Loan
Risk.
Junior Loans are subject to the same general risks inherent to any Loan investment. Due to their lower place in the Obligor’s capital structure and possible unsecured status, Junior Loans involve a higher
degree of overall risk than Senior Loans of the same Obligor. Junior Loans that are Bridge Loans generally carry the expectation that the Obligor will be able to obtain permanent financing in the near future. Any delay in obtaining permanent
financing subjects the Bridge Loan investor to increased risk. An Obligor’s use of Bridge Loans also involves the risk that the Obligor may be unable to locate permanent financing to replace the Bridge Loan, which may impair the
Obligor’s perceived creditworthiness.
Mezzanine
Loan Risk.
In addition to the risk factors described above, mezzanine loans are subject to additional risks. Unlike conventional mortgage loans, mezzanine loans are not secured by a mortgage on the underlying real
property but rather by a pledge of equity interests (such as a partnership or limited liability company membership) in the property owner or another company in the ownership structures that has control over the property. Such companies are typically
structured as special purpose entities. Generally, mezzanine loans may be more highly leveraged than other types of Loans and subordinate in the capital structure of the Obligor. While foreclosure of a mezzanine loan generally takes substantially
less time than foreclosure of a traditional mortgage, the holders of a mezzanine loan have different remedies available versus the holder of a first lien mortgage loan. In addition, a sale of the underlying real property would not be unencumbered,
and thus would be subject to encumbrances by more senior mortgages and liens of other creditors. Upon foreclosure of a mezzanine loan, the holder of the mezzanine loan acquires an equity interest in the Obligor. However, because of the subordinate
nature of a mezzanine loan, the real property continues to be subject to the lien of the mortgage and other liens encumbering the real estate. In the event the holder of a mezzanine loan forecloses on its equity collateral, the holder may need to
cure the Obligor’s existing mortgage defaults or, to the extent permissible under the governing agreements, sell the property to pay off other creditors. To the extent that the amount of mortgages and senior indebtedness and liens exceed the
value of the real estate, the collateral underlying the mezzanine loan may have little or no value.
Foreclosure
Risk.
There may be additional costs associated with enforcing a Fund’s remedies under a Loan including additional legal costs and payment of real property transfer taxes upon foreclosure in certain
jurisdictions or legal costs and expenses associated with operating real property. As a result of these additional costs, the Fund may determine that pursuing foreclosure on the Loan
collateral is not worth the associated costs.
In addition, if the Fund incurs costs and the collateral loses value or is not recovered by the Fund in foreclosure, the Fund could lose more than its original investment in the Loan. Foreclosure risk is heightened for Junior Loans, including
certain mezzanine loans.
Miscellaneous
Investment Strategies and Risks
Borrowings.
A Fund may borrow for temporary purposes and/or for investment purposes. Such a practice will result in leveraging of a Fund’s assets and may cause a Fund to liquidate portfolio positions when it would not be
advantageous to do so. This borrowing may be secured or unsecured. If a Fund utilizes borrowings, for investment purposes or otherwise, it may pledge up to
33
1
⁄
3
% of its total assets to
secure such borrowings. Provisions of the 1940 Act require a Fund to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for
borrowings not in excess of 5% of the Fund’s total assets made for temporary administrative or emergency purposes. Any borrowings for temporary administrative purposes in excess of 5% of the Fund’s total assets must maintain continuous
asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio holdings within three days to reduce the debt and restore the 300% asset coverage,
even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on NAV of any increase or decrease in the market value of a Fund’s portfolio. Money borrowed will
be subject to interest costs which may or may not be recovered by appreciation of the securities purchased. A Fund also may be required to maintain minimum average balances in connection with such borrowing or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate.
Certain types of investments are
considered to be borrowings under precedents issued by the SEC. Such investments are subject to the limitations as well as asset segregation requirements.
Commodity-Linked Derivatives.
Commodity-linked derivatives are derivative instruments the value of which is linked to the value of a commodity, commodity index or commodity futures contract. A Fund’s investment in commodity-linked derivative
instruments may subject the Fund to greater volatility than investments in traditional securities, particularly if the instruments involve leverage. The value of commodity-linked derivative instruments may be affected by changes in overall market
movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory
developments. Use of leveraged commodity-linked derivatives creates the possibility for greater loss (including the likelihood of greater volatility of the Fund’s NAV), and there can be no assurance that a Fund’s use of leverage will be
successful. Tax considerations may limit a Fund’s ability to pursue investments in commodity-linked derivatives.
Commodity-Related Pooled
Investment Vehicles.
Commodity-related pooled investment vehicles include ownership interests in grantor trusts and other pooled investment vehicles that hold tangible assets such as gold, silver or other
commodities or invest in commodity futures. Grantor trusts are typically traded on an exchange.
Investors do not have the
rights normally associated with ownership of other types of shares when they invest in pooled investment vehicles holding commodities or commodity futures, including those structured as limited partnerships or grantor trusts holding commodities. For
example, the owners of these commodity-related grantor trusts or limited partnerships do not have the right to elect directors, receive dividends or take other actions normally associated with the ownership of shares of a corporation. Holders of a
certain percentage of shares in a grantor trust may have the right to terminate the trust or exercise other rights which would not be available to small investors. If investors other than a Fund exercise their right to terminate, a Fund that wishes
to invest in the underlying commodity through the pooled investment vehicle will have to find another investment and may not be able to find another vehicle that offers the same investment features. In the event that one or more participants holding
a substantial interest in these pooled investment vehicles withdraw from participation, the liquidity of the pooled investment vehicle will likely decrease which could adversely affect the market price of the pooled investment vehicle and result in
a Fund incurring a loss on its investments.
These pooled investment
vehicles are not registered investment companies, and many are not commodity pools, and therefore, do not have the protections available to those types of investments under federal securities or commodities laws. For example, unlike registered
investment companies, these
vehicles are not subject to federal securities laws that limit
transactions with affiliates, require redemption of shares, or limit sales load. Although shares of these vehicles may be traded on an exchange, there may be no active market for such shares and such shares may be highly illiquid.
These vehicles are subject to
the risks associated with direct investments in commodities. The market price of shares of these vehicles will be as unpredictable as the price of the underlying commodity. Many factors can cause a decline in the prices of commodities including a
change in economic conditions, such as a recession. This risk is magnified when the commodity is used in manufacturing. In addition, the prices of commodities may be adversely impacted by a change in the attitude of speculators and investors toward
the applicable commodity, or a significant increase in commodity price hedging activity. In addition, the value of the shares will be adversely affected if the assets owned by the trust are lost, damaged or of inferior quality.
The commodities represented by
shares of a grantor trust will decrease over the life of the trust due to sales of the underlying commodities necessary to pay trust fees and expenses, including expenses associated with indemnification of certain service providers to the pooled
investment vehicle. Without increases in the price of the underlying commodity sufficient to compensate for that decrease, the price of the investment will decline and a Fund will incur a loss on its investment.
Commodity-related grantor
trusts are passive investment vehicles. This means that the value of the investment in a grantor trust may be adversely affected by trust losses that, if the trust had been actively managed, it might have been possible to avoid. A Fund’s
intention to qualify as a regulated investment company under Subchapter M of the Code may limit its ability to make investments in grantor trusts or limited partnerships that invest in commodities or commodity futures.
Cyber Security Risk.
As the use of technology has become more prevalent in the course of business, the Funds have become more susceptible to operational and financial risks associated with cyber security, including: theft, loss, misuse,
improper release, corruption and destruction of, or unauthorized access to, confidential or highly restricted data relating to a Fund and its shareholders; and compromises or failures to systems, networks, devices and applications relating to the
operations of a Fund and its service providers. Cyber security risks may result in financial losses to a Fund and its shareholders; the inability of a Fund to transact business with its shareholders; delays or mistakes in the calculation of a
Fund’s NAV or other materials provided to shareholders; the inability to process transactions with shareholders or other parties; violations of privacy and other laws; regulatory fines, penalties and reputational damage; and compliance and
remediation costs, legal fees and other expenses. A Fund’s service providers (including, but not limited to, its investment adviser, any sub-advisers, administrator, transfer agent, and custodian or their agents), financial intermediaries,
companies in which a Fund invests and parties with which a Fund engages in portfolio or other transactions also may be adversely impacted by cyber security risks in their own businesses, which could result in losses to a Fund or its shareholders.
While measures have been developed which are designed to reduce the risks associated with cyber security, there is no guarantee that those measures will be effective, particularly since the Funds do not directly control the cyber security defenses
or plans of their service providers, financial intermediaries and companies in which they invest or with which they do business.
Volcker Rule Risk.
Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and certain rules promulgated thereunder (known as the Volcker Rule) places restrictions on the activities
of banking entities, including the adviser and its affiliates, and may impact the long-term viability of a Fund. Under the Volcker Rule, if the adviser or its affiliates own 25% or more of the ownership interests of a Fund outside of the permitted
seeding time period, a Fund could be subject to restrictions on trading that would adversely impact a Fund’s ability to execute its investment strategy. Generally, the permitted seeding period is three years from the implementation of a
Fund’s investment strategy. As a result, the adviser and/or its affiliates may be required to reduce their ownership interests in a Fund at a time that is sooner than would otherwise be desirable. This may require the sale of Fund securities,
which may result in losses, increased transaction costs and adverse tax consequences. In addition, the ongoing viability of a Fund may be adversely impacted by the anticipated or actual redemption of Fund shares owned by the adviser and its
affiliates and could result in a Fund’s liquidation.
Government Intervention in
Financial Markets.
Events in the financial sector over the past several years have resulted in reduced liquidity in credit and fixed income markets and in an unusually high degree of volatility in the financial
markets, both domestically and internationally. While entire markets have been impacted, issuers that have exposure to the real estate, mortgage and credit markets have been particularly affected. These events and the potential for continuing market
turbulence may have an adverse effect on the Funds’ investments. It is uncertain how long these conditions will continue.
Recent instability in the
financial markets has led governments and regulators around the world to take a number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in
some cases a lack of liquidity. Governments, their regulatory agencies, or self regulatory organizations may take actions that affect the regulation of the instruments in which the Funds invest, or the issuers of such instruments, in ways that are
unforeseeable. Legislation or regulation may also change the way in which the Funds themselves are regulated. For instance, in 2016, the SEC adopted rules that regulate the Funds’ management of liquidity risk. Such legislation or regulation
could limit or preclude a Fund’s ability to achieve its investment objective.
Governments or their agencies
may also acquire distressed assets from financial institutions and acquire ownership interests in those institutions. The implications of government ownership and disposition of these assets are unclear, and such a program may have positive or
negative effects on the liquidity, valuation and performance of a Fund’s portfolio holdings. Furthermore, volatile financial markets can expose the Funds to greater market and liquidity risk and potential difficulty in valuing portfolio
instruments held by the Funds.
Master Limited Partnerships.
Certain companies are organized as master limited partnerships (“MLPs”) in which ownership interests are publicly traded. MLPs often own several properties or businesses (or directly own interests) that are
related to real estate development and oil and gas industries, but they also may finance motion pictures, research and development and other projects or provide financial services. Generally, an MLP is operated under the supervision of one or more
managing general partners. Limited partners (like a Fund that invests in an MLP) are not involved in the day-to-day management of the partnership. They are allocated income and capital gains associated with the partnership project in accordance with
the terms established in the partnership agreement.
The risks of investing in an
MLP are generally those inherent in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections
afforded investors in an MLP than investors in a corporation. Additional risks involved with investing in an MLP are risks associated with the specific industry or industries in which the partnership invests, such as the risks of investing in real
estate, or oil and gas industries.
New Financial Products.
New options and futures contracts and other financial products, and various combinations thereof, including over-the-counter products, continue to be developed. These various products may be used to adjust the risk and
return characteristics of certain Funds’ investments. These various products may increase or decrease exposure to security prices, interest rates, commodity prices, or other factors that affect security values, regardless of the issuer’s
credit risk. If market conditions do not perform as expected, the performance of a Fund would be less favorable than it would have been if these products were not used. In addition, losses may occur if counterparties involved in transactions do not
perform as promised. These products may expose the Fund to potentially greater return as well as potentially greater risk of loss than more traditional fixed income investments.
Private Placements, Restricted
Securities and Other Unregistered Securities.
Subject to its policy limitation, a Fund may acquire investments that are illiquid or have limited liquidity, such as commercial obligations issued in reliance on the
so-called “private placement” exemption from registration afforded by Section 4(a)(2) under the Securities Act of 1933, as amended (the “1933 Act”), and cannot be offered for public sale in the U.S. without first being
registered under the 1933 Act. An illiquid investment is any investment that cannot be disposed of within seven days in the normal course of business at approximately the amount at which it is valued by a Fund. The price a Fund pays for illiquid
securities or receives upon resale may be lower than the price paid or received for similar securities with a more liquid market. Accordingly the valuation of these securities will reflect any limitations on their liquidity.
A Fund is subject to a risk
that should the Fund decide to sell illiquid securities when a ready buyer is not available at a price the Fund deems representative of their value, the value of the Fund’s net assets could be adversely affected. Where an illiquid security
must be registered under the 1933 Act before it may be sold, a Fund may be obligated to pay all or part of the registration expenses, and a considerable period may elapse between the time of the decision to sell and the time the Fund may be
permitted to sell a security under an effective registration statement. If, during such a period, adverse market conditions were to develop, a Fund might obtain a less favorable price than prevailed when it decided to sell.
The Funds may invest in
commercial paper issued in reliance on the exemption from registration afforded by Section 4(a)(2) of the 1933 Act and other restricted securities (i.e., other securities subject to restrictions on resale). Section 4(a)(2) commercial paper
(“4(a)(2) paper”) is restricted as to disposition
under federal securities law and is generally sold to
institutional investors, such as the Funds, that agree that they are purchasing the paper for investment purposes and not with a view to public distribution. Any resale by the purchaser must be in an exempt transaction. 4(a)(2) paper is normally
resold to other institutional investors through or with the assistance of the issuer or investment dealers who make a market in 4(a)(2) paper, thus providing liquidity. The Funds believe that 4(a)(2) paper and possibly certain other restricted
securities which meet the criteria for liquidity established by the Trustees are quite liquid. The Funds intend, therefore, to treat restricted securities that meet the liquidity criteria established by the Board of Trustees, including 4(a)(2) paper
and Rule 144A Securities, as determined by the Adviser, as liquid and not subject to the investment limitation applicable to illiquid securities.
The ability of the Trustees to
determine the liquidity of certain restricted securities is permitted under an SEC Staff position set forth in the adopting release for Rule 144A under the 1933 Act (“Rule 144A”). Rule 144A is a nonexclusive safe-harbor for certain
secondary market transactions involving securities subject to restrictions on resale under federal securities laws. Rule 144A provides an exemption from registration for resales of otherwise restricted securities to qualified institutional buyers.
Rule 144A was expected to further enhance the liquidity of the secondary market for securities eligible for resale. The Funds believe that the Staff of the SEC has left the question of determining the liquidity of all restricted securities to the
Trustees. The Trustees have directed the Adviser to consider the following criteria in determining the liquidity of certain restricted securities:
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the frequency of
trades and quotes for the security;
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the number of
dealers willing to purchase or sell the security and the number of other potential buyers;
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dealer
undertakings to make a market in the security; and
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the
nature of the security and the nature of the marketplace trades.
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Certain 4(a)(2) paper programs
cannot rely on Rule 144A because, among other things, they were established before the adoption of the rule. However, the Trustees may determine for purposes of the Trust’s liquidity requirements that an issue of 4(a)(2) paper is liquid if the
following conditions, which are set forth in a 1994 SEC no-action letter, are met:
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The 4(a)(2) paper
must not be traded flat or in default as to principal or interest;
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The 4(a)(2)
paper must be rated in one of the two highest rating categories by at least two NRSROs, or if only one NRSRO rates the security, by that NRSRO, or if unrated, is determined by the Adviser to be of equivalent quality;
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The
Fund’s Adviser must consider the trading market for the specific security, taking into account all relevant factors, including but not limited to, whether the paper is the subject of a commercial paper program that is administered by an
issuing and paying agent bank and for which there exists a dealer willing to make a market in that paper, or whether the paper is administered by a direct issuer pursuant to a direct placement program; and
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The
Fund’s Adviser shall report to the Board of Trustees on the appropriateness of the purchase and retention of liquid restricted securities under these guidelines no less frequently than quarterly.
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Securities Issued in Connection
with Reorganizations and Corporate Restructuring.
Debt securities may be downgraded and issuers of debt securities including investment grade securities may default in the payment of principal or interest or be
subject to bankruptcy proceedings. In connection with reorganizing or restructuring of an issuer, an issuer may issue common stock or other securities to holders of its debt securities. A Fund may hold such common stock and other securities even
though it does not ordinarily invest in such securities and such common stock or other securities may be denominated in currencies that a Fund may not ordinarily hold.
Stapled
Securities.
From time to time, the Funds may invest in stapled securities to gain exposure to companies. A stapled security is a security that is comprised of two or more parts that cannot be separated from one
another. The resulting security is influenced by both parts, and must be treated as one unit at all times, such as when buying or selling a security. The value of stapled securities and the income derived from them may fall as well as rise. Stapled
securities are not obligations of, deposits in, or guaranteed by, the Fund. The listing of stapled securities on a domestic or foreign exchange does not guarantee a liquid market for stapled securities.
Temporary Defensive Positions.
To respond to unusual market conditions, the actively managed Funds may invest their assets in cash or cash equivalents. Cash equivalents are highly liquid, high quality instruments with maturities of three months or
less on the date they are purchased (“Cash Equivalents”) for temporary defensive purposes. These investments may result in a lower yield than lower-quality or longer term investments and may prevent the Funds from meeting their
investment objectives. The percentage of Fund’s total assets that a Fund may invest in cash or cash equivalents is described in the applicable Fund’s Prospectuses. They include securities issued by the U.S. government, its agencies,
Government-Sponsored Enterprises (“GSEs”) and instrumentalities, repurchase agreements with maturities of 7 days or less, certificates of deposit, bankers’ acceptances, commercial paper, money market mutual funds, and bank deposit
accounts. In order to invest in repurchase agreements with the Federal Reserve Bank of New York for temporary defensive purposes, certain Funds may engage in periodic “test” trading in order to assess operational abilities at times when
the Fund would otherwise not enter into such a position. These exercises may vary in size and frequency.
Mortgage-Related Securities
Mortgages (Directly Held).
Mortgages are debt instruments secured by real property. Unlike mortgage-backed securities, which generally represent an interest in a pool of mortgages, direct investments in mortgages involve prepayment and credit
risks of an individual issuer and real property. Consequently, these investments require different investment and credit analysis by a Fund’s Adviser.
Directly placed mortgages may
include residential mortgages, multifamily mortgages, mortgages on cooperative apartment buildings, commercial mortgages, and sale-leasebacks. These investments are backed by assets such as office buildings, shopping centers, retail stores,
warehouses, apartment buildings and single-family dwellings. In the event that a Fund forecloses on any non-performing mortgage, and acquires a direct interest in the real property, such Fund will be subject to the risks generally associated with
the ownership of real property. There may be fluctuations in the market value of the foreclosed property and its occupancy rates, rent schedules and operating expenses. There may also be adverse changes in local, regional or general economic
conditions, deterioration of the real estate market and the financial circumstances of tenants and sellers, unfavorable changes in zoning, building, environmental and other laws, increased real property taxes, rising interest rates, reduced
availability and increased cost of mortgage borrowings, the need for unanticipated renovations, unexpected increases in the cost of energy, environmental factors, acts of God and other factors which are beyond the control of a Fund or the
Fund’s Adviser. Hazardous or toxic substances may be present on, at or under the mortgaged property and adversely affect the value of the property. In addition, the owners of property containing such substances may be held responsible, under
various laws, for containing, monitoring, removing or cleaning up such substances. The presence of such substances may also provide a basis for other claims by third parties. Costs of clean up or of liabilities to third parties may exceed the value
of the property. In addition, these risks may be uninsurable. In light of these and similar risks, it may be impossible to dispose profitably of properties in foreclosure.
Mortgage-Backed Securities
(“CMOs” and “REMICs”).
Mortgage-backed securities include collateralized mortgage obligations (“CMOs”) and Real Estate Mortgage Investment Conduits (“REMICs”). A REMIC
is a CMO that qualifies for special tax treatment under the Code and invests in certain mortgages principally secured by interests in real property and other permitted investments.
Mortgage-backed securities
represent pools of mortgage loans assembled for sale to investors by:
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various
governmental agencies such as the Government National Mortgage Association (“Ginnie Mae”);
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organizations such
as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”); and
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non-governmental
issuers such as commercial banks, savings and loan institutions, mortgage bankers, and private mortgage insurance companies (non-governmental mortgage securities cannot be treated as U.S. government securities for purposes of investment policies).
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There
are a number of important differences among the agencies, GSEs and instrumentalities of the U.S. government that issue mortgage-related securities and among the securities that they issue.
Ginnie Mae
Securities.
Mortgage-related securities issued by Ginnie Mae include Ginnie Mae Mortgage Pass-Through Certificates which are guaranteed as to the timely payment of principal and interest by Ginnie Mae. Ginnie
Mae’s guarantee is backed by the full faith and credit of the U.S.
Ginnie Mae is a wholly-owned U.S. government
corporation within the Department of Housing and Urban Development. Ginnie Mae certificates also are supported by the authority of Ginnie Mae to borrow funds from the U.S. Treasury to make payments under its guarantee.
Fannie Mae
Securities.
Mortgage-related securities issued by Fannie Mae include Fannie Mae Guaranteed Mortgage Pass-Through Certificates which are solely the obligations of Fannie Mae and are not backed by or entitled to the
full faith and credit of the U.S. Fannie Mae is a government-sponsored organization owned entirely by private stockholders. Fannie Mae Certificates are guaranteed as to timely payment of the principal and interest by Fannie Mae.
Freddie Mac
Securities.
Mortgage-related securities issued by Freddie Mac include Freddie Mac Mortgage Participation Certificates. Freddie Mac is a corporate instrumentality of the U.S., created pursuant to an Act of Congress,
which is owned by private stockholders. Freddie Mac Certificates are not guaranteed by the U.S. or by any Federal Home Loan Bank and do not constitute a debt or obligation of the U.S. or of any Federal Home Loan Bank. Freddie Mac Certificates
entitle the holder to timely payment of interest, which is guaranteed by Freddie Mac. Freddie Mac guarantees either ultimate collection or timely payment of all principal payments on the underlying mortgage loans. When Freddie Mac does not guarantee
timely payment of principal, Freddie Mac may remit the amount due on account of its guarantee of ultimate payment of principal at any time after default on an underlying mortgage, but in no event later than one year after it becomes
payable.
For more
information on recent events impacting Fannie Mae and Freddie Mac securities, see “
Recent Events Regarding Fannie Mae and Freddie Mac Securities
” under the heading “Risk Factors of
Mortgage-Related Securities” below.
CMOs and guaranteed REMIC
pass-through certificates (“REMIC Certificates”) issued by Fannie Mae, Freddie Mac, Ginnie Mae and private issuers are types of multiple class pass-through securities. Investors may purchase beneficial interests in REMICs, which are
known as “regular” interests or “residual” interests. The Funds do not currently intend to purchase residual interests in REMICs. The REMIC Certificates represent beneficial ownership interests in a REMIC Trust, generally
consisting of mortgage loans or Fannie Mae, Freddie Mac or Ginnie Mae guaranteed mortgage pass-through certificates (the “Mortgage Assets”). The obligations of Fannie Mae, Freddie Mac or Ginnie Mae under their respective guaranty of the
REMIC Certificates are obligations solely of Fannie Mae, Freddie Mac or Ginnie Mae, respectively.
Fannie Mae
REMIC Certificates.
Fannie Mae REMIC Certificates are issued and guaranteed as to timely distribution of principal and interest by Fannie Mae. In addition, Fannie Mae will be obligated to distribute the principal
balance of each class of REMIC Certificates in full, whether or not sufficient funds are otherwise available.
Freddie Mac
REMIC Certificates.
Freddie Mac guarantees the timely payment of interest, and also guarantees the payment of principal as payments are required to be made on the underlying mortgage participation certificates
(“PCs”). PCs represent undivided interests in specified residential mortgages or participation therein purchased by Freddie Mac and placed in a PC pool. With respect to principal payments on PCs, Freddie Mac generally guarantees ultimate
collection of all principal of the related mortgage loans without offset or deduction. Freddie Mac also guarantees timely payment of principal on certain PCs referred to as “Gold PCs.”
Ginnie Mae
REMIC Certificates.
Ginnie Mae guarantees the full and timely payment of interest and principal on each class of securities (in accordance with the terms of those classes as specified in the related offering circular
supplement). The Ginnie Mae guarantee is backed by the full faith and credit of the U.S. REMIC Certificates issued by Fannie Mae, Freddie Mac and Ginnie Mae are treated as U.S. Government securities for purposes of investment policies.
CMOs and REMIC Certificates
provide for the redistribution of cash flow to multiple classes. Each class of CMOs or REMIC Certificates, often referred to as a “tranche,” is issued at a specific adjustable or fixed interest rate and must be fully retired no later
than its final distribution date. This reallocation of interest and principal results in the redistribution of prepayment risk across different classes. This allows for the creation of bonds with more or less risk than the underlying collateral
exhibits. Principal prepayments on the mortgage loans or the Mortgage Assets underlying the CMOs or REMIC Certificates may cause some or all of the classes of CMOs or REMIC Certificates to be retired substantially earlier than their final
distribution dates. Generally, interest is paid or accrues on all classes of CMOs or REMIC Certificates on a monthly basis.
The principal of and interest
on the Mortgage Assets may be allocated among the several classes of CMOs or REMIC Certificates in various ways. In certain structures (known as “sequential pay” CMOs or REMIC Certificates), payments of principal, including any principal
prepayments, on the Mortgage Assets generally are applied to the classes of CMOs or REMIC Certificates in the order of their respective final distribution dates. Thus, no payment of principal will be made on any class of sequential pay CMOs or REMIC
Certificates until all other classes having an earlier final distribution date have been paid in full.
Additional structures of CMOs
and REMIC Certificates include, among others, principal only structures, interest only structures, inverse floaters and “parallel pay” CMOs and REMIC Certificates. Certain of these structures may be more volatile than other types of CMO
and REMIC structures. Parallel pay CMOs or REMIC Certificates are those which are structured to apply principal payments and prepayments of the Mortgage Assets to two or more classes concurrently on a proportionate or disproportionate basis. These
simultaneous payments are taken into account in calculating the final distribution date of each class.
A wide variety of REMIC
Certificates may be issued in the parallel pay or sequential pay structures. These securities include accrual certificates (also known as “Z-Bonds”), which only accrue interest at a specified rate until all other certificates having an
earlier final distribution date have been retired and are converted thereafter to an interest-paying security, and planned amortization class (“PAC”) certificates, which are parallel pay REMIC Certificates which generally require that
specified amounts of principal be applied on each payment date to one or more classes of REMIC Certificates (the “PAC Certificates”), even though all other principal payments and prepayments of the Mortgage Assets are then required to be
applied to one or more other classes of the certificates. The scheduled principal payments for the PAC Certificates generally have the highest priority on each payment date after interest due has been paid to all classes entitled to receive interest
currently. Shortfalls, if any, are added to the amount of principal payable on the next payment date. The PAC Certificate payment schedule is taken into account in calculating the final distribution date of each class of PAC. In order to create PAC
tranches, one or more tranches generally must be created that absorb most of the volatility in the underlying Mortgage Assets. These tranches tend to have market prices and yields that are much more volatile than the PAC classes. The Z-Bonds in
which the Funds may invest may bear the same non-credit-related risks as do other types of Z-Bonds. Z-Bonds in which the Fund may invest will not include residual interest.
Total Annual Fund Operating
Expenses set forth in the fee table and Financial Highlights section of each Fund’s Prospectuses do not include any expenses associated with investments in certain structured or synthetic products that may rely on the exception for the
definition of “investment company” provided by section 3(c)(1) or 3(c)(7) of the 1940 Act.
GSE Credit
Risk Transfer Securities and GSE Credit-Linked Notes.
GSE Credit risk transfer securities are notes issued directly by a GSE, such as Fannie Mae and Freddie Mac, and GSE credit-linked notes are notes issued by a SPV
sponsored by a GSE. Investors in these notes provide credit protection for the applicable GSE’s mortgage-related securities guarantee obligations. In this regard, a noteholder receives compensation for providing credit protection to the GSE
and, when a specified level of losses on the relevant mortgage loans occurs, the principal balance and certain payments owed to the noteholder may be reduced. In addition, noteholders may receive a return of principal prior to the stated maturity
date reflecting prepayment on the underlying mortgage loans and in any other circumstances that may be set forth in the applicable loan agreement. The notes may be issued in different tranches representing the issuance of different levels of credit
risk protection to the GSE on the underlying mortgage loans and the notes are not secured by the reference mortgage loans. There are important differences between the structure of GSE credit risk transfer securities and GSE credit-linked
notes.
GSE Credit
Risk Transfer Securities Structure.
In this structure, the GSE receives the note sale proceeds. The GSE pays noteholders monthly interest payments and a return of principal on the stated maturity date based on the
initial investment amount, as reduced by any covered losses on the reference mortgage loans.
GSE
Credit-Linked Notes Structure.
In this structure, the SPV receives the note sale proceeds and the SPV’s obligations to the noteholder are collateralized by the note sale proceeds. The SPV invests the proceeds
in cash or other short-term assets. The SPV also enters into a credit protection agreement with the GSE pursuant to which the GSE pays the SPV monthly premium payments and the SPV compensates the GSE for covered losses on the reference mortgage
loans. The SPV pays noteholders monthly interest payments based on the premium payments paid by the GSE and the performance on
the
invested note sale proceeds. The noteholders also receive a return of principal on a stated maturity date based on the initial investment amount, as reduced by any covered losses on the reference mortgage loans paid by the SPV or the GSE.
Mortgage TBAs.
A Fund may invest in mortgage pass-through securities eligible to be sold in the “to-be-announced” or TBA market (“Mortgage TBAs”). Mortgage TBAs provide for the forward or delayed delivery of
the underlying instrument with settlement up to 180 days. The term TBA comes from the fact that the actual mortgage-backed security that will be delivered to fulfill a TBA trade is not designated at the time the trade is made, but rather is
generally announced 48 hours before the settlement date. Mortgage TBAs are subject to the risks described in the “When-Issued Securities, Delayed Delivery Securities and Forward Commitments” section. Additionally, amendments to
applicable rolls include certain mandatory margin requirements for the TBA market, which may require the Funds to pay collateral in connection with their TBA transactions. The required margin could increase the cost of the Funds and add additional
complexity for Funds engaging in these transactions.
Mortgage Dollar Rolls.
In a mortgage dollar roll transaction, one party sells mortgage-backed securities, principally Mortgage TBAs, for delivery in the current month and simultaneously contracts with the same counterparty to repurchase
similar (same type, coupon and maturity) but not identical securities on a specified future date. When a Fund enters into TBAs/mortgage dollar rolls, the Fund will segregate or earmark until the settlement date liquid assets, in an amount equal to
the agreed-upon purchase price of each long and short position. Economically offsetting TBA positions with the same agency, coupon, and maturity date, are generally permitted to be netted if the short position settles on the same date or before the
long position. During the period between the sale and repurchase in a mortgage dollar roll transaction, the Fund will not be entitled to receive interest and principal payments on securities sold. Losses may arise due to changes in the value of the
securities or if the counterparty does not perform under the terms of the agreement. If the counterparty files for bankruptcy or becomes insolvent, the Fund’s right to repurchase or sell securities may be limited. Mortgage dollar rolls may be
subject to leverage risks. In addition, mortgage dollar rolls may increase interest rate risk and result in an increased portfolio turnover rate which increases costs and may increase taxable gains. The benefits of mortgage dollar rolls may depend
upon a Fund’s Adviser’s ability to predict mortgage prepayments and interest rates. There is no assurance that mortgage dollar rolls can be successfully employed. For purposes of diversification and investment limitations, mortgage
dollar rolls are considered to be mortgage-backed securities.
Stripped Mortgage-Backed
Securities.
Stripped Mortgage-Backed Securities (“SMBS”) are derivative multi-class mortgage securities issued outside the REMIC or CMO structure. SMBS are usually structured with two classes that
receive different proportions of the interest and principal distributions from a pool of mortgage assets. A common type of SMBS will have one class receiving all of the interest from the mortgage assets (“IOs”), while the other class
will receive all of the principal (“POs”). Mortgage IOs receive monthly interest payments based upon a notional amount that declines over time as a result of the normal monthly amortization and unscheduled prepayments of principal on the
associated mortgage POs.
In addition to the risks
applicable to Mortgage-Related Securities in general, SMBS are subject to the following additional risks:
Prepayment/Interest
Rate Sensitivity.
SMBS are extremely sensitive to changes in prepayments and interest rates. Even though these securities have been guaranteed by an agency or instrumentality of the U.S. government, under certain
interest rate or prepayment rate scenarios, the Funds may lose money on investments in SMBS.
Interest Only
SMBS.
Changes in prepayment rates can cause the return on investment in IOs to be highly volatile. Under extremely high prepayment conditions, IOs can incur significant losses.
Principal
Only SMBS.
POs are bought at a discount to the ultimate principal repayment value. The rate of return on a PO will vary with prepayments, rising as prepayments increase and falling as prepayments decrease. Generally,
the market value of these securities is unusually volatile in response to changes in interest rates.
Yield
Characteristics.
Although SMBS may yield more than other mortgage-backed securities, their cash flow patterns are more volatile and there is a greater risk that any premium paid will not be fully recouped. A
Fund’s Adviser will seek to manage these risks (and potential benefits) by investing in a variety of such securities and by using certain analytical and hedging techniques.
Adjustable Rate Mortgage Loans.
Certain Funds may invest in adjustable rate mortgage loans (“ARMs”). ARMs eligible for inclusion in a mortgage pool will generally provide for a fixed initial mortgage interest rate for a specified period of
time. Thereafter, the interest rates (the “Mortgage Interest Rates”) may be subject to periodic adjustment based on changes in the applicable index rate (the “Index Rate”). The adjusted rate would be equal to the Index Rate
plus a gross margin, which is a fixed percentage spread over the Index Rate established for each ARM at the time of its origination.
Adjustable interest rates can
cause payment increases that some borrowers may find difficult to make. However, certain ARMs may provide that the Mortgage Interest Rate may not be adjusted to a rate above an applicable lifetime maximum rate or below an applicable lifetime minimum
rate for such ARM. Certain ARMs may also be subject to limitations on the maximum amount by which the Mortgage Interest Rate may adjust for any single adjustment period (the “Maximum Adjustment”). Other ARMs (“Negatively Amortizing
ARMs”) may provide instead or as well for limitations on changes in the monthly payment on such ARMs. Limitations on monthly payments can result in monthly payments which are greater or less than the amount necessary to amortize a Negatively
Amortizing ARM by its maturity at the Mortgage Interest Rate in effect in any particular month. In the event that a monthly payment is not sufficient to pay the interest accruing on a Negatively Amortizing ARM, any such excess interest is added to
the principal balance of the loan, causing negative amortization and will be repaid through future monthly payments. It may take borrowers under Negatively Amortizing ARMs longer periods of time to achieve equity and may increase the likelihood of
default by such borrowers. In the event that a monthly payment exceeds the sum of the interest accrued at the applicable Mortgage Interest Rate and the principal payment which would have been necessary to amortize the outstanding principal balance
over the remaining term of the loan, the excess (or “accelerated amortization”) further reduces the principal balance of the ARM. Negatively Amortizing ARMs do not provide for the extension of their original maturity to accommodate
changes in their Mortgage Interest Rate. As a result, unless there is a periodic recalculation of the payment amount (which there generally is), the final payment may be substantially larger than the other payments. These limitations on periodic
increases in interest rates and on changes in monthly payments protect borrowers from unlimited interest rate and payment increases.
Certain ARMs may provide for
periodic adjustments of scheduled payments in order to amortize fully the mortgage loan by its stated maturity. Other ARMs may permit their stated maturity to be extended or shortened in accordance with the portion of each payment that is applied to
interest as affected by the periodic interest rate adjustments.
There are two main categories
of indices which provide the basis for rate adjustments on ARMs: those based on U.S. Treasury securities and those derived from a calculated measure such as a cost of funds index or a moving average of mortgage rates. Commonly utilized indices
include the one-year, three-year and five-year constant maturity Treasury bill rates, the three-month Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th District Federal Home Loan Bank Cost of
Funds, the National Median Cost of Funds, the one-month, three-month, six-month or one-year London InterBank Offered Rate (“LIBOR”), the prime rate of a specific bank, or commercial paper rates. Some indices, such as the one-year
constant maturity Treasury rate, closely mirror changes in market interest rate levels. Others, such as the 11th District Federal Home Loan Bank Cost of Funds index, tend to lag behind changes in market rate levels and tend to be somewhat less
volatile. The degree of volatility in the market value of the Fund’s portfolio and therefore in the net asset value of the Fund’s shares will be a function of the length of the interest rate reset periods and the degree of volatility in
the applicable indices.
In general, changes in both
prepayment rates and interest rates will change the yield on Mortgage-Backed Securities. The rate of principal prepayments with respect to ARMs has fluctuated in recent years. As is the case with fixed mortgage loans, ARMs may be subject to a
greater rate of principal prepayments in a declining interest rate environment. For example, if prevailing interest rates fall significantly, ARMs could be subject to higher prepayment rates than if prevailing interest rates remain constant because
the availability of fixed rate mortgage loans at competitive interest rates may encourage mortgagors to refinance their ARMs to “lock-in” a lower fixed interest rate. Conversely, if prevailing interest rates rise significantly, ARMs may
prepay at lower rates than if prevailing rates remain at or below those in effect at the time such ARMs were originated. As with fixed rate mortgages, there can be no certainty as to the rate of prepayments on the ARMs in either stable or changing
interest rate environments. In addition, there can be no certainty as to whether increases in the principal balances of the ARMs due to the addition of deferred interest may result in a default rate higher than that on ARMs that do not provide for
negative amortization.
Other
factors affecting prepayment of ARMs include changes in mortgagors’ housing needs, job transfers, unemployment, mortgagors’ net equity in the mortgage properties and servicing decisions.
Risk Factors of Mortgage-Related
Securities.
The following is a summary of certain risks associated with Mortgage-Related Securities:
Guarantor Risk.
There can be no assurance that the U.S. government would provide financial support to Fannie Mae or Freddie Mac if necessary in the future. Although certain mortgage-related securities are guaranteed by a third party or
otherwise similarly secured, the market value of the security, which may fluctuate, is not so secured.
Interest Rate Sensitivity.
If a Fund purchases a mortgage-related security at a premium, that portion may be lost if there is a decline in the market value of the security whether resulting from changes in interest rates or prepayments in the
underlying mortgage collateral. As with other interest-bearing securities, the prices of such securities are inversely affected by changes in interest rates. Although the value of a mortgage-related security may decline when interest rates rise, the
converse is not necessarily true since in periods of declining interest rates the mortgages underlying the securities are prone to prepayment. For this and other reasons, a mortgage-related security’s stated maturity may be shortened by
unscheduled prepayments on the underlying mortgages and, therefore, it is not possible to predict accurately the security’s return to the Fund. In addition, regular payments received in respect of mortgage-related securities include both
interest and principal. No assurance can be given as to the return the Fund will receive when these amounts are reinvested.
Liquidity.
The liquidity of certain mortgage-backed securities varies by type of security; at certain times the Fund may encounter difficulty in disposing of such investments. In the past, in stressed markets, certain types of
mortgage-backed securities suffered periods of illiquidity when disfavored by the market. It is possible that the Fund may be unable to sell a mortgage-backed security at a desirable time or at the value the Fund has placed on the
investment.
Market Value.
The market value of the Fund’s adjustable rate Mortgage-Backed Securities may be adversely affected if interest rates increase faster than the rates of interest payable on such securities or by the adjustable rate
mortgage loans underlying such securities. Furthermore, adjustable rate Mortgage-Backed Securities or the mortgage loans underlying such securities may contain provisions limiting the amount by which rates may be adjusted upward and downward and may
limit the amount by which monthly payments may be increased or decreased to accommodate upward and downward adjustments in interest rates. When the market value of the properties underlying the Mortgage-Backed Securities suffer broad declines on a
regional or national level, the values of the corresponding Mortgage-Backed Securities or Mortgage-Backed Securities as a whole, may be adversely affected as well.
Prepayments.
Adjustable rate Mortgage-Backed Securities have less potential for capital appreciation than fixed rate Mortgage-Backed Securities because their coupon rates will decline in response to market interest rate declines. The
market value of fixed rate Mortgage-Backed Securities may be adversely affected as a result of increases in interest rates and, because of the risk of unscheduled principal prepayments, may benefit less than other fixed rate securities of similar
maturity from declining interest rates. Finally, to the extent Mortgage-Backed Securities are purchased at a premium, mortgage foreclosures and unscheduled principal prepayments may result in some loss of the Fund’s principal investment to the
extent of the premium paid. On the other hand, if such securities are purchased at a discount, both a scheduled payment of principal and an unscheduled prepayment of principal will increase current and total returns and will accelerate the
recognition of income.
Yield Characteristics.
The yield characteristics of Mortgage-Backed Securities differ from those of traditional fixed income securities. The major differences typically include more frequent interest and principal payments, usually monthly,
and the possibility that prepayments of principal may be made at any time. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic, social and other factors and cannot be predicted with certainty.
As with fixed rate mortgage loans, adjustable rate mortgage loans may be subject to a greater prepayment rate in a declining interest rate environment. The yields to maturity of the Mortgage-Backed Securities in which the Funds invest will be
affected by the actual rate of payment (including prepayments) of principal of the underlying mortgage loans. The mortgage loans underlying such securities generally may be prepaid at any time without penalty. In a fluctuating interest rate
environment, a predominant factor affecting the prepayment rate on a pool of mortgage loans is the difference between the interest rates on the mortgage loans and prevailing mortgage loan interest rates taking into account the cost of any
refinancing. In general, if mortgage loan interest rates fall sufficiently below the interest rates on fixed rate mortgage loans underlying mortgage pass-through securities, the rate of prepayment would be expected to increase. Conversely, if
mortgage loan interest rates rise above the interest rates on the fixed rate mortgage loans underlying the mortgage pass-through securities, the rate of prepayment may be expected to decrease.
Recent Events Regarding Fannie
Mae and Freddie Mac Securities.
On September 6, 2008, the Federal Housing Finance Agency (“FHFA”) placed Fannie Mae and Freddie Mac into conservatorship. As the conservator, FHFA succeeded to all rights,
titles, powers and privileges of Fannie Mae and Freddie Mac and of any stockholder, officer or director of Fannie Mae and Freddie Mac with respect to Fannie Mae and Freddie Mac and the assets of Fannie Mae and Freddie Mac. FHFA selected a new chief
executive officer and chairman of the board of directors for each of Fannie Mae and Freddie Mac. In connection with the conservatorship, the U.S. Treasury entered into a Senior Preferred Stock Purchase Agreement with each of Fannie Mae and Freddie
Mac pursuant to which the U.S. Treasury will purchase up to an aggregate of $100 billion of each of Fannie Mae and Freddie Mac to maintain a positive net worth in each enterprise. This agreement contains various covenants, discussed below, that
severely limit each enterprise’s operations. In exchange for entering into these agreements, the U.S. Treasury received $1 billion of each enterprise’s senior preferred stock and warrants to purchase 79.9% of each enterprise’s
common stock. In 2009, the U.S. Treasury announced that it was doubling the size of its commitment to each enterprise under the Senior Preferred Stock Program to $200 billion. The U.S. Treasury’s obligations under the Senior Preferred Stock
Program are for an indefinite period of time for a maximum amount of $200 billion per enterprise. In 2009, the U.S. Treasury further amended the Senior Preferred Stock Purchase Agreement to allow the cap on the U.S. Treasury’s funding
commitment to increase as necessary to accommodate any cumulative reduction in Fannie Mae’s and Freddie Mac’s net worth through the end of 2012. In August 2012, the Senior Preferred Stock Purchase Agreement was further amended to, among
other things, accelerate the wind down of the retained portfolio, terminate the requirement that Fannie Mae and Freddie Mac each pay a 10% dividend annually on all amounts received under the funding commitment, and require the submission of an
annual risk management plan to the U.S. Treasury.
Fannie Mae and Freddie Mac are
continuing to operate as going concerns while in conservatorship and each remain liable for all of its obligations, including its guaranty obligations, associated with its mortgage-backed securities. The Senior Preferred Stock Purchase Agreement is
intended to enhance each of Fannie Mae’s and Freddie Mac’s ability to meet its obligations. The FHFA has indicated that the conservatorship of each enterprise will end when the director of FHFA determines that FHFA’s plan to
restore the enterprise to a safe and solvent condition has been completed.
Under the Federal Housing
Finance Regulatory Reform Act of 2008 (the “Reform Act”), which was included as part of the Housing and Economic Recovery Act of 2008, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by Fannie Mae
or Freddie Mac prior to FHFA’s appointment as conservator or receiver, as applicable, if FHFA determines, in its sole discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly
administration of Fannie Mae’s or Freddie Mac’s affairs. The Reform Act requires FHFA to exercise its right to repudiate any contract within a reasonable period of time after its appointment as conservator or receiver. FHFA, in its
capacity as conservator, has indicated that it has no intention to repudiate the guaranty obligations of Fannie Mae or Freddie Mac because FHFA views repudiation as incompatible with the goals of the conservatorship. However, in the event that FHFA,
as conservator or if it is later appointed as receiver for Fannie Mae or Freddie Mac, were to repudiate any such guaranty obligation, the conservatorship or receivership estate, as applicable, would be liable for actual direct compensatory damages
in accordance with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of Fannie Mae’s or Freddie Mac’s assets available therefor. In the event of repudiation, the payments of interest to holders of
Fannie Mae or Freddie Mac mortgage-backed securities would be reduced if payments on the mortgage loans represented in the mortgage loan groups related to such mortgage-backed securities are not made by the borrowers or advanced by the servicer. Any
actual direct compensatory damages for repudiating these guaranty obligations may not be sufficient to offset any shortfalls experienced by such mortgage-backed security holders. Further, in its capacity as conservator or receiver, FHFA has the
right to transfer or sell any asset or liability of Fannie Mae or Freddie Mac without any approval, assignment or consent. Although FHFA has stated that it has no present intention to do so, if FHFA, as conservator or receiver, were to transfer any
such guaranty obligation to another party, holders of Fannie Mae or Freddie Mac mortgage-backed securities would have to rely on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party.
In addition, certain rights
provided to holders of mortgage-backed securities issued by Fannie Mae and Freddie Mac under the operative documents related to such securities may not be enforced against FHFA, or enforcement of such rights may be delayed, during the
conservatorship or any future receivership. The operative documents for Fannie Mae and Freddie Mac mortgage-backed securities may provide (or with respect to securities issued prior to the date of the appointment of the conservator may have
provided) that upon the occurrence of an event of default on the part of Fannie Mae or Freddie Mac, in its capacity as guarantor, which includes the appointment of a conservator or receiver, holders of such
mortgage-backed securities have the right to replace Fannie Mae
or Freddie Mac as trustee if the requisite percentage of mortgage-backed securities holders consent. The Reform Act prevents mortgage-backed security holders from enforcing such rights if the event of default arises solely because a conservator or
receiver has been appointed. The Reform Act also provides that no person may exercise any right or power to terminate, accelerate or declare an event of default under certain contracts to which Fannie Mae or Freddie Mac is a party, or obtain
possession of or exercise control over any property of Fannie Mae or Freddie Mac, or affect any contractual rights of Fannie Mae or Freddie Mac, without the approval of FHFA, as conservator or receiver, for a period of 45 or 90 days following the
appointment of FHFA as conservator or receiver, respectively.
In addition, in a February 2011
report to Congress from the Treasury Department and the Department of Housing and Urban Development, the Obama administration provided a plan to reform America’s housing finance market. The plan would reduce the role of and eventually
eliminate Fannie Mae and Freddie Mac. Notably, the plan does not propose similar significant changes to Ginnie Mae, which guarantees payments on mortgage-related securities backed by federally insured or guaranteed loans such as those issued by the
Federal Housing Association or guaranteed by the Department of Veterans Affairs. The report also identified three proposals for Congress and the administration to consider for the long-term structure of the housing finance markets after the
elimination of Fannie Mae and Freddie Mac, including implementing: (i) a privatized system of housing finance that limits government insurance to very limited groups of creditworthy low- and moderate-income borrowers; (ii) a privatized system with a
government backstop mechanism that would allow the government to insure a larger share of the housing finance market during a future housing crisis; and (iii) a privatized system where the government would offer reinsurance to holders of certain
highly-rated mortgage-related securities insured by private insurers and would pay out under the reinsurance arrangements only if the private mortgage insurers were insolvent.
The conditions attached to the
financial contribution made by the Treasury to Freddie Mac and Fannie Mae and the issuance of senior preferred stock place significant restrictions on the activities of Freddie Mac and Fannie Mae. Freddie Mac and Fannie Mae must obtain the consent
of the Treasury to, among other things, (i) make any payment to purchase or redeem its capital stock or pay any dividend other than in respect of the senior preferred stock, (ii) issue capital stock of any kind, (iii) terminate the conservatorship
of the FHFA except in connection with a receivership, or (iv) increase its debt beyond certain specified levels. In addition, significant restrictions are placed on the maximum size of each of Freddie Mac’s and Fannie Mae’s respective
portfolios of mortgages and mortgage-backed securities, and the purchase agreements entered into by Freddie Mac and Fannie Mae provide that the maximum size of their portfolios of these assets must decrease by a specified percentage each year. The
future status and role of Freddie Mac and Fannie Mae could be impacted by (among other things) the actions taken and restrictions placed on Freddie Mac and Fannie Mae by the FHFA in is role as conservator, the restrictions placed on Freddie
Mac’s and Fannie Mae’s operations and activities as a result of the senior preferred stock investment made by the U.S. Treasury, market responses to developments at Freddie Mac and Fannie Mac, and future legislative and regulatory action
that alters the operations, ownership, structure and/or mission of these institutions, each of which may, in turn, impact the value of, and cash flows on, any mortgage-backed securities guaranteed by Freddie Mac and Fannie Mae, including any such
mortgage-backed securities held by a Fund.
Risks Related to GSE Credit Risk
Transfer Securities and GSE Credit-Linked Notes.
GSE Credit risk transfer securities are general obligations issued by a GSE and are unguaranteed and unsecured. GSE Credit-linked notes are similar, except that the
notes are issued by an SPV, rather than by a GSE, and the obligations of the SPV are collateralized by the note proceeds as invested by the SPV, which are invested in cash or short-term securities. Although both GSE credit risk transfer securities
and GSE credit-linked notes are unguaranteed, obligations of an SPV are also not backstopped by the Department of Treasury or an obligation of a GSE.
The risks
associated with these investments are different than the risks associated with an investment in mortgage-backed securities issued by GSEs or a private issuer. For example, in the event of a default on the obligations to noteholders, noteholders such
as the Funds have no recourse to the underlying mortgage loans. In addition, some or all of the mortgage default risk associated with the underlying mortgage loans is transferred to noteholders. As a result, there can be no assurance that losses
will not occur on an investment in GSE credit risk transfer securities or GSE credit-linked notes and Funds investing in these instruments may be exposed to the risk of loss on their investment. In addition, these investments are subject to
prepayment risk.
In the case of GSE
credit-linked notes, if a GSE fails to make a premium or other required payment to the SPV, the SPV may be unable to pay a noteholder the entire amount of interest or principal payable to the noteholder. In the event of a default on the obligations
to noteholders, the SPV’s principal and interest payment obligations to noteholders will be subordinated to the SPV’s credit protection payment obligations to the GSE. Payment of such amounts to noteholders depends on the cash available
in the trust from the loan proceeds and the GSE’s premium payments.
Any income
earned by the SPV on investments of loan proceeds is expected to be less than the interest payments amounts to be paid to noteholders of the GSE credit-linked notes and interest payments to noteholders will be reduced if the GSE fails to make
premium payments to the SPV. An SPV’s investment of loan proceeds may also be concentrated in the securities of a few number of issuers. A noteholder bears any investment losses on the allocable portion of the loan proceeds.
An SPV that issues GSE
credit-linked notes may fall within the definition of a “commodity pool” under the Commodity Exchange Act. Certain GSEs are not registered as commodity pool operators in reliance on CFTC no-action relief, subject to certain conditions
similar to those under CFTC Rule 4.13(a)(3), which respect to the operation of the SPV. If the GSE or SPV fails to comply with such conditions, noteholders that are investment vehicles, such as the Funds, may need to register as a CPO, which could
cause such a Fund to incur increased costs.
Municipal Securities
Municipal Securities are issued
to obtain funds for a wide variety of reasons. For example, municipal securities may be issued to obtain funding for the construction of a wide range of public facilities such as:
1.
|
bridges;
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2.
|
highways;
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3.
|
roads;
|
4.
|
schools;
|
5.
|
waterworks and
sewer systems; and
|
6.
|
other
utilities.
|
Other public purposes for which
Municipal Securities may be issued include:
1.
|
refunding
outstanding obligations;
|
2.
|
obtaining funds
for general operating expenses; and
|
3.
|
obtaining
funds to lend to other public institutions and facilities.
|
In addition, certain debt
obligations known as “Private Activity Bonds” may be issued by or on behalf of municipalities and public authorities to obtain funds to provide:
1.
|
water, sewage and
solid waste facilities;
|
2.
|
qualified
residential rental projects;
|
3.
|
certain local
electric, gas and other heating or cooling facilities;
|
4.
|
qualified
hazardous waste facilities;
|
5.
|
high-speed
intercity rail facilities;
|
6.
|
governmentally-owned
airports, docks and wharves and mass transportation facilities;
|
7.
|
qualified
mortgages;
|
8.
|
student loan and
redevelopment bonds; and
|
9.
|
bonds
used for certain organizations exempt from Federal income taxation.
|
Certain debt obligations known as
“Industrial Development Bonds” under prior Federal tax law may have been issued by or on behalf of public authorities to obtain funds to provide:
1.
|
privately operated
housing facilities;
|
2.
|
sports facilities;
|
3.
|
industrial parks;
|
4.
|
convention or
trade show facilities;
|
5.
|
airport, mass
transit, port or parking facilities;
|
6.
|
air or water
pollution control facilities;
|
7.
|
sewage or solid
waste disposal facilities; and
|
8.
|
facilities
for water supply.
|
Other private activity bonds
and industrial development bonds issued to fund the construction, improvement, equipment or repair of privately-operated industrial, distribution, research, or commercial facilities may also be Municipal Securities, however the size of such issues
is limited under current and prior Federal tax law. The aggregate amount of most private activity bonds and industrial development bonds is limited (except in the case of certain types of facilities) under Federal tax law by an annual “volume
cap.” The volume cap limits the annual aggregate principal amount of such obligations issued by or on behalf of all governmental instrumentalities in the state.
The two principal
classifications of Municipal Securities consist of “general obligation” and “limited” (or revenue) issues. General obligation bonds are obligations involving the credit of an issuer possessing taxing power and are payable
from the issuer’s general unrestricted revenues and not from any particular fund or source. The characteristics and method of enforcement of general obligation bonds vary according to the law applicable to the particular issuer, and payment
may be dependent upon appropriation by the issuer’s legislative body. Limited obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in some cases, from the proceeds of a special
excise or other specific revenue source. Private activity bonds and industrial development bonds generally are revenue bonds and thus not payable from the unrestricted revenues of the issuer. The credit and quality of such bonds is generally related
to the credit of the bank selected to provide the letter of credit underlying the bond. Payment of principal of and interest on industrial development revenue bonds is the responsibility of the corporate user (and any guarantor).
The Funds may also acquire
“moral obligation” issues, which are normally issued by special purpose authorities, and in other tax-exempt investments including pollution control bonds and tax-exempt commercial paper. Each Fund that may purchase municipal bonds may
purchase:
1.
|
Short-term
tax-exempt General Obligations Notes;
|
2.
|
Tax Anticipation
Notes;
|
3.
|
Bond Anticipation
Notes;
|
4.
|
Revenue
Anticipation Notes;
|
5.
|
Project Notes; and
|
6.
|
Other
forms of short-term tax-exempt loans.
|
Such notes are issued with a
short-term maturity in anticipation of the receipt of tax funds, the proceeds of bond placements, or other revenues. Project Notes are issued by a state or local housing agency and are sold by the Department of Housing and Urban Development. While
the issuing agency has the primary obligation with respect to its Project Notes, they are also secured by the full faith and credit of the U.S. through agreements with the issuing authority which provide that, if required, the Federal government
will lend the issuer an amount equal to the principal of and interest on the Project Notes.
There are, of course,
variations in the quality of Municipal Securities, both within a particular classification and between classifications. Also, the yields on Municipal Securities depend upon a variety of factors, including:
1.
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general money
market conditions;
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2.
|
coupon rate;
|
3.
|
the financial
condition of the issuer;
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4.
|
general
conditions of the municipal bond market;
|
5.
|
the size of a
particular offering;
|
6.
|
the maturity of
the obligations; and
|
7.
|
the
rating of the issue.
|
The ratings of Moody’s
and S&P represent their opinions as to the quality of Municipal Securities. However, ratings are general and are not absolute standards of quality. Municipal Securities with the same maturity, interest rate and rating may have different yields
while Municipal Securities of the same maturity and interest rate with different ratings may have the same yield. Subsequent to its purchase by a Fund, an issue of Municipal Securities may cease to be rated or its rating may be reduced below the
minimum rating required for purchase by the Fund. The Adviser will consider such an event in determining whether the Fund should continue to hold the obligations.
Municipal Securities may
include obligations of municipal housing authorities and single-family mortgage revenue bonds. Weaknesses in Federal housing subsidy programs and their administration may result in a decrease of subsidies available for payment of principal and
interest on housing authority bonds. Economic developments, including fluctuations in interest rates and increasing construction and operating costs, may also adversely impact revenues of housing authorities. In the case of some housing authorities,
inability to obtain additional financing could also reduce revenues available to pay existing obligations.
Single-family mortgage revenue
bonds are subject to extraordinary mandatory redemption at par in whole or in part from the proceeds derived from prepayments of underlying mortgage loans and also from the unused proceeds of the issue within a stated period which may be within a
year from the date of issue.
Municipal leases are
obligations issued by state and local governments or authorities to finance the acquisition of equipment and facilities. Municipal leases may be considered to be illiquid. They may take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation interest in any of the above. The Board of Trustees is responsible for determining the credit quality of unrated municipal leases on an ongoing basis, including an assessment of the likelihood that the
lease will not be canceled.
Premium Securities.
During a period of declining interest rates, many Municipal Securities in which the Funds invest likely will bear coupon rates higher than current market rates, regardless of whether the securities were initially
purchased at a premium.
Risk Factors in Municipal
Securities.
The following is a summary of certain risks associated with Municipal Securities
Tax Risk.
The Code imposes certain continuing requirements on issuers of tax-exempt bonds regarding the use, expenditure and investment of bond proceeds and the payment of rebates to the U.S. Failure by the issuer to comply
subsequent to the issuance of tax-exempt bonds with certain of these requirements could cause interest on the bonds to become includable in gross income retroactive to the date of issuance.
Housing Authority Tax Risk.
The exclusion from gross income for Federal income tax purposes for certain housing authority bonds depends on qualification under relevant provisions of the Code and on other provisions of Federal law. These provisions
of Federal law contain requirements relating to the cost and location of the residences financed with the proceeds of the single-family mortgage bonds and the income levels of tenants of the rental projects financed with the proceeds of the
multi-family housing bonds. Typically, the issuers of the bonds, and other parties, including the originators and servicers of the single-family mortgages and the owners of the rental projects financed with the multi-family housing bonds, covenant
to meet these requirements. However, there is no assurance that the requirements will be met. If such requirements are not met:
•
|
the interest on
the bonds may become taxable, possibly retroactively from the date of issuance;
|
•
|
the value of the
bonds may be reduced;
|
•
|
you and other
Shareholders may be subject to unanticipated tax liabilities;
|
•
|
a Fund may be
required to sell the bonds at the reduced value;
|
•
|
it may be an event
of default under the applicable mortgage;
|
•
|
the holder may be
permitted to accelerate payment of the bond; and
|
•
|
the
issuer may be required to redeem the bond.
|
In addition, if the mortgage
securing the bonds is insured by the Federal Housing Administration (“FHA”), the consent of the FHA may be required before insurance proceeds would become payable.
Information Risk.
Information about the financial condition of issuers of Municipal Securities may be less available than that of corporations having a class of securities registered under the SEC.
State and Federal Laws.
An issuer’s obligations under its Municipal Securities are subject to the provisions of bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. These laws may extend the time for
payment of principal or interest, or restrict the Fund’s ability to collect payments due on Municipal Securities. In addition, recent amendments to some statutes governing security interests (e.g., Revised Article 9 of the Uniform Commercial
Code (“UCC”)) change the way in which security interests and liens securing Municipal Securities are perfected. These amendments may have an adverse impact on existing Municipal Securities (particularly issues of Municipal Securities
that do not have a corporate trustee who is responsible for filing UCC financing statements to continue the security interest or lien).
Litigation and Current
Developments.
Litigation or other conditions may materially and adversely affect the power or ability of an issuer to meet its obligations for the payment of interest on and principal of its Municipal Securities.
Such litigation or conditions may from time to time have the effect of introducing uncertainties in the market for tax-exempt obligations, or may materially affect the credit risk with respect to particular bonds or notes. Adverse economic,
business, legal or political developments might affect all or a substantial portion of a Fund’s Municipal Securities in the same manner. Given the recent bankruptcy-type proceedings by the Commonwealth of Puerto Rico, risks associated with
municipal obligations are heightened.
New Legislation.
From time to time, proposals have been introduced before Congress for the purpose of restricting or eliminating the federal income tax exemption for interest on tax exempt bonds, and similar proposals may be introduced
in the future. The Supreme Court has held that Congress has the constitutional authority to enact such legislation. It is not possible to determine what effect the adoption of such proposals could have on (i) the availability of Municipal Securities
for investment by the Funds, and (ii) the value of the investment portfolios of the Funds.
Limitations on the Use of
Municipal Securities.
Certain Funds may invest in Municipal Securities if the Adviser determines that such Municipal Securities offer attractive yields. The Funds may invest in Municipal Securities either by
purchasing them directly or by purchasing certificates of accrual or similar instruments evidencing direct ownership of interest payments or principal payments, or both, on Municipal Securities, provided that, in the opinion of counsel to the
initial seller of each such certificate or instrument, any discount accruing on such certificate or instrument that is purchased at a yield not greater than the coupon rate of interest on the related Municipal Securities will to the same extent as
interest on such Municipal Securities be exempt from federal income tax and state income tax (where applicable) and not be treated as a preference item for individuals for purposes of the federal alternative minimum tax. The Funds may also invest in
Municipal Securities by purchasing from banks participation interests in all or part of specific holdings of Municipal Securities. Such participation interests may be backed in whole or in part by an irrevocable letter of credit or guarantee of the
selling bank. The selling bank may receive a fee from a Fund in connection with the arrangement.
Each Fund will limit its
investment in municipal leases to no more than 5% of its total assets.
Options and Futures Transactions
A Fund may purchase and sell
(a) exchange traded and OTC put and call options on securities, on indexes of securities and other types of instruments, and on futures contracts on securities and indexes of securities and other instruments such as interest rate futures and global
interest rate futures and (b) futures contracts on securities and other types of instruments and on indexes of securities and other types of instruments. Each of these instruments is a derivative instrument as its value derives from the underlying
asset or index.
Subject to
its investment objective and policies, a Fund may use futures contracts and options for hedging and risk management purposes and to seek to enhance portfolio performance.
Options and futures contracts
may be used to manage a Fund’s exposure to changing interest rates and/or security prices. Some options and futures strategies, including selling futures contracts and buying puts, tend to hedge a Fund’s investments against price
fluctuations. Other strategies, including buying futures contracts and buying calls, tend to increase market exposure. Options and futures contracts may be
combined with each other or with forward contracts in order to
adjust the risk and return characteristics of a Fund’s overall strategy in a manner deemed appropriate by the Adviser and consistent with the Fund’s objective and policies. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close out.
The use of options and futures
is a highly specialized activity which involves investment strategies and risks different from those associated with ordinary portfolio securities transactions, and there can be no guarantee that their use will increase a Fund’s return. While
the use of these instruments by a Fund may reduce certain risks associated with owning its portfolio securities, these techniques themselves entail certain other risks. If the Adviser applies a strategy at an inappropriate time or judges market
conditions or trends incorrectly, options and futures strategies may lower a Fund’s return. Certain strategies limit a Fund’s possibilities to realize gains, as well as its exposure to losses. A Fund could also experience losses if the
prices of its options and futures positions were poorly correlated with its other investments, or if it could not close out its positions because of an illiquid secondary market. In addition, the Fund will incur transaction costs, including trading
commissions and option premiums, in connection with its futures and options transactions, and these transactions could significantly increase the Fund’s turnover rate.
Certain
Funds have filed a notice under the Commodity Exchange Act under Regulation 4.5 and are operated by a person that has claimed an exclusion from the definition of the term “commodity pool operator” under the Commodity Exchange Act and,
therefore, is not subject to registration or regulation as a commodity pool operator under the Commodity Exchange Act. Certain other Funds may rely on no-action relief issued by the CFTC. For Funds that cannot rely on an exclusion from the
definition of commodity pool operator, or no action relief from the CFTC, the Adviser is subject to regulation as a commodity pool operator.
Purchasing Put and Call Options.
By purchasing a put option, a Fund obtains the right (but not the obligation) to sell the instrument underlying the option at a fixed strike price. In return for this right, a Fund pays the current market price for the
option (known as the option premium). Options have various types of underlying instruments, including specific securities, indexes of securities, indexes of securities prices, and futures contracts. A Fund may terminate its position in a put option
it has purchased by allowing it to expire or by exercising the option. A Fund may also close out a put option position by entering into an offsetting transaction, if a liquid market exists. If the option is allowed to expire, a Fund will lose the
entire premium it paid. If a Fund exercises a put option on a security, it will sell the instrument underlying the option at the strike price. If a Fund exercises an option on an index, settlement is in cash and does not involve the actual purchase
or sale of securities. If an option is American style, it may be exercised on any day up to its expiration date. A European style option may be exercised only on its expiration date.
The buyer of a typical put
option can expect to realize a gain if the value of the underlying instrument falls substantially. However, if the price of the instrument underlying the option does not fall enough to offset the cost of purchasing the option, a put buyer can expect
to suffer a loss (limited to the amount of the premium paid, plus related transaction costs).
The features of call options
are essentially the same as those of put options, except that the purchaser of a call option obtains the right to purchase, rather than sell, the instrument underlying the option at the option’s strike price. A call buyer typically attempts to
participate in potential price increases of the instrument underlying the option with risk limited to the cost of the option if security prices fall. At the same time, the buyer can expect to suffer a loss if security prices do not rise sufficiently
to offset the cost of the option.
Selling (Writing) Put and Call
Options on Securities.
When a Fund writes a put option on a security, it takes the opposite side of the transaction from the option’s purchaser. In return for the receipt of the premium, a Fund assumes the
obligation to pay the strike price for the security underlying the option if the other party to the option chooses to exercise it. A Fund may seek to terminate its position in a put option it writes before exercise by purchasing an offsetting option
in the market at its current price. If the market is not liquid for a put option a Fund has written, however, it must continue to be prepared to pay the strike price while the option is outstanding, regardless of price changes, and must continue to
post margin as discussed below. If the market value of the underlying securities does not move to a level that would make exercise of the option profitable to its holder, the option will generally expire unexercised, and the Fund will realize as
profit the premium it received.
If the price of the underlying
securities rises, a put writer would generally expect to profit, although its gain would be limited to the amount of the premium it received. If security prices remain the same over time, it is likely that the writer will also profit, because it
should be able to close out the option at a lower
price. If security prices fall, the put writer would expect to
suffer a loss. This loss should be less than the loss from purchasing and holding the underlying security directly, however, because the premium received for writing the option should offset a portion of the decline.
Writing a call option
obligates a Fund to sell or deliver the option’s underlying security in return for the strike price upon exercise of the option. The characteristics of writing call options are similar to those of writing put options, except that writing calls
generally is a profitable strategy if prices remain the same or fall. Through receipt of the option premium a call writer offsets part of the effect of a price decline. At the same time, because a call writer must be prepared to deliver the
underlying instrument in return for the strike price, even if its current value is greater, a call writer gives up some ability to participate in security price increases.
In order to meet its asset
coverage requirements, when a Fund writes an exchange traded put or call option on a security, it will be required to deposit cash or securities or a letter of credit as margin and to make mark to market payments of variation margin as the position
becomes unprofitable.
Certain Funds will usually
sell covered call options or cash-secured put options on securities. A call option is covered if the writer either owns the underlying security (or comparable securities satisfying the cover requirements of the securities exchanges) or has the right
to acquire such securities. A put option is cash-secured if the writer segregates cash, high-grade short-term debt obligations, or other permissible collateral equal to the exercise price. As the writer of a covered call option, the Fund foregoes,
during the option’s life, the opportunity to profit from increases in the market value of the security covering the call option above the sum of the premium and the strike price of the call, but has retained the risk of loss should the price
of the underlying security decline. As the Fund writes covered calls over more of its portfolio, its ability to benefit from capital appreciation becomes more limited. The writer of an option has no control over the time when it may be required to
fulfill its obligation, but may terminate its position by entering into an offsetting option. Once an option writer has received an exercise notice, it cannot effect an offsetting transaction in order to terminate its obligation under the option and
must deliver the underlying security at the exercise price.
When the Fund writes
cash-secured put options, it bears the risk of loss if the value of the underlying stock declines below the exercise price minus the put premium. If the option is exercised, the Fund could incur a loss if it is required to purchase the stock
underlying the put option at a price greater than the market price of the stock at the time of exercise plus the put premium the Fund received when it wrote the option. While the Fund’s potential gain in writing a cash-secured put option is
limited to distributions earned on the liquid assets securing the put option plus the premium received from the purchaser of the put option, the Fund risks a loss equal to the entire exercise price of the option minus the put premium.
Engaging in Straddles and
Spreads.
In a straddle transaction, a Fund either buys a call and a put or sells a call and a put on the same security. In a spread, a Fund purchases and sells a call or a put. A Fund will sell a straddle when the
Fund’s Adviser believes the price of a security will be stable. The Fund will receive a premium on the sale of the put and the call. A spread permits a Fund to make a hedged investment that the price of a security will increase or
decline.
Options on
Indexes.
Certain Funds may purchase and sell options on securities indexes and other types of indexes. Options on indexes are similar to options on securities, except that the exercise of index options may be
settled by cash payments (or in some instances by a futures contract) and does not involve the actual purchase or sale of securities or the instruments in the index. In addition, these options are designed to reflect price fluctuations in a group of
securities or instruments or segment of the securities’ or instruments’ market rather than price fluctuations in a single security or instrument. A Fund, in purchasing or selling index options, is subject to the risk that the value of
its portfolio may not change as much as an index because a Fund’s investments generally will not match the composition of an index. Unlike call options on securities, index options are cash settled, or settled with a futures contract in some
instances, rather than settled by delivery of the underlying index securities or instruments.
Certain Funds purchase and
sell credit options which are options on indexes of derivative instruments such as credit default swap indexes. Like other index options, credit options can be cash settled or settled with a futures contract in some instances. In addition, credit
options can also be settled in some instances by delivery of the underlying index instrument. Credit options may be used for a variety of purposes including hedging, risk management such as positioning a portfolio for anticipated volatility or
increasing income or gain to a Fund. There is no guarantee that the strategy of using options on indexes or credit options in particular will be successful.
For a number of reasons, a
liquid market may not exist and thus a Fund may not be able to close out an option position that it has previously entered into. When a Fund purchases an OTC option (as defined below), it will be relying on its counterparty to perform its
obligations and the Fund may incur additional losses if the counterparty is unable to perform.
Exchange-Traded and OTC Options.
All options purchased or sold by a Fund will be traded on a securities exchange or will be purchased or sold by securities dealers (“OTC options”) that meet the Fund’s creditworthiness standards. While
exchange-traded options are obligations of the Options Clearing Corporation, in the case of OTC options, a Fund relies on the dealer from which it purchased the option to perform if the option is exercised. Thus, when a Fund purchases an OTC option,
it relies on the dealer from which it purchased the option to make or take delivery of the underlying securities. Failure by the dealer to do so would result in the loss of the premium paid by a Fund as well as loss of the expected benefit of the
transaction.
Provided
that a Fund has arrangements with certain qualified dealers who agree that a Fund may repurchase any option it writes for a maximum price to be calculated by a predetermined formula, a Fund may treat the underlying securities used to cover written
OTC options as liquid. In these cases, the OTC option itself would only be considered illiquid to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option. Accordingly, these OTC options are subject to
heightened credit risk, as well as liquidity and valuation risk depending upon the type of OTC options in which the Fund invests.
Futures Contracts.
When a Fund purchases a futures contract, it agrees to purchase a specified quantity of an underlying instrument at a specified future date or, in the case of an index futures contract, to make or receive a cash payment
based on the value of a securities index. When a Fund sells a futures contract, it agrees to sell a specified quantity of the underlying instrument at a specified future date or, in the case of an index futures contract, to make or receive a cash
payment based on the value of a securities index. The price at which the purchase and sale will take place is fixed when a Fund enters into the contract. Futures can be held until their delivery dates or the position can be (and normally is) closed
out before then. There is no assurance, however, that a liquid market will exist when the Fund wishes to close out a particular position.
When a Fund purchases a futures
contract, the value of the futures contract tends to increase and decrease in tandem with the value of its underlying instrument. Therefore, purchasing futures contracts will tend to increase a Fund’s exposure to positive and negative price
fluctuations in the underlying instrument, much as if it had purchased the underlying instrument directly. When a Fund sells a futures contract, by contrast, the value of its futures position will tend to move in a direction contrary to the value of
the underlying instrument. Selling futures contracts, therefore, will tend to offset both positive and negative market price changes, much as if the underlying instrument had been sold.
The purchaser or seller of a
futures contract is not required to deliver or pay for the underlying instrument unless the contract is held until the delivery date. However, when a Fund buys or sells a futures contract, it will be required to deposit “initial margin”
with a futures commission merchant (“FCM”). Initial margin deposits are typically equal to a small percentage of the contract’s value. If the value of either party’s position declines, that party will be required to make
additional “variation margin” payments equal to the change in value on a daily basis. The party that has a gain may be entitled to receive all or a portion of this amount. A Fund may be obligated to make payments of variation margin at a
time when it is disadvantageous to do so. Furthermore, it may not always be possible for a Fund to close out its futures positions. Until it closes out a futures position, a Fund will be obligated to continue to pay variation margin. Initial and
variation margin payments do not constitute purchasing on margin for purposes of a Fund’s investment restrictions. In the event of the bankruptcy of an FCM that holds margin on behalf of a Fund, the Fund may be entitled to return of margin
owed to it only in proportion to the amount received by the FCM’s other customers, potentially resulting in losses to the Fund. For cash-settled futures, the Fund will segregate or earmark liquid assets in an amount equal to the mark-to-market
value. For physically settled futures, except for certain physically settled futures held by the Diversified Alternatives ETF, the Managed Futures Strategy ETF or their Cayman subsidiaries, the Fund will earmark or segregate liquid assets in an
amount equal to the notional value. Futures contracts will be treated as cash-settled for asset segregation purposes when the Diversified Alternatives ETF, the Managed Futures Strategy ETF and/or their Cayman subsidiaries have entered into a
contractual arrangement (each, a “side letter”) with an FCM or other counterparty to off-set the Fund’s or subsidiary’s exposure under the contract and, failing that, to assign its delivery obligation under the contract to
the FCM or counterparty. In calculating the segregation amount, netting of similar contracts is generally permitted. Such assets cannot be sold while the futures contract or option is outstanding unless they are replaced with other suitable assets.
By setting aside assets
equal only to its net obligation under cash-settled futures or
under physically-settled futures for which the Diversified Alternatives ETF, the Managed Futures Strategy ETF and/or their Cayman subsidiaries have entered into a side letter, a Fund will have the ability to have exposure to such instruments to a
greater extent than if a Fund were required to set aside assets equal to the full notional value of such contracts. There is a possibility that earmarking and reservation of a large percentage of a Fund’s assets could impede portfolio
management or a Fund’s ability to meet redemption requests or other current obligations.
The Funds only invest in
futures contracts to the extent they could invest in the underlying instrument directly. Certain Funds may also invest in index futures where the underlying securities or instruments are not available for direct investments by the Funds.
Cash Equitization.
The objective where equity futures are used to “equitize” cash is to match the notional value of all futures contracts to a Fund’s cash balance. The notional values of the futures contracts and of the
cash are monitored daily. As the cash is invested in securities and/or paid out to participants in redemptions, the Adviser simultaneously adjusts the futures positions. Through such procedures, a Fund not only gains equity exposure from the use of
futures, but also benefits from increased flexibility in responding to client cash flow needs. Additionally, because it can be less expensive to trade a list of securities as a package or program trade rather than as a group of individual orders,
futures provide a means through which transaction costs can be reduced. Such non-hedging risk management techniques involve leverage, and thus present, as do all leveraged transactions, the possibility of losses as well as gains that are greater
than if these techniques involved the purchase and sale of the securities themselves rather than their synthetic derivatives.
Options on Futures Contracts.
Futures contracts obligate the buyer to take and the seller to make delivery at a future date of a specified quantity of a financial instrument or an amount of cash based on the value of a securities or other index.
Currently, futures contracts are available on various types of securities, including but not limited to U.S. Treasury bonds, notes and bills, Eurodollar certificates of deposit and on indexes of securities. Unlike a futures contract, which requires
the parties to buy and sell a security or make a cash settlement payment based on changes in a financial instrument or securities or other index on an agreed date, an option on a futures contract entitles its holder to decide on or before a future
date whether to enter into such a contract. If the holder decides not to exercise its option, the holder may close out the option position by entering into an offsetting transaction or may decide to let the option expire and forfeit the premium
thereon. The purchaser of an option on a futures contract pays a premium for the option but makes no initial margin payments or daily payments of cash in the nature of “variation margin” payments to reflect the change in the value of the
underlying contract as does a purchaser or seller of a futures contract.
The seller of an option on a
futures contract receives the premium paid by the purchaser and may be required to pay initial margin. For physically settled options on futures, the Funds will earmark or segregate an amount of liquid assets equal to the notional value of the
underlying future. For cash-settled options on futures, the Fund will earmark or segregate an amount of liquid assets equal to the market value of the obligation. Market value is equal to the intrinsic value, which is calculated by taking the number
of contracts times a multiplier times the difference between the strike and current market price.
Combined Positions.
Certain Funds may purchase and write options in combination with futures or forward contracts, to adjust the risk and return characteristics of the overall position. For example, a Fund may purchase a put option and
write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option
at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher
transaction costs and may be more difficult to open and close out.
Correlation of Price Changes.
Because there are a limited number of types of exchange-traded options and futures contracts, it is likely that the standardized options and futures contracts available will not match a Fund’s current or
anticipated investments exactly. A Fund may invest in options and futures contracts based on securities or instruments with different issuers, maturities, or other characteristics from the securities in which it typically invests, which involves a
risk that the options or futures position will not track the performance of a Fund’s other investments.
Options and futures contracts
prices can also diverge from the prices of their underlying instruments, even if the underlying instruments match the Fund’s investments well. Options and futures contracts prices are affected by such factors as current and anticipated short
term interest rates, changes in volatility of the underlying instrument, and the time remaining until expiration of the contract, which may not affect
security prices the same way. Imperfect correlation may also
result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures and securities are traded, or from imposition of daily price fluctuation limits or trading
halts. A Fund may purchase or sell options and futures contracts with a greater or lesser value than the securities it wishes to hedge or intends to purchase in order to attempt to compensate for differences in volatility between the contract and
the securities, although this may not be successful in all cases. If price changes in a Fund’s options or futures positions are poorly correlated with its other investments, the positions may fail to produce anticipated gains or result in
losses that are not offset by gains in other investments.
Liquidity of Options and Futures
Contracts.
There is no assurance that a liquid market will exist for any particular options or futures contract at any particular time even if the contract is traded on an exchange. In addition, exchanges may
establish daily price fluctuation limits for options and futures contracts and may halt trading if a contract’s price moves up or down more than the limit in a given day. On volatile trading days when the price fluctuation limit is reached or
a trading halt is imposed, it may be impossible for a Fund to enter into new positions or close out existing positions. If the market for a contract is not liquid because of price fluctuation limits or otherwise, it could prevent prompt liquidation
of unfavorable positions, and could potentially require a Fund to continue to hold a position until delivery or expiration regardless of changes in its value. As a result, a Fund’s access to other assets held to cover its options or futures
positions could also be impaired. (See “Exchange-Traded and OTC Options” above for a discussion of the liquidity of options not traded on an exchange.)
Foreign Investment Risk.
Certain Funds may buy and sell options on interest rate futures including global interest rate futures in which the reference interest rate is tied to currencies other than the U.S. dollar. Such investments are subject
to additional risks including the risks associated with foreign investment and currency risk. See “Foreign Investments (including Foreign Currencies)” in this SAI Part II.
Position Limits.
Futures exchanges can limit the number of futures and options on futures contracts that can be held or controlled by an entity. If an adequate exemption cannot be obtained, a Fund or the Adviser may be required to
reduce the size of its futures and options positions or may not be able to trade a certain futures or options contract in order to avoid exceeding such limits.
Asset Segregation for Futures
Contracts and Options Positions.
A Fund will set aside or earmark appropriate liquid assets for asset segregation purposes. Such assets cannot be sold while the futures contract or option is outstanding, unless they
are replaced with other suitable assets. As a result, there is a possibility that the reservation of a large percentage of a Fund’s assets could impede portfolio management or a Fund’s ability to meet redemption requests or other current
obligations.
Real Estate Investment
Trusts (“REITs”)
Certain of the Funds may
invest in equity interests or debt obligations issued by REITs. REITs are pooled investment vehicles which invest primarily in income producing real estate or real estate related loans or interest. REITs are generally classified as equity REITs,
mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains by selling
property that has appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive income from the collection of interest payments. Similar to investment companies, REITs are not taxed on income
distributed to shareholders provided they comply with several requirements of the Code. A Fund will indirectly bear its proportionate share of expenses incurred by REITs in which a Fund invests in addition to the expenses incurred directly by a
Fund.
Investing in REITs
involves certain unique risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may
be affected by the quality of any credit extended. REITs are dependent upon management skills and on cash flows, are not diversified, and are subject to default by borrowers and self-liquidation. REITs are also subject to the possibilities of
failing to qualify for tax free pass-through of income under the Code and failing to maintain their exemption from registration under the 1940 Act.
REITs (especially mortgage
REITs) are also subject to interest rate risks. When interest rates decline, the value of a REIT’s investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT’s investment in
fixed rate obligations can be expected to decline. In
contrast, as interest rates on adjustable rate mortgage loans
are reset periodically, yields on a REIT’s investment in such loans will gradually align themselves to fluctuate less dramatically in response to interest rate fluctuations than would investments in fixed rate obligations.
Investment in REITs involves
risks similar to those associated with investing in small capitalization companies. These risks include:
•
|
limited financial
resources;
|
•
|
infrequent or
limited trading; and
|
•
|
more
abrupt or erratic price movements than larger company securities.
|
In addition, small capitalization
stocks, such as certain REITs, historically have been more volatile in price than the larger capitalization stocks included in the S&P 500® Index.
Recent Events Relating to the Overall Economy
The U.S. Government, the
Federal Reserve, the Treasury, the SEC, the Federal Deposit Insurance Corporation and other governmental and regulatory bodies have taken actions to address the financial crisis. These actions included, in part, the enactment by the United States
Congress of the Dodd-Frank Act, which was signed into law on July 21, 2010 and imposed a new regulatory framework over the U.S. financial services industry and the consumer credit markets in general, and proposed and final regulations by the SEC.
Given the broad scope, sweeping nature, and relatively recent enactment of some of these regulatory measures, the potential impact they could have on securities held by the Funds is unknown. There can be no assurance that these measures will not
have an adverse effect on the value or marketability of securities held by the Funds. Furthermore, no assurance can be made that the U.S. Government or any U.S. regulatory body (or other authority or regulatory body) will not continue to take
further legislative or regulatory action, and the effect of such actions, if taken, cannot be known. However, current efforts by the U.S. Government to reduce the impact of regulations on the U.S. financial services industry could lead to the repeal
of certain elements of the regulatory framework.
Repurchase Agreements
Repurchase agreements may be
entered into with brokers, dealers or banks or other entities that meet the Adviser’s credit guidelines. A Fund will enter into repurchase agreements only with member banks of the Federal Reserve System and securities dealers or other entities
believed by the Adviser to be creditworthy. The Adviser may consider the collateral received and any applicable guarantees in making its determination. In a repurchase agreement, a Fund buys a security from a seller that has agreed to repurchase the
same security at a mutually agreed upon date and price. The resale price normally is in excess of the purchase price, reflecting an agreed upon interest rate. This interest rate is effective for the period of time a Fund is invested in the agreement
and is not related to the coupon rate on the underlying security. A repurchase agreement may also be viewed as a fully collateralized loan of money by a Fund to the seller. The maximum maturity permitted for a non- “putable” repurchase
agreement will be 190 days. In the case of a tri-party agreement, the maximum notice period permitted for a “putable” or “open” repurchase agreement (i.e., where the Fund has a right to put the repurchase agreement to the
counterparty or terminate the transaction at par plus accrued interest at a specified notice period) will be 190 days. The securities which are subject to repurchase agreements, however, may have maturity dates in excess of 190 days from the
effective date of the repurchase agreement. In addition, the maturity of a “putable” or “open” repurchase agreement may be in excess of 190 days. Repurchase agreements maturing in more than seven days (or where the put right
or notice provision requires greater than seven days’ notice) are treated as illiquid for purposes of a Fund’s restrictions on purchases of illiquid securities. A Fund will always receive securities as collateral during the term of the
agreement whose market value is at least equal to 100% of the dollar amount invested by the Fund in each agreement plus accrued interest. The repurchase agreements further authorize the Fund to demand additional collateral in the event that the
dollar value of the collateral falls below 100%. A Fund will make payment for such securities only upon physical delivery or upon evidence of book entry transfer to the account of the custodian. Repurchase agreements are considered under the 1940
Act to be loans collateralized by the underlying securities.
All of the Funds that are
permitted to invest in repurchase agreements may engage in repurchase agreement transactions that are collateralized fully as defined in Rule 5b-3(c)(1) of the 1940 Act, which has the effect of enabling a Fund to look to the collateral, rather than
the counterparty, for determining whether its assets are “diversified” for 1940 Act purposes. The Adviser may consider the collateral received and any applicable guarantees in making its determination. Certain Funds may, in
addition,
engage in repurchase agreement transactions that are
collateralized by money market instruments, debt securities, loan participations, equity securities or other securities including securities that are rated below investment grade by the requisite NRSROs or unrated securities of comparable quality.
For these types of repurchase agreement transactions, the Fund would look to the counterparty, and not the collateral, for determining such diversification.
A repurchase agreement is
subject to the risk that the seller may fail to repurchase the security. In the event of default by the seller under a repurchase agreement construed to be a collateralized loan, the underlying securities would not be owned by the Fund, but would
only constitute collateral for the seller’s obligation to pay the repurchase price. Therefore, a Fund may suffer time delays and incur costs in connection with the disposition of the collateral. The collateral underlying repurchase agreements
may be more susceptible to claims of the seller’s creditors than would be the case with securities owned by the Fund.
Under existing guidance from
the SEC, certain Funds may transfer uninvested cash balances into a joint account, along with cash of other Funds and certain other accounts. These balances may be invested in one or more repurchase agreements and/or short-term money market
instruments.
Reverse Repurchase
Agreements
In a reverse
repurchase agreement, a Fund sells a security and agrees to repurchase the same security at a mutually agreed upon date and price reflecting the interest rate effective for the term of the agreement. For purposes of the 1940 Act, a reverse
repurchase agreement is considered borrowing by a Fund and, therefore, a form of leverage. Leverage may cause any gains or losses for a Fund to be magnified. The Funds will invest the proceeds of borrowings under reverse repurchase agreements. In
addition, except for liquidity purposes, a Fund will enter into a reverse repurchase agreement only when the expected return from the investment of the proceeds is greater than the expense of the transaction. A Fund will not invest the proceeds of a
reverse repurchase agreement for a period which exceeds the duration of the reverse repurchase agreement. A Fund would be required to pay interest on amounts obtained through reverse repurchase agreements, which are considered borrowings under
federal securities laws. The repurchase price is generally equal to the original sales price plus interest. Reverse repurchase agreements are usually for seven days or less and cannot be repaid prior to their expiration dates. Each Fund will earmark
and reserve Fund assets, in cash or liquid securities, in an amount at least equal to its purchase obligations under its reverse repurchase agreements. Reverse repurchase agreements involve the risk that the market value of the portfolio securities
transferred may decline below the price at which a Fund is obliged to purchase the securities. All forms of borrowing (including reverse repurchase agreements) are limited in the aggregate and may not exceed 33
1
⁄
3
% of a Fund’s total assets, except as permitted by law.
Securities Lending
To generate
additional income, certain Funds may lend up to 33
1
⁄
3
% of such Fund’s total assets
pursuant to agreements requiring that the loan be continuously secured by collateral equal to at least 100% of the market value plus accrued interest on the securities lend. The Funds use Citibank, N.A. (“Citibank”) as their securities
lending agent. Pursuant to a Third Party Securities Lending Rider to the Custody Agreement between JPMorgan Chase Bank, Citibank and the Funds (the “Third Party Securities Lending Rider”) approved by the Board of Trustees, Citibank
compensates JPMorgan Chase Bank for certain custodial services provided by JPMorgan Chase Bank in connection with the Funds’ use of Citibank as securities lending agent.
Pursuant to the Global
Securities Lending Agency Agreement approved by the Board of Trustees between Citibank and the Trust on behalf of the applicable Funds, severally and not jointly (the “Securities Lending Agency Agreement”), collateral for loans will
consist only of cash. The Funds receive payments from the borrowers equivalent to the dividends and interest that would have been earned on the securities lent. For loans secured by cash, the Funds seek to earn interest on the investment of cash
collateral in investments permitted by the Securities Lending Agency Agreement. Under the Securities Lending Agency Agreement, cash collateral may be invested in IM Shares of JPMorgan Prime Money Market Fund, JPMorgan U.S. Government Money Market
Fund and Class Agency SL Shares of the JPMorgan Securities Lending Money Market Fund.
Under the Securities Lending
Agency Agreement, Citibank marks to market the loaned securities on a daily basis. In the event the cash received from the borrower is less than 102% of the value of the loaned securities (105% for non-U.S. securities), Citibank requests additional
cash from the borrower so as to maintain a collateralization level of at least 102% of the value of the loaned securities plus accrued interest
(105% for non-U.S.
securities). Loans are subject to termination by a Fund or the borrower at any time, and are therefore not considered to be illiquid investments. A Fund does not have the right to vote proxies for securities on loan over a record date for such
proxies. However, if the Fund’s Adviser has notice of the proxy in advance of the record date, a Fund’s Adviser may terminate a loan in advance of the record date if the Fund’s Adviser determines the vote is considered material
with respect to an investment.
Securities lending involves
counterparty risk, including the risk that the loaned securities may not be returned or returned in a timely manner and/or a loss of rights in the collateral if the borrower or the lending agent defaults or fails financially. This risk is increased
when a Fund’s loans are concentrated with a single or limited number of borrowers. The earnings on the collateral invested may not be sufficient to pay fees incurred in connection with the loan. Also, the principal value of the collateral
invested may decline and may not be sufficient to pay back the borrower for the amount of collateral posted. There are no limits on the number of borrowers a Fund may use and a Fund may lend securities to only one or a small group of borrowers. In
addition, loans may be made to affiliates of Citibank as identified. Funds participating in securities lending bear the risk of loss in connection with investments of the cash collateral received from the borrowers, which do not trigger additional
collateral requirements from the borrower.
To the extent that the value or
return of a Fund’s investments of the cash collateral declines below the amount owed to a borrower, the Fund may incur losses that exceed the amount it earned on lending the security. In situations where the Adviser does not believe that it is
prudent to sell the cash collateral investments in the market, a Fund may borrow money to repay the borrower the amount of cash collateral owed to the borrower upon return of the loaned securities. This will result in financial leverage, which may
cause the Fund to be more volatile because financial leverage tends to exaggerate the effect of any increase or decrease in the value of the Fund’s portfolio securities.
Short Selling
In short selling transactions,
a Fund sells a security it does not own in anticipation of a decline in the market value of the security. To complete the transaction, a Fund must borrow the security to make delivery to the buyer. A Fund is obligated to replace the security
borrowed by purchasing it subsequently at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund, which may result in a loss or gain, respectively. Unlike
taking a long position in a security by purchasing the security, where potential losses are limited to the purchase price, short sales have no cap on maximum losses, and gains are limited to the price of the security at the time of the short
sale.
Short sales of
forward commitments and derivatives do not involve borrowing a security. These types of short sales may include futures, options, contracts for differences, forward contracts on financial instruments and options such as contracts, credit linked
instruments, and swap contracts.
A Fund may not always be able
to borrow a security it wants to sell short. A Fund also may be unable to close out an established short position at an acceptable price and may have to sell long positions at disadvantageous times to cover its short positions. The value of your
investment in a Fund will fluctuate in response to movements in the market. Fund performance also will depend on the effectiveness of the Adviser’s research and the management team’s investment decisions. The SEC and financial industry
regulatory authorities in other countries may impose prohibitions, restrictions or other regulatory requirements on short sales, which could inhibit the ability of the Adviser to sell securities short on behalf of the Fund. For example, in September
2008, in response to spreading turmoil in the financial markets, the SEC temporarily banned short selling in the stocks of numerous financial services companies, and also promulgated new disclosure requirements with respect to short positions held
by investment managers. The SEC’s temporary ban on short selling of such stocks has since expired, but should similar restrictions and/or additional disclosure requirements be promulgated, especially if market turmoil occurs, a Fund may be
forced to cover short positions more quickly than otherwise intended and may suffer losses as a result. Such restrictions may also adversely affect the ability of a Fund (especially if a Fund utilizes short selling as a significant portion of its
investment strategy) to execute its investment strategies generally.
Short sales also involve other
costs. A Fund must repay to the lender an amount equal to any dividends or interest that accrues while the loan is outstanding. To borrow the security, a Fund may be required to pay a premium. A Fund also will incur transaction costs in effecting
short sales. The amount of any ultimate gain for a Fund resulting from a short sale will be decreased and the amount of any ultimate loss will be increased by the amount of premiums, interest or expenses a Fund may be required to pay in
connection
with the short sale. Until a Fund closes the short position, it
will earmark and reserve Fund assets, in cash or liquid securities, to offset a portion of the leverage risk. Realized gains from short sales are typically treated as short-term gains/losses.
Certain of a Fund’s
service providers may have agreed to waive fees and reimburse expenses to limit the Fund’s operating expenses in the amount and for the time period specified in the Fund’s prospectuses. The expense limitation does not include certain
expenses including, to the extent indicated in the Fund’s prospectuses, dividend and interest expense on short sales. In calculating the interest expense on short sales for purposes of this exclusion, the Fund will recognize all economic
elements of interest costs, including premium and discount adjustments.
Short-Term Funding Agreements
Short-term funding agreements
issued by insurance companies are sometimes referred to as Guaranteed Investment Contracts (“GICs”), while those issued by banks are referred to as Bank Investment Contracts (“BICs”). Pursuant to such agreements, a Fund makes
cash contributions to a deposit account at a bank or insurance company. The bank or insurance company then credits to the Fund on a monthly basis guaranteed interest at either a fixed, variable or floating rate. These contracts are general
obligations of the issuing bank or insurance company (although they may be the obligations of an insurance company separate account) and are paid from the general assets of the issuing entity.
Generally, there is no active
secondary market in short-term funding agreements. Therefore, short-term funding agreements may be considered by a Fund to be illiquid investments. To the extent that a short-term funding agreement is determined to be illiquid, such agreements will
be acquired by a Fund only if, at the time of purchase, no more than 15% of the Fund’s net assets will be invested in short-term funding agreements and other illiquid securities.
Structured Investments
A structured investment is a
security having a return tied to an underlying index or other security or asset class. Structured investments generally are individually negotiated agreements and may be traded over-the-counter. Structured investments are organized and operated to
restructure the investment characteristics of the underlying security. This restructuring involves the deposit with or purchase by an entity, such as a corporation or trust, or specified instruments (such as commercial bank loans) and the issuance
by that entity or one or more classes of securities (“structured securities”) backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued
structured securities to create securities with different investment characteristics, such as varying maturities, payment priorities and interest rate provisions, and the extent of such payments made with respect to structured securities is
dependent on the extent of the cash flow on the underlying instruments. Because structured securities typically involve no credit enhancement, their credit risk generally will be equivalent to that of the underlying instruments. Investments in
structured securities are generally of a class of structured securities that is either subordinated or unsubordinated to the right of payment of another class. Subordinated structured securities typically have higher yields and present greater risks
than unsubordinated structured securities. Structured instruments include structured notes. In addition to the risks applicable to investments in structured investments and debt securities in general, structured notes bear the risk that the issuer
may not be required to pay interest on the structured note if the index rate rises above or falls below a certain level. Structured securities are typically sold in private placement transactions, and there currently is no active trading market for
structured securities. Investments in government and government-related restructured debt instruments are subject to special risks, including the inability or unwillingness to repay principal and interest, requests to reschedule or restructure
outstanding debt and requests to extend additional loan amounts. Structured investments include a wide variety of instruments including, without limitation, Collateralized Debt Obligations, credit linked notes, and participation notes and
participatory notes.
Structured instruments that
are registered under the federal securities laws may be treated as liquid. In addition, many structured instruments may not be registered under the federal securities laws. In that event, a Fund’s ability to resell such a structured instrument
may be more limited than its ability to resell other Fund securities. The Funds will treat such instruments as illiquid and will limit their investments in such instruments to no more than 15% of each Fund’s net assets, when combined with all
other illiquid investments of each Fund.
Total Annual Fund Operating
Expenses set forth in the fee table and Financial Highlights section of each Fund’s Prospectuses do not include any expenses associated with investments in certain structured or synthetic products that may rely on the exception for the
definition of “investment company” provided by section 3(c)(1) or 3(c)(7) of the 1940 Act.
Swaps and Related Swap Products
Swap transactions may include,
but are not limited to, interest rate swaps, currency swaps, cross-currency interest rate swaps, forward rate agreements, contracts for differences, total return swaps, index swaps, basket swaps, specific security swaps, fixed income sectors swaps,
commodity swaps, asset-backed swaps (ABX), commercial mortgage-backed securities (CMBS) and indexes of CMBS (CMBX), credit default swaps, interest rate caps, price lock swaps, floors and collars and swaptions (collectively defined as “swap
transactions”).
A
Fund may enter into swap transactions for any legal purpose consistent with its investment objective and policies, such as for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining that return
or spread through purchases and/or sales of instruments in cash markets, to protect against currency fluctuations, to protect against any increase in the price of securities a Fund anticipates purchasing at a later date, or to gain exposure to
certain markets in the most economical way possible.
Swap
agreements are two-party contracts entered into primarily by institutional counterparties for periods ranging from a few weeks to several years. They may be bilaterally negotiated between the two parties (referred to as OTC swaps) or traded over an
exchange. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) that would be earned or realized on specified notional investments or instruments. The gross returns to be exchanged or
“swapped” between the parties are calculated by reference to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency
or commodity, or in a “basket” of securities representing a particular index. The purchaser of an interest rate cap or floor, upon payment of a fee, has the right to receive payments (and the seller of the cap or floor is obligated to
make payments) to the extent a specified interest rate exceeds (in the case of a cap) or is less than (in the case of a floor) a specified level over a specified period of time or at specified dates. The purchaser of an interest rate collar, upon
payment of a fee, has the right to receive payments (and the seller of the collar is obligated to make payments) to the extent that a specified interest rate falls outside an agreed upon range over a specified period of time or at specified dates.
The purchaser of an option on an interest rate swap, also known as a “swaption,” upon payment of a fee (either at the time of purchase or in the form of higher payments or lower receipts within an interest rate swap transaction) has the
right, but not the obligation, to initiate a new swap transaction of a pre-specified notional amount with pre-specified terms with the seller of the swaption as the counterparty.
The “notional
amount” of a swap transaction is the agreed upon basis for calculating the payments that the parties have agreed to exchange. For example, one swap counterparty may agree to pay a floating rate of interest (e.g., 3 month LIBOR) calculated
based on a $10 million notional amount on a quarterly basis in exchange for receipt of payments calculated based on the same notional amount and a fixed rate of interest on a semi-annual basis. In the event a Fund is obligated to make payments more
frequently than it receives payments from the other party, it will incur incremental credit exposure to that swap counterparty. This risk may be mitigated somewhat by the use of swap agreements which call for a net payment to be made by the party
with the larger payment obligation when the obligations of the parties fall due on the same date. Under most swap agreements entered into by a Fund, payments by the parties will be exchanged on a “net basis”, and a Fund will receive or
pay, as the case may be, only the net amount of the two payments.
The amount of a Fund’s
potential gain or loss on any swap transaction is not subject to any fixed limit. Nor is there any fixed limit on a Fund’s potential loss if it sells a cap or collar. If a Fund buys a cap, floor or collar, however, the Fund’s potential
loss is limited to the amount of the fee that it has paid. When measured against the initial amount of cash required to initiate the transaction, which is typically zero in the case of most conventional swap transactions, swaps, caps, floors and
collars tend to be more volatile than many other types of instruments.
The use of swap transactions,
caps, floors and collars involves investment techniques and risks that are different from those associated with portfolio security transactions. If a Fund’s Adviser is incorrect in its forecasts of market values, interest rates, and other
applicable factors, the investment performance of the Fund will be less favorable than if these techniques had not been used. These instruments are typically not
traded on exchanges. Accordingly, there is a risk that the other
party to certain of these instruments will not perform its obligations to a Fund or that a Fund may be unable to enter into offsetting positions to terminate its exposure or liquidate its position under certain of these instruments when it wishes to
do so. Such occurrences could result in losses to a Fund. A Fund’s Adviser will consider such risks and will enter into swap and other derivatives transactions only when it believes that the risks are not unreasonable.
A Fund will earmark and reserve
Fund assets, in cash or liquid securities, in an amount sufficient at all times to cover its current obligations under its swap transactions, caps, floors and collars. If a Fund enters into a swap agreement on a net basis, it will earmark and
reserve assets with a daily value at least equal to the excess, if any, of a Fund’s accrued obligations under the swap agreement over the accrued amount a Fund is entitled to receive under the agreement. If a Fund enters into a swap agreement
on other than a net basis, or sells a cap, floor or collar, it will earmark and reserve assets with a daily value at least equal to the full amount of a Fund’s accrued obligations under the agreement. A Fund will not enter into any swap
transaction, cap, floor, or collar, unless the counterparty to the transaction is deemed creditworthy by the Fund’s Adviser. If a counterparty defaults, a Fund may have contractual remedies pursuant to the agreements related to the
transaction. The swap markets in which many types of swap transactions are traded have grown substantially in recent years, with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap
documentation. As a result, the markets for certain types of swaps (e.g., interest rate swaps) have become relatively liquid. The markets for some types of caps, floors and collars are less liquid.
The liquidity of swap
transactions, caps, floors and collars will be as set forth in guidelines established by a Fund’s Adviser and approved by the Trustees which are based on various factors, including: (1) the availability of dealer quotations and the estimated
transaction volume for the instrument, (2) the number of dealers and end users for the instrument in the marketplace, (3) the level of market making by dealers in the type of instrument, (4) the nature of the instrument (including any right of a
party to terminate it on demand) and (5) the nature of the marketplace for trades (including the ability to assign or offset a Fund’s rights and obligations relating to the instrument). Such determination will govern whether the instrument
will be deemed within the applicable liquidity restriction on investments in securities that are not readily marketable.
During the term of a swap,
cap, floor or collar, changes in the value of the instrument are recognized as unrealized gains or losses by marking to market to reflect the market value of the instrument. When the instrument is terminated, a Fund will record a realized gain or
loss equal to the difference, if any, between the proceeds from (or cost of) the closing transaction and a Fund’s basis in the contract.
The federal income tax treatment
with respect to swap transactions, caps, floors, and collars may impose limitations on the extent to which a Fund may engage in such transactions.
Under the
Dodd-Frank Act, certain swaps that were historically traded OTC must now be traded on an exchange or facility regulated by the CFTC and/or centrally cleared (central clearing interposes a central clearing house to each participant’s swap).
Exchange trading and central clearing are intended to reduce counterparty credit risk and increase liquidity and transparency, but they do not make swap transactions risk-free. Moving trading to an exchange-type system may increase market
transparency and liquidity but may require Funds to incur increased expenses to access the same types of cleared and uncleared swaps. Moreover, depending on the size of a Fund and other factors, the margin required under the clearinghouse rules and
by a clearing member may be in excess of the collateral required to be posted by the Fund to support its obligations under a similar uncleared swap. But applicable regulators have also adopted rules imposing margin requirements, including minimums,
on uncleared swaps, which may result in a Fund and its counterparties posting higher margin amounts for uncleared swaps as well. Recently adopted rules also require centralized reporting of detailed information about many types of cleared and
uncleared swaps. Swaps data reporting may result in greater market transparency, but may subject a Fund to additional administrative burdens, and the safeguards established to protect trader anonymity may not function as expected. Implementing these
new exchange trading, central clearing, margin and data reporting regulations may increase Fund’s cost of hedging risk and, as a result, may affect returns to Fund investors.
Credit Default Swaps.
As described above, 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 the case of a credit default swap
(“CDS”), the contract gives one party (the buyer) the right to recoup the economic value of a decline in the value of debt securities of the reference issuer if the credit event (a downgrade or default) occurs. This value is obtained by
delivering a debt security of the reference issuer to the party in
return for a previously agreed
payment from the other party (frequently, the par value of the debt security). CDS include credit default swaps, which are contracts on individual securities, and credit default swap indices (“CDX”), which are contracts on baskets or
indices of securities.
Credit default swaps may
require initial premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of a reference obligation. In cases where a Fund is a seller of a CDS contract including a CDX contract,
the Fund will segregate or earmark liquid assets equal the notional amount of the contract. Furthermore, a Fund will segregate or earmark liquid assets to cover any accrued payment obligations when it is the buyer of a CDS including CDX. In
calculating the amount to be segregated for this purpose, the Fund is not considered to have an accrued payment obligation when it is the buyer of a CDS including a CDX when the contract is in a gain position as no additional amounts are owed to the
counterparty. In cases where a Fund is a buyer of a CDS contract including a CDX contract, the Fund will segregate or earmark liquid assets equal to the mark-to-market value when the contract is in a loss position.
If a Fund is a seller of
protection under a CDS contract, the Fund would be required to pay the par (or other agreed upon) value of a referenced debt obligation to the counterparty in the event of a default or other credit event by the reference issuer, such as a U.S. or
foreign corporate issuer, with respect to such debt obligations. In return, a Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs,
a Fund would keep the stream of payments and would have no payment obligations. As the seller, a Fund would be subject to investment exposure on the notional amount of the swap.
If a Fund is a buyer of
protection under a CDS contract, the Fund would have the right to deliver a referenced debt obligation and receive the par (or other agreed-upon) value of such debt obligation from the counterparty in the event of a default or other credit event
(such as a downgrade in credit rating) by the reference issuer, such as a U.S. or foreign corporation, with respect to its debt obligations. In return, the Fund would pay the counterparty a periodic stream of payments over the term of the contract
provided that no event of default has occurred. If no default occurs, the counterparty would keep the stream of payments and would have no further obligations to the Fund.
The use of CDSs, like all swap
agreements, is subject to certain risks. If a counterparty’s creditworthiness declines, the value of the swap would likely decline. Moreover, there is no guarantee that a Fund could eliminate its exposure under an outstanding swap agreement by
entering into an offsetting swap agreement with the same or another party. In addition to general market risks, CDSs involve liquidity, credit and counterparty risks. The recent increase in corporate defaults further raises these liquidity and
credit risks, increasing the possibility that sellers will not have sufficient funds to make payments. As unregulated instruments, CDSs are difficult to value and are therefore susceptible to liquidity and credit risks. Counterparty risks also stem
from the lack of regulation of CDSs. Collateral posting requirements are individually negotiated between counterparties and there is no regulatory requirement concerning the amount of collateral that a counterparty must post to secure its
obligations under a CDS. Because they are unregulated, there is no requirement that parties to a contract be informed in advance when a CDS is sold. As a result, investors may have difficulty identifying the party responsible for payment of their
claims.
If a
counterparty’s credit becomes significantly impaired, multiple requests for collateral posting in a short period of time could increase the risk that the Fund may not receive adequate collateral. There is no readily available market for
trading out of CDS contracts. In order to eliminate a position it has taken in a CDS, the Fund must terminate the existing CDS contract or enter into an offsetting trade. The Fund may only exit its obligations under a CDS contract by terminating the
contract and paying applicable breakage fees, which could result in additional losses to the Fund. Furthermore, the cost of entering into an offsetting CDS position could cause the Fund to incur losses.
Under the
Dodd-Frank Act, certain CDS indices are subject to mandatory central cleaning and exchange trading, which may reduce counterparty credit risk and increase liquidity compared to other credit default swap or CDS index transactions.
Synthetic Variable Rate Instruments
Synthetic variable rate
instruments generally involve the deposit of a long-term tax exempt bond in a custody or trust arrangement and the creation of a mechanism to adjust the long-term interest rate on the bond to a variable short-term rate and a right (subject to
certain conditions) on the part of the purchaser to tender it periodically to a third party at par. A Fund’s Adviser reviews the structure of synthetic variable rate instruments to identify credit and liquidity risks (including the conditions
under which the right to
tender the instrument would no longer be available) and will
monitor those risks. In the event that the right to tender the instrument is no longer available, the risk to the Fund will be that of holding the long-term bond. In the case of some types of instruments credit enhancement is not provided, and if
certain events occur, which may include (a) default in the payment of principal or interest on the underlying bond, (b) downgrading of the bond below investment grade or (c) a loss of the bond’s tax exempt status, then the put will terminate
and the risk to the Fund will be that of holding a long-term bond.
Total Annual Fund Operating
Expenses set forth in the fee table and Financial Highlights section of each Fund’s Prospectuses do not include any expenses associated with investments in certain structured or synthetic products that may rely on the exception for the
definition of “investment company” provided by section 3(c)(1) or 3(c)(7) of the 1940 Act.
Treasury Receipts
A Fund may purchase interests
in separately traded interest and principal component parts of U.S. Treasury obligations that are issued by banks or brokerage firms and are created by depositing U.S. Treasury notes and U.S. Treasury bonds into a special account at a custodian
bank. Receipts include Treasury Receipts (“TRs”), Treasury Investment Growth Receipts (“TIGRs”), and Certificates of Accrual on Treasury Securities (“CATS”). Receipts in which an entity other than the government
separates the interest and principal components are not considered government securities unless such securities are issued through the Treasury Separate Trading of Registered Interest and Principal of Securities (“STRIPS”) program.
Trust Preferred Securities
Certain Funds may purchase
trust preferred securities, also known as “trust preferreds”, which are preferred stocks issued by a special purpose trust subsidiary backed by subordinated debt of the corporate parent. An issuer creates trust preferred securities by
creating a trust and issuing debt to the trust. The trust in turn issues trust preferred securities. Trust preferred securities are hybrid securities with characteristics of both subordinated debt and preferred stock. Such characteristics include
long maturities (typically 30 years or more), early redemption by the issuer, periodic fixed or variable interest payments, and maturities at face value. In addition, trust preferred securities issued by a bank holding company may allow deferral of
interest payments for up to 5 years. Holders of trust preferred securities have limited voting rights to control the activities of the trust and no voting rights with respect to the parent company.
U.S. Government Obligations
U.S. government obligations may
include direct obligations of the U.S. Treasury, including Treasury bills, notes and bonds, all of which are backed as to principal and interest payments by the full faith and credit of the U.S., and separately traded principal and interest
component parts of such obligations that are transferable through the Federal book-entry system known as STRIPS and Coupon Under Book Entry Safekeeping (“CUBES”). The Funds may also invest in TIPS. U.S. government obligations are subject
to market risk, interest rate risk and credit risk.
The principal and interest
components of U.S. Treasury bonds with remaining maturities of longer than ten years are eligible to be traded independently under the STRIPS program. Under the STRIPS program, the principal and interest components are separately issued by the U.S.
Treasury at the request of depository financial institutions, which then trade the component parts separately. The interest component of STRIPS may be more volatile than that of U.S. Treasury bills with comparable maturities.
Other obligations include
those issued or guaranteed by U.S. government agencies, GSEs or instrumentalities. These obligations may or may not be backed by the “full faith and credit” of the U.S. Securities which are backed by the full faith and credit of the U.S.
include obligations of the Government National Mortgage Association, the Farmers Home Administration, and the Export-Import Bank. In the case of securities not backed by the full faith and credit of the U.S., the Funds must look principally to the
federal agency issuing or guaranteeing the obligation for ultimate repayment and may not be able to assert a claim against the U.S. itself in the event the agency or instrumentality does not meet its commitments. Securities in which the Funds may
invest that are not backed by the full faith and credit of the U.S. include, but are not limited to: (i) obligations of the Tennessee Valley Authority, the Federal Home Loan Banks and the U.S. Postal Service, each of which has the right to borrow
from the U.S. Treasury to meet its obligations; (ii) securities issued by Freddie Mac and Fannie Mae, which are supported only by the credit of such securities, but for which the Secretary of the Treasury has discretionary authority to
purchase
limited amounts of the agency’s obligations; and (iii)
obligations of the Federal Farm Credit System and the Student Loan Marketing Association, each of whose obligations may be satisfied only by the individual credits of the issuing agency.
The total public debt of the
United States and other countries around the globe as a percent of gross domestic product has grown rapidly since the beginning of the 2008 financial downturn. Although high debt levels do not necessarily indicate or cause economic problems, they
may create certain systemic risks if sound debt management practices are not implemented. A high national debt level may increase market pressures to meet government funding needs, which may drive debt cost higher and cause a country to sell
additional debt, thereby increasing refinancing risk. A high national debt also raises concerns that a government will not be able to make principal or interest payments when they are due. Unsustainable debt levels can cause devaluations of
currency, prevent a government from implementing effective counter-cyclical fiscal policy in economic downturns, and contribute to market volatility. From time to time, uncertainty regarding the status of negotiations in the U.S. government to
increase the statutory debt ceiling could: increase the risk that the U.S. government may default on payments on certain U.S. government securities; cause the credit rating of the U.S. government to be downgraded or increase volatility in both stock
and bond markets; result in higher interest rates; reduce prices of U.S. Treasury securities; and/or increase the costs of certain kinds of debt.
In the past, U.S. sovereign
credit has experienced downgrades and there can be no guarantee that it will not experience further downgrades in the future by rating agencies. The market prices and yields of securities supported by the full faith and credit of the U.S. Government
may be adversely affected by a rating agency’s decision to downgrade the sovereign credit rating of the United States.
When-Issued Securities, Delayed Delivery Securities
and Forward Commitments
Securities may be purchased on
a when-issued or delayed delivery basis. For example, delivery of and payment for these securities can take place a month or more after the date of the purchase commitment. The purchase price and the interest rate payable, if any, on the securities
are fixed on the purchase commitment date or at the time the settlement date is fixed. The value of such securities is subject to market fluctuation, and for money market instruments and other fixed income securities, no interest accrues to a Fund
until settlement takes place. At the time a Fund makes the commitment to purchase securities on a when-issued or delayed delivery basis, it will record the transaction, reflect the value each day of such securities in determining its NAV and, if
applicable, calculate the maturity for the purposes of average maturity from that date. At the time of settlement, a when-issued security may be valued at less than the purchase price. To facilitate such acquisitions, each Fund will earmark and
reserve Fund assets, in cash or liquid securities, in an amount at least equal to such commitments. On delivery dates for such transactions, each Fund will meet its obligations from maturities or sales of the securities earmarked and reserved for
such purpose and/or from cash flow. If a Fund chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as with the disposition of any other portfolio obligation, incur a gain or loss due to market
fluctuation. Also, a Fund may be disadvantaged if the other party to the transaction defaults.
Forward Commitments.
Securities may be purchased for delivery at a future date, which may increase their overall investment exposure and involves a risk of loss if the value of the securities declines prior to the settlement date. In order
to invest a Fund’s assets immediately, while awaiting delivery of securities purchased on a forward commitment basis, short-term obligations that offer same-day settlement and earnings will normally be purchased.
When a Fund makes a commitment
to purchase a security on a forward commitment basis, cash or liquid securities equal to the amount of such Fund’s commitments will be reserved for payment of the commitment. For the purpose of determining the adequacy of the securities
reserved for payment of commitments, the reserved securities will be valued at market value. If the market value of such securities declines, additional cash, cash equivalents or highly liquid securities will be reserved for payment of the
commitment so that the value of the Fund’s assets reserved for payment of the commitments will equal the amount of such commitments purchased by the respective Fund.
Purchases of securities on a
forward commitment basis may involve more risk than other types of purchases. Securities purchased on a forward commitment basis and the securities held in the respective Fund’s portfolio are subject to changes in value based upon the
public’s perception of the issuer and changes, real or anticipated, in the level of interest rates. Purchasing securities on a forward commitment basis can involve the risk that the yields available in the market when the delivery takes place
may actually be higher or lower than those obtained in the transaction itself. On the settlement date of the forward
commitment transaction, the respective Fund will meet its
obligations from then-available cash flow, sale of securities reserved for payment of the commitment, sale of other securities or, although it would not normally expect to do so, from sale of the forward commitment securities themselves (which may
have a value greater or lesser than such Fund’s payment obligations). The sale of securities to meet such obligations may result in the realization of capital gains or losses. Purchasing securities on a forward commitment basis can also
involve the risk of default by the other party on its obligation, delaying or preventing the Fund from recovering the collateral or completing the transaction.
To the extent a Fund engages in
forward commitment transactions, it will do so for the purpose of acquiring securities consistent with its investment objective and policies and not for the purpose of investment leverage.
ADDITIONAL INFORMATION REGARDING FUND INVESTMENT
PRACTICES
Investments in the Asia Pacific
Region
The economies in
the Asia Pacific region are in all stages of economic development and may be intertwined. The small size of securities markets and the low trading volume in some countries in the Asia Pacific region may lead to a lack of liquidity. The share prices
of companies in the region tend to be volatile and there is a significant possibility of loss. Many of the countries in the region are developing, both politically and economically, and as a result companies in the region may be subject to risks
like nationalization or other forms of government interference, and/or may be heavily reliant on only a few industries or commodities. Investments in the region may also be subject to currency risks, such as restrictions on the flow of money in and
out of the country, extreme volatility relative to the U.S. dollar, and devaluation, all of which could decrease the value of a Fund.
Investments in the European Market
Some of the Funds may invest in
securities in the European Market. A Fund’s performance will be affected by political, social and economic conditions in Europe, such as growth of the economic output (the gross national product), the rate of inflation, the rate at which
capital is reinvested into European economies, the success of governmental actions to reduce budget deficits, the resource self-sufficiency of European countries and interest and monetary exchange rates between European countries. European financial
markets may experience volatility due to concerns about high government debt levels, credit rating downgrades, rising unemployment, the future of the euro as a common currency, possible restructuring of government debt and other government measures
responding to those concerns, and fiscal and monetary controls imposed on member countries of the European Union. The risk of investing in Europe may be heightened due to steps being taken by the United Kingdom to exit the European Union. In
addition, if one or more countries were to exit the European Union or abandon the use of the euro as a currency, the value of investments tied to those countries or the euro could decline significantly and unpredictably.
Investments in the Commonwealth of Puerto Rico
The
Commonwealth of Puerto Rico is currently seeking bankruptcy-like protections from debt and unfunded pension obligations. Puerto Rico’s debt restructuring petition was filed by Puerto Rico’s financial oversight board in the U.S. District
Court in Puerto Rico on May 3, 2017, and was made under a U.S. Congressional rescue law known as the Puerto Rico Oversight Management, and Economic Stability Act (“PROMESA.”) In addition, Hurricane Maria caused significant damage to
Puerto Rico, which could have a long-lasting impact on Puerto Rico’s economy.
A Fund’s investments in
municipal securities may be affected by political and economic developments within the applicable municipality and by the financial condition of the municipality. Certain of the issuers in which a Fund may invest have recently experienced, or may
experience, significant financial difficulties. For example, Puerto Rico, in particular, has been experiencing significant financial difficulties and has entered bankruptcy-like proceedings. The default by issuers of Puerto Rico municipal securities
on their obligations under securities held by a Fund may adversely affect the Fund and cause the Fund to lose the value of its investment in such securities.
An insolvent municipality may
take steps to reorganize its debt, which might include extending debt maturities, reducing the amount of principal or interest, refinancing the debt or taking other measures that may significantly affect the rights of creditors and the value of the
securities issued by the municipality and the value of a Fund’s investments in those securities. Pursuant to Chapter 9 of the U.S. Bankruptcy Code, certain municipalities that meet specific conditions may be provided protection from creditors
while
they develop and negotiate plans for reorganizing their debts.
The U.S. Bankruptcy Code provides that individual U.S. states are not permitted to pass their own laws purporting to bind non-consenting creditors to a restructuring of a municipality’s indebtedness, and thus all such restructurings must be
pursuant to Chapter 9 of the Bankruptcy Code.
Municipal
bankruptcies are relatively rare, and certain provisions of the U.S. Bankruptcy Code governing such bankruptcies are unclear and remain untested. Although Puerto Rico is a U.S. Territory, neither Puerto Rico nor its subdivisions or agencies are
eligible to file under the U.S. Bankruptcy Code in order to seek protection from creditors or restructure their debt. The U.S. Supreme Court has ruled that recent Puerto Rico legislation that would have allowed certain Puerto Rico public
corporations to seek protection from creditors and to restructure their debt is unconstitutional. In June 2016, the U.S. Congress passed the PROMESA, which establishes a federally-appointed fiscal oversight board (“Oversight Board”) to
oversee Puerto Rico’s financial operations and possible debt restructuring. On May 3, 2017, the Oversight Board filed a debt restructuring petition in the U.S. District Court in Puerto Rico to seek bankruptcy-like protections from, at the time
of the filing, approximately $74 billion in debt and approximately $48 billion in unfunded pension obligations. The petition states that the fiscal distress in Puerto Rico is about to worsen exponentially, due to a variety of factors, which include
the elimination of certain federal funds, the exhaustion of public pension funding and recent negative economic growth in Puerto Rico. The petition states that Puerto Rico is unable to satisfy its debt and pension burdens and cannot pay operating
expenses from current revenues, noting that Puerto Rico faces a severe fiscal and socioeconomic crisis. Further legislation by the U.S. Congress or actions by the oversight board established by PROMESA could have a negative impact on the
marketability, liquidity or value of certain investments held by a Fund and could reduce a Fund’s performance.
Investments in the China Region
Investing in China, Hong Kong
and Taiwan (collectively, “the China Region”) involves a high degree of risk and special considerations not typically associated with investing in other more established economies or securities markets. Such risks may include: (a) the
risk of nationalization or expropriation of assets or confiscatory taxation; (b) greater social, economic and political uncertainty (including the risk of war); (c) dependency on exports and the corresponding importance of international trade; (d)
the increasing competition from Asia’s other low-cost emerging economies; (e) greater price volatility and significantly smaller market capitalization of securities markets, particularly in China; (f) substantially less liquidity, particularly
of certain share classes of Chinese securities; (g) currency exchange rate fluctuations and the lack of available currency hedging instruments; (h) higher rates of inflation; (i) controls on foreign investment and limitations on repatriation of
invested capital and on a Fund’s ability to exchange local currencies for U.S. dollars; (j) greater governmental involvement in and control over the economy; (k) the risk that the Chinese government may decide not to continue to support the
economic reform programs implemented since 1978 and could return to the prior, completely centrally planned, economy; (l) the fact that China region companies, particularly those located in China, may be smaller, less seasoned and newly-organized
companies; (m) the difference in, or lack of, auditing and financial reporting standards which may result in unavailability of material information about issuers, particularly in China; (n) the fact that statistical information regarding the economy
of China may be inaccurate or not comparable to statistical information regarding the U.S. or other economies; (o) the less extensive, and still developing, regulation of the securities markets, business entities and commercial transactions; (p) the
fact that the settlement period of securities transactions in foreign markets may be longer; (q) the willingness and ability of the Chinese government to support the Chinese and Hong Kong economies and markets is uncertain; (r) the risk that it may
be more difficult, or impossible, to obtain and/or enforce a judgment than in other countries; (s) the rapidity and erratic nature of growth, particularly in China, resulting in inefficiencies and dislocations; and (t) the risk that, because of the
degree of interconnectivity between the economies and financial markets of China, Hong Kong and Taiwan, any sizable reduction in the demand for goods from China, or an economic downturn in China, could negatively affect the economies and financial
markets of Hong Kong and Taiwan, as well.
Investment in the China Region
is subject to certain political risks. Following the establishment of the People’s Republic of China by the Communist Party in 1949, the Chinese government renounced various debt obligations incurred by China’s predecessor governments,
which obligations remain in default, and expropriated assets without compensation. There can be no assurance that the Chinese government will not take similar action in the future. An investment in a Fund involves risk of a total loss. The political
reunification of China and Taiwan is a highly problematic issue and is unlikely to be settled in the near future. This situation poses a threat to Taiwan’s economy and could negatively affect its stock market. China has committed by treaty to
preserve Hong Kong’s autonomy and its economic, political and social
freedoms for fifty years from the July 1, 1997 transfer of
sovereignty from Great Britain to China. However, if China would exert its authority so as to alter the economic, political or legal structures or the existing social policy of Hong Kong, investor and business confidence in Hong Kong could be
negatively affected, which in turn could negatively affect markets and business performance.
As with all transition
economies, China’s ability to develop and sustain a credible legal, regulatory, monetary, and socioeconomic system could influence the course of outside investment. Hong Kong is closely tied to China, economically and through China’s
1997 acquisition of the country as a Special Autonomous Region (SAR). Hong Kong’s success depends, in large part, on its ability to retain the legal, financial, and monetary systems that allow economic freedom and market expansion.
In addition to the risks inherent
in investing in the emerging markets, the risks of investing in China, Hong Kong, and Taiwan merit special consideration.
People’s Republic of China
. The government of the People’s Republic of China is dominated by the one-party rule of the Chinese Communist Party.
China’s economy has
transitioned from a rigidly central-planned state-run economy to one that has been only partially reformed by more market-oriented policies. Although the Chinese government has implemented economic reform measures, reduced state ownership of
companies and established better corporate governance practices, a substantial portion of productive assets in China are still owned by the Chinese government. The government continues to exercise significant control over regulating industrial
development and, ultimately, control over China’s economic growth through the allocation of resources, controlling payment of foreign currency denominated obligations, setting monetary policy and providing preferential treatment to particular
industries or companies.
Growth has also put a strain
on China’s economy. The government has attempted to slow down the pace of growth through monetary tightening and administrative measures; however that policy started reversing in September 2008 in part due to the current global economic
crisis, which has led to lower levels of economic growth and lower exports and foreign investments in the country. The Chinese government has taken unprecedented steps to shore up economic growth, however, the results of these measures are
unpredictable. Over the long term the country’s major challenges will be dealing with its aging infrastructure, worsening environmental conditions and rapidly widening urban and rural income gap.
As with all transition
economies, China’s ability to develop and sustain a credible legal, regulatory, monetary, and socioeconomic system could influence the course of outside investment. The Chinese legal system, in particular, constitutes a significant risk factor
for investors. The Chinese legal system is based on statutes. Over the past 25 years, Chinese legislative bodies have promulgated laws and regulations dealing with various economic matters such as foreign investment, corporate organization and
governance, commerce, taxation, and trade. However, these laws are relatively new and published court decisions based on these laws are limited and non-binding. The interpretation and enforcement of these laws and regulations are uncertain.
Hong Kong
. In 1997, Great Britain handed over control of Hong Kong to the Chinese mainland government. Since that time, Hong Kong has been governed by a semi-constitution known as the Basic Law, which guarantees a high degree of
autonomy in certain matters until 2047, while defense and foreign affairs are the responsibility of the central government in Beijing. The chief executive of Hong Kong is appointed by the Chinese government. Hong Kong is able to participate in
international organizations and agreements and it continues to function as an international financial center, with no exchange controls, free convertibility of the Hong Kong dollar and free inward and outward movement of capital. The Basic Law
guarantees existing freedoms, including free speech and assembly, press, religion, and the right to strike and travel. Business ownership, private property, the right of inheritance and foreign investment are also protected by law. China has
committed by treaty to preserve Hong Kong’s autonomy until 2047; however, if China were to exert its authority so as to alter the economic, political, or legal structures or the existing social policy of Hong Kong, investor and business
confidence in Hong Kong could be negatively affected, which in turn could negatively affect markets and business performance. In addition, Hong Kong’s economy has entered a recession as a result of the current global economic crisis. Near term
improvement in its economy appears unlikely.
Taiwan
. For decades, a state of hostility has existed between Taiwan and the People’s Republic of China. Beijing has long deemed Taiwan a part of the “one China” and has made a nationalist cause of recovering
it. In the past, China has staged frequent military provocations off the coast of Taiwan and made threats of full-scale military action. Foreign trade has been the engine of rapid growth in Taiwan and has
transformed the island into one of Asia’s great exporting
nations. However, investing in Taiwan involves the possibility of the imposition of exchange controls, such as restrictions on the repatriation of Fund investments or on the conversion of local currency into foreign currencies. As an export-oriented
economy, Taiwan depends on an open world trade regime and remains vulnerable to downturns in the world economy. Taiwanese companies continue to compete mostly on price, producing generic products or branded merchandise on behalf of multinational
companies. Accordingly, these businesses can be particularly vulnerable to currency volatility and increasing competition from neighboring lower-cost countries. Moreover, many Taiwanese companies are heavily invested in mainland China and other
countries throughout Southeast Asia, making them susceptible to political events and economic crises in these parts of the region. Although Taiwan has not yet suffered any major economic setbacks due to the current global economic crisis, it is
possible its economy could still be impacted.
A Fund may hold securities
listed on either the Shanghai and/or Shenzhen stock exchanges. Securities listed on these exchanges are divided into two classes, A shares, which are mostly limited to domestic investors, and B shares, which are allocated for both international and
domestic investors. A Fund’s exposure to securities listed on either the Shanghai or Shenzhen exchanges will initially be through B shares. The government of China has announced plans to exchange B shares for A shares and to merge the two
markets. Such an event may produce greater liquidity and stability for the combined markets. However, it is uncertain whether or the extent to which these plans will be implemented. In addition to B shares, a Fund may also invest in Hong Kong listed
H shares.
Investments in India
Securities of many issuers in
the Indian market may be less liquid and more volatile than securities of comparable domestic issuers, but may offer the potential for higher returns over the long term. Indian securities will generally be denominated in foreign currency, mainly the
rupee. Accordingly, the value of the Fund will fluctuate depending on the rate of exchange between the U.S. dollar and such foreign currency. India has less developed clearance and settlement procedures, and there have been times when settlements
have been unable to keep pace with the volume of securities and have been significantly delayed. The Indian stock exchanges have in the past been subject to closure, broker defaults and broker strikes, and there can be no certainty that this will
not recur. In addition, significant delays are common in registering transfers of securities and the Fund may be unable to sell securities until the registration process is completed and may experience delays in receipt of dividends and other
entitlements.
The value
of investments in Indian securities may also be affected by political and economic developments, social, religious or regional tensions, changes in government regulation and government intervention, high rates of inflation or interest rates and
withholding tax affecting India. The risk of loss may also be increased because there may be less information available about Indian issuers since they are not subject to the extensive accounting, auditing and financial reporting standards and
practices which are applicable in North America. There is also a lower level of regulation and monitoring of the Indian securities market and its participants than in other more developed markets.
Foreign investment in the
securities of issuers in India is usually restricted or controlled to some degree. In addition, the availability of financial instruments with exposure to Indian financial markets may be substantially limited by the restrictions on Foreign
Institutional Investors (“FIIs”). Only registered FIIs and non-Indian funds that comply with certain statutory conditions may make direct portfolio investments in exchange-traded Indian securities. JPMIM is a registered FII. FIIs are
required to observe certain investment restrictions which may limit the Fund’s ability to invest in issuers or to fully pursue its investment objective. Income, gains and initial capital with respect to such investments are freely repatriable,
subject to payment of applicable Indian taxes.
India’s guidelines under
which foreign investors may invest in Indian securities are new and evolving. There can be no assurance that these investment control regimes will not change in a way that makes it more difficult or impossible for a Fund to implement investment
objective or repatriate its income, gains and initial capital from these countries. Similar risks and considerations will be applicable to the extent that a Fund invests in other countries. Recently, certain policies have served to restrict foreign
investment, and such policies may have the effect of reducing demand for such investments.
India may require withholding
on dividends paid on portfolio securities and on realized capital gains. In the past, these taxes have sometimes been substantial. There can be no assurance that restrictions on repatriation of a Fund’s income, gains or initial capital from
India will not occur.
A high proportion of the shares
of many issuers in India may be held by a limited number of persons and financial institutions, which may limit the number of shares available for investment. In addition, further issuances, or the perception that such issuances may occur, of
securities by Indian issuers in which a Fund has invested could dilute the earnings per share of a Fund’s investment and could adversely affect the market price of such securities. Sales of securities by such issuer’s major shareholders,
or the perception that such sales may occur, may also significantly and adversely affect the market price of such securities and, in turn, a Fund’s investment. The prices at which investments may be acquired may be affected by trading by
persons with material non-public information and by securities transactions by brokers in anticipation of transactions by a Fund in particular securities. Similarly, volume and liquidity in the bond markets in India are less than in the United
States and, at times, price volatility can be greater than in the United States. The limited liquidity of securities markets in India may also affect a Fund’s ability to acquire or dispose of securities at the price and time it wishes to do
so. In addition, India’s securities markets are susceptible to being influenced by large investors trading significant blocks of securities.
India’s stock market is
undergoing a period of growth and change which may result in trading volatility and difficulties in the settlement and recording of transactions, and in interpreting and applying the relevant law and regulations. The securities industry in India is
comparatively underdeveloped. Stockbrokers and other intermediaries in India may not perform as well as their counterparts in the United States and other more developed securities markets.
Political and economic
structures in India are undergoing significant evolution and rapid development, and may lack the social, political and economic stability characteristic of the United States. The risks described above, including the risks of nationalization or
expropriation of assets, may be heightened. In addition, unanticipated political or social developments may affect the values of investments in India and the availability of additional investments. The laws in India relating to limited liability of
corporate shareholders, fiduciary duties of officers and directors, and the bankruptcy of state enterprises are generally less well developed than or different from such laws in the United States. It may be more difficult to obtain or enforce a
judgment in the courts in India than it is in the United States. Monsoons and natural disasters also can affect the value of investments.
Religious and border disputes
persist in India. Moreover, India has from time to time experienced civil unrest and hostilities with neighboring countries such as Pakistan. The Indian government has confronted separatist movements in several Indian states. The longstanding
dispute with Pakistan over the bordering Indian state of Jammu and Kashmir, a majority of whose population is Muslim, remains unresolved. If the Indian government is unable to control the violence and disruption associated with these tensions, the
results could destabilize the economy and consequently, adversely affect the Fund’s investments.
A Fund may use P-notes.
Indian-based brokerages may buy Indian-based securities and then issue P-notes to foreign investors. Any dividends or capital gains collected from the underlying securities may be remitted to the foreign investors. However, unlike ADRs, notes are
subject to credit risk based on the uncertainty of the counterparty’s (i.e., the Indian-based brokerage’s) ability to meet its obligations.
Investments in Japan
The Japanese economy may be
subject to economic, political and social instability, which could have a negative impact on Japanese securities. In the past, Japan’s economic growth rate has remained relatively low, and it may remain low in the future. At times, the
Japanese economy has been adversely impacted by government intervention and protectionism, changes in its labor market, and an unstable financial services sector. International trade, government support of the financial services sector and other
troubled sectors, government policy, natural disasters and/or geopolitical developments could significantly affect the Japanese economy. A significant portion of Japan’s trade is conducted with developing nations and can be affected by
conditions in these nations or by currency fluctuations. Japan is an island state with few natural resources and limited land area and is reliant on imports for its commodity needs. Any fluctuations or shortages in the commodity markets could have a
negative impact on the Japanese economy.
Investments in the Middle East and Africa
Certain countries in the
region are in early stages of development. As a result, there may be a high concentration of market capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of
investors and financial intermediaries. Brokers may be fewer in number and less well capitalized than brokers in more developed regions. Certain economies in the region depend to a significant degree upon exports of commodities and are vulnerable
to
changes in commodity prices, which in turn may be affected by a
variety of factors. In addition, certain governments in the region have exercised substantial influence over the private sector, including ownership or control of companies. Governmental actions in the future could have a significant economic
impact. Certain armed conflict, territorial disputes, historical animosities, regional instability, terrorist activities and religious, ethnic and/or socioeconomic unrest. Such developments could have a negative effect on economic growth and could
result in significant disruptions in the securities markets, including securities held by a Fund. Certain Middle Eastern and African countries have currencies pegged to the U.S. dollar, which, if abandoned, could cause sudden and significant
currency adjustments, which could impact the Fund’s investment returns in those countries. The legal systems, and the unpredictability thereof, in certain countries in the region also may have an adverse impact on the Fund and may expose the
Fund to significant or unlimited liabilities. Investment in certain countries in the region by the Fund may be restricted or prohibited under applicable regulation, and the Fund, as a foreign investor, may be required to obtain approvals and may
have to invest on less advantageous terms (including price) than nationals. A Fund’s investments in securities of a country in the region may be subject to economic sanctions or other government restrictions, which may negatively impact the
value or liquidity of the Fund’s investments. Investments in the region may adversely impact the operations of the Fund through the delay of the Fund’s ability to exercise its rights as a security holder. Substantial limitations may
exist in the region with respect to the Fund’s ability to repatriate investment income, capital gains or its investment. Securities which are subject to material legal restrictions on repatriation of assets will be considered illiquid
securities by the Fund and subject to the limitations on illiquid investments.
Investments in Latin America
As an emerging market, Latin
America has long suffered from political, economic, and social instability. For investors, this has meant additional risk caused by periods of regional conflict, political corruption, totalitarianism, protectionist measures, nationalization,
hyperinflation, debt crises, sudden and large currency devaluation, and intervention by the military in civilian and economic spheres. However, much has changed in the past decade. Democracy is beginning to become well established in some countries.
A move to a more mature and accountable political environment is well under way. Domestic economies have been deregulated, privatization of state-owned companies is almost completed and foreign trade restrictions have been relaxed. Nonetheless, to
the extent that events such as those listed above continue in the future, they could reverse favorable trends toward market and economic reform, privatization, and removal of trade barriers, and result in significant disruption in securities markets
in the region. Investors in the region continue to face a number of potential risks. Governments of many Latin American countries have exercised and continue to exercise substantial influence over many aspects of the private sector. Governmental
actions in the future could have a significant effect on economic conditions in Latin American countries, which could affect the companies in which a Fund invests and, therefore, the value of Fund shares.
Certain Latin American
countries may experience sudden and large adjustments in their currency which, in turn, can have a disruptive and negative effect on foreign investors. For example, in late 1994 the Mexican peso lost more than one-third of its value relative to the
U.S. dollar. In 1999, the Brazilian real lost 30% of its value against the U.S. dollar. Certain Latin American countries may impose restrictions on the free conversion of their currency into foreign currencies, including the U.S. dollar. There is no
significant foreign exchange market for many currencies and it would, as a result, be difficult for certain Funds to engage in foreign currency transactions designed to protect the value of the Funds’ interests in securities denominated in
such currencies.
Almost
all of the region’s economies have become highly dependent upon foreign credit and loans from external sources to fuel their state-sponsored economic plans. Government profligacy and ill-conceived plans for modernization have exhausted these
resources with little benefit accruing to the economy and most countries have been forced to restructure their loans or risk default on their debt obligations. In addition, interest on the debt is subject to market conditions and may reach levels
that would impair economic activity and create a difficult and costly environment for borrowers. Accordingly, these governments may be forced to reschedule or freeze their debt repayment, which could negatively affect the stock market. Latin
American economies that depend on foreign credit and loans could fall into recession because of tighter international credit supplies due to the current global economic crisis.
Substantial limitations may
exist in certain countries with respect to a Fund’s ability to repatriate investment income, capital or the proceeds of sales of securities. A Fund could be adversely affected by delays in, or a refusal to grant, any required governmental
approval for repatriation of capital, as well as by the application to the Fund of any restrictions on investments.
Certain Latin American
countries have entered into regional trade agreements that are designed to, among other things, reduce barriers between countries, increase competition among companies and reduce government subsidies in certain industries. No assurance can be given
that these changes will be successful in the long term, or that these changes will result in the economic stability intended. There is a possibility that these trade arrangements will not be fully implemented, or will be partially or completely
unwound. It is also possible that a significant participant could choose to abandon a trade agreement, which could diminish its credibility and influence. Any of these occurrences could have adverse effects on the markets of both participating and
non-participating countries, including sharp appreciation or depreciation of participants’ national currencies and a significant increase in exchange rate volatility, a resurgence in economic protectionism, an undermining of confidence in the
Latin American markets, an undermining of Latin American economic stability, the collapse or slowdown of the drive towards Latin American economic unity, and/or reversion of the attempts to lower government debt and inflation rates that were
introduced in anticipation of such trade agreements. Such developments could have an adverse impact on a Fund’s investments in Latin America generally or in specific countries participating in such trade agreements.
Terrorism and related
geo-political risks have led, and may in the future lead, to increased short-term market volatility and may have adverse long-term effects on world economies and markets generally.
Investments in Russia
Investing in Russian
securities is highly speculative and involves significant risks and special considerations not typically associated with investing in the securities markets of the U.S. and most other developed countries.
Over the past century, Russia
has experienced political, social and economic turbulence and has endured decades of communist rule under which the property of tens of millions of its citizens was collectivized into state agricultural and industrial enterprises. Since the collapse
of the Soviet Union, Russia’s government has been faced with the daunting task of stabilizing its domestic economy, while transforming it into a modern and efficient structure able to compete in international markets and respond to the needs
of its citizens. However, to date, many of the country’s economic reform initiatives have floundered as the proceeds of International Monetary Fund and other economic assistance have been squandered or stolen. In this environment, there is
always the risk that the nation’s government will abandon the current program of economic reform and replace it with radically different political and economic policies that would be detrimental to the interests of foreign investors. This
could entail a return to a centrally planned economy and nationalization of private enterprises similar to what existed in the Soviet Union.
Many of Russia’s
businesses have failed to mobilize the available factors of production because the country’s privatization program virtually ensured the predominance of the old management teams that are largely non-market-oriented in their management
approach. Poor accounting standards, inept management, pervasive corruption, insider trading and crime, and inadequate regulatory protection for the rights of investors all pose a significant risk, particularly to foreign investors. In addition,
there is the risk that the Russian tax system will not be reformed to prevent inconsistent, retroactive, and/or exorbitant taxation, or, in the alternative, the risk that a reformed tax system may result in the inconsistent and unpredictable
enforcement of the new tax laws.
Compared to most national
stock markets, the Russian securities market suffers from a variety of problems not encountered in more developed markets. There is little long-term historical data on the Russian securities market because it is relatively new and a substantial
proportion of securities transactions in Russia are privately negotiated outside of stock exchanges. The inexperience of the Russian securities market and the limited volume of trading in securities in the market may make obtaining accurate prices
on portfolio securities from independent sources more difficult than in more developed markets. Additionally, because of less stringent auditing and financial reporting standards that apply to companies operating in Russia, there is little solid
corporate information available to investors. As a result, it may be difficult to assess the value or prospects of an investment in Russian companies. Stocks of Russian companies also may experience greater price volatility than stocks of U.S.
companies.
Settlement,
clearing and registration of securities transactions in Russia are subject to additional risks because of the recent formation of the Russian securities market, the underdeveloped state of the banking and telecommunications systems, and the overall
legal and regulatory framework. Prior to 2013, there was no central registration system for equity share registration in Russia and registration was carried out by either the issuers themselves or by registrars located throughout Russia. Such
registrars were not
necessarily subject to effective state supervision nor were they
licensed with any governmental entity, thereby increasing the risk that a Fund could lose ownership of its securities through fraud, negligence, or even mere oversight. With the implementation of the National Settlement Depository
(“NSD”) in Russia as a recognized central securities depository, title to Russian equities is now based on the records of the Depository and not the registrars. Although the implementation of the NSD is generally expected to decrease the
risk of loss in connection with recording and transferring title to securities, issues resulting in loss still might occur. In addition, issuers and registrars are still prominent in the validation and approval of documentation requirements for
corporate action processing in Russia. Because the documentation requirements and approval criteria vary between registrars and/or issuers, there remain unclear and inconsistent market standards in the Russian market with respect to the completion
and submission of corporate action elections. To the extent that a Fund suffers a loss relating to title or corporate actions relating to its portfolio securities, it may be difficult for the Fund to enforce its rights or otherwise remedy the
loss.
The Russian economy
is heavily dependent upon the export of a range of commodities including most industrial metals, forestry products, oil, and gas. Accordingly, it is strongly affected by international commodity prices and is particularly vulnerable to any weakening
in global demand for these products.
Foreign investors also face a
high degree of currency risk when investing in Russian securities and a lack of available currency hedging instruments. In a surprise move in August 1998, Russia devalued the ruble, defaulted on short-term domestic bonds, and imposed a moratorium on
the repayment of its international debt and the restructuring of the repayment terms. These actions have negatively affected Russian borrowers’ ability to access international capital markets and have had a damaging impact on the Russian
economy. In light of these and other government actions, foreign investors face the possibility of further devaluations. In addition, there is a risk that the government may impose capital controls on foreign portfolio investments in the event of
extreme financial or political crisis. Such capital controls would prevent the sale of a portfolio of foreign assets and the repatriation of investment income and capital. The current economic turmoil in Russia and the effects on the current global
economic crisis on the Russian economy may cause flight from the Russian ruble into U.S. dollars and other currencies, which could force the Russian central bank to spend reserves to maintain the value of the ruble. If the Russian central bank
falters in its defense of the ruble, there could be additional pressure on Russia’s banks and its currency.
The United States may impose
economic sanctions against companies in various sectors of the Russian economy, including, but not limited to, the financial services, energy, metals and mining, engineering, and defense and defense-related materials sectors. These sanctions, if
imposed, could impair a Fund’s ability to invest in securities it views as attractive investment opportunities. For example, a Fund may be prohibited from investing in securities issued by companies subject to such sanctions. In addition, the
sanctions may require a Fund to freeze its existing investments in Russian companies, prohibiting the Fund from selling or otherwise transacting in these investments. This could impact a Fund’s ability to sell securities or other financial
instruments as needed to meet shareholder redemptions.
Terrorism and related
geo-political risks have led, and may in the future lead, to increased short-term market volatility and may have adverse long-term effects on world economies and markets generally.
RISK MANAGEMENT
Each actively managed Fund may
employ non-hedging risk management techniques. Risk management strategies are used to keep the Funds fully invested and to reduce the transaction costs associated with cash flows into and out of a Fund. The Funds use a wide variety of instruments
and strategies for risk management and the examples below are not meant to be exhaustive.
Examples of risk management
strategies include synthetically altering the duration of a portfolio or the mix of securities in a portfolio. For example, if the Adviser wishes to extend maturities in a fixed income portfolio in order to take advantage of an anticipated decline
in interest rates, but does not wish to purchase the underlying long-term securities, it might cause a Fund to purchase futures contracts on long term debt securities. Likewise, if the Adviser wishes to gain exposure to an instrument but does not
wish to purchase the instrument it may use swaps and related instruments. Similarly, if the Adviser wishes to decrease exposure to fixed income securities or purchase equities, it could cause the Fund to sell futures contracts on debt securities and
purchase futures contracts on a stock index. Such non-hedging risk management techniques involve leverage, and thus, present, as do all leveraged transactions, the possibility of losses as well as gains that are greater than if these techniques
involved the purchase and sale of the securities themselves rather than their synthetic derivatives.
RISK RELATED TO MANAGEMENT OF CERTAIN SIMILAR
FUNDS
The name,
investment objective and policies of certain Funds are similar to other funds advised by the adviser or its affiliates. However, the investment results of a Fund may be higher or lower than, and there is no guarantee that the investment results of
the Fund will be comparable to, any other of these funds.
DIVERSIFICATION
Certain
Funds are diversified funds and as such intend to meet the diversification requirements of the 1940 Act. Please refer to the Funds’ Prospectuses for information about whether a Fund is a diversified or non-diversified Fund. Current 1940 Act
diversification requirements require that with respect to 75% of the assets of a Fund, the Fund may not invest more than 5% of its total assets in the securities of any one issuer or own more than 10% of the outstanding voting securities of any one
issuer, except cash or cash items, obligations of the U.S. government, its agencies and instrumentalities, and securities of other investment companies. As for the other 25% of a Fund’s assets not subject to the limitation described above,
there is no limitation on investment of these assets under the 1940 Act, so that all of such assets may be invested in securities of any one issuer. Investments not subject to the limitations described above could involve an increased risk to a Fund
should an issuer be unable to make interest or principal payments or should the market value of such securities decline.A Fund is considered “non-diversified” because a relatively high percentage of the Fund’s assets may be
invested in the securities of a single issuer or a limited number of issuers, primarily within the same economic sector. A non-diversified Fund’s portfolio securities, therefore, may be more susceptible to any single economic, political, or
regulatory occurrence than the portfolio securities of a more diversified investment company.
Regardless of whether a Fund
is diversified under the 1940 Act, all of the Funds will comply with the diversification requirements imposed by the Code for qualification as a regulated investment company. See “Distributions and Tax Matters.”
DISTRIBUTIONS AND TAX MATTERSThe following
discussion is a brief summary of some of the important federal (and, where noted, state) income tax consequences affecting each Fund and its shareholders. There may be other tax considerations applicable to particular shareholders. Except as
otherwise noted in a Fund’s Prospectus, the Funds are not intended for foreign shareholders. As a result, this section does not address in detail the tax consequences affecting any shareholder who, as to the U.S., is a nonresident alien
individual, foreign trust or estate, foreign corporation, or foreign partnership. This section is based on the Code, the regulations thereunder, published rulings and court decisions, all as currently in effect. These laws are subject to change,
possibly on a retroactive basis. The following tax discussion is very general; therefore, prospective investors are urged to consult their tax advisors about the impact an investment in a Fund may have on their own tax situations and the possible
application of foreign, state and local law.Each Fund generally will be treated as a separate entity for federal income tax purposes, and thus the provisions of the Code generally will be applied to each Fund separately. Net long-term and short-term
capital gain, net income and operating expenses therefore will be determined separately for each Fund.
Special tax rules apply to
investments held through defined contribution plans and other tax-qualified plans. Shareholders should consult their tax advisors to determine the suitability of shares of the Fund as an investment through such plans.
Qualification as a Regulated Investment Company
Each Fund intends to elect to
be treated and qualify each year as a regulated investment company under Subchapter M of the Code. In order to qualify for the special tax treatment accorded regulated investment companies and their shareholders, each Fund must, among other
things:
(a)
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derive at least
90% of its gross income for each taxable year from (i) dividends, interest, payments with respect to certain securities loans, and gain from the sale or other disposition of stock, securities, or foreign currencies, or other income (including, but
not limited to, gain from options, swaps, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies and (ii) net income derived from interests in “qualified publicly traded
partnerships” (“QPTPs”, defined below);
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(b)
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diversify
its holdings so that, at the end of each quarter of the Fund’s taxable year, (i) at least 50% of the market value of the Fund’s total assets is represented by cash and cash items, U.S.
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government
securities, securities of other regulated investment companies, and other securities, limited in respect of any one issuer to an amount not greater than 5% of the value of the Fund’s total assets and not more than 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the Fund’s total assets is invested (x) in the securities (other than cash or cash items, or securities issued by the U.S. government or other regulated investment
companies) of any one issuer or of two or more issuers that the Fund controls and that are engaged in the same, similar, or related trades or businesses, or (y) in the securities of one or more QPTPs. In the case of a Fund’s investments in
loan participations, the Fund shall treat both the financial intermediary and the issuer of the underlying loan as an issuer for the purposes of meeting this diversification requirement; and
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(c)
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distribute
with respect to each taxable year at least 90% of the sum of its investment company taxable income (as that term is defined in the Code, without regard to the deduction for dividends paid — generally, taxable ordinary income and any excess of
net short-term capital gain over net long-term capital loss) and net tax-exempt interest income, for such taxable year.
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In general, for purposes of the
90% gross income requirement described in paragraph (a) above, income derived from a partnership will be treated as qualifying income only to the extent such income is attributable to items of income of the partnership which would be qualifying
income if realized by the regulated investment company. However, 100% of the net income derived from an interest in a “qualified publicly traded partnership” (defined as a partnership (x) interests in which are traded on an established
securities markets or readily tradable on a secondary market as the substantial equivalents thereof, (y) that derives at least 90% of its income from passive income sources defined in Section 7704(d) of the Code, and (z) that derives less than 90%
of its income from the qualifying income described in (a)(i) above) will be treated as qualifying income. Although income from a QPTP is qualifying income, as discussed above, investments in QPTPs cannot exceed 25% of the Fund’s assets. In
addition, although in general the passive loss rules of the Code do not apply to regulated investment companies, such rules do apply to a regulated investment company with respect to items attributable to an interest in a QPTP.
Gains from foreign currencies
(including foreign currency options, foreign currency swaps, foreign currency futures and foreign currency forward contracts) currently constitute qualifying income for purposes of the 90% test, described in paragraph (a) above. However, the
Treasury Department has the authority to issue regulations (possibly with retroactive effect) excluding from the definition of “qualifying income” a fund’s foreign currency gains to the extent that such income is not directly
related to the Fund’s principal business of investing in stock or securities.
For purposes of paragraph (b)
above, the term “outstanding voting securities of such issuer” will include the equity securities of a QPTP. A Fund’s investment in MLPs may qualify as an investment in (1) a QPTP, (2) a “regular” partnership, (3) a
“passive foreign investment company” (a “PFIC”) or (4) a corporation for U.S. federal income tax purposes. The treatment of particular MLPs for U.S. federal income tax purposes will affect the extent to which a Fund can
invest in MLPs. The U.S. federal income tax consequences of a Fund’s investments in “PFICs” and “regular” partnerships are discussed in greater detail below.
If a Fund qualifies for a
taxable year as a regulated investment company that is accorded special tax treatment, the Fund will not be subject to federal income tax on income distributed in a timely manner to its shareholders in the form of dividends (including Capital Gain
Dividends, defined below). If a Fund were to fail to qualify as a regulated investment company accorded special tax treatment in any taxable year, the Fund would be subject to taxation on its taxable income at corporate rates, and all distributions
from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gain, would be taxable to shareholders as ordinary income. Some portions of such distributions may be eligible for the dividends-received
deduction in the case of corporate shareholders and for treatment as qualified dividend income in the case of individual shareholders. In addition, the Fund could be required to recognize unrealized gain, pay substantial taxes and interest, and make
substantial distributions before re-qualifying as a regulated investment company that is accorded special tax treatment.
Each Fund intends to distribute
at least annually to its shareholders all or substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction) and may distribute its net capital gain (that is the excess of net long-term capital
gain over net short-term capital loss). Investment company taxable income which is retained by a Fund will be subject to tax at regular corporate tax rates. A Fund might also retain for investment its net capital gain. If a Fund does retain such net
capital gain, such gain will be subject to tax at regular corporate rates on the amount retained, but the Fund may designate the retained amount as undistributed capital gain in a notice to its shareholders who (i)
will be required to include in income for federal income tax
purposes, as long-term capital gain, their respective shares of the undistributed amount, and (ii) will be entitled to credit their respective shares of the tax paid by the Fund on such undistributed amount against their federal income tax
liabilities, if any, and to claim refunds to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of a Fund will be increased by an amount equal under current law to the
difference between the amount of undistributed capital gain included in the shareholder’s gross income and the tax deemed paid by the shareholder under clause (ii) of the preceding sentence.
In determining its net capital
gain, including in connection with determining the amount available to support a Capital Gain Dividend, its taxable income and its earnings and profits, a Fund may elect to treat part or all of any post-October capital loss (defined as any net
capital loss attributable to the portion of the taxable year after October 31, or if there is no net capital loss, any net long-term capital loss or any net short-term capital loss attributable to the portion of the taxable year after that date) or
late-year ordinary loss (generally, (i) net ordinary loss from the sale, exchange or other taxable disposition of property, attributable to the portion of the taxable year after October 31, plus (ii) other net ordinary loss attributable to the
portion of the taxable year after December 31) as if incurred in the succeeding taxable year.
Excise Tax on Regulated Investment Companies
If a Fund fails to distribute
in a calendar year an amount at least equal to the sum of 98% of its ordinary income (taking into account certain deferrals and elections) for such year and 98.2% of its capital gain net income (adjusted for certain ordinary losses) for the one-year
period ending October 31 (or later if the Fund is permitted to elect and so elects), plus any retained amount from the prior year, the Fund will be subject to a nondeductible 4% excise tax on the undistributed amounts. The Funds intend to make
distributions sufficient to avoid imposition of the 4% excise tax, although each Fund reserves the right to pay an excise tax rather than make an additional distribution when circumstances warrant (e.g., the excise tax amount is deemed by a Fund to
be de minimis). Certain derivative instruments give rise to ordinary income and loss. If a Fund has a taxable year that begins in one calendar year and ends in the next calendar year, the Fund will be required to make this excise tax distribution
during its taxable year. There is a risk that a Fund could recognize income prior to making this excise tax distribution and could recognize losses after making this distribution. As a result, all or a portion of an excise tax distribution could
constitute a return of capital (see discussion below).
Fund Distributions
The Funds anticipate
distributing substantially all of their net investment income for each taxable year. Distributions are taxable to shareholders even if they are paid from income or gain earned by the Fund before a shareholder’s investment (and thus were
included in the price the shareholder paid). Distributions are taxable whether shareholders receive them in cash or reinvest them in additional shares. A shareholder whose distributions are reinvested in shares will be treated as having received a
dividend equal to the amount of cash that the shareholder would have received if such shareholder had elected to receive the distribution in cash.
Dividends and distributions on
a Fund’s shares generally are subject to federal income tax as described herein to the extent they do not exceed the Fund’s realized income and gains, even though such dividends and distributions may represent economically a return of a
particular shareholder’s investment. Such dividends and distributions are likely to occur in respect of shares purchased at a time when the Fund’s NAV reflects gains that are either (i) unrealized, or (ii) realized but not
distributed.
For federal
income tax purposes, distributions of net investment income generally are taxable as ordinary income. Taxes on distributions of capital gain are determined by how long a Fund owned the investment that generated it, rather than how long a shareholder
may have owned shares in the Fund. Distributions of net capital gain from the sale of investments that a Fund owned for more than one year and that are properly designated by the Fund as capital gain dividends (“Capital Gain Dividends”)
will be taxable as long-term capital gain. Distributions of capital gain generally are made after applying any available capital loss carryovers. The maximum individual rate applicable to long-term capital gains is either 15% or 20%, depending on
whether the individual’s income exceeds certain threshold amounts. A distribution of gain from the sale of investments that a Fund owned for one year or less will be taxable as ordinary income. Distributions attributable to gain from the sale
of MLPs that is characterized as ordinary income under the Code’s recapture provisions will be taxable as ordinary income.
Distributions of investment
income designated by a Fund as derived from “qualified dividend income” will be taxed in the hands of individuals at the rates applicable to long-term capital gain. In order for some portion of the dividends received by a Fund
shareholder to be qualified dividend income, the Fund must meet certain holding-period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio, and the shareholder must meet certain holding-period and other
requirements with respect to the Fund’s shares. A dividend will not be treated as qualified dividend income (at either the Fund or shareholder level) (i) if the dividend is received with respect to any share of stock held for fewer than 61
days during the 121-day period beginning on the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90
days before such date), (ii) to the extent that the recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property, (iii) if the
recipient elects to have the dividend income treated as investment interest for purposes of the limitation on deductibility of investment interest, or (iv) if the dividend is received from a foreign corporation that is (a) not eligible for the
benefits of a comprehensive income tax treaty with the U.S. (with the exception of dividends paid on stock of such a foreign corporation readily tradable on an established securities market in the U.S.) or (b) treated as a PFIC. The amount of a
Fund’s distributions that would otherwise qualify for this favorable tax treatment may be reduced as a result of a Fund’s securities lending activities or high portfolio turnover rate.
In general, distributions of
investment income designated by a Fund as derived from qualified dividend income will be treated as qualified dividend income by a non-corporate taxable shareholder so long as the shareholder meets the holding period and other requirements described
above with respect to the Fund’s shares. In any event, if the qualified dividend income received by each Fund during any taxable year is equal to or greater than 95% of its “gross income”, then 100% of the Fund’s dividends
(other than dividends that are properly designated as Capital Gain Dividends) will be eligible to be treated as qualified dividend income. For this purpose, the only gain included in the term “gross income” is the excess of net
short-term capital gain over net long-term capital loss.
If a Fund receives dividends
from an underlying fund, and the underlying fund designates such dividends as “qualified dividend income,” then the Fund may, in turn, designate a portion of its distributions as “qualified dividend income” as well, provided
the Fund meets the holding-period and other requirements with respect to shares of the underlying fund.
Any loss realized upon a
taxable disposition of shares held for six months or less will be treated as long-term capital loss to the extent of any Capital Gain Dividends received by the shareholder with respect to those shares. All or a portion of any loss realized upon a
taxable disposition of Fund shares will be disallowed if other shares of such Fund are purchased within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed
loss.
A distribution paid
to shareholders by a Fund in January of a year generally is deemed to have been received by shareholders on December 31 of the preceding year, if the distribution was declared and payable to shareholders of record on a date in October, November, or
December of that preceding year. The Funds will provide federal tax information annually, including information about dividends and distributions paid during the preceding year to taxable investors and others requesting such information.
If a Fund makes a distribution
to its shareholders in excess of its current and accumulated “earnings and profits” in any taxable year, the excess distribution will be treated as a return of capital to the extent of each shareholder’s basis (for tax purposes) in
its shares, and any distribution in excess of basis will be treated as capital gain. A return of capital is not taxable, but it reduces the shareholder’s basis in its shares, which reduces the loss (or increases the gain) on a subsequent
taxable disposition by such shareholder of the shares.
Dividends of net investment
income received by corporate shareholders (other than shareholders that are S corporations) of a Fund will qualify for the dividends-received deduction generally available to corporations to the extent of the amount of qualifying dividends received
by the Fund from domestic corporations for the taxable year. A dividend received by a Fund will not be treated as a qualifying dividend (1) if the stock on which the dividend is paid is considered to be “debt-financed” (generally,
acquired with borrowed funds), (2) if it has been received with respect to any share of stock that the Fund has held less than 46 days (91 days in the case of certain preferred stock) during the 91-day period beginning on the date which is 45 days
before the date on which such share becomes ex-dividend with respect to such dividend (during the 181-day period beginning 90 days before such date in the case of certain preferred stock) or (3) to the extent that the Fund is under an obligation
(pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property.
Moreover, the dividends-received deduction may be disallowed or
reduced (1) if the corporate shareholder fails to satisfy the foregoing requirements with respect to its shares of a Fund or (2) by application of the Code. However, any distributions received by a Fund from REITs and PFICs will not qualify for the
corporate dividends-received deduction. The amount eligible for the dividends received deduction may also be reduced as a result of a Fund’s securities lending activities or high portfolio turnover rate.
Individuals (and certain other
non-corporate entities) are generally eligible for a 20% deduction with respect to taxable ordinary dividends from REITs and certain taxable income from publicly traded partnerships. Currently, there is not a regulatory mechanism for RICs to
pass-through the special character of this income to shareholders. An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from a Fund and net gains from
redemptions or other taxable dispositions of Fund shares, but excluding any exempt interest dividends from a Fund) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the
case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds certain threshold amounts.
Sale or Redemption of Shares
The sale, exchange, or
redemption of Fund shares may give rise to a gain or loss. In general, any gain or loss arising from (or treated as arising from) the sale or redemption of shares of the Fund will be considered capital gain or loss and will be long-term capital gain
or loss if the shares were held for more than one year. However, any capital loss arising from the sale or redemption of shares held for six months or less will be treated as a long-term capital loss to the extent of the amount of capital gain
dividends received on (or undistributed capital gains credited with respect to) such shares. Additionally, any loss realized upon the sale or exchange of Fund shares with a tax holding period of six months or less may be disallowed to the extent of
any distributions treated as exempt interest dividends with respect to such shares. The maximum individual rate applicable to long-term capital gains is either 15% or 20%, depending on whether the individual’s income exceeds certain threshold
amounts. Capital gain of a corporate shareholder is taxed at the same rate as ordinary income.
Fund Investments
The following applies to Fund
investments to the extent a Fund is permitted to invest in such investments.
Certain investments of the
Funds, including transactions in options, swaptions, futures contracts, forward contracts, straddles, swaps, short sales, foreign currencies, inflation-linked securities and foreign securities, including for hedging purposes, will be subject to
special tax rules (including mark-to-market, constructive sale, straddle, wash sale and short sale rules). In a given case, these rules may accelerate income to a Fund, defer losses to a Fund, cause adjustments in the holding periods of a
Fund’s securities, convert long-term capital gain into short-term capital gain, convert short-term capital losses into long-term capital loss, or otherwise affect the character of a Fund’s income. These rules could therefore affect the
amount, timing and character of distributions to shareholders and cause differences between a Fund’s book income and its taxable income. If a Fund’s book income exceeds its taxable income, the distribution (if any) of such excess
generally will be treated as (i) a dividend to the extent of the Fund’s remaining earnings and profits (including earnings and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the
recipient’s basis in its shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset. If a Fund’s book income is less than taxable income, the Fund could be required to make distributions exceeding book income to
qualify as a regulated investment company that is accorded special tax treatment. Income earned as a result of these transactions would, in general, not be eligible for the dividends-received deduction or for treatment as exempt-interest dividends
when distributed to shareholders. The Funds will endeavor to make any available elections pertaining to such transactions in a manner believed to be in the best interest of each Fund and its shareholders.
The Fund’s participation
in loans of securities may affect the amount, timing, and character of distributions to shareholders. With respect to any security subject to a securities loan, any (i) amounts received by the Fund in place of dividends earned on the security during
the period that such security was not directly held by the Fund will not give rise to qualified dividend income and (ii) withholding taxes accrued on dividends during the period that such security was not directly held by the Fund will not qualify
as a foreign tax paid by the Fund and therefore cannot be passed through to shareholders even if the Fund meets the requirements described in “Foreign Taxes,” below.
Certain debt securities
purchased by the Funds are sold at an original issue discount and thus do not make periodic cash interest payments. Similarly, zero-coupon bonds do not make periodic interest payments. Generally, the amount of the original issue discount is treated
as interest income and is included in taxable income (and required to be distributed) over the term of the debt security even though payment of that amount is not received until a later time, usually when the debt security matures. In addition,
payment-in-kind securities will give rise to income that is required to be distributed and is taxable even though the Fund holding the security receives no interest payment in cash on the security during the year. Because each Fund distributes
substantially all of its net investment income to its shareholders (including such imputed interest), a Fund may have to sell portfolio securities in order to generate the cash necessary for the required distributions. Such sales may occur at a time
when the Adviser would not otherwise have chosen to sell such securities and may result in a taxable gain or loss. Some of the Funds may invest in inflation-linked debt securities. Any increase in the principal amount of an inflation-linked debt
security will be original issue discount, which is taxable as ordinary income and is required to be distributed, even though the Fund will not receive the principal, including any increase thereto, until maturity. A Fund investing in such securities
may be required to liquidate other investments, including at times when it is not advantageous to do so, in order to satisfy its distribution requirements and to eliminate any possible taxation at the Fund level. Certain debt securities that may be
acquired by a Fund in the secondary market may be treated as having market discount. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having market discount is treated as ordinary income
to the extent the gain, or principal payment, does not exceed the “accrued market discount” on such debt security. Market discount generally accrues in equal daily installments. A Fund may make one or more of the elections applicable to
debt securities having market discount, which could affect the character and timing of recognition of income.
Recent tax legislation may,
pending further regulatory guidance, require a Fund to accrue currently market discount with respect to a security. A Fund may invest to a significant extent in debt obligations that are in the lowest rated categories (or are unrated), including
debt obligations of issuers that are not currently paying interest or that are in default. Investments in debt obligations that are at risk of being in default (or are presently in default) present special tax issues for a Fund. Tax rules are not
entirely clear about issues such as when a Fund 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 and how payments received on obligations
in default should be allocated between principal and income. These and other related issues will be addressed by each Fund when, as and if it invests in such securities, in order to seek to ensure that it distributes sufficient income to preserve
its status as a regulated investment company and does not become subject to U.S. federal income taxation or any excise tax.
A Fund’s investments in
foreign currencies, foreign currency denominated debt securities and certain options, futures or forward foreign currency contracts (and similar instruments) will be subject to special tax rules. Generally, transactions in foreign currencies give
rise to ordinary income or loss. An election under Section 988(a)(1)(B) may be available to treat foreign currency gain or loss attributable to certain forward, futures and option contracts as capital, including certain “foreign currency
contracts.” A “foreign currency contract” is a contract that (1) requires delivery of, or settlement of, a foreign currency that is a currency in which positions are also traded through regulated futures contracts, (2) is traded in
the interbank market, and (3) is entered into at an arm’s-length price determined by reference to the price in the interbank market. If this Section 988(a)(1)(B) election is made, foreign currency contracts are treated as 60% long-term capital
gain or loss and 40% short-term capital gain or loss under the Section 1256 mark-to-market rules. All other forward contracts under this 988(a)(1)(B) election would be characterized as capital and generally gain or loss would be recognized when the
contract is closed and completed. Other rules apply to options, futures or forward foreign currency contracts that may be part of a straddle or a Section 988 hedging transaction within the meaning of Code Section 988(d).
Special tax considerations
apply if a Fund invests in investment companies that are taxable as partnerships for federal income tax purposes. In general, the Fund will not recognize income earned by such an investment company until the close of the investment company’s
taxable year. But the Fund will recognize such income as it is earned by the investment company for purposes of determining whether it is subject to the 4% excise tax. Therefore, if the Fund and such an investment company have different taxable
years, the Fund may be compelled to make distributions in excess of the income recognized from such an investment company in order to avoid the imposition of the 4% excise tax. A Fund’s receipt of a non-liquidating cash distribution from an
investment company taxable as a partnership generally will result in recognized gain (but not loss) only to the extent that the amount of the distribution exceeds the Fund’s adjusted basis in shares of such investment company before the
distribution. A Fund that receives a liquidating cash distribution from an investment company taxable as a partnership will recognize capital
gain or loss to the extent of the difference between the
proceeds received by the Fund and the Fund’s adjusted tax basis in shares of such investment company; however, the Fund will recognize ordinary income, rather than capital gain, to the extent that the Fund’s allocable share of
“unrealized receivables” (including any accrued but untaxed market discount) exceeds the shareholder’s share of the basis in those unrealized receivables.
Some amounts received by a Fund
with respect to its investments in MLPs will likely be treated as a return of capital because of accelerated deductions available with respect to the activities of such MLPs. On the disposition of an investment in such an MLP, the Fund will likely
realize taxable income in excess of economic gain with respect to that asset (or, if the Fund does not dispose of the MLP, the Fund likely will realize taxable income in excess of cash flow with respect to the MLP in a later period), and the Fund
must take such income into account in determining whether the Fund has satisfied its distribution requirements. The Fund may have to borrow or liquidate securities to satisfy its distribution requirements and to meet its redemption requests, even
though investment considerations might otherwise make it undesirable for the Fund to sell securities or borrow money at such time.
Some of the Funds may invest in
REITs. Such investments in REIT equity securities may require a Fund to accrue and distribute income not yet received. In order to generate sufficient cash to make the requisite distributions, the Fund may be required to sell securities in its
portfolio (including when it is not advantageous to do so) that it otherwise would have continued to hold. A Fund’s investments in REIT equity securities may at other times result in the Fund’s receipt of cash in excess of the
REIT’s earnings; if the Fund distributes such amounts, such distribution could constitute a return of capital to Fund shareholders for federal income tax purposes. Dividends received by a Fund from a REIT generally will not constitute
qualified dividend income.
Tax reform legislation enacted
on December 22, 2017, informally known as the Tax Cuts and Jobs Act (the “Tax Act”), established a 20% deduction for qualified business income. Under this provision, which is effective for taxable years beginning in 2018 and, without
further legislation, will sunset for taxable years beginning after 2025, individuals, trusts, and estates generally may deduct (the “Deduction”) 20% of “qualified business income,” which includes all ordinary REIT dividends
(“Qualifying REIT Dividends”) and certain income from investments in MLPs (“MLP Income”). The Tax Act does not contain a provision permitting a registered investment company (“RIC”) to pass the special character
of this income through to its shareholders. Thus, distributions by a RIC that invests in REITs or MLPs of Qualifying REIT Dividends and MLP Income is not eligible for the Deduction, whereas direct investors in REITs and MLP are generally eligible
for the Deduction with respect to Qualifying REIT Dividends and MLP Income directly received by such investors. It is uncertain whether future legislation or other guidance will enable a RIC to pass through the special character of Qualifying REIT
Dividends or MLP Income to the RIC’s shareholders.
Additionally, the Tax Act,
under certain circumstances, requires accrual method taxpayers to recognize income for U.S. federal income tax purposes no later than the income is taken into account as revenue in an applicable financial statement. The impact of this new
legislation on the funds, stockholders of the funds and entities in which the funds may invest is uncertain. Prospective investors are urged to consult their tax advisors regarding the effects of the new legislation on an investment in the
Funds.
A Fund might
invest directly or indirectly in residual interests in real estate mortgage investment conduits (“REMICs”) or equity interests in taxable mortgage pools (“TMPS”). Under a notice issued by the IRS in October 2006 and Treasury
regulations that have not yet been issued (but may apply with retroactive effect) a portion of a Fund’s income from a REIT that is attributable to the REIT’s residual interest in a REMIC or a TMP (referred to in the Code as an
“excess inclusion”) will be subject to federal income taxation in all events. This notice also provides, and the regulations are expected to provide, that excess inclusion income of a regulated investment company, such as each of the
Funds, will generally be allocated to shareholders of the regulated investment company in proportion to the dividends received by such shareholders, with the same consequences as if the shareholders held the related REMIC or TMP residual interest
directly.
In general,
excess inclusion income allocated to shareholders (i) cannot be offset by net operating losses (subject to a limited exception for certain thrift institutions) and (ii) will constitute unrelated business taxable income (“UBTI”) to
entities (including a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated excess inclusion income,
and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income. In addition, because the Code
provides that excess inclusion income is ineligible for treaty
benefits, a regulated investment company must withhold tax on excess inclusions attributable to its foreign shareholders at a 30% rate of withholding, regardless of any treaty benefits for which a shareholder is otherwise eligible.
Any investment in residual
interests of a CMO that has elected to be treated as a REMIC can create complex tax problems, especially if the Fund has state or local governments or other tax-exempt organizations as shareholders. Under current law, the Fund serves to block UBTI
from being realized by its tax-exempt shareholders. Notwithstanding the foregoing, a tax-exempt shareholder will recognize UBTI by virtue of its investment in the Fund if shares in the Fund constitute debt-financed property in the hands of the
tax-exempt shareholder within the meaning of Section 514(b) of the Code. Furthermore, a tax-exempt shareholder may recognize UBTI if the Fund recognizes “excess inclusion income” derived from direct or indirect investments in REMIC
residual interests or TMPs if the amount of such income recognized by the Fund exceeds the Fund’s investment company taxable income (after taking into account deductions for dividends paid by the Fund).
In addition, special tax
consequences apply to charitable remainder trusts (“CRTs”) that invest in regulated investment companies that invest directly or indirectly in residual interests in REMICs or in TMPs. Under legislation enacted in December 2006, a CRT, as
defined in Section 664 of the Code, that realizes UBTI for a taxable year must pay an excise tax annually of an amount equal to such UBTI. Under IRS guidance issued in October 2006, a CRT will not recognize UBTI solely as a result of investing in a
Fund that recognizes “excess inclusion income.” Rather, if at any time during any taxable year a CRT (or one of certain other tax-exempt shareholders, such as the U.S., a state or political subdivision, or an agency or instrumentality
thereof, and certain energy cooperatives) is a record holder of a share in a Fund that recognizes “excess inclusion income,” then the Fund will be subject to a tax on that portion of its “excess inclusion income” for the
taxable year that is allocable to such shareholders at the highest federal corporate income tax rate. The extent to which this IRS guidance remains applicable in light of the December 2006 legislation is unclear. To the extent permitted under the
1940 Act, each Fund may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such shareholder’s distributions for the year by the amount of the tax that relates to such shareholder’s
interest in the Fund. The Funds have not yet determined whether such an election will be made. CRTs are urged to consult their tax advisors concerning the consequences of investing in a Fund.
If a Fund invests in PFICs,
certain special tax consequences may apply. A PFIC is any foreign corporation in which (i) 75% or more of the gross income for the taxable year is passive income, or (ii) the average percentage of the assets (generally by value, but by adjusted tax
basis in certain cases) that produce or are held for the production of passive income is at least 50%. Generally, passive income for this purpose includes dividends, interest (including income equivalent to interest), royalties, rents, annuities,
the excess of gains over losses from certain property transactions and commodities transactions, and foreign currency gains. Passive income for this purpose does not include rents and royalties received by the foreign corporation from active
business and certain income received from related persons. A Fund’s investments in certain PFICs could subject the Fund to a U.S. federal income tax (including interest charges) on distributions received from the company or on proceeds
received from the disposition of shares in the company. This tax cannot be eliminated by making distributions to Fund shareholders. In addition, certain interest charges may be imposed on the Fund as a result of such distributions.
If a Fund is in a position to
treat a PFIC as a “qualified electing fund” (“QEF”), the Fund will be required to include in its gross income its share of the company’s income and net capital gain annually, regardless of whether it receives any
distributions from the company. Alternately, a Fund may make an election to mark the gains (and to a limited extent losses) in such holdings “to the market” as though it had sold and repurchased its holdings in those PFICs on the last
day of the Fund’s taxable year. Such gain and loss are treated as ordinary income and loss. The QEF and mark-to-market elections may have the effect of accelerating the recognition of income (without the receipt of cash) and increasing the
amount required to be distributed by the Fund to avoid taxation. Making either of these elections, therefore, may require the Fund to liquidate other investments (including when it is not advantageous to do so) to meet its distribution requirement,
which also may accelerate the recognition of gain and affect the Fund’s total return. A fund that invests indirectly in PFICs by virtue of the fund’s investment in other investment companies that qualify as “U.S. persons”
within the meaning of the Code may not make a QEF election; rather, such underlying investment companies investing directly in the PFICs would decide whether to make such election. Furthermore, under proposed United States Treasury Regulations,
certain income derived by a Fund from a PFIC with respect to which the Fund has made a “QEF” election would generally constitute qualifying income for purposes of the RIC income test only to the extent the PFIC makes distributions
of
that income to the Fund. The proposed regulations, if adopted,
would apply to taxable years beginning on or after 90 days after the regulations are published as final. Dividends paid by PFICs will not be eligible to be treated as “qualified dividend income.”
The ability of a Fund to invest
directly in commodities, and in certain commodity-related securities and other instruments, is subject to significant limitations in order to enable a Fund to maintain its status as a regulated investment company under the Code.
Investment in Other Funds
If a Fund invests in shares of
mutual funds, other ETFs or other companies that are taxable as regulated investment companies, as well as certain investments in REITs (collectively, “underlying funds”), its distributable income and gains will normally consist, in
part, of distributions from the underlying funds and gains and losses on the disposition of shares of the underlying funds. To the extent that an underlying fund realizes net losses on its investments for a given taxable year, the Fund will not be
able to recognize its share of those losses (so as to offset distributions of net income or capital gains from other underlying funds) until it disposes of shares of the underlying fund. Moreover, even when the Fund does make such a disposition, a
portion of its loss may be recognized as a long-term capital loss, which will not be treated as favorably for federal income tax purposes as a short-term capital loss or an ordinary deduction. In particular, the Fund will not be able to offset any
capital losses from its dispositions of underlying fund shares against its ordinary income (including distributions of any net short-term capital gain realized by an underlying fund).
In addition, in certain
circumstances, the “wash sale” rules under Section 1091 of the Code may apply to a Fund’s sales of underlying fund shares that have generated losses. A wash sale occurs if shares of an underlying fund are sold by the Fund at a loss
and the Fund acquires substantially identical shares of that same underlying fund 30 days before or after the date of the sale. The wash-sale rules could defer losses in the Fund’s hands on sales of underlying fund shares (to the extent such
sales are wash sales) for extended (and, in certain cases, potentially indefinite) periods of time.
As a result of the foregoing
rules, and certain other special rules, the amount of net investment income and net capital gain that each Fund will be required to distribute to shareholders may be greater than what such amounts would have been had the Fund directly invested in
the securities held by the underlying funds, rather than investing in shares of the underlying funds. For similar reasons, the character of distributions from the Fund (e.g., long-term capital gain, exempt interest, eligibility for
dividends-received deduction, etc.) will not necessarily be the same as it would have been had the Fund invested directly in the securities held by the underlying funds.
If a Fund received dividends
from an underlying fund that qualifies as a regulated investment company, and the underlying fund designates such dividends as “qualified dividend income”, then the Fund is permitted in turn to designate a portion of its distributions as
“qualified dividend income”, provided the Fund meets holding period and other requirements with respect to shares of the underlying fund.
Depending on a Fund’s
percentage ownership in an underlying fund, both before and after a redemption, a redemption of shares of an underlying fund by a Fund may cause the Fund to be treated as receiving a Section 301 distribution taxable as a dividend under Section 307
of the Code, to the extent of its allocable shares of earnings and profits, on the full amount of the distribution instead of receiving capital gain income on the shares of the underlying fund. Such a distribution may be treated as qualified
dividend income and thus eligible to be taxed at the rates applicable to long-term capital gain. If qualified dividend income treatment is not available, the distribution may be taxed as ordinary income. This could cause shareholders of the Fund to
recognize higher amounts of ordinary income than if the shareholders had held the shares of the underlying funds directly.
A Fund may elect to pass
through to shareholders foreign tax credits from an underlying fund and exempt-interest dividends from an underlying fund, provided that at least 50% of the Fund’s total assets are invested in other regulated investment companies at the end of
each quarter of the taxable year.
Backup
Withholding
Each Fund
generally is required to backup withhold and remit to the U.S. Treasury a percentage of the taxable dividends and other distributions paid to, and the proceeds of share sales, exchanges, or redemptions made by, any individual shareholder who fails
to properly furnish the Fund with a correct
taxpayer identification number (“TIN”), who has
under-reported dividend or interest income, or who fails to certify to the Fund that he or she is not subject to backup withholding. The backup withholding rules may also apply to distributions that are properly designated as exempt-interest
dividends.
Foreign Shareholders
Shares of
the Funds have not been registered for sale outside of the United States. This SAI is not intended for distribution to prospective investors outside of the United States. The Funds generally do not market or sell shares to investors domiciled
outside of the United States, even, with regard to individuals, if they are citizens or lawful permanent residents of the United States.
Distributions properly
designated as Capital Gain Dividends and exempt-interest dividends generally will not be subject to withholding of federal income tax. However, exempt-interest dividends may be subject to backup withholding (as discussed above). In general,
dividends other than Capital Gain Dividends and exempt-interest dividends paid by a Fund to a shareholder that is not a “U.S. person” within the meaning of the Code (a “foreign person”) are subject to withholding of U.S.
federal income tax at a rate of 30% (or lower applicable treaty rate) even if they are funded by income or gains (such as portfolio interest, short-term capital gains, or foreign-source dividend and interest income) that, if paid to a foreign person
directly, would not be subject to withholding. However, the Fund will not be required to withhold any amounts (i) with respect to distributions (other than distributions to a foreign person (w) that has not provided a satisfactory statement that the
beneficial owner is not a U.S. person, (x) to the extent that the dividend is attributable to certain interest on an obligation if the foreign person is the issuer or is a 10% shareholder of the issuer, (y) that is within certain foreign countries
that have inadequate information exchange with the United States, or (z) to the extent the dividend is attributable to interest paid by a person that is a related person of the foreign person and the foreign person is a controlled foreign
corporation) from U.S.-source interest income of types similar to those not subject to U.S. federal income tax if earned directly by an individual foreign person, to the extent such distributions are properly designated by the Fund
(“interest-related dividends”), and (ii) with respect to distributions (other than (a) distributions to an individual foreign person who is present in the United States for a period or periods aggregating 183 days or more during the year
of the distribution and (b) distributions subject to special rules regarding the disposition of U.S. real property interests (as described below)) of net short-term capital gains in excess of net long-term capital losses to the extent such
distributions are properly designated by the Fund (“short-term capital gain dividends”). Depending on the circumstances, a Fund may make designations of interest-related and/or short-term capital gain dividends with respect to all, some
or none of its potentially eligible dividends and/or treat such dividends, in whole or in part, as ineligible for these exemptions from withholding. In the case of shares held through an intermediary, the intermediary may withhold even if a Fund
makes a designation with respect to a payment. Foreign persons should contact their intermediaries regarding the application of these rules to their accounts.
A beneficial holder of shares
who is a foreign person is not, in general, subject to U.S. federal income tax on gains (and is not allowed a deduction for losses) realized on the sale of shares of the Fund or on Capital Gain Dividends or exempt-interest dividends unless (i) such
gain or dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States or (ii) in the case of an individual holder, the holder is present in the United States for a period or periods
aggregating 183 days or more during the year of the sale or the receipt of the Capital Gain Dividend and certain other conditions are met or (iii) the shares constitute “U.S. real property interests” (“USRPIs”) or the Capital
Gain Dividends are attributable to gains from the sale or exchange of USRPIs in accordance with the rules set forth below.
Special rules apply to
distributions to foreign shareholders from a Fund that is either a “U.S. real property holding corporation” (“USRPHC”) or would be a USRPHC but for the operation of the exceptions to the definition thereof described below.
Additionally, special rules apply to the sale of shares in a Fund that is a USRPHC. Very generally, a USRPHC is a domestic corporation that holds U.S. real property interests (“USRPIs”) — USRPIs are defined as any interest in U.S.
real property or any equity interest in a USRPHC — the fair market value of which equals or exceeds 50% of the sum of the fair market values of the corporation’s USRPIs, interests in real property located outside the United States and
certain other assets. A Fund that holds (directly or indirectly) significant interests in REITs may be a USRPHC. The special rules discussed in the next paragraph will also generally apply to distributions from a Fund that would be a USRPHC absent
exclusions from USRPI treatment for interests in domestically controlled REITs or regulated investment companies and not-greater-than-5% interests in publicly traded classes of stock in REITs or regulated investment companies.
In the case of a Fund that is a
USRPHC or would be a USRPHC but for the exceptions from the definition of USRPI (described immediately above), distributions by the Fund that are attributable to (a) gains realized on the disposition of USRPIs by the Fund and (b) distributions
received by the Fund from a lower-tier regulated investment company or REIT that the Fund is required to treat as USRPI gain in its hands will retain their character as gains realized from USRPIs in the hands of the Fund’s foreign
shareholders. If the foreign shareholder holds (or has held in the prior year) more than a 5% interest in the Fund, such distributions will be treated as gains “effectively connected” with the conduct of a “U.S. trade or
business,” and subject to tax at graduated rates. Moreover, such shareholders will be required to file a U.S. income tax return for the year in which the gain was recognized and the Fund will be required to withhold 35% for taxable years
beginning before 2018, and 21% for taxable years beginning in 2018 or later of the amount of such distribution. In the case of all other foreign shareholders (i.e., those whose interest in the Fund did not exceed 5% at any time during the prior
year), the USRPI distribution will be treated as ordinary income (regardless of any designation by the Fund that such distribution is a short-term capital gain dividend or a Capital Gain Dividend), and the Fund must withhold 30% (or a lower
applicable treaty rate) of the amount of the distribution paid to such foreign shareholder. Foreign shareholders of a Fund are also subject to “wash sale” rules to prevent the avoidance of the tax-filing and -payment obligations
discussed above through the sale and repurchase of Fund shares.
In addition, if a Fund is a
USRPHC, it must typically withhold 15% of the amount realized in a redemption by a greater-than-5% foreign shareholder, and that shareholder must file a U.S. income tax return for the year of the disposition of the USRPI and pay any additional tax
due on the gain. No withholding is generally required with respect to amounts paid in redemption of shares of a Fund if the Fund is a domestically controlled USRPHC or, in certain limited cases, if the Fund (whether or not domestically controlled)
holds substantial investments in regulated investment companies that are domestically controlled USRPHCs.
In order to qualify for any
exemptions from withholding described above or for lower withholding tax rates under income tax treaties, or to establish an exemption from backup withholding, the foreign investor must comply with special certification and filing requirements
relating to its non-US status (including, in general, furnishing an applicable IRS Form W-8 or substitute form). Foreign investors in a Fund should consult their tax advisers in this regard.
If a shareholder is eligible
for the benefits of a tax treaty, any effectively connected income or gain will generally be subject to U.S. federal income tax on a net basis only if it is also attributable to a permanent establishment maintained by the shareholder in the United
States.
A beneficial
holder of shares who is a foreign person may be subject to state and local tax and to the U.S. federal estate tax in addition to the federal tax on income referred to above. Foreign shareholders in a Fund should consult their tax advisors with
respect to the potential application of the above rules.
A Fund is required to withhold
U.S. tax (at a 30% rate) on payments of taxable dividends and (effective January 1, 2019) redemption proceeds and certain capital gain dividends made to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new
reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional information to a Fund to enable the Fund to determine
whether withholding is required.
Foreign
Taxes
Certain Funds may
be subject to foreign withholding taxes or other foreign taxes with respect to income (possibly including, in some cases, capital gain) received from sources within foreign countries. Tax conventions between certain countries and the U.S. may reduce
or eliminate such taxes. If more than 50% of a Fund’s assets at year end consists of the securities of foreign corporations, the Fund may elect to permit shareholders to claim a credit or deduction on their income tax returns for their pro
rata portion of qualified taxes paid by the Fund to foreign countries in respect of foreign securities the Fund has held for at least the minimum period specified in the Code. In such a case, shareholders will include in gross income from foreign
sources their pro rata shares of such taxes. A shareholder’s ability to claim a foreign tax credit or deduction in respect of foreign taxes paid by a Fund may be subject to certain limitations imposed by the Code and the Treasury Regulations
issued thereunder, as a result of which a shareholder may not get a full credit or deduction for the amount of such taxes. In particular, shareholders must hold their Fund shares (without protection from risk of loss) on the ex-dividend date and for
at least 15 additional days during the 30-day period surrounding the ex-dividend date to be eligible to claim a foreign tax credit with respect to a given dividend. Shareholders who do not itemize on their federal income tax
returns may claim a credit (but no deduction) for such foreign
taxes. Any foreign taxes withheld on payments made “in lieu of” dividends or interest with respect to loaned securities will not qualify for the pass-through of foreign tax credits to shareholders.
If a Fund does not make the
above election or if more than 50% of its assets at the end of the year do not consist of securities of foreign corporations, the Fund’s net income will be reduced by the foreign taxes paid or withheld. In such cases, shareholders will not be
entitled to claim a credit or deduction with respect to foreign taxes.
The foregoing is only a general
description of the treatment of foreign source income or foreign taxes under the U.S. federal income tax laws. Because the availability of a credit or deduction depends on the particular circumstances of each shareholder, shareholders are advised to
consult their own tax advisors.
Exempt-Interest
Dividends
Some of the
Funds intend to qualify to pay exempt-interest dividends to their respective shareholders. In order to qualify to pay exempt-interest dividends, at least 50% of the value of a Fund’s total assets must consist of tax-exempt municipal bonds at
the close of each quarter of the Fund’s taxable year. An exempt-interest dividend is that part of a dividend that is properly designated as an exempt-interest dividend and that consists of interest received by a Fund on such tax-exempt
securities. Shareholders of a Fund that pays exempt-interest dividends would not incur any regular federal income tax on the amount of exempt-interest dividends received by them from a Fund, but an investment in such a Fund may result in liability
for federal and state alternative minimum taxation and may be subject to state and local taxes.
Interest on indebtedness
incurred or continued by a shareholder, whether a corporation or an individual, to purchase or carry shares of a Fund is not deductible to the extent it relates to exempt-interest dividends received by the shareholder from that Fund. Any loss
incurred on the sale or redemption of a Fund’s shares held for six months or less may be disallowed to the extent of exempt-interest dividends received with respect to such shares.
Interest on certain tax-exempt
bonds that are private activity bonds within the meaning of the Code is treated as a tax preference item for purposes of the alternative minimum tax, and any such interest received by a Fund and distributed to shareholders will be so treated for
purposes of any alternative minimum tax liability of shareholders to the extent of the dividend’s proportionate share of a Fund’s income consisting of such interest. All exempt-interest dividends are subject to the corporate alternative
minimum tax.
The
exemption from federal income tax for exempt-interest dividends does not necessarily result in exemption for such dividends under the income or other tax laws of any state or local authority. Shareholders that receive social security or railroad
retirement benefits should consult their tax advisors to determine what effect, if any, an investment in a Fund may have on the federal taxation of their benefits.
From time to time legislation
may be introduced or litigation may arise that would change the tax treatment of exempt-interest dividends. Such legislation or litigation may have the effect of raising the state or other taxes payable by shareholders on such dividends.
Shareholders should consult their tax advisors for the current federal, state and local law on exempt-interest dividends.
Creation Units
As a result of U.S. federal
income tax requirements, the Trust on behalf of a Fund, has the right to reject an order for a creation of Shares if the creator (or group of creators) would, upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares of a Fund
and if, pursuant to Section 351 of the Code, the Fund would have a basis in the Deposit Instruments different from the market value of such securities on the date of deposit. The Trust also has the right to require information necessary to determine
beneficial share ownership for purposes of the 80% determination. See “Creation and Redemption of Creation Units—Procedures for Creation of Creation Units” in Appendix A.
State and Local Tax Matters
Depending on the residence of
the shareholders for tax purposes, distributions may also be subject to state and local taxation. Rules of state and local taxation regarding qualified dividend income, ordinary income dividends and capital gain dividends from regulated investment
companies may differ from the rules of U.S. federal income tax in many respects. Shareholders are urged to consult their tax advisors as to the consequences of these and other state and local tax rules affecting investment in the Funds.
Most states provide that a
regulated investment company may pass through (without restriction) to its shareholders state and local income tax exemptions available to direct owners of certain types of U.S. government securities (such as U.S. Treasury obligations). Thus, for
residents of these states, distributions derived from a Fund’s investment in certain types of U.S. government securities should be free from state and local income taxation to the extent that the interest income from such investments would
have been exempt from state and local taxes if such securities had been held directly by the respective shareholders. Certain states, however, do not allow a regulated investment company to pass through to its shareholders the state and local income
tax exemptions available to direct owners of certain types of U.S. government securities unless a Fund holds at least a required amount of U.S. government securities. Accordingly, for residents of these states, distributions derived from a
Fund’s investment in certain types of U.S. government securities may not be entitled to the exemptions from state and local income taxes that would be available if the shareholders had purchased U.S. government securities directly. The
exemption from state and local income taxes does not preclude states from asserting other taxes on the ownership of U.S. government securities. To the extent that a Fund invests to a substantial degree in U.S. government securities which are subject
to favorable state and local tax treatment, shareholders of the Fund will be notified as to the extent to which distributions from the Fund are attributable to interest on such securities.
Tax Shelter Reporting Regulations
If a shareholder realizes a
loss on disposition of a Fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886.
Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a regulated investment company are not excepted. Future guidance may extend the current exception
from this reporting requirement to shareholders of most or all regulated investment companies. The fact that a loss is reportable under these regulations does not affect the legal determination whether the taxpayer’s treatment of the loss is
proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
General Considerations
The federal income tax
discussion set forth above is for general information only. Prospective investors should consult their tax advisers regarding the specific federal tax consequences of purchasing, holding, and disposing of shares of each of the Funds, as well as the
effects of state, local and foreign tax law and any proposed tax law changes.
TRUSTEES
The names of the Trustees of
the Trust, together with information regarding their year of birth, the year each Trustee became a Board member of the Trust, principal occupations and other board memberships, including those in any company with a class of securities registered
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”) or subject to the requirements of Section 15(d) of the Securities Exchange Act or any company registered as an investment company
under the 1940 Act, are shown below. The contact address for each of the Trustees is 270 Park Avenue, New York, NY 10017.
Name
(Year of Birth; Positions
with the Funds since)
|
|
Principal
Occupation
During Past 5 Years
|
|
Number
of Funds
in Fund Complex
Overseen by
Trustee
(1)
|
|
Other
Directorships Held
During the Past 5 Years
|
Independent
Trustees
|
|
|
|
|
|
|
Name
(Year of Birth; Positions
with the Funds since)
|
|
Principal
Occupation
During Past 5 Years
|
|
Number
of Funds
in Fund Complex
Overseen by
Trustee
(1)
|
|
Other
Directorships Held
During the Past 5 Years
|
Gary
L. French
(1951); Trustee of the Trust since 2014
|
|
Real
Estate Investor (2011–present); Consultant to the Mutual Fund Industry (2011-Present); Senior Consultant for The Regulatory Fundamentals Group LLC (2011–2017); Senior Vice President–
Fund Administration, State Street
Corporation (2002–
2010).
|
|
36
|
|
Independent
Trustee, The China Fund, Inc. (2013– present); Exchange Traded Concepts Trust II (2012– 2014); Exchange Traded Concepts Trust I (2011–2014).
|
Robert
J. Grassi
(1957); Trustee of the Trust since 2014
|
|
Sole
Proprietor, Academy Hills Advisors LLC (2012– present); Pension Director, Corning Incorporated (2002–
2012).
|
|
36
|
|
None.
|
Name
(Year of Birth; Positions
with the Funds since)
|
|
Principal
Occupation
During Past 5 Years
|
|
Number
of Funds
in Fund Complex
Overseen by
Trustee
(1)
|
|
Other
Directorships Held
During the Past 5 Years
|
Thomas
P. Lemke
(1954); Trustee of the Trust since 2014
|
|
Retired;
Executive Vice President and General Counsel, Legg Mason (2005–2013).
|
|
36
|
|
SEI
family of funds (Independent Trustee of Advisors’ Inner Circle Fund III (20 portfolios) (from February 2014 to Present); Independent Trustee of Winton Diversified Opportunities Fund (from December 2014 to Present); Independent
Trustee of Gallery Trust (from August 2015 to Present); Independent Trustee of Schroder Series Trust (from February 2017 to Present); Independent Trustee of Schroder Global Series Trust (from February 2017 to Present); Independent Trustee of
O’Connor EQUUS (May 2014–
April 2016); Independent Trustee of Winton Series Trust (December 2014–
March 2017); Independent Trustee of AXA Premier VIP Trust (2014–June 2017); Independent Director of The
Victory Funds (or their predecessor funds) (35 portfolios) (2014–
March 2015).
|
Lawrence
R. Maffia
(1950); Trustee of the Trust since 2014
|
|
Retired;
Director and President, ICI Mutual Insurance Company (2006– 2013).
|
|
36
|
|
Director,
ICI Mutual Insurance Company (1999–2013).
|
Name
(Year of Birth; Positions
with the Funds since)
|
|
Principal
Occupation
During Past 5 Years
|
|
Number
of Funds
in Fund Complex
Overseen by
Trustee
(1)
|
|
Other
Directorships Held
During the Past 5 Years
|
Emily
A. Youssouf
(1951); Trustee of the Trust since 2014
|
|
Clinical
Professor, NYU Schack Institute of Real Estate (2009–
present); Board Member (2005– present), Chair of Capital Committee (2006–2016), Chair of Audit Committee (2005–present), and Chair of IT Committee (2016–
present), NYC Health and Hospitals Corporation; Board Member and Member of the Audit Committee and Related Parties Committee (2013–
present) and Member of the Risk Management Committee (2017–
present), PennyMac Financial
Services, Inc.
|
|
36
|
|
Trustee,
NYC School Construction Authority (2009–present); Board Member, NYS Job Development Authority (2008–present); Trustee (2015–present) and Chair of the Audit and Finance Committee (2015–present) of the TransitCenter
Foundation; Vice Chair (2011–2013) and Board Member (2013–2014) of New York City Housing Authority.
|
Interested
Trustee
|
|
|
|
36
|
|
|
Robert
F. Deutsch
(2)
(1957); Chairman and Trustee of the Trust since 2014
|
|
Retired;
Head of the Global ETF Business for JPMorgan Asset Management (2013– 2017); Head of the Global Liquidity Business for JPMorgan Asset Management (2003–2013).
|
|
36
|
|
Board
of Directors of the JUST Capital Foundation (2017–present).
|
(1)
|
A Fund Complex
means two or more registered investment companies that hold themselves out to investors as related companies for purposes of investment and investor services or have a common investment adviser or have an investment adviser that is an affiliated
person of the investment adviser of any of the other registered investment companies. Thirty two series of the Trust have commenced operations, but four additional series have been created and are expected to commence operations in the future.
|
(2)
|
Mr. Deutsch is an
interested trustee because he was an employee of the Adviser until August 2017.
|
The Trustees serve for an
indefinite term. The Board of Trustees decides upon general policies and is responsible for overseeing the business affairs of the Trust.
Qualifications of Trustees
The Board believes that each
Trustee’s experience, qualifications, attributes or skills on an individual basis and in combination with those of the other Trustees lead to the conclusion that the Board possesses the requisite skills and attributes to carry out its
oversight responsibilities with respect to the Trust. The Board believes that the significance of each Trustee’s experience, qualifications, attributes or skills is an individual matter (meaning that experience that is important for one
Trustee may not have the same value for another) and that these factors are best evaluated at the Board level, with no single Trustee, or particular factor, being indicative of Board effectiveness. However, the Board believes that Trustees need to
be able to critically review, evaluate, question and discuss information provided to them, and to interact effectively with Trust management, service providers and counsel, in order to exercise effective business judgment in the performance of their
duties. The Board believes that each of its members has these abilities.
The summaries below, relating
to the experience, qualifications, attributes and skills of the each Trustee, are required by the registration form adopted by the SEC, do not constitute holding out the Board or any Trustee as having any special expertise or experience, and do not
impose any greater responsibility or liability on any such person or on the Board as a whole than would otherwise be the case. The following is a summary of specific experience, qualifications, attributes and/or skills of each Trustee:
Gary L. French
. Mr. French has over 30 years of experience in the financial services industry and related fields, including serving in various leadership roles with large financial institutions that operated and administered services
to investment companies. He has familiarity with a variety of financial, accounting, investment, regulatory and operational matters through his prior experience (including as Senior Vice President and Business Head in the Fund Administration
Division at State Street Bank) and through other positions held during his career in the investment management industry. He also gained experience serving as an independent director and officer of several other registered investment companies, and
in his current position as an independent director with The China Fund, Inc.
Robert J. Grassi
. Mr. Grassi has over 25 years of experience in a variety of business and financial matters, including experience in senior management positions. He has familiarity with a variety of financial, accounting, investment and
regulatory matters through his prior experience (including as Director of Pensions and Investments at Corning Incorporated) and through his current position as Sole Proprietor of Academy Hills Advisors LLC, an investment consulting
firm.
Thomas P.
Lemke
. Mr. Lemke has over 35 years of experience in the financial services industry, including experience in various senior management positions with financial services firms in addition to multiple years of service
with a regulatory agency and major law firms. In addition, he has a background in internal controls, including legal, compliance, internal audit, risk management and fund administration, and has served as general counsel for several financial
services firms. He has familiarity with a variety of financial, accounting, investment, regulatory and operational matters through his prior experience (including as Executive Vice President, General Counsel, and Head of the Governance Group of Legg
Mason, Inc.). He has also gained experience as an independent director of other registered investment companies, including his current position with each of AXA Premier VIP Trust, and The Advisors’ Inner Circle III Funds, and his prior
positions as independent director of ICI Mutual Insurance Company and as independent trustee of The Victory Funds (or their predecessor funds).
Lawrence R. Maffia
. Mr. Maffia has over 30 years of experience in the financial services industry, including positions held at a public auditing firm and various other positions in the mutual fund industry. He has familiarity with a
variety of financial, accounting, investment and regulatory matters through his prior experience (including as President and Company Director at ICI Mutual Insurance Company, a provider of D&O/E&O liability insurance and fidelity bonding for
the U.S. mutual fund industry, and his prior positions as chief financial officer of Stein Roe & Farnham Mutual Funds and chief operations officer of Stein Roe & Farnham Mutual Funds’ transfer agent).
Emily A. Youssouf
. Ms. Youssouf has over 25 years of business experience in the financial services industry and related fields, including serving in several executive level positions within the investment banking and housing finance
industries. In addition, she has an extensive background in strategic planning and financial analysis based on her current positions as a Board Member of the NYC Health and Hospitals Corporation (where she serves as the Chair of the Audit Committee,
Chair of the IT Committee and Member of the Finance Committee), as a Board Member of PennyMac Financial Services, Inc. (where she serves as a member of the Related Party Committee, the Risk Management Committee and the Audit Committee), as a Board
Member of the NYC School Construction Authority, as a Board Member of the NYS Job Development Authority (where she also serves as a member of the Audit Committee) and as a Trustee of the TransitCenter Foundation (where she also serves as Chair of
the Audit and Finance Committee), and as a Clinical Professor at NYU Schack Institute of Real Estate. She has familiarity with a variety of financial, accounting, investment and regulatory matters through her prior experience and through her current
positions described above.
Robert F. Deutsch
. Mr. Deutsch has over 30 years of experience in the financial services industry. He has substantial mutual fund background and is experienced with financial, accounting, investment and regulatory matters through his
tenure at J.P. Morgan Asset Management (“JPMAM”), including his prior positions as head of the Global ETF Business and as head of the Global Liquidity Business. Prior roles also include National Sales Manager for JPMorgan Funds and
Client Advisor at Goldman Sachs Asset Management.
Board Leadership Structure and Oversight
The Board has structured itself
in a manner that allows it to effectively perform its oversight function. Although the Chairman of the Board is not an Independent Trustee, Mr. Lemke serves as the Lead Independent Trustee to the Board and provides leadership to the other Trustees
and acts as a liaison with the Adviser’s management.
The Board has adopted a
committee structure that allows it to effectively perform its oversight function for all of the Funds in the complex. As described under “Qualification of Trustees” and “Standing Committees,” the Board has two committees: the
Audit and Valuation Committee and the Governance and Nominating Committee. The Board has determined that the leadership and committee structure is appropriate for the Funds and allows the Board to effectively and efficiently evaluate issues that
impact the Trust as a whole as well, as issues that are unique to each Fund.
The Board takes an active role
in risk oversight including the risks associated with exchange-traded funds, including investment risk, compliance and valuation. In connection with its oversight, the Board receives regular reports from the Chief Compliance Officer
(“CCO”), the Adviser and the Administrator. The Board also receives periodic reports from the Chief Risk Officer of JPMAM, including reports concerning operational controls that are designed to address market risk, credit risk, and
liquidity risk among others. The Board also receives regular reports from personnel responsible for JPMAM’s business resiliency and disaster recovery.
In addition, the Board and its
Committees work on an ongoing basis in fulfilling the oversight function. Additional information about the functions of each of the Committees is included below in “Standing Committees.” After each meeting of the Committee, each
committee reports its committee proceedings to the full Board. This committee structure allows the Board to efficiently evaluate a large amount of material and effectively fulfill its oversight function. Annually, the Board considers the efficiency
of this committee structure.
Standing
Committees
The Board of
Trustees has two standing committees: the Audit and Valuation Committee and the Governance and Nominating Committee.
The members of each Committee are set forth
below:
Name
of Committee
|
|
Members
|
|
Committee
Chair
|
Audit
and Valuation Committee
|
|
Mr.
French
Mr. Lemke
Mr. Grassi
Mr. Maffia
Ms. Youssouf
|
|
Mr.
French
|
Governance
and Nominating Committee
|
|
Ms.
Youssouf
Mr. French
Mr. Grassi
Mr. Lemke
Mr. Maffia
|
|
Ms. Youssouf
|
Audit
and Valuation Committee
.
The primary purposes of the Audit and Valuation Committee are: (i) appointment, retention, compensation and oversight of the
Funds’ independent accountants; (ii) oversight of the Funds’ audit, accounting and financial reporting policies, practices and internal controls; (iii) approval of non-audit services, as required by the statutes and regulations
administered by the SEC, including the 1940 Act and the Sarbanes-Oxley Act of 2002 (the “Sarbanes Act”); (iv) oversight of the valuation process in accordance with procedures adopted by the Trust; (v) conduct of such other business
and/or attention to such other matters as the Board may specifically assign to the Audit and Valuation Committee from time to time. The Audit and Valuation Committee will oversee the quality and objectivity of the Funds’ independent audit and
the financial statements of the Funds, act as a liaison between the Boards of Trustees and the Funds’ independent accountants and periodically report to the Boards of Trustees.
The Audit and Valuation
Committee’s responsibilities include the following: (i) approve and recommend to the Board the selection, appointment, retention and compensation of the Funds’ independent accountants; (ii) evaluate the independence of the independent
accountants; (iii) review the arrangements for and scope of the annual audits of the Funds and for any non- audit services for which the
independent accountants may be engaged; (iv) review the
Funds’ financial statements contained in the annual and other periodic reports to shareholders with Fund management and the independent accountants, and determine whether the independent accountants are satisfied with the disclosure and
content of the annual financial statements; (v) meet with independent counsel for the Independent Trustees and Fund Counsel in order to be informed on legal issues having the possibility of impacting the financial reporting process; (vi) review the
form of opinion the independent accountants propose to render on the Fund’s annual financial statements; (vii) receive information from the Adviser regarding the state of the Funds’ internal controls; (viii) discuss policies with respect
to risk assessment and risk management; (ix) oversee the implementation of the Funds’ valuation policies by the Administrator and recommend and approve changes in the Funds’ valuation policies from time to time; and (x) review and act on
such other matters as referred to the Audit and Valuation Committee by the Board.
Governance and Nominating
Committee
.
The primary purposes of the Governance and Nominating Committee are to: (1) oversee the Board’s governance processes; (2) evaluate and
recommend individuals to serve as Independent Trustees; and (3) review and recommend changes to the compensation paid to the Board.
The Governance and Nominating
Committee shall have such responsibilities as may be assigned to it by the Board, including the following responsibilities: (i) identify, consider and recommend to the Board candidates for election as Independent Trustees of the Board. The Committee
shall review periodically the composition of the Board and the backgrounds and skill sets of the Trustees to determine whether it may be appropriate to recommend adding additional individuals to the Board; (ii) recommend to the Board a successor to
the Chair of the Board, the Lead Independent Trustee or Chair of any committee when determined to be appropriate or necessary; (iii) recommend to the Board selections for membership on each committee of the Board, including committee chairperson
assignments, review periodically all committee assignments, the responsibilities of each committee, whether there is a continuing need for each committee, whether there is a need for additional committees, and whether committees should be combined
or reorganized, and make and discuss recommendations for any such action to and with the Board; (iv) review periodically Board governance practices and procedures and make recommendations to the Board regarding any appropriate changes; (v) consider,
implement and oversee the annual self-assessment process of the Board; (vi) review periodically the adequacy of this charter and evaluate the Committee’s performance of its duties and responsibilities hereunder, and make recommendations to the
Board regarding any appropriate changes; (vii) review periodically the compensation of the Trustees and make recommendations to the Board regarding any appropriate changes; (viii) review periodically the Trust’s retirement policies regarding
Trustees and make recommendations to the Board regarding any appropriate changes; and (ix) consider and evaluate any other matter the Committee deems necessary or appropriate or as may be delegated to the Committee by the Board from time to
time.
When evaluating a
person as a potential nominee to serve as an Independent Trustee, the Governance and Nominating Committee may consider, among other factors, (i) whether or not the person is “independent” and whether the person is otherwise qualified
under applicable laws and regulations to serve as a Trustee; (ii) whether or not the person is willing to serve, and willing and able to commit the time necessary for the performance of the duties of an Independent Trustee; (iii) the contribution
that the person can make to the Board and the Funds, with consideration being given to the person’s business experience, education and such other factors as the Committee may consider relevant; (iv) the character and integrity of the person;
(v) the desirable personality traits, including independence, leadership and the ability to work with the other members of the Board; and (vi) to the extent consistent with the 1940 Act, such recommendations from management as are deemed
appropriate. The process of identifying nominees involves the consideration of candidates recommended by one or more of the following: current Independent Trustees, officers, shareholders and other sources that the Governance and Nominating
Committee deems appropriate. The Governance and Nominating Committee will review nominees recommended to the Board by shareholders and will evaluate such nominees in the same manner as it evaluates nominees identified by the Governance and
Nominating Committee. Nominee recommendations may be submitted to the Secretary of the Trust at the Trust’s principal business address.
For details of the number of times
the Audit and Valuation Committee met during the most recent fiscal year, see “TRUSTEES — Standing Committees” in Part I of this SAI.
For details of the dollar range of
equity securities owned by each Trustee in the Funds, see “TRUSTEES — Ownership of Securities” in Part I of this SAI.
Trustee Compensation
Prior to
January 1, 2018, The Funds overseen by the Trustees will pay each Trustee an annual fee of $80,000 and will reimburse each Trustee for expenses incurred in connection with service as a Trustee. In addition, the Funds pay the lead Independent Trustee
an additional annual fee of $8,000, Audit and Valuation Committee Chair an additional annual fee of $7,500 and Governance and Nominating Committee Chair an additional annual fee of $6,000. The Trustees may hold various other directorships unrelated
to the Trust.
Beginning
January 1, 2019, The Funds overseen by the Trustees will pay each Trustee an annual fee of $120,000 and will reimburse each Trustee for expenses incurred in connection with service as a Trustee. In addition, the Funds pay the lead Independent
Trustee an additional annual fee of $8,000, Audit and Valuation Committee Chair an additional annual fee of $7,500 and Governance and Nominating Committee Chair an additional annual fee of $6,000. The Trustees may hold various other directorships
unrelated to the Trust.
The Declaration of Trust
provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with litigation in which they may be involved because of their offices with the Trust, unless, as to liability to the Trust or
its shareholders, it is finally adjudicated that they engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in their offices (collectively, “disabling conduct”). In the case of
settlement, such indemnification will not be provided unless it has been determined by a court or other body approving the settlement or disposition, or in the absence of such a determination, there has been a dismissal of the proceeding by the
court or other body before it was brought for insufficiency of evidence of any disabling conduct with which the Trustee or officer has been charged, or by a reasonable determination based upon a review of readily available facts, by vote of a
majority of disinterested Trustees or in a written opinion of independent counsel, that such officers or Trustees did not engage in disabling conduct.
For details of Trustee compensation
paid by the Funds, including deferred compensation, see “TRUSTEES — Trustee Compensation” in Part I of this SAI.
OFFICERS
The Trust’s executive
officers (listed below) generally are employees of the Adviser or one of its affiliates. The officers conduct and supervise the business operations of the Trust. The officers hold office until a successor has been elected and duly qualified. The
Trust has no employees. The names of the officers of the Funds, together with their year of birth, information regarding their positions held with the Trust and principal occupations are shown below. The contact address for each of the officers,
unless otherwise noted, is 270 Park Avenue, New York, NY 10017.
Name
(Year of Birth),
Positions Held with
the Trusts (Since)
|
|
Principal
Occupations During Past 5 Years
|
Joanna
Gallegos (1975),
President and Principal Executive Officer (2017)
|
|
Managing
Director, Head of J.P. Morgan Asset Management’s U.S. Exchange Traded Funds business. Previously, Head of J.P. Morgan Asset Management’s ETF Product Development team from August 2013 to July 2017; Managing Director of the Strategic
Initiatives Group in BlackRock’s iShares Exchange Traded Funds division from 2010 to 2013.
|
Ogden
Hammond (1975),
Interim President and Principal Executive Officer (2019)
|
|
Managing
Director and Global Head of Beta (Passive) Product and Business Development for J.P. Morgan Asset Management. Previously, Executive Director and Global Head of Beta Product and Business Development (2017-2018), Executive Director and Head of
Beta Strategy and Business Development (2016-2017) and Executive Director and Head of ETF Solutions Strategy & Business Development (2014-2016) for J.P. Morgan Investment Management Inc., Executive Director, Strategy and Business Development
(2013-2014) for J.P. Morgan Asset Management. Prior to joining J.P. Morgan Asset Management in 2013, Mr. Hammond worked for McKinsey & Company.
|
Name
(Year of Birth),
Positions Held with
the Trusts (Since)
|
|
Principal
Occupations During Past 5 Years
|
Lauren
Paino (1973),
Treasurer and Principal Financial Officer (2016)*
|
|
Executive
Director, J.P. Morgan Investment Management Inc. (formerly JPMorgan Funds Management, Inc.) since August 2013; formerly Director, Credit Suisse Asset Management from 2000 to 2013.
|
Brian
S. Shlissel (1964),
Vice President (2016)
|
|
Managing
Director and Chief Administrative Officer for J.P. Morgan pooled vehicles, J.P. Morgan Investment Management Inc. (formerly JPMorgan Funds Management, Inc.) (from 2014 to present); Managing Director and Head of Mutual Fund Services, Allianz Global
Investors; President and Chief Executive Officer, Allianz Global Investors Mutual Funds and PIMCO Closed-End Funds (from 1999 to 2014).
|
Paul
Shield (1960),
Vice President and Assistant Treasurer (2016)
|
|
Managing
Director and head of Business Management for JPMorgan Asset Management’s Exchange Traded Fund platform since 2013. Senior Global Product Manager of Alternative Investments for BNY Mellon from 2011 to 2013 and Global Product Head for Exchange
Traded Funds at JPMorgan Chase Bank from 2008 to 2011.
|
Elizabeth
A. Davin (1964), Secretary (2018)**
|
|
Executive
Director and Assistant General Counsel, JPMorgan Chase. Ms. Davin has been with JPMorgan Chase (formerly Bank One Corporation) since 2004.
|
Stephen
M. Ungerman (1953), Chief Compliance Officer (2014)
|
|
Managing
Director, JPMorgan Chase & Co.; Mr. Ungerman has been with JPMorgan Chase & Co. since 2000.
|
Jessica
K. Ditullio (1962), Assistant Secretary (2014)**
|
|
Executive
Director and Assistant General Counsel. Ms. Ditullio has been with JPMorgan Chase (formerly Bank One Corporation) since 1990.
|
Carmine
Lekstutis (1980), Assistant Secretary (2014)*
|
|
Executive
Director and Assistant General Counsel, JPMorgan Chase since February 2015; formerly Vice President and Assistant General Counsel, JPMorgan Chase from 2011 to February 2015.
|
Gregory
S. Samuels (1980), Assistant Secretary (2014)*
|
|
Executive
Director and Assistant General Counsel, JPMorgan Chase since February 2014; formerly Vice President and Assistant General Counsel, JPMorgan Chase from 2010.
|
Pamela
L. Woodley (1971), Assistant Secretary (2014)*
|
|
Vice
President and Assistant General Counsel, JPMorgan Chase since November 2004.
|
Zachary
E. Vonnegut-Gabovitch (1986),
Assistant Secretary (2017)*
|
|
Vice
President and Assistant General Counsel, JPMorgan Chase since September 2016; Associate, Morgan, Lewis & Bockius (law firm) from 2012 to 2016.
|
Frederick
J. Cavaliere (1978), Assistant Treasurer (2015)*
|
|
Executive
Director, J.P. Morgan Investment Management Inc. since February 2016; formerly, Vice President, J.P. Morgan Investment Management Inc. (formerly JPMorgan Funds Management, Inc.) since September 2010 to February 2016. Mr. Cavaliere has been with
JPMorgan since May 2006.
|
Michael
M. D’Ambrosio (1969), Assistant Treasurer (2014)
|
|
Managing
Director, J.P. Morgan Investment Management Inc. (formerly JPMorgan Funds Management, Inc.) since May 2014; formerly Executive Director, J.P. Morgan Investment Management Inc. (formerly JPMorgan Funds Management, Inc.) from 2012 to May
2014.
|
Name
(Year of Birth),
Positions Held with
the Trusts (Since)
|
|
Principal
Occupations During Past 5 Years
|
Jason
Ronca (1978), Assistant Treasurer (2014)***
|
|
Executive
Director, Assistant Treasurer and ETF Platform Manager for J.P. Morgan Asset Management since February 2017; formerly Vice President, Assistant Treasurer and ETF Platform Manager for J.P. Morgan Asset Management from May 2014 to February 2017. ETF
Product Manager for Corporate Investment Bank responsible for setting the strategy and control agenda for the ETF servicing business from 2010 to May 2014; Prior to 2010, a Vice President in Fund Accounting within J.P. Morgan Investor Services,
supporting a series of U.S. registered mutual funds.
|
*
|
The contact address
for the officer is 4 New York Plaza, New York, NY 10004.
|
**
|
The contact address
for the officer is 1111 Polaris Parkway, Columbus, OH 43240.
|
***
|
The contact address
for the officer is 50 Rowes Wharf, Floor 03, Boston, MA 02110.
|
For details of the percentage of
shares of the Funds owned by the officers and Trustees, as a group, see “SHARE OWNERSHIP — Trustees and Officers” in Part I of this SAI.
INVESTMENT ADVISER
Pursuant to an investment
advisory agreement, JPMIM serves as investment adviser to the Funds.
The Trust’s Shares are
not sponsored, endorsed or guaranteed by, and do not constitute obligations or deposits of JPMorgan Chase, any bank affiliate of JPMIM or any other bank, and are not insured by the FDIC or issued or guaranteed by the U.S. government or any of its
agencies.
For details of the
investment advisory fees paid under the advisory agreement, see “INVESTMENT ADVISER — Investment Advisory Fees” in Part I of the SAI for the Fund.
For details of the dollar range
of shares of the Funds beneficially owned by the portfolio managers who serve on a teams that manage the Funds, see “PORTFOLIO MANAGERS — Portfolio Managers’ Other Accounts Managed” in Part I of this SAI.
J.P. Morgan Investment Management Inc.
(“JPMIM”)
JPMIM serves as investment
adviser to the Funds pursuant to the investment advisory agreement between JPMIM and the Trust (the “JPMIM Advisory Agreement”). JPMIM is a wholly-owned subsidiary of JPMorgan Asset Management Holdings Inc., which is a wholly-owned
subsidiary of JPMorgan Chase & Co. (“JPMorgan Chase”).
JPMIM is a registered investment
adviser under the Investment Advisers Act of 1940, as amended. JPMIM is located at 270 Park Avenue, New York, NY 10017.
Under the JPMIM Advisory
Agreement, JPMIM provides investment advisory services to each Fund, which include managing the purchase, retention and disposition of each Fund’s investments. JPMIM may delegate its responsibilities to a sub-adviser. Any subadvisory
agreements must be approved by the Trust’s Board of Trustees and the applicable Fund’s shareholders, to the extent required by the 1940 Act.
Under separate agreements,
JPMorgan Chase Bank and JPMIM provide certain custodial, lead recordkeeping and administrative services to the Trust. JPMorgan Chase Bank is a subsidiary of JPMorgan Chase and an affiliate of the Adviser. See the “Custodian,”
“Administrator,” and “Transfer Agent” sections.
Under the terms of the JPMIM
Advisory Agreement, the investment advisory services JPMIM provides to the Funds are not exclusive. JPMIM is free to and does render similar investment advisory services to others. JPMIM serves as investment adviser to personal investors and other
investment companies and acts as fiduciary for trusts, estates and employee benefit plans. Certain of the assets of trusts and estates under management are invested in common trust funds for which JPMIM serves as trustee. The accounts which are
managed or advised by JPMIM have varying investment objectives, and JPMIM invests assets of such accounts in investments substantially similar to, or the same as, those which are expected to constitute the principal investments of the Fund. Such
accounts are supervised by employees of JPMIM who may also be acting in similar capacities for the Fund. See “Portfolio Transactions.”
Each Fund is managed by
employees of JPMIM who, in acting for their customers, including the Fund, do not discuss their investment decisions with any personnel of JPMorgan Chase or any personnel of other divisions of JPMIM or with any of their affiliated persons, with the
exception of certain other investment management affiliates of JPMorgan Chase which execute transactions on behalf of a Fund.
As compensation for the
services rendered and related expenses, such as salaries of advisory personnel borne by JPMIM under the JPMIM Advisory Agreement, the Trust, on behalf of each Fund, has agreed to pay JPMIM a fee, which is computed daily and may be paid monthly,
equal to the annual rate of each Fund’s average daily net assets as described in the applicable Prospectuses.
The JPMIM Advisory Agreement
continues in effect for annual periods beyond 2016 of each year only if specifically approved thereafter annually in the same manner as the Distribution Agreement; except that for new funds, the initial approval will continue for up to two years,
after which annual approvals are required. See the “Distributor” section. The JPMIM Advisory Agreement will terminate automatically if assigned and is terminable at any time without penalty by a vote of a majority of the Trustees, or by
a vote of the holders of a majority of a Fund’s outstanding voting securities (as defined in the 1940 Act), on 60 days’ written notice to JPMIM and by JPMIM on 90 days’ written notice to the Trust.
The JPMIM Advisory Agreement
provides that the Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by any Fund in connection with the matters to when the JPMIM Advisory Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the performance of its duties or from reckless disregard by it of its duties and obligations thereunder, or, a loss resulting from a breach of fiduciary duty with respect to
the receipt of compensation for services.
Subject to the supervision of
the Trust’s Board of Trustees, JPMIM provides or will cause to be provided a continuous investment program for a Fund, including investment research and management with respect to all securities and investments and cash equivalents. JPMIM may
delegate its responsibilities to a sub-adviser. Any subadvisory agreement must be approved by the Trust’s Board of Trustees and the Funds’ shareholders, to the extent required by the 1940 Act.
JPMorgan Chase Bank and JPMFM are
each subsidiaries of JPMorgan Chase and affiliates of JPMIM. See the “Custodian” and “Administrator” sections.
POTENTIAL CONFLICTS OF INTEREST
JPMIM
JPMIM and/or its affiliates
(the “Affiliates” and, together, “JPMorgan”) provide an array of discretionary and non-discretionary investment management services and products to institutional clients and individual investors. In addition, JPMorgan is a
diversified financial services firm that provides a broad range of services and products to its clients and is a major participant in the global currency, equity, commodity, fixed-income and other markets in which a Fund invests or will invest.
Investors should carefully review the following, which describes potential and actual conflicts of interest that JPMorgan can face in the operation of its investment management services. JPMorgan and the Funds have adopted policies and procedures
reasonably designed to appropriately prevent, limit or mitigate the conflicts of interest described below. In addition, many of the activities that create these conflicts of interest are limited and/or prohibited by law, unless an exception is
available.
This section
is not, and is not intended to be, a complete enumeration or explanation of all of the potential conflicts of interest that may arise. Additional information about potential conflicts of interest regarding JPMIM and JPMorgan is set forth in
JPMIM’s Form ADV. A copy of Part 1 and Part 2A of JPMIM’s Form ADV is available on the SEC’s website (www.adviserinfo.sec.gov).
Acting for Multiple Clients.
In general, JPMIM faces conflicts of interest when it renders investment advisory services to several clients and, from time to time, provides dissimilar investment advice to different clients. For example, when funds
or accounts managed by JPMIM (“Other Accounts”) engage in short sales of the same securities held by a Fund, JPMIM could be seen as harming the performance of a Fund for the benefit of the Other Accounts engaging in short sales, if the
short sales cause the market value of the securities to fall. In addition, a conflict could arise when one or more Other Accounts invest in different instruments or classes of securities of the same issuer than those in which a Fund invests. In
certain circumstances, Other Accounts have different investment objectives or could pursue or enforce rights with respect to a particular issuer in which a Fund has also invested and these activities could have an adverse effect on the Fund. For
example, if a Fund holds debt instruments of an issuer and an Other
Account holds equity securities of the same issuer, then if the
issuer experiences financial or operational challenges, the Fund (which holds the debt instrument) may seek a liquidation of the issuer, whereas the Other Account (which holds the equity securities) may prefer a reorganization of the issuer. In
addition, an issuer in which the Fund invests may use the proceeds of the Fund’s investment to refinance or reorganize its capital structure which could result in repayment of debt held by JPMorgan or an Other Account. If the issuer performs
poorly following such refinancing or reorganization, the Fund’s results will suffer whereas the Other Account’s performance will not be affected because the Other Account no longer has an investment in the issuer. Conflicts are magnified
with respect to issuers that become insolvent. It is possible that in connection with an insolvency, bankruptcy, reorganization, or similar proceeding, a Fund will be limited (by applicable law, courts or otherwise) in the positions or actions it
will be permitted to take due to other interests held or actions or positions taken by JPMorgan or Other Accounts.
Positions taken by Other
Accounts may also dilute or otherwise negatively affect the values, prices or investment strategies associated with positions held by a Fund. For example, this may occur when investment decisions for the Fund are based on research or other
information that is also used to support portfolio decisions by JPMIM for Other Accounts following different investment strategies or by Affiliates in managing their clients’ accounts. When an Other Account or an account managed by an
Affiliate implements a portfolio decision or strategy ahead of, or contemporaneously with, similar portfolio decisions or strategies for a Fund (whether or not the portfolio decisions emanate from the same research analysis or other information),
market impact, liquidity constraints, or other factors could result in the Fund receiving less favorable investment results, and the costs of implementing such portfolio decisions or strategies could be increased or the Fund could otherwise be
disadvantaged.
Investment opportunities that
are appropriate for a Fund may also be appropriate for Other Accounts and there is no assurance the Fund will receive an allocation of all or a portion of those investments it wishes to pursue. JPMIM’s management of an Other Account that pays
it a performance fee or a higher management fee and follows the same or similar strategy as a Fund or invests in substantially similar assets as a Fund, creates an incentive for JPMIM to favor the account paying it the potentially higher fee, e.g.,
in placing securities trades.
JPMIM and its Affiliates, and
any of their directors, officers or employees, also buy, sell, or trade securities for their own accounts or the proprietary accounts of JPMIM and/or an Affiliate. JPMIM or its Affiliates, within their discretion, may make different investment
decisions and take other actions with respect to their own proprietary accounts than those made for client accounts, including the timing or nature of such investment decisions or actions. Further, JPMIM is not required to purchase or sell for any
client account securities that it, an Affiliate or any of its or their employees may purchase or sell for their own accounts or the proprietary accounts of JPMIM or an Affiliate or its clients. JPMIM, its Affiliates and their respective directors,
officers and employees face a conflict of interest as they will have income or other incentives to favor their own accounts or proprietary accounts.
The portfolio managers of
certain Funds-of-Funds have access to the holdings and may have knowledge of the investment strategies and techniques of certain underlying Funds because they are portfolio managers of separately managed accounts following similar strategies as a
Fund-of-Funds. They therefore face conflicts of interest in the timing and amount of allocations to an underlying Fund, as well as in the choice of an underlying fund. JPMorgan also faces conflicts of interest when waiving certain fees if those
waivers enhance performance.
The chart in Part I of this SAI
entitled “Portfolio Managers’ Other Accounts Managed” shows the number, type and market value as of a specified date of the accounts and other Funds managed by each Fund’s (excluding the Money Market Funds’) portfolio
managers.
Acting in
Multiple Commercial Capacities.
JPMorgan is a diversified financial services firm that provides a broad range of services and products to its clients and is a major participant in the global currency, equity,
commodity, fixed-income and other markets in which a Fund invests or may invest. JPMorgan is typically entitled to compensation in connection with these activities and the Funds will not be entitled to any such compensation. In providing services
and products to clients other than the Funds, JPMorgan, from time to time, faces conflicts of interest with respect to activities recommended to or performed for a Fund on one hand and for JPMorgan’s other clients on the other hand. For
example, JPMorgan has, and continues to seek to develop, banking and other financial and advisory relationships with numerous U.S. and non-U.S. persons and governments. JPMorgan also advises and represents potential buyers and sellers of businesses
worldwide. The Funds have invested in, or may wish to invest in, such entities represented by JPMorgan or with which JPMorgan has a banking or other financial relationship. In addition, certain clients of JPMorgan may invest in entities in which
JPMorgan holds an
interest, including a Fund. In providing services to its
clients, JPMorgan from time to time recommends activities that compete with or otherwise adversely affect a Fund or the Fund’s investments. It should be recognized that such relationships may also preclude the Fund from engaging in certain
transactions and may constrain the Fund’s investment flexibility. For example, Affiliates that are broker dealers cannot deal with the Funds as principal in the purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the SEC. Certain of the Funds have received exemptive orders permitting the Funds to engage in principal transactions with Affiliates involving taxable and tax exempt money market instruments. However, for the purchase
and sale of longer term fixed income securities, which are generally principal transactions, the Funds cannot use broker dealer Affiliates. Or, if an Affiliate is the sole underwriter of an initial or secondary offering, the Funds could not purchase
in the offering. In both cases the number of securities and counterparties available to the Funds will be fewer than are available to mutual funds that are not affiliated with major broker dealers.
JPMorgan derives ancillary
benefits from providing investment advisory, custody, administration, fund accounting and shareholder servicing and other services to the Funds, and providing such services to the Funds may enhance JPMorgan’s relationships with various
parties, facilitate additional business development and enable JPMorgan to obtain additional business and generate additional revenue.
Participations Adverse to the
Funds.
JPMorgan’s participation in certain markets or its actions for certain clients may also restrict or affect a Fund’s ability to transact in those markets and JPMorgan may face conflicts with
respect to the interests involved. For example, when a Fund and another JPMorgan client invest in different parts of an issuer’s capital structure, decisions over whether to trigger an event of default, over the terms of any workout, or how to
exit an investment implicate conflicts of interest. See also “Acting for Multiple Clients”.
Preferential Treatment.
JPMIM receives more compensation with respect to certain Funds or Other Accounts than it receives with respect to a Fund, or receives compensation based in part on the performance of certain accounts. This creates a
conflict of interest for JPMIM and its portfolio managers by providing an incentive to favor those accounts. Actual or potential conflicts of interest also arise when a portfolio manager has management responsibilities to more than one account or
Fund, such as devotion of unequal time and attention to the management of the Funds or accounts.
Allocation and Aggregation.
Potential conflicts of interest also arise with both the aggregation of trade orders and allocation of securities transactions or investment opportunities. Allocations of aggregated trades, particularly trade orders
that were only partially filled due to limited availability, and allocation of investment opportunities raise a potential conflict of interest because JPMorgan has an incentive to allocate trades or investment opportunities to certain accounts or
Funds. For example, JPMorgan has an incentive to cause accounts it manages to participate in an offering where such participation could increase JPMorgan’s overall allocation of securities in that offering. When JPMorgan serves as adviser to
the Funds, as well as certain Funds-of-Funds, it faces certain potential conflicts of interest when allocating the assets of the Funds-of-Funds among its underlying Funds. For example, JPMorgan has an incentive to allocate assets of the
Fund-of-Funds to seed a new Fund or to allocate to an underlying Fund that is small, pays higher fees to JPMorgan or to which JPMorgan has provided seed capital.
Overall Position Limits.
Potential conflicts of interest also exist when JPMorgan maintains certain overall investment limitations on positions in securities or other financial instruments due to, among other things, investment restrictions
imposed upon JPMorgan by law, regulation, contract or internal policies. These limitations have precluded and, in the future could preclude, a Fund from purchasing particular securities or financial instruments, even if the securities or financial
instruments would otherwise meet the Fund’s objectives. For example, there are limits on the aggregate amount of investments by affiliated investors in certain types of securities that may not be exceeded without additional regulatory or
corporate consent. There also are limits on the writing of options by a Fund that could be triggered based on the number of options written by JPMIM on behalf of other investment advisory clients. If certain aggregate ownership thresholds are
reached or certain transactions are undertaken, the ability of a Fund to purchase or dispose of investments, or exercise rights or undertake business transactions, will be restricted.
Soft Dollars.
JPMIM pays certain broker-dealers with “soft” or commission dollars generated by client brokerage transactions in exchange for access to statistical information and other research services. JPMIM faces
conflicts of interest because the statistical information and other research services may benefit certain other clients of JPMIM more than a Fund and can be used in connection with the management of accounts other than the accounts whose trades
generated the commissions.
Additionally, when JPMIM uses
client brokerage commissions to obtain statistical information and other research services, JPMIM receives a benefit because it does not have to produce or pay for the information or other research services itself. As a result, JPMIM may have an
incentive to select a particular broker-dealer in order to obtain such information and other research services from that broker-dealer, rather than to obtain the lowest price for execution.
Redemptions.
JPMorgan, as a seed investor has significant ownership in the Funds. In addition, JPMorgan Funds of Funds and JPMorgan on behalf of its discretionary clients could make significant investments in the Funds. JPMorgan
faces conflicts of interest when considering the effect of redemptions on such Funds and on other shareholders in deciding whether and when to redeem its shares. A large redemption of shares by JPMorgan, by a JPMorgan Fund of Funds or by JPMorgan
acting on behalf of its discretionary clients could result in the Fund selling securities when it otherwise would not have done so, accelerating the realization of capital gains and increasing transaction costs. A large redemption could
significantly reduce the assets of a Fund, causing decreased liquidity and, depending on any applicable expense caps, a higher expense ratio.
Affiliated Transactions.
The Funds are subject to conflicts of interest if they engage in principal or agency transactions with other Funds or with JPMorgan. To the extent permitted by law, the Funds can enter into transactions in which
JPMorgan acts as principal on its own behalf (principal transactions), advises both sides of a transaction (cross transactions) and acts as broker for, and receives a commission from, the Funds (agency transactions). Principal and agency
transactions create the opportunity for JPMorgan to engage in self-dealing. JPMorgan faces a conflict of interest when it engages in a principal or agency transaction on behalf of a Fund, because such transactions result in additional compensation
to JPMorgan. JPMorgan faces a potentially conflicting division of loyalties and responsibilities to the parties in these transactions.
In addition, Affiliates of
JPMIM have direct or indirect interests in electronic communication networks and alternative trading systems (collectively “ECNs”). JPMIM, in accordance with its fiduciary obligation to seek to obtain best execution, from time to time
executes client trades through ECNs in which an Affiliate has, or may acquire, an interest. In such case, the Affiliate will be indirectly compensated based upon its ownership percentage in relation to the transaction fees charged by the ECNs.
JPMorgan also faces conflicts
of interest if a Fund purchases securities during the existence of an underwriting syndicate for such securities, of which JPMorgan is a member because JPMorgan typically receives fees for certain services that it provides to the syndicate and, in
certain cases, will be relieved directly or indirectly of certain financial obligations as a result of a Fund’s purchase of securities.
Affiliated Service Providers.
JPMorgan faces conflicts of interest when the Funds use service providers affiliated with JPMorgan because JPMorgan receives greater overall fees when they are used. Affiliates provide investment advisory, custody, and
transfer agency services to the Funds for which they are compensated by the Funds. Similarly, JPMIM faces a conflict of interest if it decides to use or negotiate the terms of a credit facility for a Fund if the facility is provided by an Affiliate.
In addition, if a JPMorgan Fund of Funds is investing in actively managed underlying funds, JPMIM limits its selection to Funds in the JPMorgan family of mutual funds. JPMIM does not consider or canvass the universe of unaffiliated investment
companies available, even though there may be unaffiliated investment companies that may be more appropriate for the JPMorgan Fund of Funds or that have superior returns. The JPMorgan affiliates providing services to the Funds benefit from
additional fees when a Fund is included as an underlying Fund in a JPMorgan Fund of Funds.
Indexes.
JPMIM or one of its affiliates may develop or own and operate stock market and other indexes based on investment and trading strategies developed by JPMIM or its affiliates or assist unaffiliated entities in creating
indexes that are tracked by certain Funds utilized by JPMIM. Some of the Funds seek to track the performance of these indexes. JPMIM may, from time to time, manage client accounts that invest in the Funds. In addition, JPMIM may manage client
accounts which track the same indexes used by the Funds or which may be based on the same, or substantially similar, strategies that are used in the operation of the indexes and the Funds. The operation of the indexes, the Funds and client accounts
in this manner may give rise to potential conflicts of interest. For example, client accounts that track the same indexes used by the Funds may engage in purchases and sales of securities relating to index changes prior to the implementation of
index updates or the time as of which the Funds engage in similar transactions because the client accounts may be managed and rebalanced on an ongoing basis, whereas the Funds’ portfolios are only rebalanced on a periodic basis corresponding
with the rebalancing of an index. These differences may result in the client accounts having more favorable performance relative to that of the index and the Funds or other client accounts that track the index. Other potential conflicts include
the
potential for unauthorized access to index information, allowing
index changes that benefit JPMIM or other client accounts and not the investors in the Funds. JPMIM has established certain information barriers and other policies to address the sharing of information between different businesses within JPMIM and
its affiliates, including with respect to personnel responsible for maintaining the indexes and those involved in decision-making for the Funds.
Proxy Voting.
Potential conflicts of interest can arise when JPMIM votes proxies for securities held by a Fund. A conflict is deemed to exist when the proxy is for JPMorgan Chase & Co. stock or for J.P. Morgan Funds, or when the
proxy administrator has actual knowledge indicating that an Affiliate is an investment banker or rendered a fairness opinion with respect to the matter that is the subject of the proxy vote. When such conflicts are identified, the proxy will be
voted by an independent third party either in accordance with JPMIM’s proxy voting guidelines or by the third party using its own guidelines. Potential conflicts of interest can arise when JPMIM invests Fund assets in securities of companies
that are also clients of JPMIM or that have material business relationships with JPMIM or an Affiliate and a vote against management could harm or otherwise affect JPMIM’s or the Affiliate’s business relationship with that company. See
the Proxy Voting section in this SAI.
Personal Trading.
JPMorgan and any of its directors, officers, agents or employees, face conflicts of interest when transacting in securities for their own accounts because they could benefit by trading in the same securities as a Fund,
which could have an adverse effect on a Fund.
Valuation.
JPMIM acting in its capacity as the Funds’ administrator is the primary valuation agent of the Funds. JPMIM values securities and assets in the Funds according to the Funds’ valuation policies. From time to
time JPMIM will value an asset differently than an Affiliate values the identical asset, including because the Affiliate has information regarding valuation techniques and models or other information that it does not share with JPMIM. This arises
particularly in connection with securities or other assets for which market quotations are not readily available or for which market quotations do not represent the value at the time of pricing (
e.g
., startup companies) and which are fair valued. JPMIM will also face a conflict with respect to valuations as they affect the amount of JPMIM’s
compensation as investment adviser and administrator.
Information Access.
As a result of JPMorgan’s various other businesses, Affiliates, from time to time, come into possession of information about certain markets and investments which, if known to JPMIM, could cause JPMIM to seek to
dispose of, retain or increase interests in investments held by a Fund or acquire certain positions on behalf of a Fund. However, JPMorgan’s internal information barriers restrict JPMIM’s ability to access such information even when it
would be relevant to its management of the Funds. Such Affiliates can trade differently from the Funds potentially based on information not available to JPMIM. If JPMIM acquires or is deemed to acquire material non-public information regarding an
issuer, JPMIM will be restricted from purchasing or selling securities of that issuer for its clients, including a Fund, until the information has been publicly disclosed or is no longer deemed material. (Such an issuer could include an underlying
Fund in a Fund-of-Funds.)
Gifts and Entertainment.
From time to time, employees of JPMIM receive gifts and/or entertainment from clients, intermediaries, or service providers to the Funds or JPMIM, which could have the appearance of affecting or may potentially affect
the judgment of the employees, or the manner in which they conduct business.
For details of the dollar range
of shares of each Fund beneficially owned by the portfolio managers, see “PORTFOLIO MANAGERS — Portfolio Managers’ Ownership of Securities” in Part I of this SAI.
PORTFOLIO MANAGER COMPENSATION
The Adviser’s portfolio
managers participate in a competitive compensation program that is designed to attract, retain and motivate talented people and closely link the performance of investment professionals to client investment objectives. The total compensation program
includes a base salary fixed from year to year and a variable discretionary incentive award. Base salaries are reviewed annually and awarded based on individual performance and business results taking into account level and scope of position,
experience and market competitiveness. The variable discretionary performance based incentive award consists of cash incentives and deferred compensation which includes mandatory notional investments (as described below) in selected mutual funds
advised by the Adviser or its affiliates (“Mandatory Investment Plan”). These elements reflect individual performance and the performance of the Adviser’s business as a whole.
Each portfolio manager’s
performance is formally evaluated annually based on a variety of factors including the aggregate size and blended performance of the portfolios such portfolio manager manages, individual contribution relative to client risk and return objectives,
and adherence with the Adviser’s compliance, risk and regulatory procedures. In evaluating each portfolio manager’s performance with respect to the mutual funds and/or ETFs he or she manages, a Fund’s pre-tax performance (or the
portion of the funds managed by the portfolio manager) is compared to the appropriate market peer group and to the Fund’s benchmark index listed in the Fund’s Prospectus over one, three and five year periods (or such shorter time as the
portfolio manager has managed the Fund). Investment performance is generally more heavily weighted to the long-term.
Deferred compensation granted
as part of an employee’s annual incentive compensation comprises from 0% to 60% of a portfolio manager’s total performance-based incentives. As the level of incentive compensation increases, the percentage of compensation awarded in
deferred incentives also increases. The Adviser’s portfolio managers are required to notionally invest a certain percentage of their deferred compensation (typically 20% to 50% depending on the level of compensation) into the selected Funds
they manage. The remaining portion of the non-cash incentive is elective and may be notionally invested in any of the mutual funds available in the Mandatory Investment Plan or can be placed in restricted stock. When these awards vest over time, the
portfolio manager receives cash equal to the market value of the notional investment in the selected mutual funds.
CODES OF ETHICS
The Trust, the Adviser and the
Distributor have each adopted codes of ethics pursuant to Rule 17j-1 under the 1940 Act (and pursuant to Rule 204A-1 under the Advisers Act with respect to the Adviser).
The Trust’s code of
ethics includes policies which require “access persons” (as defined in Rule 17j-1) to: (i) place the interest of Trust shareholders first; (ii) conduct personal securities transactions in a manner that avoids any actual or potential
conflict of interest or any abuse of a position of trust and responsibility; and (iii) refrain from taking inappropriate advantage of his or her position with the Trust or a Fund. The Trust’s code of ethics prohibits any access person from:
(i) employing any device, scheme or artifice to defraud the Trust or a Fund; (ii) making to the Trust or a Fund any untrue statement of a material fact or omit to state to the Trust or a Fund a material fact necessary in order to make the statements
made, in light of the circumstances under which they are made, not misleading; (iii) engaging in any act, practice, or course of business which operates or would operate as a fraud or deceit upon the Trust or a Fund; or (iv) engaging in any
manipulative practice with respect to the Trust or a Fund. The Trust’s code of ethics permits personnel subject to the code to invest in securities, including securities that may be purchased or held by a Fund so long as such investment
transactions are not in contravention of the above noted policies and prohibitions.
The code of ethics adopted by
the Adviser requires that all employees must: (i) place the interest of the accounts which are managed by the Adviser first; (ii) conduct all personal securities transactions in a manner that is consistent with the code of ethics and the individual
employee’s position of trust and responsibility; and (iii) refrain from taking inappropriate advantage of their position. Employees of the Adviser are also prohibited from certain mutual fund trading activity including excessive trading of
shares of a mutual fund and effecting or facilitating a mutual fund transaction to engage in market timing. The Adviser’s code of ethics permits personnel subject to the code to invest in securities, including securities that may be purchased
or held by a Fund subject to certain restrictions. However, all employees are required to preclear securities trades (except for certain types of securities such as non-proprietary mutual fund shares and U.S. government securities).
The Distributor’s code of
ethics requires that all employees of the Distributor must: (i) place the interest of the accounts which are managed by affiliates of the Distributor first; (ii) conduct all personal securities transactions in a manner that is consistent with the
code of ethics and the individual employee’s position of trust and responsibility; and (iii) refrain from taking inappropriate advantage of their positions. The Distributor’s code of ethics permits personnel subject to the code to invest
in securities, including securities that may be purchased or held by a Fund subject to the policies and restrictions in such code of ethics.
PORTFOLIO TRANSACTIONS
Investment Decisions and Portfolio Transactions
Pursuant to the JPMIM Advisory
Agreement, the Adviser determines, subject to the general supervision of the Board of Trustees of the Trust and in accordance with a Fund’s investment objective and restrictions, which securities are to be purchased and sold by a Fund and
which brokers are to be eligible to execute its portfolio transactions. The Adviser operates independently in providing services to their respective clients. Investment decisions are the product of many factors in addition to basic suitability for
the particular client involved. Thus, for example, a particular security may be bought or sold for certain clients even though it could have been bought or sold for other clients at the same time. Likewise, a particular security may be bought for
one or more clients when one or more other clients are selling the security. In some instances, one client may sell a particular security to another client. It also happens that two or more clients may simultaneously buy or sell the same security,
in which event each day’s transactions in such security are, insofar as possible, averaged as to price and allocated between such clients in a manner which in the opinion of the Adviser is equitable to each and in accordance with the amount
being purchased or sold by each. There may be circumstances when purchases or sales of portfolio securities for one or more clients will have an adverse effect on other clients.
Brokerage and Research Services
On behalf of a Fund, the
Adviser places orders for all purchases and sales of portfolio securities, enters into repurchase agreements, and may enter into reverse repurchase agreements and execute loans of portfolio securities on behalf of a Fund unless otherwise prohibited.
See “Investment Strategies and Policies.”
Fixed income and debt
securities and municipal bonds and notes are generally traded at a net price with dealers acting as principal for their own accounts without a stated commission. The price of the security usually includes profit to the dealers. In underwritten
offerings, securities are purchased at a fixed price, which includes an amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount. Transactions on stock exchanges (other than foreign stock
exchanges) involve the payment of negotiated brokerage commissions. Such commissions vary among different brokers. Also, a particular broker may charge different commissions according to such factors as the difficulty and size of the transaction.
Transactions in foreign securities generally involve payment of fixed brokerage commissions, which are generally higher than those in the U.S. On occasion, certain securities may be purchased directly from an issuer, in which case no commissions or
discounts are paid.
In
connection with portfolio transactions, the overriding objective is to obtain the best execution of purchase and sales orders. In making this determination, the Adviser considers a number of factors including, but not limited to: the price per unit
of the security, the broker’s execution capabilities, the commissions charged, the broker’s reliability for prompt, accurate confirmations and on-time delivery of securities, the broker-dealer firm’s financial condition, the
broker’s ability to provide access to public offerings, as well as the quality of research services provided. As permitted by Section 28(e) of the Securities Exchange Act, the Adviser may cause the Funds to pay a broker-dealer which provides
brokerage and research services to the Adviser, or the Funds and/or other accounts for which the Adviser exercises investment discretion an amount of commission for effecting a securities transaction for a Fund in excess of the amount other
broker-dealers would have charged for the transaction if the Adviser determines in good faith that the greater commission is reasonable in relation to the value of the brokerage and research services provided by the executing broker-dealer viewed in
terms of either a particular transaction or the Adviser’s overall responsibilities to accounts over which it exercises investment discretion. Not all such services are useful or of value in advising the Funds. The Adviser reports to the Board
of Trustees regarding overall commissions paid by the Funds and their reasonableness in relation to the benefits to the Funds. In accordance with Section 28(e) of the Securities Exchange Act and consistent with applicable SEC guidance and
interpretation, the term “brokerage and research services” includes (i) advice as to the value of securities; (ii) the advisability of investing in, purchasing or selling securities; (iii) the availability of securities or of purchasers
or sellers of securities; (iv) furnishing analyses and reports concerning issues, industries, securities, economic factors and trends, portfolio strategy and the performance of accounts; and (v) effecting securities transactions and performing
functions incidental thereto (such as clearance, settlement, and custody) or required by rule or regulation in connection with such transactions.
Brokerage and research
services received from such broker-dealers will be in addition to, and not in lieu of, the services required to be performed by an Adviser under the Advisory Agreement. The fees that the Funds pay to the Adviser are not reduced as a consequence of
the Adviser’s receipt of brokerage and research services. To the extent the Funds’ portfolio transactions are used to obtain such services, the brokerage commissions paid by the Funds may exceed those that might otherwise be paid by an
amount that cannot be presently determined. Such services generally would be useful and of value to the Adviser in serving one or more of its other clients and, conversely, such services obtained by the placement of brokerage business of other
clients generally would be useful to the Adviser in carrying out its obligations to the Funds. While such services are not expected to reduce the expenses of the Adviser, the Adviser would, through use of the services, avoid the additional expenses
that would be incurred if it should attempt to develop comparable information through its own staff.
Subject to the overriding
objective of obtaining the best execution of orders, the Adviser may allocate a portion of a Fund’s brokerage transactions to affiliates of the Adviser. Under the 1940 Act, persons affiliated with a Fund and persons who are affiliated with
such persons are prohibited from dealing with the Fund as principal in the purchase and sale of securities unless an exemptive order allowing such transactions is obtained from the SEC. The SEC has granted an exemptive order permitting each Fund to
engage in principal transactions with J.P. Morgan Securities LLC, an affiliated broker, involving taxable and tax exempt money market instruments (including commercial paper, banker acceptances and medium term notes) and repurchase agreements. The
orders are subject to certain conditions. An affiliated person of a Fund may serve as its broker in listed or over-the-counter transactions conducted on an agency basis provided that, among other things, the fee or commission received by such
affiliated broker is reasonable and fair compared to the fee or commission received by non-affiliated brokers in connection with comparable transactions.
In addition, a Fund may not
purchase securities during the existence of any underwriting syndicate for such securities of which JPMorgan Chase Bank or an affiliate is a member or in a private placement in which JPMorgan Chase Bank or an affiliate serves as placement agent,
except pursuant to procedures adopted by the Board of Trustees that either comply with rules adopted by the SEC or with interpretations of the SEC’s staff. Each Fund expects to purchase securities from underwriting syndicates of which certain
affiliates of JPMorgan Chase act as a member or manager. Such purchases will be effected in accordance with the conditions set forth in Rule 10f-3 under the 1940 Act and related procedures adopted by the Trustees, including a majority of the
Trustees who are not “interested persons” of a Fund. Among the conditions are that the issuer of any purchased securities will have been in operation for at least three years, that not more than 25% of the underwriting will be purchased
by a Fund and all other accounts over which the same investment adviser has discretion, and that no shares will be purchased from any of the Adviser’s affiliates.
On those occasions when the
Adviser deems the purchase or sale of a security to be in the best interests of a Fund as well as other customers, including other Funds, the Adviser, to the extent permitted by applicable laws and regulations, may, but is not obligated to,
aggregate the securities to be sold or purchased for a Fund with those to be sold or purchased for other customers in order to obtain best execution, including lower brokerage commissions if appropriate. In such event, allocation of the securities
so purchased or sold as well as any expenses incurred in the transaction will be made by the Adviser in the manner it considers to be most equitable and consistent with its fiduciary obligations to its customers, including the Funds. In some
instances, the allocation procedure might not permit a Fund to participate in the benefits of the aggregated trade.
If a Fund that writes options
effects a closing purchase transaction with respect to an option written by it, normally such transaction will be executed by the same broker-dealer who executed the sale of the option. The writing of options by a Fund will be subject to limitations
established by each of the exchanges governing the maximum number of options in each class which may be written by a single investor or group of investors acting in concert, regardless of whether the options are written on the same or different
exchanges or are held or written in one or more accounts or through one or more brokers. The number of options that a Fund may write may be affected by options written by the Adviser for other investment advisory clients. An exchange may order the
liquidation of positions found to be in excess of these limits, and it may impose certain other sanctions.
Allocation of transactions,
including their frequency, to various broker-dealers is determined by a Fund’s Adviser based on its best judgment and in a manner deemed fair and reasonable to Shareholders and consistent with the Adviser’s obligation to obtain the best
execution of purchase and sales orders. In making this determination, the Adviser considers the same factors for the best execution of purchase and sales orders listed above. Accordingly, in selecting broker-dealers to execute a particular
transaction, and in
evaluating the best overall terms available, the Adviser is
authorized to consider the brokerage and research services (as those terms are defined in Section 28(e) of the Securities Exchange Act) provided to the Funds and/or other accounts over which the Adviser exercises investment discretion. The Adviser
may cause a Fund to pay a broker-dealer that furnishes brokerage and research services a higher commission than that which might be charged by another broker-dealer for effecting the same transaction, provided that the Adviser determines in good
faith that such commission is reasonable in relation to the value of the brokerage and research services provided by such broker-dealer, viewed in terms of either the particular transaction or the overall responsibilities of the Adviser to the
Funds. To the extent such services are permissible under the safe harbor requirements of Section 28(e) of the Securities Exchange Act and consistent with applicable SEC guidance and interpretation, such brokerage and research services might consist
of advice as to the value of securities, the advisability of investing in, purchasing, or selling securities, the availability of securities or purchasers or sellers of securities; analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of accounts, market data, stock quotes, last sale prices, and trading volumes. Shareholders of the Funds should understand that the services provided by such brokers may be useful
to the Adviser in connection with its services to other clients and not all the services may be used by the Adviser in connection with the Fund.
Under the policy for JPMIM,
“soft dollar” services refer to arrangements that fall within the safe harbor requirements of Section 28(e) of the Securities Exchange Act, as amended, which allow JPMIM to allocate client brokerage transactions to a broker-dealer in
exchange for products or services that are research and brokerage-related and provide lawful and appropriate assistance in the performance of the investment decision-making process. These services include third party research, market data services,
and proprietary broker-dealer research. The Funds receive proprietary research where broker-dealers typically incorporate the cost of such research into their commission structure. Many brokers do not assign a hard dollar value to the research they
provide, but rather bundle the cost of such research into their commission structure. It is noted in this regard that some research that is available only under a bundled commission structure is particularly important to the investment process.
However, the Funds do not participate in soft dollar arrangements for market data services and third-party research.
Investment decisions for each
Fund are made independently from those for the other Funds or any other investment company or account managed by the Adviser. Any such other investment company or account may also invest in the same securities as the Trust. When a purchase or sale
of the same security is made at substantially the same time on behalf of a given Fund and another investment company or account, the transaction will be averaged as to price, and available investments allocated as to amount, in a manner which the
Adviser of the given Fund believes to be equitable to the Fund(s) and such other investment company or account. In some instances, this procedure may adversely affect the price paid or received by a Fund or the size of the position obtained by a
Fund. To the extent permitted by law, the Adviser may aggregate the securities to be sold or purchased by it for a Fund with those to be sold or purchased by it for other Funds or for other investment companies or accounts in order to obtain best
execution. In making investment recommendations for the Trust, the Adviser will not inquire or take into consideration whether an issuer of securities proposed for purchase or sale by the Trust is a customer of the Adviser or their parents or
subsidiaries or affiliates and in dealing with its commercial customers, the Adviser and their respective parent, subsidiaries, and affiliates will not inquire or take into consideration whether securities of such customers are held by the
Trust.
Effective January
2018, pursuant to the second Markets in Financial Instruments Directive (“MiFID II”), investment managers in the European Union (“EU”), including a segment of the operations of the Adviser, are required to either pay for
research out of their own resources or agree with clients to have research costs paid by clients through research payment accounts that are funded out of trading commissions or by a specific client research charge, provided that the payments for
research are unbundled from the payments for execution. Where such a restriction applies, the Adviser will pay for any research out of its own resources and not through soft dollars. Additionally, MiFID II may have practical ramifications outside
the EU. For example, U.S. asset managers acting under the delegated authority of an EU-based asset manager and U.S. asset managers that are part of a global asset management group with one or more EU affiliates may, in practice, have to restructure
the way they procure, value and pay for research under U.S. laws and regulations to more closely align with the requirements under MiFID II. It is difficult to predict the full impact of MiFID II on the Funds, the Adviser and any sub-advisers, but
it could increase the overall costs of entering into investments, increase the overall price of research and/or reduce access to research.
Portfolio Trading by Authorized Participants
When creation or redemption
transactions consist of cash, the transactions may require a Fund to contemporaneously transact with broker-dealers for purchases or sales of portfolio securities, as applicable. Depending on the timing of the transactions and certain other factors,
such transactions may be placed with the purchasing or redeeming Authorized Participant in its capacity as a broker-dealer or with its affiliated broker-dealer and conditioned upon an agreement with the Authorized Participant or its affiliated
broker-dealer to transact at guaranteed prices in order to reduce transaction costs incurred as a consequence of settling creations or redemptions in cash rather than in-kind.
Specifically, following a
Fund’s receipt of a creation or redemption order, to the extent such purchases or redemptions consist of a cash portion, the Fund may enter an order with the Authorized Participant or its affiliated broker-dealer to purchase or sell the
portfolio securities, as applicable. Such Authorized Participant or its affiliated broker-dealer will be required to guarantee that the Fund will achieve execution of its order at a price at least as favorable to the Fund as the Fund’s
valuation of the portfolio securities used for purposes of calculating the NAV applied to the creation or redemption transaction giving rise to the order. Whether the execution of the order is at a price at least as favorable to the Fund will depend
on the results achieved by the executing firm and will vary depending on market activity, timing and a variety of other factors.
An Authorized Participant is
required to deposit an amount with the Fund in order to ensure that the execution of the order on the terms noted above will be honored on orders arising from creation transactions executed by an Authorized Participant or its affiliate as
broker-dealer. If the broker-dealer executing the order achieves executions in market transactions at a price equal to or more favorable than a Fund’s valuation of the portfolio securities, the Fund receives the benefit of the favorable
executions and the deposit is returned to the Authorized Participant. If, however, the broker-dealer executing the order is unable to achieve a price at least equal to a Fund’s valuation of the securities, the Fund retains the portion of the
deposit equal to the full amount of the execution shortfall (including any taxes, brokerage commissions or other costs) and may require the Authorized Participant to deposit any additional amount required to cover the full amount of the actual
execution transaction.
An
Authorized Participant agrees to pay the shortfall amount in order to ensure that a guarantee on execution will be honored for brokerage orders arising from redemption transactions executed by an Authorized Participant or its affiliate as
broker-dealer. If the broker-dealer executing the order achieves executions in market transactions at a price equal to or more favorable than the Fund’s valuation of the portfolio securities, the Fund receives the benefit of the favorable
executions. If, however, the broker-dealer is unable to achieve executions in market transactions at a price at least equal to the Fund’s valuation of the securities, the Fund will be entitled to the portion of the offset equal to the full
amount of the execution shortfall (including any taxes, brokerage commissions or other costs).
For details of brokerage commissions
paid by the Funds, see “BROKERAGE AND RESEARCH SERVICES — Brokerage Commissions” in Part I of this SAI.
For details of the Funds’
ownership of securities of the Funds’ regular broker dealers, see “BROKERAGE AND RESEARCH SERVICES — Securities of Regular Broker-Dealers” in Part I of this SAI.
ADMINISTRATOR
JPMIM (the
“Administrator”)
1
serves as the administrator to the Funds, pursuant to an Administration Agreement (the “Administration
Agreement”), between the Trust, on behalf of each Fund, and JPMIM. JPMIM is an affiliate of the JPMorgan Chase Bank and an indirect, wholly-owned subsidiary of JPMorgan Chase.
Pursuant to the Administration
Agreement, JPMIM performs or supervises all operations of the Funds for which it serves (other than those performed under the advisory agreement, the custodian agreement, and the transfer agency agreement for the Fund). Under the Administration
Agreement, JPMIM has agreed to maintain the necessary office space for the Funds, and to furnish certain other services required by the Funds with respect to each Fund. JPMIM prepares annual and semi-annual reports to the SEC, prepares federal and
state tax returns and generally assists in all aspects of the Fund’s operations other than those performed under the advisory agreement, any sub-advisory agreements, the custodian agreement, and the
1
|
JPMorgan Funds
Management, Inc., the former Administrator, was merged with and into JPMIM effective April 1, 2016.
|
transfer agency agreement. JPMIM may, at its expense,
subcontract with any entity or person concerning the provision of services under the Administration Agreement. Effective October 1, 2017, JPMorgan Chase Bank serves as the Funds’ sub-administrator (the “Sub-administrator”). Prior
to October 1, 2017, SEI Investments Global Funds Services served as the Funds’ sub-administrator. JPMIM pays the Sub-administrator a fee for its services as the Funds’ Sub-administrator.
If not terminated, the
Administration Agreement shall continue in effect for annual periods beyond April 30 of each year, provided that such continuance is specifically approved at least annually by the vote of a majority of those members of the Board of Trustees who are
not parties to the Administration Agreement or interested persons of any such party. The Administration Agreement may be terminated without penalty, on not less than 60 days’ prior written notice, by the Board of Trustees of the Trust or by
JPMIM.
The Administration
Agreement provides that JPMIM shall not be liable for any error of judgment or mistake of law or any loss suffered by the Funds in connection with the matters to which the Administration Agreement relates, except a loss resulting from willful
misfeasance, bad faith or negligence in the performance of its duties, or from the reckless disregard by it of its obligations and duties thereunder.
In
consideration of the services to be provided by JPMIM pursuant to the Administration Agreement, JPMIM receives from each Fund a pro rata portion of a fee computed daily and paid monthly at an annual rate equal to 0.075% of average daily net assets
of each Fund.
For
details of the administration and administrative services fees paid or accrued, see “ADMINISTRATOR — Administrator Fees” in Part I of this SAI.
DISTRIBUTOR
Shares will be continuously
offered for sale by the Distributor only. The Distributor will deliver the Prospectus and, upon request, this SAI to persons purchasing Creation Unit Aggregations and will maintain records of both orders placed with it and confirmations of
acceptance furnished by it. The Distributor, an indirect, wholly owned subsidiary of JPMorgan Chase, is a broker-dealer registered under the Securities Exchange Act and a member of the Financial Industry Regulatory Authority (“FINRA”).
Although the Distributor does not receive any fees under the Distribution Agreement with the Trust, JPMIM pays the Distributor for certain distribution related services.
Unless otherwise terminated,
the Distribution Agreement will continue in effect for successive one-year terms after the initial two year term if approved at least annually by: (a) the vote of the Board of Trustees, including the vote of a majority of those members of the Board
of Trustees who are not parties to the Distribution Agreement or interested persons of any such party, cast in person at a meeting for the purpose of voting on such approval, or (b) the vote of a majority of the outstanding voting securities of the
Fund. The Distribution Agreement for the Funds provides that it may be terminated as to a Fund at any time, without the payment of any penalty (i) by vote of the Trustees; (ii) by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the Fund; or (iii) by the Distributor upon not less than 60 days’ prior written notice to the Trust. The Distribution Agreement will terminate automatically in the event of its assignment (as defined in the 1940 Act).
The Distributor may also enter
into agreements with securities dealers (“Soliciting Dealers”) who will solicit purchases of Creation Unit Aggregations of Fund Shares. Such Soliciting Dealers may also be Participating Parties (as defined in “Procedures for
Creation of Creation Unit Aggregations” below) and DTC Participants (as defined in “DTC Acts as Securities Depository” below).
CUSTODIAN
Pursuant to the Global Custody
and Fund Accounting Agreement with JPMorgan Chase Bank, 270 Park Avenue, New York, New York 10017 (the “JPMorgan Custody Agreement”), JPMorgan Chase Bank serves as the custodian and fund accounting agent for each Fund. Pursuant to the
JPMorgan Custody Agreement, JPMorgan Chase Bank is responsible for holding portfolio securities and cash and maintaining the books of account and records of portfolio transactions. JPMorgan Chase Bank is an affiliate of the Adviser, the
Administrator and the Distributor.
With respect the Diversified
Alternatives ETF and Managed Futures Strategy ETF, JPMorgan Chase Bank serves as custodian for both the Fund’s and the Subsidiary’s portfolio securities and cash, and in that capacity, maintains certain financial accounting books and
records pursuant to agreements with the Fund and the Subsidiary.
CUSTODY AND FUND ACCOUNTING FEES AND EXPENSES
For custodian services, each
Fund pays to JPMorgan Chase Bank annual safekeeping fees of between 0.0006% and 0.35% of assets held by JPMorgan Chase Bank (depending on the domicile in which the asset is held), calculated monthly in arrears and fees between $2.50 and $80 for
securities trades (depending on the domicile in which the trade is settled), as well as transaction fees on certain activities of $2.50 to $20 per transaction. JPMorgan Chase Bank is also reimbursed for its reasonable out-of pocket or incidental
expenses, including, but not limited to, registration and transfer fees and related legal fees.
JPMorgan Chase Bank may also
be paid $15, $35 or $60 per proxy (depending on the country where the issuer is located) for its service which helps facilitate the voting of proxies throughout the world. For securities in the U.S. market, this fee is waived if the Adviser votes
the proxies directly.
With respect to fund accounting
services, the following schedule shall be employed in the calculation of the fees payable for the services provided under the JPMorgan Custody Agreement. For purposes of determining the asset levels at which a tier applies, assets for all the Funds
(including any Cayman subsidiaries) shall be used.
Tier
One
|
First
$75 billion
|
0.0025%
|
Tier
Two
|
Next
$25 billion
|
0.0020%
|
Tier
Three
|
Over
$100 billion
|
0.0015%
|
Other
Fees:
|
|
|
Annual
Base Fee (in addition to asset based fee)
|
|
$20,000
per Fund
|
In addition, JPMorgan Chase
Bank provides derivative servicing. The fees for these services include a transaction fee of $5 or $75 per new contract (depending on whether the transaction is electronic or manual), a fee of up to $5 or $75 per contract amendment (including
transactions such as trade amendments, cancellations, terminations, novations, option exercises, option expiries, maturities or credit events) and a daily fee of $1.00 per contract for position management services. In addition, a Fund will pay a fee
of $3.00 to $12.25 per day for the valuation of the derivative positions covered by these services.
Pursuant to an arrangement with
JPMorgan Chase Bank, custodian fees may be reduced by amounts calculated as a percentage of uninvested balances for certain Funds.
A Fund and/or its Cayman
subsidiary, as applicable, may at times hold some of their assets in cash, which may subject the Fund and/or the Cayman subsidiary, as applicable, to additional risks and costs, such as increased credit exposure to the custodian bank and fees
imposed for cash balances. Cash positions may also hurt a Fund’s and/or the Cayman subsidiary’s performance.
TRANSFER AGENT
JPMorgan Chase Bank also
serves as the Funds’ transfer agent. As transfer agent, JPMorgan Chase Bank is also responsible for maintaining account records, detailing the ownership of Fund shares and for crediting income, capital gains and other changes in share
ownership to shareholder accounts. JPMorgan Chase Bank will be paid $250 per creation or redemption transaction. The Trust may be reimbursed for all or part of this fee by the Authorized Participant placing the creation or redemption order.
SECURITIES LENDING AGENT
To generate
additional income, the Funds may lend up to 33
1
⁄
3
% of their total assets pursuant to
agreements (“Borrower Agreements”) requiring that the loan be continuously secured by cash. Citibank serves as securities lending agent pursuant to the Securities Lending Agency Agreement effective June 18, 2018, as amended effective
October 4, 2018. The Funds did not loan their securities or employ Citibank during their most recent fiscal year. To the extent that the Funds engage in securities lending during the current fiscal year, information concerning the amounts of income
and fees/compensation related to securities lending activities will be included in the SAI in the Funds’ next annual update to its registration statement.
Under the Securities Lending
Agency Agreement, Citibank acting as agent for the Funds, loans securities to approved borrowers pursuant to Borrower Agreements substantially in the form approved by the Board of Trustees in exchange for collateral. During the term of the loan, the
Fund receives payments from borrowers equivalent to the dividends and interest that would have been earned on securities lent while simultaneously seeking to earn loan fees and income on the investment of cash collateral in accordance with
investment guidelines contained in the Securities Lending Agency Agreement. The Fund retains loan fees and the interest on cash collateral investments but is required to pay the borrower a rebate for the use of cash collateral. In cases where the
lent security is of high value to borrowers, there may be a negative rebate (i.e., a net payment to the Funds). The net income earned on the securities lending (after payment of rebates and the lending agent’s fee) is included in the Statement
of Operations as income from securities lending (net in the Fund’s financial statements). Information on the investment of cash collateral is shown in the Schedule of Portfolio Investments (in the Fund’s financial statements).
Under the
Securities Lending Agency Agreement, Citibank is entitled to (i) a fee equal to 8% of the investment income (net of rebates) on cash collateral delivered to Citibank on the Fund’s behalf in respect of any loans by the Borrowers; and (ii) fees
paid by a Borrower with respect to a loan for which non-cash collateral is provided (to the extent that the Funds subsequently authorize Citibank to accept non-cash collateral for securities loans).
EXPENSES
The Funds pay the expenses
incurred in their operations, including their pro-rata share of expenses of the Trust. These expenses include: investment advisory and administrative fees; the compensation of the Trustees; registration fees; interest charges; taxes; expenses
connected with the execution, recording and settlement of security transactions; fees and expenses of the Funds’ custodian for all services to the Funds, including safekeeping of funds and securities and maintaining required books and
accounts; expenses of preparing and mailing reports to investors and to government offices and commissions; expenses of meetings of investors; listing fees; fees and expenses of independent accountants, legal counsel and any transfer agent,
registrar or dividend disbursing agent of the Trust; insurance premiums; and expenses of calculating the NAV of, and the net income on, shares of the Funds. Service providers to the Funds may, from time to time, voluntarily waive all or a portion of
any fees to which they are entitled.
The Funds’ service providers
have agreed that they will waive fees or reimburse the Funds as described in the Prospectus.
COMPENSATION TO INTERMEDIARIES
JPMIM and/or its affiliates
(“JPMorgan Entities”) may pay certain broker-dealers, banks and other financial intermediaries (“Intermediaries”) for certain activities related to the Funds (“Compensation”). Any Compensation by JPMorgan Entities
will be paid at their own expense out of their legitimate profits and not from the assets of the Funds. Although a portion of JPMorgan Entities’ revenue comes directly or indirectly in part from fees paid by the Funds, Compensation does not
increase the price paid by investors for the purchase of Shares of, or the cost of owning, a Fund. JPMorgan Entities may pay Compensation for Intermediaries’ participating in activities that are designed to make registered representatives,
other professionals and individual investors more knowledgeable about the Funds or for other activities, such as participation in marketing activities and presentations, educational training programs, the support of technology platforms and/or
reporting systems. In addition, JPMorgan Entities may pay Compensation to Intermediaries that make Shares available to their clients or for otherwise promoting the Funds. These may include Compensation to Intermediaries that agree not to charge
their customers any trading commissions when those customers purchase or sell shares of the Funds online and/or that promote the availability of commission-free ETF trading to their customers. Compensation payments of this type are sometimes
referred to as revenue-sharing payments. Compensation will only be paid to the Intermediary, never to individuals other than occasional gifts and entertainment that are permitted by rules of the Financial Industry Regulatory Authority (also known as
FINRA). JPMIM has entered into written agreements to pay Compensation to Charles Schwab & Co., Inc., E*TRADE Securities LLC, CLS Investments, LLC, Morgan Stanley Smith Barney LLC and TD Ameritrade, Inc.
The JPMorgan Entities may be
motivated to pay Compensation to promote the purchase of Fund shares by clients of Intermediaries and the retention of those investments by those clients. To the extent clients of Intermediaries purchase more shares of the Funds or retain shares of
the Funds in their clients’ accounts, the JPMorgan Entities benefit from the incremental management and other fees paid by the Funds with respect to those assets.
Compensation to an
Intermediary may be significant to the Intermediary, and amounts that Intermediaries pay to your salesperson or other investment professional may also be significant for your salesperson or other investment professional. Because an Intermediary may
make decisions about which investment options it will recommend or make available to its clients or what services to provide for various products based on payments it receives or is eligible to receive, Compensation creates conflicts of interest
between the Intermediary and its clients and these financial incentives may cause the Intermediary to recommend the Funds over other investments. The same conflict of interest exists with respect to your salesperson or other investment professional
if he or she receives similar payments from his or her Intermediary firm.
JPMorgan Entities may
determine to pay Compensation based on any number of metrics. For example, JPMorgan Entities may pay Compensation at year-end or other intervals in a fixed amount, an amount based upon an Intermediary’s services at defined levels or an amount
based on the Intermediary’s net sales of one or more Funds in a year or other period or calculated in basis points based on average net assets attributed to the Intermediary. Please contact your salesperson or other investment professional or
visit the Intermediary’s website for more information regarding any Compensation his or her Intermediary firm may receive. Any Compensation paid by the JPMorgan Entities to an Intermediary may create the incentive for an Intermediary to
encourage customers to buy shares of the Funds.
TRUST COUNSEL
The law firm of Dechert LLP, 1095
Avenue of the Americas, New York, NY 10036-6797, is counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The independent registered
public accounting firm for the Trust and the Funds is PricewaterhouseCoopers LLP (“PWC”). PWC conducts an annual audit of the financial statements of each of the Funds and assists in the preparation and/or review of each Fund’s
federal and state income tax returns.
DIVIDENDS AND DISTRIBUTIONS
Each Fund declares and pays
dividends and distributions as described under “Distribution and Tax Matters” in the Prospectuses.
NET ASSET VALUE
The NAV per share of a Fund is
equal to the value of all the assets attributable to that class, minus the liabilities, divided by the number of outstanding shares. NAV of each Fund is calculated each business day as of the close of the New York Stock Exchange (“NYSE”)
which is typically 4:00 p.m. ET. On occasion, the NYSE will close before 4:00 p.m. ET. When that happens, NAV will be calculated as of the time the NYSE closes. The Funds will not treat an intraday unscheduled disruption or closure in NYSE trading
as a closure of the NYSE and will calculate NAV as of 4:00 p.m. ET if the particular disruption or closure directly affects only the NYSE. The following is a discussion of the procedures used by a Fund in valuing its assets.
Securities for which market
quotations are readily available are generally valued at their current market value. Other securities and assets, including securities for which market quotations are not readily available; market quotations are determined not to be reliable; or,
their value has been materially affected by events occurring after the close of trading on the exchange or market on which the security is principally traded (for example, a natural disaster affecting an entire country or region, or an event that
affects an individual company) but before a Fund’s NAV is calculated, may be valued at its fair value in accordance with policies and procedures adopted by the Trust’s Board of Trustees. Fair value represents a good faith determination
of the value of a security or other asset based upon specifically applied procedures. Fair valuation determinations may require subjective determinations. There can be no assurance that the fair value of an asset is the price at which the asset
could have been sold during the period in which the particular fair value was used in determining the Fund’s NAV.
Equity securities listed on a
North American, Central American, South American or Caribbean (“Americas”) securities exchange are generally valued at the last sale price on the exchange on which the security is principally traded that is reported before the time when
the net assets of a Fund are valued. The value of securities listed on the NASDAQ Stock Market, Inc. is generally the NASDAQ official closing price.
Generally, trading of foreign
securities on most foreign markets is completed before the close in trading in U.S. markets. The Funds have implemented fair value pricing on a daily basis for all equity securities other than Americas equity securities. The fair value pricing
utilizes the quotations of an independent pricing service. Trading on foreign markets may also take place on days on which the U.S. markets and the Funds are closed.
Shares of exchange-traded funds
(ETFs) are generally valued at the last sale price on the exchange on which the ETF is principally traded. Shares of open-end mutual funds are valued at their respective NAVs.
Fixed income securities are
valued using market quotations supplied by approved independent third party pricing services, affiliated pricing services or broker/dealers. In determining security prices, pricing services and broker/dealers may consider a variety of inputs and
factors, including, but not limited to proprietary models that may take into account market transactions in securities with comparable characteristics, yield curves, option-adjusted spreads, credit spreads, estimated default rates, coupon rates,
underlying collateral and estimated cash flows.
Assets and liabilities initially
expressed in foreign currencies will be converted into U.S. dollars at the prevailing market rates from an approved independent pricing service as of 4:00 PM ET.
Options (e.g., on stock
indices or equity securities) traded on U.S. equity securities exchanges are valued at the composite mean price, using the National Best Bid and Offer quotes at the close of options trading on such exchanges.
Options traded on foreign
exchanges or U.S. commodities exchanges are valued at the settled price, or if no settled price is available, at the last sale price available prior to the calculation of a Fund’s NAV and will be fair valued by applying fair value factor
provided by independent pricing services, as applicable, for any options involving equity reference obligations listed on exchanges other than North American, Central American, South American or Caribbean securities exchanges.
Exchange traded futures (e.g.,
on stock indices, debt securities or commodities) are valued at the settled price, or if no settled price is available, at the last sale price as of the close of the exchanges on which they trade. Any futures involving equity reference obligations
listed on exchanges other than North American, Central American, South American or Caribbean securities exchanges will be fair valued by applying fair value factor provided by independent pricing services, as applicable.
Non-listed over-the-counter
options and futures are valued utilizing market quotations provided by approved pricing service.
Swaps and structured notes are
priced generally by an approved independent third party or affiliated pricing service or at an evaluated price provided by a counterparty or broker/dealer.
Any derivatives involving
equity reference obligations listed on exchanges other than North American, Central American, South American or Caribbean securities exchanges will be fair valued by applying fair value factor provided by independent pricing services, as
applicable.
Certain
fixed income securities and swaps may be valued using market quotations or valuations provided by pricing services affiliated with the Adviser. Valuations received by a Fund from affiliated pricing services are the same as those provided to other
affiliated and unaffiliated entities by these affiliated pricing services.
Securities or other assets for
which market quotations are not readily available or for which market quotations do not represent the value at the time of pricing (including certain illiquid securities) are fair valued in accordance with procedures established by and under the
supervision and responsibility of the Trustees. The Board of Trustees has established an Audit and Valuation Committee to assist the Board of Trustees in its oversight of the valuation of the Fund’s securities. The Fund’s Administrator
has created a Valuation Committee (“VC”) to (1) make fair value determinations in certain predetermined situations as outlined in the procedures approved by the Board of Trustees and (2) provide recommendations to the Board of
Trustee’s in other situations. The VC includes senior representatives from the Fund’s management as well as the Fund’s investment adviser. Fair value situations could include, but are not limited to: (1) a significant event that
affects the value of a Fund’s securities (e.g., news relating to natural disasters affecting an issuer’s operations or earnings announcements); (2) illiquid securities; (3) securities that may be defaulted or de-listed from an exchange
and are no longer trading; or (4) any other circumstance in which the VC believes that market quotations do not accurately reflect the value of a security.
From time to time, there may be
errors in the calculation of the NAV of the Fund or the processing of creations and redemptions. Shareholders will generally not be notified of the occurrence of an error or the resolution thereof.
DELAWARE TRUST
The Trust was formed as a Delaware
statutory trust on February 25, 2010 pursuant to a Declaration of Trust.
Under Delaware law,
shareholders of a statutory trust shall have the same limitation of personal liability that is extended to stockholders of private corporations for profit organized under Delaware law, unless otherwise provided in the trust’s governing trust
instrument. The Trust’s Declaration of Trust provides that shareholders of the Trust shall not be personally liable for the debts, liabilities, obligations and expenses incurred by, contracted for, or otherwise existing with respect to the
Trust or any series thereof. In addition, the Declaration of Trust provides that neither the Trust, nor the Trustees, officers, employees, nor agents thereof shall have any power to bind personally any shareholders nor to call upon any shareholder
for payment of any sum of money or assessment other than such as the shareholder may personally agree to pay. Moreover, the Trust’s Declaration of Trust expressly provides that the shareholders shall have the same limitation of personal
liability that is extended to shareholders of a private corporation for profit organized under the General Corporation Law of in the State of Delaware.
The Trust’s Declaration
of Trust provides for the indemnification out of the assets held with respect to a particular series of shares of any shareholder or former shareholder held personally liable solely by reason of a claim or demand relating to the person being or
having been a shareholder and not because of the shareholder’s acts or omissions. The Trust’s Declaration of Trust also provides that the Trust, on behalf of the applicable series, may, at its option with prior written notice, assume the
defense of any claim made against a shareholder.
The Trust’s Declaration
of Trust provides that the Trust will indemnify its Trustees and officers against liabilities and expenses incurred in connection with any proceeding in which they may be involved because of their offices with the Trust, unless, as to liability to
the Trust or the shareholders thereof, the Trustees engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their offices. In addition, the Declaration of Trust provides that any
Trustee who has been determined to be an “audit committee financial expert” shall not be subject to a greater liability or duty of care because of such determination.
The Trust shall continue
without limitation of time subject to the provisions in the Declaration of Trust concerning termination by action of the shareholders or by action of the Trustees upon written notice to the shareholders.
DESCRIPTION OF SHARES
The Trust is an open-end,
management investment company organized as a Delaware statutory trust. Each Fund represents a separate series of shares of beneficial interest. See “Delaware Trust.”
The Trust’s Declaration
of Trust permits the Trustees to issue an unlimited number of full and fractional shares (par value $0.0001 per share (or such other value as the Trustees may determine from time to time)) of one or more series and classes within any series and to
divide or combine the shares of any series or class without materially changing the proportionate beneficial interest of such shares of such series or class in the assets held with respect to that series. Each share represents an equal beneficial
interest in the net assets of a Fund with each other share of that Fund. The Trustees of the Trust may authorize the issuance of shares of additional series and the creation of classes of shares within any series with such preferences, voting
powers, rights, duties and privileges as the Trustees may determine; however, the Trustees may not classify or change outstanding shares in a manner materially adverse to shareholders of each share. Upon liquidation of a Fund, shareholders are
entitled to share pro rata in the net assets of a Fund available for distribution to such shareholders. The rights of redemption and exchange are described in the Prospectus and elsewhere in this SAI.
The shareholders of a Fund are
entitled to one vote for each dollar of NAV (or a proportionate fractional vote with respect to the remainder of the NAV of shares, if any), on matters on which shares of a Fund shall be entitled to vote. Subject to the 1940 Act, the Trustees
themselves have the power to alter the number and the terms of office of the Trustees, to lengthen their own terms, or to make their terms of unlimited duration subject to certain removal procedures, and appoint their own successors, provided,
however, that immediately after such appointment the requisite majority of the Trustees have been elected
by the shareholders. The voting rights of shareholders are not
cumulative with respect to the election of Trustees. It is the intention of the Trust not to hold meetings of shareholders annually. The Trustees may call meetings of shareholders for action by shareholder vote as may be required by either the 1940
Act or the Declaration of Trust of the Trust.
Each share of a series
represents an equal proportionate interest in the assets in that series with each other share of that series. The shares of each series participate equally in the earnings, dividends and assets of the particular series. Expenses of the Trust which
are not attributable to a specific series are allocated among all of their series in a manner deemed by the Trustees to be fair and equitable. Shares have no pre-emptive or conversion rights, and when issued, are fully paid and non-assessable.
Shares of each series generally vote together, except when required under federal securities laws to vote separately on matters that may affect a particular class, such as the approval of distribution plans for a particular class.
The Trustees of the Trust may,
without shareholder approval (unless otherwise required by applicable law): (i) cause the Trust to merge or consolidate with or into one or more trusts (or series thereof to the extent permitted by law, partnerships, associations, corporations or
other business entities (including trusts, partnerships, associations, corporations, or other business entities created by the Trustees to accomplish such merger or consolidation) so long as the surviving or resulting entity is an investment company
as defined in the 1940 Act, or is a series thereof, that will succeed to or assume the Trust’s registration under the 1940 Act and that is formed, organized, or existing under the laws of the U.S. or of a state, commonwealth, possession or
territory of the U.S., unless otherwise permitted under the 1940 Act; (ii) cause the shares to be exchanged under or pursuant to any state or federal statute to the extent permitted by law; or (iii) cause the Trust to reorganize as a corporation,
limited liability company or limited liability partnership under the laws of Delaware or any other state or jurisdiction. However, the exercise of such authority may be subject to certain restrictions under the 1940 Act.
The Trustees may, without
shareholder vote, generally restate, amend or otherwise supplement the Trust’s governing instruments, including the Declaration of Trust and the By-Laws, without the approval of shareholders, subject to limited exceptions, such as the right to
elect Trustees.
The
Trustees, without obtaining any authorization or vote of shareholders, may change the name of any series or dissolve or terminate any series.
Shares have no subscription or
preemptive rights and only such conversion or exchange rights as the Board may grant in its discretion. When issued for payment as described in the Prospectus and this SAI, Shares will be fully paid and non-assessable. In the event of a liquidation
or dissolution of the Trust, Shares of a Fund are entitled to receive the assets available for distribution belonging to the Fund, and a proportionate distribution, based upon the relative asset values of a Fund, of any general assets not belonging
to any particular Fund which are available for distribution.
Rule 18f-2 under the 1940 Act
provides that any matter required to be submitted to the holders of the outstanding voting securities of an investment company such as the Trust shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of
the outstanding Shares of a Fund affected by the matter. For purposes of determining whether the approval of a majority of the outstanding Shares of a Fund will be required in connection with a matter, a Fund will be deemed to be affected by a
matter unless it is clear that the interests of a Fund in the matter are identical, or that the matter does not affect any interest of the Fund. Under Rule 18f-2, the approval of an investment advisory agreement or any change in investment policy
would be effectively acted upon with respect to a Fund only if approved by a majority of the outstanding Shares of a Fund. However, Rule 18f-2 also provides that the ratification of independent public accountants, the approval of principal
underwriting contracts, and the election of Trustees may be effectively acted upon by Shareholders of the Trust voting without regard to series.
PORTFOLIO HOLDINGS DISCLOSURE
The Trust has adopted a policy
regarding the disclosure of information about each Fund’s portfolio holdings. The Board of Trustees of the Trust must approve all material amendments to this policy. A Fund’s complete portfolio holdings are publicly disseminated each day
the Fund is open for business through financial reporting and news services, including publicly accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for
Fund shares, together with estimates and actual cash components, is publicly disseminated daily prior to the opening of the Exchange via the National Securities Clearing Corporation (“NSCC”). The basket represents one Creation Unit of a
Fund. The Trust, the Adviser and the Distributor will not disseminate
non-public information concerning the Trust, except: (i) to a
party for a legitimate business purpose related to the day-to-day operations of the Funds or (ii) to any other party for a legitimate business or regulatory purpose, upon waiver or exception.
PROXY VOTING PROCEDURES AND GUIDELINES
The Board of Trustees has
delegated to the Adviser and its affiliated advisers, proxy voting authority with respect to the Funds’ portfolio securities. To ensure that the proxies of portfolio companies are voted in the best interests of the Funds, the Funds’
Board of Trustees has adopted the Adviser’s detailed proxy voting procedures (the “Procedures”) that incorporate guidelines (“Guidelines”) for voting proxies on specific types of issues.
The Adviser and its affiliated
advisers are part of a global asset management organization with the capability to invest in securities of issuers located around the globe. Because the regulatory framework and the business cultures and practices vary from region to region, the
Guidelines are customized for each region to take into account such variations. Separate Guidelines cover the regions of (1) North America, (2) Europe, Middle East, Africa, Central America and South America, (3) Asia (ex-Japan) and (4) Japan,
respectively.
Notwithstanding the variations
among the Guidelines, all of the Guidelines have been designed with the uniform objective of encouraging corporate action that enhances shareholder value. As a general rule, in voting proxies of a particular security, the Adviser and its affiliated
advisers will apply the Guidelines of the region in which the issuer of such security is organized. Except as noted below, proxy voting decisions will be made in accordance with the Guidelines covering a multitude of both routine and non-routine
matters that the Adviser and its affiliated advisers have encountered globally, based on many years of collective investment management experience.
To oversee and monitor the
proxy-voting process, the Adviser has established a proxy committee and appointed a proxy administrator in each global location where proxies are voted. The primary function of each proxy committee is to review periodically general proxy-voting
matters, review and approve the Guidelines annually, and provide advice and recommendations on general proxy-voting matters as well as on specific voting issues. The procedures permit an independent voting service to perform certain services
otherwise carried out or coordinated by the proxy administrator.
Although for many matters the
Guidelines specify the votes to be cast, for many others, the Guidelines contemplate case-by-case determinations. In addition, there will undoubtedly be proxy matters that are not contemplated by the Guidelines. For both of these categories of
matters and to override the Guidelines, the Procedures require a certification and review process to be completed before the vote is cast. That process is designed to identify actual or potential material conflicts of interest (between the Fund on
the one hand, and the Fund’s Adviser, principal underwriter or an affiliate of any of the foregoing, on the other hand) and ensure that the proxy vote is cast in the best interests of the Fund. A conflict is deemed to exist when the proxy is
for JPMorgan Chase & Co. stock or for the Fund, or when the proxy administrator has actual knowledge indicating that a JPMorgan affiliate is an investment banker or rendered a fairness opinion with respect to the matter that is the subject of
the proxy vote. When such conflicts are identified, the proxy will be voted by an independent third party either in accordance with JPMorgan proxy voting guidelines or by the third party using its own guidelines.
When other types of potential
material conflicts of interest are identified, the proxy administrator and, as necessary and a legal representative from the proxy committee will evaluate the potential conflict of interest and determine whether such conflict actually exists, and if
so, will recommend how the Adviser will vote the proxy. In addressing any material conflict, the Adviser may take one or more of the following measures (or other appropriate action): removing or “walling off” from the proxy voting
process certain Adviser personnel with knowledge of the conflict, voting in accordance with any applicable Guideline if the application of the Guideline would objectively result in the casting of a proxy vote in a predetermined manner, or deferring
the vote to or obtaining a recommendation from an third independent party, in which case the proxy will be voted by, or in accordance with the recommendation of, the independent third party.
The following summarizes some of
the more noteworthy types of proxy voting policies of the non-U.S. Guidelines:
•
|
Corporate
governance procedures differ among the countries. Because of time constraints and local customs, it is not always possible for the Adviser to receive and review all proxy materials in connection with each item submitted for a vote. Many proxy
statements are in foreign languages. Proxy materials are generally mailed by the issuer to the sub-custodian which holds the securities
|
|
for the client
in the country where the portfolio company is organized, and there may not be sufficient time for such materials to be transmitted to the Adviser in time for a vote to be cast. In some countries, proxy statements are not mailed at all, and in some
locations, the deadline for voting is two to four days after the initial announcement that a vote is to be solicited and it may not always be possible to obtain sufficient information to make an informed decision in good time to vote.
|
•
|
Certain markets
require that shares being tendered for voting purposes are temporarily immobilized from trading until after the shareholder meeting has taken place. Elsewhere, notably emerging markets, it may not always be possible to obtain sufficient information
to make an informed decision in good time to vote. Some markets require a local representative to be hired in order to attend the meeting and vote in person on our behalf, which can result in considerable cost. The Adviser also considers the cost of
voting in light of the expected benefit of the vote. In certain instances, it may sometimes be in the Fund’s best interests to intentionally refrain from voting in certain overseas markets from time to time.
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Where proxy
issues concern corporate governance, takeover defense measures, compensation plans, capital structure changes and so forth, the Adviser pays particular attention to management’s arguments for promoting the prospective change. The
Adviser’s sole criterion in determining its voting stance is whether such changes will be to the economic benefit of the beneficial owners of the shares.
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The Adviser is
in favor of a unitary board structure of the type found in the United Kingdom as opposed to tiered board structures. Thus, the Adviser will generally vote to encourage the gradual phasing out of tiered board structures, in favor of unitary boards.
However, since tiered boards are still very prevalent in markets outside of the United Kingdom, local market practice will always be taken into account.
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The Adviser will
use its voting powers to encourage appropriate levels of board independence, taking into account local market practice.
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The Adviser will
usually vote against discharging the board from responsibility in cases of pending litigation, or if there is evidence of wrongdoing for which the board must be held accountable.
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The Adviser
will vote in favor of increases in capital which enhance a company’s long-term prospects. The Adviser will also vote in favor of the partial suspension of preemptive rights if they are for purely technical reasons (e.g., rights offers which
may not be legally offered to shareholders in certain jurisdictions). However, the Adviser will vote against increases in capital which would allow the company to adopt “poison pill” takeover defense tactics, or where the increase in
authorized capital would dilute shareholder value in the long term.
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The Adviser
will vote in favor of proposals which will enhance a company’s long-term prospects. The Adviser will vote against an increase in bank borrowing powers which would result in the company reaching an unacceptable level of financial leverage,
where such borrowing is expressly intended as part of a takeover defense, or where there is a material reduction in shareholder value.
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The Adviser will
generally vote against anti-takeover devices.
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Where
social or environmental issues are the subject of a proxy vote, the Adviser will consider the issue on a case-by-case basis, keeping in mind at all times the best economic interests of its clients.
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The following summarizes some of
the more noteworthy types of proxy voting policies of the U.S. Guidelines:
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The Adviser
considers votes on director nominees on a case-by-case basis. Votes generally will be withheld from directors who: (a) attend less than 75% of board and committee meetings without a valid excuse; (b) implement or renew a dead-hand poison pill; (c)
are affiliated directors who serve on audit, compensation or nominating committees or are affiliated directors and the full board serves on such committees or the company does not have such committees; (d) ignore a shareholder proposal that is
approved by a majority of either the shares outstanding or the votes cast based on a review over a consecutive two year time frame; (e) are insiders and affiliated outsiders on boards that are not at least majority independent; or (f) are CEOs of
publically-traded companies who serve on more than three public boards or serve on more than four public company boards. In addition, votes are generally withheld for directors who serve on committees in certain
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cases. For
example, the Adviser generally withholds votes from audit committee members in circumstances in which there is evidence that there exists material weaknesses in the company’s internal controls.
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The Adviser
votes proposals to classify boards on a case-by-case basis, but normally will vote in favor of such proposal if the issuer’s governing documents contain each of eight enumerated safeguards (for example, a majority of the board is composed of
independent directors and the nominating committee is composed solely of such directors).
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The Adviser also
considers management poison pill proposals on a case-by-case basis, looking for shareholder-friendly provisions before voting in favor.
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The Adviser votes
against proposals for a super-majority vote to approve a merger.
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The Adviser
considers proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan on a case-by-case basis, taking into account such factors as the extent of dilution and whether the transaction will result in a
change in control.
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The Adviser
considers vote proposals with respect to compensation plans on a case-by-case basis. The analysis of compensation plans focuses primarily on the transfer of shareholder wealth (the dollar cost of pay plans to shareholders) and includes an analysis
of the structure of the plan and pay practices of other companies in the relevant industry and peer companies. Other matters included in the analysis are the amount of the company’s outstanding stock to be reserved for the award of stock
options, whether the exercise price of an option is less than the stock’s fair market value at the date of the grant of the options, and whether the plan provides for the exchange of outstanding options for new ones at lower exercise prices.
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The Adviser
also considers on a case-by-case basis proposals to change an issuer’s state of incorporation, mergers and acquisitions and other corporate restructuring proposals and certain social issue proposals.
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The Adviser
generally votes for management proposals which seek shareholder approval to make the state of incorporation the exclusive forum for disputes if the company is a Delaware corporation; otherwise, the Adviser votes on a case by case basis.
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The Adviser
generally encourages a level of reporting on environmental matters that is not unduly costly or burdensome and which does not place the company at a competitive disadvantage, but which provides meaningful information to enable shareholders to
evaluate the impact of the company’s environmental policies and practices on its financial performance. The Adviser considers how environmental and social issues affect the risks to which companies are exposed and how they impact the
performance of those companies. In addition, the Adviser considers various factors including: the company’s current level of disclosure and the consistency of disclosure across its industry; existing and proposed mandated regulatory
requirements or formal guidance at the local, state, or national level; if the proposed disclosure would result in unintended consequences such as creating a competitive disadvantage; and whether the company incorporates environmental or social
issues in a risk assessment or risk reporting framework. In general, the Adviser supports management disclosure practices that are overall consistent with the goals and objective expressed above. Proposals with respect to companies that have been
involved in controversies, fines or litigation are expected to be subject to heightened review and consideration.
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The
Adviser reviews Say on Pay proposals on a case by case basis with additional review of proposals where the issuer’s previous year’s proposal received a low level of support.
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In accordance with regulations
of the SEC, the Fund’s proxy voting records for the most recent 12-month period ended June 30 are on file with the SEC and are available on the Funds’ website at www.jpmorganfunds.com and are on the SEC’s website at
www.sec.gov.
ADDITIONAL INFORMATION
The Trust is not required to
hold a meeting of Shareholders for the purpose of electing Trustees except that (i) the Trust is required to hold a Shareholders’ meeting for the election of Trustees at such time as less than a majority of the Trustees holding office have
been elected by Shareholders and (ii) if, as a result of a vacancy on the Board of Trustees, less than two-thirds of the Trustees holding office have been elected by the Shareholders, that vacancy may only be filled by a vote of the Shareholders. In
addition, Trustees may be removed from office by a written consent signed by the holders of Shares representing two-thirds of the
outstanding Shares of a Trust at a meeting duly called for the
purpose, which meeting shall be called and held in accordance with the By-Laws of the Trust. Except as set forth above, the Trustees may continue to hold office and may appoint successor Trustees.
As used in the Trust’s
Prospectuses and in this SAI, “assets belonging to a Fund” means the consideration received by the Trust upon the issuance or sale of Shares in that Fund, together with all income, earnings, profits, and proceeds derived from the
investment thereof, including any proceeds from the sale, exchange, or liquidation of such investments, and any funds or payments derived from any reinvestment of such proceeds, and any general assets of the Trust not readily identified as belonging
to a particular Fund that are allocated to that Fund by the Trust’s Board of Trustees. The Board of Trustees may allocate such general assets in any manner it deems fair and equitable. It is anticipated that the factor that will be used by the
Board of Trustees in making allocations of general assets to particular Funds will be the relative NAV of the respective Funds at the time of allocation. Assets belonging to a particular Fund are charged with the direct liabilities and expenses in
respect of that Fund, and with a share of the general liabilities and expenses of the Trust not readily identified as belonging to a particular Fund that are allocated to that Fund in proportion to the relative NAV of the respective Funds at the
time of allocation. The timing of allocations of general assets and general liabilities and expenses of the Trust to a particular Fund will be determined by the Board of Trustees of the Trust and will be in accordance with generally accepted
accounting principles. Determinations by the Board of Trustees of the Trust as to the timing of the allocation of general liabilities and expenses and as to the timing and allocable portion of any general assets with respect to a particular Fund are
conclusive.
As used in
this SAI and the Prospectuses, the term “majority of the outstanding voting securities” of the Trust, a particular Fund means the following when the 1940 Act governs the required approval: the affirmative vote of the lesser of (a) more
than 50% of the outstanding shares of the Trust, such Fund or such class of such Fund, or (b) 67% or more of the shares of the Trust, such Fund or such class of such Fund present at a meeting at which the holders of more than 50% of the outstanding
shares of the Trust, such Fund or such class of such Fund are represented in person or by proxy. Otherwise, the declaration of trust, articles of incorporation or by-laws usually govern the needed approval and generally require that if a quorum is
present at a meeting, the vote of a majority of the shares of the Trust, such Fund or such class of such Fund, as applicable, shall decide the question.
Telephone calls to the Funds,
the Funds’ service providers or a Financial Intermediary as Financial Intermediary may be recorded. With respect to the securities offered hereby, this SAI and the Prospectuses do not contain all the information included in the Registration
Statements of the Trust filed with the SEC under the 1933 Act and the 1940 Act. Pursuant to the rules and regulations of the SEC, certain portions have been omitted. The Registration Statement, including the exhibits filed therewith, may be examined
at the office of the SEC in Washington, D.C.
Statements contained in this
SAI and the Prospectuses concerning the contents of any contract or other document are not necessarily complete, and in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration
Statements of the Trusts. Each such statement is qualified in all respects by such reference.
No dealer, salesman or any
other person has been authorized to give any information or to make any representations, other than those contained in the Prospectuses and this SAI, in connection with the offer contained therein and, if given or made, such other information or
representations must not be relied upon as having been authorized by the Trust, the Fund or the Distributor. The Prospectuses and this SAI do not constitute an offer by any Fund or by the Distributor to sell or solicit any offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is unlawful for the Funds or the Distributor to make such offer in such jurisdictions.
APPENDIX A — PURCHASES AND REDEMPTIONS
BOOK ENTRY ONLY SYSTEM
The
following information supplements and should be read in conjunction with the section in the Funds’ Prospectus entitled “Buying and Selling Shares.”
The Depository Trust Company
(“DTC”) acts as securities depositary for the Shares. Shares of a Fund are represented by securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Certificates will not be issued for Shares.
DTC, a limited-purpose trust
company, was created to hold securities of its participants (the “DTC Participants”) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry
changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other
organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock Exchange (“NYSE”) and FINRA. Access to the DTC system is also available to
others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the “Indirect Participants”).
Beneficial ownership of Shares
is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as
“Beneficial Owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and
Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares.
Conveyance of all notices,
statements and other communications to Beneficial Owners is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a
listing of the Shares holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each
such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by
such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to
applicable statutory and regulatory requirements.
Share distributions shall be
made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their
respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners of Shares held through such DTC Participants will be governed by standing
instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants.
The Trust has no responsibility
or liability for any aspects of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC
Participants.
DTC may
determine to discontinue providing its service with respect to the Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall
take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other
arrangements with respect thereto satisfactory to the Exchange.
CREATION AND REDEMPTION OF CREATION UNITS
General
The Trust issues and sells
Shares of the Funds only in Creation Units on a continuous basis through the Distributor, without an initial sales load, at their NAV next determined after receipt, on any Business Day (as defined herein), of an order in proper form. An Authorized
Participant (defined below) that is not a “qualified institutional buyer,” as such term is defined under Rule 144A of the Securities Act of 1933, will not be able to receive, as part of a redemption, restricted securities eligible for
resale under Rule 144A.
A
“Business Day” with respect to the Fund is any day on which the Exchange is open for business. As of the date of this SAI, the Exchange observes the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Continuous Offering
The method by which Creation
Units are created and traded may raise certain issues under applicable securities laws. Because new Creation Units are issued and sold by a Fund on an ongoing basis, at any point a “distribution,” as such term is used in the 1933 Act,
may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner that could render them statutory underwriters
and subject them to the prospectus delivery requirement and liability provisions of the 1933 Act.
For example, a broker-dealer
firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an order with the Distributor, breaks them down into constituent shares and sells such shares directly to customers or if it chooses to couple the
creation of new shares with an active selling effort involving solicitation of secondary market demand for shares. A determination of whether one is an underwriter for purposes of the 1933 Act must take into account all the facts and circumstances
pertaining to the activities of the broker-dealer or its client in the particular case and the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an
underwriter.
Broker-dealer firms should
also note that dealers who are not “underwriters” but are effecting transactions in Shares, whether or not participating in the distribution of Shares, generally are required to deliver a prospectus. This is because the prospectus
delivery exemption in Section 4(a)(3) of the 1933 Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. Firms that incur a prospectus delivery obligation with respect to Shares of a Fund are reminded
that, pursuant to Rule 153 under the 1933 Act, a prospectus delivery obligation under Section 5(b)(2) of the 1933 Act owed to an exchange member in connection with a sale on the Exchange is satisfied by the fact that the prospectus is available at
the Exchange upon request. The prospectus delivery mechanism provided in Rule 153 is available only with respect to transactions on an exchange.
Portfolio Deposit
The consideration for a
purchase of Creation Units (except with respect to certain Funds) generally consists of the in-kind deposit of a portfolio of securities and other investments (the “Deposit Instruments”) included in each Fund and an amount of cash
computed as described below (the “Cash Amount”). The Cash Amount together with the Deposit Instruments, as applicable, are referred to as the “Portfolio Deposit,” which represents the minimum initial and subsequent investment
amount for a Creation Unit of a Fund. For certain Funds, Creation Units are issued partially or principally for cash, as specified in the Fund’s Prospectus and Part I of this SAI.
In the event a Fund requires
Deposit Instruments in consideration for purchasing a Creation Unit, the portfolio of securities required may, in certain limited circumstances (such as in connection with pending changes to the Fund’s Underlying Index), be different than the
portfolio of securities the Fund will deliver upon redemption of Fund Shares.
In the event a Fund requires
Deposit Instruments and a Cash Amount in consideration for purchasing a Creation Unit, the function of the Cash Amount is to compensate for any differences between the NAV per Creation Unit and the Deposit Amount (as defined below). The Cash Amount
would be an amount equal to the difference between the NAV of the Shares (per Creation Unit) and the “Deposit Amount,” which is an amount equal to the aggregate market value of the Deposit Instruments. If the Cash Amount is a positive
number (the NAV per Creation Unit exceeds the Deposit Amount), the Authorized Participant will deliver
the Cash Amount. If the Cash Amount is a negative number (the
NAV per Creation Unit is less than the Deposit Amount), the Authorized Participant will receive the Cash Amount. Computation of the Cash Amount excludes any stamp duty or other similar fees and expenses payable upon transfer of beneficial ownership
of the Deposit Instruments, which shall be the sole responsibility of the Authorized Participant.
The Administrator, through the
NSCC, makes available on each Business Day, immediately prior to the opening of business on the Exchange (currently 9:30 a.m. Eastern time), the list of the names and the required number of shares of each Deposit Instrument to be included in the
current Portfolio Deposit (based on information at the end of the previous Business Day), as well as information regarding the Cash Amount for a Fund. Such Portfolio Deposit is applicable, subject to any adjustments as described below, in order to
effect creations of Creation Units of a Fund until such time as the next-announced Portfolio Deposit composition is made available.
In addition, the Trust reserves
the right to accept a basket of securities or cash that differs from Deposit Instruments or to permit the substitution of an amount of cash (i.e., a “cash in lieu” amount) to be added to the Cash Amount to replace any Deposit Instrument
which may, among other reasons, not be available in sufficient quantity for delivery, not be permitted to be re-registered in the name of the Trust as a result of an in-kind creation order pursuant to local law or market convention or which may not
be eligible for transfer through the Clearing Process (described below), or which may not be eligible for trading by a Participating Party (defined below). In light of the foregoing, in order to seek to replicate the in-kind creation order process,
the Trust expects to purchase the Deposit Instruments represented by the cash in lieu amount in the secondary market (“Market Purchases”). In such cases where the Trust makes Market Purchases because a Deposit Instrument may not be
permitted to be re-registered in the name of the Trust as a result of an in-kind creation order pursuant to local law or market convention, or for other reasons, the Authorized Participant will reimburse the Trust for, among other things, any
difference between the market value at which the securities were purchased by the Trust and the cash in lieu amount (which amount, at the Adviser’s discretion, may be capped), applicable registration fees and taxes. Brokerage commissions
incurred in connection with the Trust’s acquisition of Deposit Instruments may be at the expense of a Fund and will affect the value of all Shares of the Fund; but the Adviser may adjust the transaction fee to the extent the composition of the
Deposit Instruments changes or cash in lieu is added to the Cash Amount to protect ongoing shareholders.
In addition to the list of
names and numbers of securities constituting the current Deposit Instruments of a Portfolio Deposit, the Administrator, through the NSCC, also makes available on each Business Day, the estimated Cash Component adjusted through the close of the
trading day. In addition, on a continuous basis throughout the day, the intra-day indicative value will be calculated and disseminated by the third party in accordance with relevant listing standards.
Procedures for Creation of Creation Units
To be eligible to place orders
with the Distributor to create Creation Units of a Fund, an entity or person either must be (1) a “Participating Party,” i.e., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of
the NSCC; or (2) a DTC Participant (see “Book Entry Only System”); which, in either case, must have executed an agreement with the Distributor (as it may be amended from time to time in accordance with its terms) (“Participant
Agreement”) (discussed below). A Participating Party and DTC Participant are collectively referred to as an “Authorized Participant.” All Creation Units of a Fund, however created, will be entered on the records of DTC in the name
of Cede & Co. for the account of a DTC Participant.
All orders to create Creation
Units must be placed in multiples of a certain number of Shares of a Fund, as disclosed under “
PURCHASE AND REDEMPTION OF CREATION UNITS
” in Part I of this SAI. Except as described below, and in all
cases subject to the terms of the applicable Participant Agreement, all orders to create Creation Units, whether through the NSCC Clearing Process or outside the NSCC Clearing Process through DTC or otherwise, must be received by the Distributor no
later than the closing time of the regular trading session on the Exchange (“Closing Time”) (ordinarily 4:00 p.m. Eastern time or, for Custom Orders (discussed below), such earlier time set forth in the Participant Agreement), in each
case on the date such order is placed in order for creation of Creation Units to be effected based on the NAV of a Fund as determined on such date. A “Custom Order” may be placed by an Authorized Participant in the event that the Trust
permits or requires the substitution of an amount of cash to be added to the Cash Amount to replace any Deposit Instrument which may not be available in sufficient quantity for delivery or which may not be eligible for trading by such Authorized
Participant or the investor for which it is acting, or other relevant reason. The Business Day on which a creation order (or order to redeem as discussed below) is placed is herein referred to as the “Transmittal Date.” Orders must
be
transmitted by telephone or other transmission method acceptable
to the Distributor pursuant to procedures set forth in the Participant Agreement, as described below (see “Placement of Creation Orders Using NSCC Clearing Process”). Severe economic or market disruptions or changes, or telephone or
other communication failure, may impede the ability to reach the Distributor, a Participating Party or a DTC Participant. Creation Units may be created in advance of the receipt by the Trust of all or a portion of the Portfolio Deposit. In such
cases, the Authorized Participant will remain liable for the full deposit of the missing portion(s) of the Portfolio Deposit and will be required to post collateral with the Trust consisting of cash at least equal to a percentage of the
marked-to-market value of such missing portion(s) that is specified in the Participant Agreement. The Trust may use such collateral to buy the missing portion(s) of the Portfolio Deposit at any time and will subject such Authorized Participant to
liability for any shortfall between the cost to the Trust of purchasing such securities and the value of such collateral. The Trust will have no liability for any such shortfall. The Trust will return any unused portion of the collateral to the
Authorized Participant once the entire Fund Deposit has been properly received by the Distributor and deposited into the Trust.
Orders to create Creation
Units of a Fund shall be placed with a Participating Party or DTC Participant, as applicable, in the form required by such Participating Party or DTC Participant. Investors should be aware that their particular broker may not have executed a
Participant Agreement, and that, therefore, orders to create Creation Units of a Fund may have to be placed by the investor’s broker through a Participating Party or a DTC Participant who has executed a Participant Agreement. At any given time
there may be only a limited number of broker-dealers that have executed a Participant Agreement. Those placing orders to create Creation Units of the Fund through the NSCC Clearing Process should afford sufficient time to permit proper submission of
the order to the Distributor prior to the Closing Time on the Transmittal Date.
Orders for creation that are
effected outside the NSCC Clearing Process are likely to require transmittal by the DTC Participant earlier on the Transmittal Date than orders effected using the NSCC Clearing Process. Those persons placing orders outside the NSCC Clearing Process
should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Instruments and Cash Amount.
Orders to create Creation
Units of a Fund may be placed through the Clearing Process utilizing procedures applicable to domestic funds for domestic securities (“Domestic Funds”) (see “Placement of Creation Orders Using NSCC Clearing Process”) or
outside the NSCC Clearing Process utilizing the procedures applicable to either Domestic Funds or Foreign Funds for foreign securities (“Foreign Funds”) (see “ Placement of Creation Orders Outside NSCC Clearing Process —
Domestic Funds” and “Placement of Creation Orders Outside NSCC Clearing Process — Foreign Funds”). In the event that the Fund includes both domestic and foreign securities, the time for submitting orders is as stated in the
“Placement of Creation Orders Outside NSCC Clearing Process — Foreign Funds” and “Placement of Redemption Orders Outside NSCC Clearing Process — Foreign Funds” sections below shall operate.
Placement of Creation Orders Using NSCC Clearing
Process
Portfolio Deposits
created through the NSCC Clearing Process, if available, must be delivered through a Participating Party that has executed a Participant Agreement.
The Participant Agreement
authorizes the Distributor to transmit to the NSCC on behalf of the Participating Party such trade instructions as are necessary to effect the Participating Party’s creation order. Pursuant to such trade instructions from the Distributor to
the NSCC, the Participating Party agrees to transfer the requisite Deposit Instruments (or contracts to purchase such Deposit Instruments that are expected to be delivered in a “regular way” manner by the second (2nd) Business Day
(“T+2” basis)) and the Cash Amount to the Trust, together with such additional information as may be required by the Distributor. Each Fund reserves the right to settle Creation Unit transactions on a basis other than T+2 if necessary or
appropriate under the circumstances and compliant with applicable law. An order to create Creation Units of a Fund through the NSCC Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the
Distributor not later than the Closing Time on such Transmittal Date and (ii) all other procedures set forth in the Participant Agreement are properly followed.
Placement of Creation Orders Outside NSCC Clearing
Process — Domestic Funds
Portfolio
Deposits created outside the NSCC Clearing Process must be delivered through a DTC Participant that has executed a Participant Agreement. A DTC Participant who wishes to place an order creating Creation Units of a Fund to be effected outside the
NSCC Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant is not using the NSCC Clearing Process and that the creation of Creation Units will instead be effected through a transfer of securities and
cash. The Portfolio Deposit transfer must be ordered by the DTC Participant in a timely fashion so as to ensure the delivery of the requisite number of Deposit Instruments through DTC to the account of the Trust by no later than 11:00 a.m. Eastern
time, of the next Business Day immediately following the Transmittal Date. All questions as to the number of Deposit Instruments to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered
securities, will be determined by the Trust, whose determination shall be final and binding. The cash equal to the Cash Component must be transferred directly to the Custodian through the Federal Reserve wire system in a timely manner so as to be
received by the Custodian no later than 2:00 p.m. Eastern time, on the next Business Day immediately following the Transmittal Date. An order to create Creation Units of a Fund outside the NSCC Clearing Process is deemed received by the Distributor
on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed. However, if the
Distributor does not receive both the requisite Deposit Instruments and the Cash Amount in a timely fashion on the next Business Day immediately following the Transmittal Date, such order may be cancelled. Upon written notice to the Distributor,
such cancelled order may be resubmitted the following Business Day using the Portfolio Deposit as newly constituted to reflect the current NAV of the applicable Fund. The delivery of Creation Units so created will occur no later than the second
(2nd) Business Day following the day on which the creation order is deemed received by the Distributor. Each Fund reserves the right to settle Creation Unit transactions on a basis other T+2 if necessary or appropriate under the circumstances and
compliant with applicable law.
Additional transaction fees
may be imposed with respect to transactions effected outside the NSCC Clearing Process (through a DTC Participant) and in circumstances in which any cash can be used in lieu of Deposit Instruments to create Creation Units. (See “Creation
Transaction Fee” section below.)
Placement of Creation Orders Outside NSCC Clearing
Process — Foreign Funds
The Distributor will inform the
Transfer Agent, the Adviser and the Custodian upon receipt of a Creation Order. The Custodian will then provide such information to the appropriate subcustodian. For each Fund, the Custodian will cause the subcustodian of such Fund to maintain an
account into which the Deposit Instruments (or the cash value of all or part of such securities, in the case of a permitted or required cash purchase or “cash in lieu” amount) will be delivered. Deposit Instruments must be delivered to
an account maintained at the applicable local custodian. The Trust must also receive, on or before the contractual settlement date, immediately available or same day funds estimated by the Custodian to be sufficient to pay the Cash Amount next
determined after receipt in proper form of the purchase order, together with the creation transaction fee described below.
Once the Transfer Agent has
accepted a creation order, the Transfer Agent will confirm the issuance of a Creation Unit of the Fund against receipt of payment, at such NAV as will have been calculated after receipt in proper form of such order. The Transfer Agent will then
transmit a confirmation of acceptance of such order.
Creation Units will not be
issued until the transfer of good title to the Trust of the Deposit Instruments and the payment of the Cash Component have been completed. When the subcustodian has delivered to the account of the relevant subcustodian, the Distributor and the
Adviser will be notified of such delivery and the Transfer Agent will issue and cause the delivery of the Creation Units.
Acceptance of Creation Orders
The Trust and the Distributor
reserve the absolute right to reject or revoke acceptance of a creation order transmitted to it in respect of a Fund, for example, if (a) the order is not in proper form; (b) the purchaser or group of related purchasers, upon obtaining the Creation
Units of Shares, would own 80% or more of the outstanding Shares of such Fund; (c) the acceptance of the Portfolio Deposit would have certain adverse tax consequences, such as causing the Fund no longer to meet RIC status under the Code for federal
tax purposes; (d) the acceptance of the Portfolio Deposit would, in the opinion of the Fund, be unlawful, as in the case of a purchaser who was banned from trading in securities (e) the acceptance of the
Portfolio Deposit would otherwise, in the discretion of the
Fund, the Adviser and/or sub-advisers, have an adverse effect on the Fund or on the rights of the Fund’s beneficial owners; or; or (f) there exist circumstances outside the control of the Fund that make it impossible to process purchases of
Creation Units of Shares for all practical purposes. Examples of such circumstances include: acts of God or public service or utility problems such as fires, floods, extreme weather conditions and power outage resulting in telephone, telecopy and
computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Funds, the Adviser, any sub-adviser, the Transfer Agent, the Custodian, the Distributor, DTC,
NSCC or any other participant in the purchase process; and similar extraordinary events. The Transfer Agent will notify a prospective creator of its rejection of the order of such person. The Trust, the Custodian, any subcustodian and the
Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits to Authorized Participants nor shall either of them incur any liability to Authorized Participants for the failure to give
any such notification. All questions as to the number of shares of each security in the Deposit Instruments and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the
Trust’s determination shall be final and binding.
Creation Units of a Fund may
be created in advance of receipt by the Trust of all or a portion of the applicable Deposit Instruments as described below. In these circumstances, the initial deposit will have a value greater than the NAV of the Shares on the date the order is
placed in proper form since, in addition to available Deposit Instruments, cash must be deposited in an amount equal to the sum of (i) the Cash Amount, plus (ii) at least 105%, which the Trust may change from time to time, of the market value of the
undelivered Deposit Instruments (the “Additional Cash Deposit”) with the Fund pending delivery of any missing Deposit Instruments.
If an Authorized Participant
determines to post an Additional Cash Deposit as collateral for any undelivered Deposit Instruments, such Authorized Participant must deposit with the Custodian the appropriate amount of federal funds by 10:00 a.m. New York, (or such other time as
specified by the Trust) on the date of requested settlement. If the Custodian does not receive the Additional Cash Deposit in the appropriate amount by such time, then the order may be deemed to be rejected and the AP shall be liable to a fund for
losses, if any, resulting therefrom. An additional amount of cash shall be required to be deposited with the Custodian, pending delivery of the missing Deposit Instruments to the extent necessary to maintain the Additional Cash Deposit with the
Trust in an amount at least equal to 105% as required, which the Trust may change from time to time, of the daily marked to market value of the missing Deposit Instruments. To the extent that missing Deposit Securities are not received by the
specified time on the settlement date, or in the event a marked-to market payment is not made within one Business Day following notification by the Distributor that such a payment is required, the Trust may use the cash on deposit to purchase the
missing Deposit Instruments. The Authorized Participant will be liable to the Trust for the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the
Deposit Instruments exceeds the market value of such Deposit Instruments on the transmittal date plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit
once all of the missing Deposit Instruments have been properly received by the Custodian or purchased by the Trust and deposited into the Trust. In addition, a transaction fee will be charged in all cases.
Creation Transaction Fee
A fixed creation transaction
fee is imposed on each creation transaction regardless of the number of Creation Units purchased in the transaction. The amount of the creation transaction fee for a Fund is disclosed under “
PURCHASE AND
REDEMPTION OF CREATION UNITS
” in Part I of this SAI. In addition, a variable charge for cash creations or for creations outside the NSCC Clearing Process currently of up to four times the basic creation transaction fee will be imposed.
In the case of cash creations or where the Trust permits a creator to substitute cash in lieu of depositing a portion of the Deposit Instruments, the creator may be assessed an additional variable charge to compensate a Fund for the costs associated
with purchasing the applicable securities. (See “Portfolio Deposit” section above.) As a result, in order to seek to replicate the in-kind creation order process, the Trust expects to purchase, in the secondary market or otherwise gain
exposure to, the portfolio securities that could have been delivered as a result of an in-kind creation order pursuant to local law or market convention, or for other reasons (“Market Purchases”). In such cases where the Trust makes
Market Purchases, the Authorized Participant will reimburse the Trust for, among other things, any difference between the market value at which the securities and/or financial instruments were purchased by the Trust and the cash in lieu amount
(which amount, at the Adviser’s discretion, may be capped), applicable registration fees, brokerage commissions and certain taxes. The Adviser may adjust the transaction fee to the extent the composition of the creation
securities changes or cash in lieu is added to the Cash Amount
to protect ongoing shareholders. Creators of Creation Units are responsible for the costs of transferring the securities constituting the Deposit Instruments to the account of the Trust.
Redemption of Creation Units
Shares may be redeemed only in
Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor, only on a Business Day and only through a Participating Party or DTC Participant who has executed a Participant Agreement.
The Trust will not redeem Shares in amounts less than Creation Units.
Beneficial owners also may sell Shares in the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have
such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit. Investors should expect to incur brokerage and other costs
in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit. See with respect to each Fund, the section entitled “Summary Information — The Fund’s Main Risks” and “More About the
Fund — Investment Risks” in the applicable Prospectus.
The Administrator, through
NSCC, makes available immediately prior to the opening of business on the Exchange (currently 9:30 a.m. Eastern time) on each day that the Exchange is open for business, the identity of a Fund’s securities and/or an amount of cash that will be
applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day. A Fund’s securities received on redemption (“Redemption Instruments”) may include, with respect
to a passively managed Fund, securities in different proportions than securities of the Underlying Index or may include securities not currently represented in the Underlying Index. Redemption Instruments received on redemption may not be identical
to Deposit Instruments that are applicable to creations of Creation Units. An Authorized Participant submitting a redemption request is deemed to represent to the Trust that it (or its client) (i) owns outright or has full legal authority and legal
beneficial right to tender for redemption the requisite number of Shares to be redeemed and can receive the entire proceeds of the redemption, and (ii) the Shares to be redeemed have not been loaned or pledged to another party nor are they the
subject of a repurchase agreement, securities lending agreement or such other arrangement which would preclude the delivery of such Shares to the Trust. The Trust reserves the right to verify these representations at its discretion, but will
typically require verification with respect to a redemption request from a Fund in connection with higher levels of redemption activity and/or short interest in the Fund. If the Authorized Participant, upon receipt of a verification request, does
not provide sufficient verification of its representations as determined by the Trust, the redemption request will not be considered to have been received in proper form and may be rejected by the Trust. Unless cash redemptions are permitted or
required for a Fund, the redemption proceeds for a Creation Unit generally consist of Redemption Instruments as announced by the Administrator on the Business Day of the request for redemption, plus cash in an amount equal to the difference between
the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Redemption Instruments, less the redemption transaction fee and variable fees described below. Should the Redemption
Instruments have a value greater than the NAV of the Shares being redeemed, a compensating cash payment to the Trust equal to the differential plus the applicable redemption transaction fee will be required to be arranged for by or on behalf of the
redeeming shareholder.
The
Trust may suspend the right of redemption or postpone the date of payment for Shares for more than seven days when:
(a)
|
trading on the
Exchange is broadly restricted by the applicable rules and regulations of the SEC;
|
(b)
|
the Exchange is
closed for other than customary weekend and holiday closing;
|
(c)
|
the SEC has by
order permitted such suspension; or
|
(d)
|
the
SEC has declared a market emergency.
|
Redemption Transaction Fee
The basic redemption
transaction fee (as described in “PURCHASE AND REDEMPTION OF CREATION UNITS” in Part I of this SAI) is the same no matter how many Creation Units are being redeemed pursuant to any one redemption request. An additional charge up to four
times the redemption transaction fee will be charged with respect to cash redemptions or redemptions outside of the NSCC Clearing Process. An additional variable charge for cash redemptions or partial cash redemptions (when cash redemptions are
permitted or required for a Fund) may also be imposed to compensate each
applicable Fund for the costs associated with selling the
applicable securities. As a result, in order to seek to replicate the in-kind redemption order process, the Trust expects to sell, in the secondary market, the portfolio securities or settle any financial instruments that may not be permitted to be
re-registered in the name of the Participating Party as a result of an in-kind redemption order pursuant to local law or market convention, or for other reasons (“Market Sales”). In such cases where the Trust makes Market Sales, the
Authorized Participant will reimburse the Trust for, among other things, any difference between the market value at which the securities and/or financial instruments were sold or settled by the Trust and the cash in lieu amount (which amount, at the
Adviser’s discretion, may be capped), applicable registration fees, brokerage commissions and certain taxes (“Transaction Costs”). The Adviser may adjust the transaction fee to the extent the composition of the redemption
securities changes or cash in lieu is added to the Cash Amount to protect ongoing shareholders. In no event will transaction fees charged by a Fund in connection with a redemption exceed 2% of the value of each Creation Unit. Investors who use the
services of a broker or other such intermediary may be charged a fee for such services. To the extent a Fund cannot recoup the amount of Transaction Costs incurred in connection with a redemption from the redeeming shareholder because of the 2% cap
or otherwise, those Transaction Costs will be borne by the Fund’s remaining shareholders and negatively affect the Fund’s performance.
Placement of Redemption Orders Using NSCC Clearing
Process
Orders to redeem
Creation Units of the Fund through the NSCC Clearing Process, if available, must be delivered through a Participating Party that has executed the Participant Agreement. An order to redeem Creation Units of a Fund using the Clearing Process is deemed
received on the Transmittal Date if (i) such order is received by the Distributor not later than 4:00 p.m. Eastern time on such Transmittal Date (or, for custom orders where cash replaces any Redemption Instrument, such earlier time set forth in the
Participant Agreement); and (ii) all other procedures set forth in the Participant Agreement are properly followed; such order will be effected based on the NAV of the Fund as next determined. An order to redeem Creation Units of the Fund using the
NSCC Clearing Process made in proper form but received by the Fund after 4:00 p.m. Eastern time, will be deemed received on the next Business Day immediately following the Transmittal Date. The requisite Redemption Instruments (or contracts to
purchase such Redemption Instruments which are expected to be delivered in a “regular way” manner) and the applicable cash payment will be transferred by the second (2nd) Business Day following the date on which such request for
redemption is deemed received. Each Fund reserves the right to settle Creation Unit transactions on a basis other than T+2 if necessary or appropriate under the circumstances and compliant with applicable law.
Placement of Redemption Orders Outside NSCC Clearing
Process — Domestic Funds
Orders to redeem Creation
Units of a Fund outside the NSCC Clearing Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units of a Fund to be effected
outside the NSCC Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Units of the Fund will instead be effected through transfer of
Creation Units of the Fund directly through DTC. An order to redeem Creation Units of a Fund outside the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than
4:00 p.m. Eastern time on such Transmittal Date; (ii) such order is preceded or accompanied by the requisite number of Shares of Creation Units specified in such order, which delivery must be made through DTC to the Custodian no later than 11:00
a.m. Eastern time, on such Transmittal Date (the “DTC Cut-Off-Time”); and (iii) all other procedures set forth in the Participant Agreement are properly followed.
After the Distributor has
deemed an order for redemption outside the NSCC Clearing Process received, the Custodian will initiate procedures to transfer the requisite Redemption Instruments (or contracts to purchase such Redemption Instruments) which are expected to be
delivered within two Business Days and the cash redemption payment to the redeeming Beneficial Owner by the second Business Day following the Transmittal Date on which such redemption order is deemed received by the Custodian. Each Fund reserves the
right to settle Creation Unit transactions on a basis other than T+2 if necessary or appropriate under the circumstances and compliant with applicable law. An additional variable redemption transaction fee of up to four times the basic transaction
fee is applicable to redemptions outside the NSCC Clearing Process.
To the extent contemplated by
an Authorized Participant’s agreement, in the event the Authorized Participant has submitted a redemption request in proper form but is unable to transfer all or part of the Creation Unit to be redeemed to the Fund’s Transfer Agent, the
Transfer Agent will nonetheless accept the
redemption request in reliance on the undertaking by the
Authorized Participant to deliver the missing shares as soon as possible. Such undertaking shall be secured by the Authorized Participant’s delivery and maintenance of collateral consisting of cash having a value (marked to market daily) of at
least 105%, which the Trust may change from time to time, of the value of the missing shares.
The current procedures for
collateralization of missing shares require, among other things, that any cash collateral shall be in the form of U.S. dollars in immediately available funds and shall be held by the Custodian and marked to market daily, and that the fees of the
Custodian and any sub-custodians in respect of the delivery, maintenance and redelivery of the cash collateral shall be payable by the Authorized Participant. The Authorized Participant’s agreement will permit the Trust, on behalf of the Fund,
to purchase the missing shares or acquire the Deposit Instruments and the Cash Amount underlying such shares at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such
shares, Deposit Instruments or Cash Amount and the value of the collateral.
Placement of Redemption Orders Outside NSCC Clearing
Process — Foreign Funds
Arrangements satisfactory to
the Trust must be in place for the Participating Party to transfer the Creation Units through DTC on or before the settlement date. Redemptions of Shares for Redemption Instruments will be subject to compliance with applicable U.S. federal and state
securities laws and a Fund (whether or not it otherwise permits or requires cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Fund could not lawfully deliver specific Redemption Instruments upon
redemptions or could not do so without first registering the Deposit Securities under such laws.
In connection with taking
delivery of Shares for Redemption Instruments upon redemption of Creation Units, a redeeming shareholder or entity acting on behalf of a redeeming shareholder must maintain appropriate custody arrangements with a qualified broker-dealer, bank or
other custody providers in each jurisdiction in which any of the Redemption Instruments are customarily traded, to which account such Redemption Instruments will be delivered. If neither the redeeming shareholder nor the entity acting on behalf of a
redeeming shareholder has appropriate arrangements to take delivery of the Redemption Instruments in the applicable foreign jurisdiction and it is not possible to make other such arrangements, or if it is not possible to effect deliveries of the
Redemption Instruments in such jurisdictions, the Trust may, in its discretion, exercise its option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds in cash.
Deliveries of redemption
proceeds generally will be made within two business days. Due to the schedule of holidays in certain countries or for other reasons, however, the delivery of redemption proceeds may take longer than two business days after the day on which the
redemption request is received in proper form. In such cases, the local market settlement procedures will not commence until the end of the local holiday periods.
The holidays applicable to the
Foreign Funds (including the Funds) are listed below. The proclamation of new holidays, the treatment by market participants of certain days as “informal holidays” (
e.g.
, days on which no or
limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of existing holidays or changes in local securities delivery practices, could affect the information set forth herein at some time in the
future.
In calendar year
2018 and 2019, the dates of regular holidays affecting the relevant securities markets in which the Funds invest are as follows (please note these holiday schedules are subject to potential changes in the relevant securities markets):
2018
AUSTRALIA
|
|
|
|
January
1
|
April
2
|
August
6
|
December
25
|
January
26
|
April
25
|
October
1
|
December
26
|
March
30
|
June
11
|
November
6
|
|
AUSTRIA
|
|
|
|
January
1
|
May
10
|
August
15
|
December
25
|
January
6
|
May
21
|
October
26
|
December
26
|
April
2
|
May
31
|
November
1
|
|
May
1
|
June
10
|
December
8
|
|
BELGIUM
|
|
|
|
January
1
|
May
10
|
November
1
|
December
25
|
April
2
|
May
21
|
December
24
|
December
26
|
May
1
|
August
15
|
|
|
BRAZIL
|
|
|
|
January
1
|
March
30
|
May
31
|
November
2
|
February
12
|
April
21
|
September
7
|
November
15
|
February
13
|
May
1
|
October
12
|
December
25
|
CANADA
|
|
|
|
January
1
|
May
21
|
September
3
|
December
25
|
February
19
|
July
2
|
October
8
|
December
26
|
March
30
|
August
6
|
November
11
|
|
CHILE
|
|
|
|
January
1
|
May
21
|
September
18
|
November
2
|
March
30
|
July
2
|
September
19
|
December
8
|
March
31
|
July
16
|
October
15
|
December
25
|
April
1
|
August
15
|
November
1
|
December
31
|
May
1
|
|
|
|
CHINA
|
|
|
|
January
1
|
February
19
|
April
30
|
October
2
|
February
15
|
February
20
|
May
1
|
October
3
|
February
16
|
February
21
|
June
18
|
October
4
|
February
17
|
April
5
|
September
24
|
October
5
|
February
18
|
April
6
|
October
1
|
|
COLOMBIA
|
|
|
|
January
1
|
May
10
|
July
20
|
December
8
|
January
8
|
May
13
|
August
7
|
December
25
|
March
19
|
May
31
|
August
15
|
|
March
29
|
June
11
|
October
15
|
|
March
30
|
June
17
|
November
5
|
|
May
1
|
July
2
|
November
12
|
|
CZECH
REPUBLIC
|
|
|
|
January
1
|
May
1
|
July
6
|
December
25
|
March
30
|
May
8
|
September
28
|
December
26
|
April
2
|
July
5
|
December
24
|
|
DENMARK
|
|
|
|
January
1
|
April
2
|
May
21
|
December
26
|
March
29
|
April
27
|
June
5
|
December
31
|
March
30
|
May
10
|
December
24
|
|
April
1
|
May
11
|
December
25
|
|
EGYPT
|
|
|
|
January
7
|
April
25
|
August
21
|
September
11
|
January
25
|
May
1
|
August
22
|
November
20
|
April
8
|
July
1
|
August
23
|
|
April
9
|
July
23
|
|
|
*
The Egyptian market is closed every Friday.
|
FINLAND
|
|
|
|
January
1
|
April
2
|
December
6
|
December
25
|
January
6
|
May
1
|
December
24
|
December
26
|
March
30
|
|
|
|
FRANCE
|
|
|
|
January
1
|
May
1
|
May
28
|
November
1
|
March
30
|
May
7
|
August
15
|
December
25
|
April
2
|
May
8
|
October
31
|
December
26
|
GERMANY
|
|
|
|
January
1
|
May
10
|
October
3
|
December
25
|
March
30
|
May
21
|
October
31
|
December
26
|
April
2
|
May
31
|
November
1
|
December
31
|
May
1
|
|
|
|
GREECE
|
|
|
|
January
6
|
April
9
|
May
28
|
December
25
|
February
19
|
May
1
|
August
15
|
December
26
|
April
6
|
|
|
|
HONG
KONG
|
|
|
|
January
1
|
April
2
|
June
18
|
October
1
|
February
16
|
April
5
|
July
2
|
December
25
|
February
19
|
May
1
|
September
25
|
December
26
|
March
30
|
May
22
|
|
|
HUNGARY
|
|
|
|
January
1
|
March
16
|
August
20
|
October
23
|
March
15
|
|
|
|
INDIA
|
|
|
|
January
26
|
May
1
|
October
2
|
December
25
|
March
30
|
August
15
|
|
|
INDONESIA
|
|
|
|
January
1
|
May
1
|
June
15
|
September
12
|
February
16
|
May
10
|
June
16
|
November
21
|
March
17
|
May
30
|
August
17
|
December
25
|
March
30
|
June
1
|
August
22
|
December
31
|
April
14
|
|
|
|
IRELAND
|
|
|
|
January
1
|
May
7
|
October
29
|
December
26
|
March
30
|
June
4
|
December
24
|
December
31
|
April
2
|
August
6
|
December
25
|
|
ISRAEL
|
|
|
|
March
1
|
May
20
|
September
11
|
September
24
|
April
6
|
July
22
|
September
18
|
October
1
|
April
19
|
September
10
|
September
19
|
|
*
The Israeli market is closed every Friday.
|
ITALY
|
|
|
|
January
1
|
April
25
|
August
15
|
December
25
|
March
30
|
May
1
|
November
1
|
December
26
|
April
2
|
|
|
|
JAPAN
|
|
|
|
January
1
|
March
21
|
July
16
|
November
3
|
January
2
|
April
30
|
August
11
|
November
23
|
January
3
|
May
3
|
September
17
|
December
24
|
January
8
|
May
4
|
September
24
|
December
31
|
February
12
|
May
5
|
October
8
|
|
KUWAIT
|
|
|
|
January
2
|
June
15
|
August
22
|
November
20
|
February
25
|
June
16
|
August
23
|
|
February
26
|
June
17
|
August
24
|
|
April
13
|
August
21
|
September
11
|
|
*
The Kuwaiti market is closed every Friday.
|
LUXEMBOURG
|
|
|
|
January
1
|
May
10
|
August
15
|
December
25
|
April
2
|
May
21
|
November
1
|
December
26
|
May
1
|
June
23
|
|
|
MALAYSIA
|
|
|
|
January
1
|
May
1
|
September
16
|
December
25
|
February
1
|
August
31
|
September
17
|
|
MEXICO
|
|
|
|
January
1
|
March
30
|
September
16
|
December
1
|
February
5
|
May
1
|
November
2
|
December
12
|
March
19
|
May
5
|
November
19
|
December
25
|
March
29
|
|
|
|
MOROCCO
|
|
|
|
January
1
|
May
1
|
June
15
|
|
January
11
|
June
15
|
July
29
|
|
NETHERLANDS
|
|
|
|
January
1
|
April
27
|
May
13
|
December
25
|
March
30
|
May
1
|
May
21
|
December
26
|
April
2
|
May
10
|
October
28
|
|
NEW
ZEALAND
|
|
|
|
January
2
|
February
6
|
April
25
|
December
25
|
January
22
|
March
30
|
June
4
|
December
26
|
January
29
|
April
2
|
October
22
|
|
NIGERIA
|
|
|
|
January
1
|
May
1
|
June
15
|
December
26
|
March
8
|
May
27
|
August
22
|
|
March
30
|
May
29
|
October
1
|
|
April
2
|
June
12
|
December
25
|
|
NORWAY
|
|
|
|
March
29
|
May
1
|
May
21
|
December
25
|
March
30
|
May
10
|
December
24
|
December
31
|
April
2
|
May
17
|
|
|
OMAN
|
|
|
|
January
1
|
June
17
|
August
23
|
November
18
|
April
13
|
June
18
|
August
24
|
November
19
|
June
15
|
July
23
|
August
25
|
November
20
|
June
16
|
August
22
|
September
11
|
|
*
The Omani market is closed every Friday.
|
PAKISTAN
|
|
|
|
January
2
|
June
26
|
August
14
|
September
29
|
March
23
|
June
27
|
September
1
|
|
May
1
|
June
28
|
|
|
PERU
|
|
|
|
January
1
|
May
1
|
July
29
|
November
1
|
March
29
|
June
29
|
August
30
|
December
8
|
March
30
|
July
28
|
October
8
|
December
25
|
PHILIPPINES
|
|
|
|
January
1
|
April
9
|
August
27
|
December
25
|
March
29
|
May
1
|
November
1
|
December
30
|
March
30
|
June
12
|
November
30
|
December
31
|
POLAND
|
|
|
|
January
1
|
May
1
|
August
15
|
December
25
|
March
30
|
May
3
|
November
1
|
December
26
|
April
2
|
May
31
|
December
24
|
|
PORTUGAL
|
|
|
|
January
1
|
April
2
|
December
25
|
December
26
|
March
30
|
May
1
|
|
|
QATAR
|
|
|
|
February
13
|
June
16
|
August
22
|
December
18
|
March
4
|
June
17
|
August
23
|
|
June
15
|
August
21
|
August
24
|
|
*
The Qatari market is closed every Friday.
|
RUSSIA
|
|
|
|
January
1
|
February
19
|
May
28
|
November
12
|
January
2
|
February
23
|
June
12
|
November
22
|
January
3
|
March
8
|
July
4
|
December
25
|
January
4
|
March
30
|
September
3
|
|
January
5
|
May
1
|
October
3
|
|
January
15
|
May
9
|
November
5
|
|
SINGAPORE
|
|
|
|
January
1
|
May
1
|
August
9
|
November
6
|
February
16
|
May
29
|
August
22
|
December
25
|
March
30
|
June
15
|
|
|
SOUTH
AFRICA
|
|
|
|
January
1
|
April
2
|
June
16
|
December
16
|
March
21
|
April
27
|
August
9
|
December
25
|
March
30
|
May
1
|
September
24
|
December
26
|
SOUTH
KOREA
|
|
|
|
January
1
|
May
1
|
June
13
|
September
26
|
February
15
|
May
5
|
August
15
|
October
3
|
February
16
|
May
7
|
September
23
|
October
9
|
February
17
|
May
22
|
September
24
|
December
25
|
March
1
|
June
6
|
September
25
|
|
SPAIN
|
|
|
|
January
1
|
April
2
|
August
15
|
December
6
|
March
19
|
May
1
|
September
11
|
December
24
|
March
29
|
May
31
|
October
12
|
December
25
|
March
30
|
July
25
|
November
1
|
December
26
|
SWEDEN
|
|
|
|
January
1
|
May
1
|
June
6
|
December
25
|
March
29
|
May
10
|
June
22
|
December
26
|
March
30
|
May
18
|
December
24
|
December
31
|
April
2
|
May
21
|
|
|
SWITZERLAND
|
|
|
|
January
1
|
April
2
|
May
21
|
December
25
|
January
2
|
May
1
|
May
31
|
December
26
|
March
30
|
May
10
|
August
1
|
|
TAIWAN
|
|
|
|
January
1
|
April
5
|
May
1
|
October
10
|
February
28
|
|
|
|
THAILAND
|
|
|
|
January
1
|
April
13
|
May
29
|
December
5
|
January
2
|
April
16
|
July
26
|
December
10
|
March
2
|
May
1
|
August
13
|
December
31
|
April
6
|
May
7
|
October
23
|
|
TURKEY
|
|
|
|
January
1
|
May
1
|
August
30
|
October
29
|
April
23
|
May
19
|
|
|
UNITED
ARAB EMIRATES
|
|
|
January
1
|
August
21
|
August
26
|
November
30
|
April
13
|
August
22
|
September
11
|
December
2
|
June
14
|
August
23
|
November
20
|
December
3
|
*
The United Arab Emirates markets are closed every Friday.
|
UNITED
KINGDOM
|
|
|
|
January
1
|
April
2
|
May
28
|
December
25
|
March
30
|
May
7
|
August
27
|
December
26
|
VIETNAM
|
|
|
|
January
2
|
January
29
|
April
6
|
May
2
|
January
27
|
January
30
|
May
1
|
September
4
|
January
28
|
|
|
|
2019
AUSTRALIA
|
|
|
|
January
1
|
April
22
|
August
5
|
December
25
|
January
28
|
April
25
|
October
7
|
|
April
19
|
May
6
|
November
5
|
|
AUSTRIA
|
|
|
|
January
1
|
May
30
|
August
15
|
December
8
|
January
6
|
June
10
|
October
26
|
December
25
|
April
22
|
June
20
|
November
1
|
December
26
|
May
1
|
|
|
|
BELGIUM
|
|
|
|
January
1
|
May
30
|
August
15
|
December
25
|
April
22
|
June
10
|
November
1
|
|
May
1
|
July
21
|
November
11
|
|
BRAZIL
|
|
|
|
January
1
|
April
19
|
September
7
|
December
25
|
March
4
|
May
1
|
October
12
|
|
March
5
|
June
20
|
November
2
|
|
March
6
|
July
9
|
November
15
|
|
CANADA
|
|
|
|
January
1
|
April
22
|
August
5
|
December
25
|
February
11
|
May
20
|
September
2
|
December
26
|
February
18
|
June
21
|
October
14
|
|
April
19
|
July
1
|
November
11
|
|
CHILE
|
|
|
|
January
1
|
June
29
|
September
19
|
December
25
|
April
19
|
July
16
|
October
12
|
December
26
|
May
1
|
August
15
|
October
31
|
|
May
21
|
September
18
|
November
1
|
|
CHINA
|
|
|
|
January
1
|
February
7
|
June
7
|
October
2
|
February
4
|
February
8
|
September
13
|
October
3
|
February
5
|
April
5
|
September
30
|
October
4
|
February
6
|
May
1
|
October
1
|
October
7
|
COLOMBIA
|
|
|
|
January
1
|
May
1
|
August
7
|
December
8
|
January
7
|
June
3
|
August
19
|
December
25
|
March
25
|
June
24
|
October
14
|
|
April
18
|
July
1
|
November
4
|
|
April
19
|
July
20
|
November
11
|
|
CZECH
REPUBLIC
|
|
|
|
January
1
|
May
1
|
September
28
|
December
24
|
April
19
|
May
8
|
October
28
|
December
25
|
April
22
|
July
5
|
November
17
|
December
26
|
DENMARK
|
|
|
|
January
1
|
April
22
|
June
5
|
December
25
|
April
18
|
May
17
|
June
10
|
December
26
|
April
19
|
May
30
|
December
24
|
December
31
|
EGYPT
|
|
|
|
January
7
|
May
1
|
August
12
|
September
1
|
January
25
|
June
5
|
August
13
|
October
6
|
April
25
|
June
6
|
August
14
|
November
10
|
April
29
|
July
23
|
August
15
|
|
*
The Egyptian market is closed every Friday.
|
FINLAND
|
|
|
|
January
1
|
April
22
|
December
6
|
December
25
|
January
6
|
May
1
|
December
24
|
December
26
|
April
19
|
May
30
|
|
|
FRANCE
|
|
|
|
January
1
|
May
8
|
July
14
|
November
11
|
April
22
|
May
30
|
August
15
|
December
25
|
May
1
|
June
10
|
November
1
|
December
26
|
GERMANY
|
|
|
|
January
1
|
May
1
|
June
10
|
December
25
|
April
19
|
May
30
|
October
3
|
December
26
|
April
22
|
|
|
|
GREECE
|
|
|
|
January
1
|
March
25
|
May
1
|
October
28
|
January
6
|
April
26
|
June
17
|
December
25
|
March
11
|
April
29
|
August
15
|
December
26
|
HONG
KONG
|
|
|
|
January
1
|
April
5
|
May
13
|
October
1
|
February
5
|
April
19
|
June
7
|
October
7
|
February
6
|
April
22
|
July
1
|
December
25
|
February
7
|
May
1
|
September
14
|
December
26
|
HUNGARY
|
|
|
|
January
1
|
April
22
|
August
19
|
November
1
|
March
15
|
May
1
|
August
20
|
December
25
|
April
19
|
June
10
|
October
23
|
December
26
|
INDIA
|
|
|
|
January
26
|
May
1
|
October
2
|
December
25
|
April
19
|
August
15
|
|
|
INDONESIA
|
|
|
|
January
1
|
April
19
|
June
5
|
September
1
|
February
5
|
May
1
|
June
6
|
November
10
|
March
7
|
May
19
|
August
12
|
December
25
|
April
3
|
May
30
|
August
17
|
|
IRELAND
|
|
|
|
January
1
|
April
22
|
August
5
|
December
26
|
March
18
|
May
6
|
October
28
|
December
27
|
April
19
|
June
3
|
December
25
|
|
ISRAEL
|
|
|
|
March
21
|
June
9
|
October
1
|
October
14
|
April
26
|
August
11
|
October
8
|
October
21
|
May
9
|
September
30
|
October
9
|
|
*
The Israeli market is closed every Friday.
|
ITALY
|
|
|
|
January
1
|
April
22
|
June
2
|
December
8
|
January
6
|
April
25
|
August
15
|
December
25
|
April
19
|
May
1
|
November
1
|
December
26
|
JAPAN
|
|
|
|
January
1
|
April
19
|
August
12
|
November
4
|
January
14
|
May
3
|
September
16
|
November
25
|
February
11
|
May
6
|
September
23
|
December
23
|
March
21
|
July
15
|
October
14
|
|
KUWAIT
|
|
|
|
January
1
|
April
3
|
June
6
|
August
13
|
February
25
|
June
5
|
August
12
|
August
14
|
February
26
|
|
|
|
*
The Kuwaiti market is closed every Friday.
|
LUXEMBOURG
|
|
|
|
January
1
|
May
1
|
June
23
|
December
25
|
April
19
|
May
30
|
August
15
|
December
26
|
April
22
|
June
10
|
November
1
|
|
MALAYSIA
|
|
|
|
January
1
|
June
5
|
August
31
|
September
16
|
February
5
|
June
6
|
September
1
|
November
10
|
May
1
|
August
12
|
September
9
|
December
25
|
May
19
|
|
|
|
MEXICO
|
|
|
|
January
1
|
April
18
|
May
5
|
December
12
|
February
4
|
April
19
|
September
16
|
December
25
|
March
18
|
May
1
|
November
18
|
|
MOROCCO
|
|
|
|
January
1
|
June
6
|
August
13
|
August
21
|
January
11
|
July
29
|
August
14
|
November
6
|
May
1
|
August
12
|
August
20
|
November
18
|
June
5
|
|
|
|
NETHERLANDS
|
|
|
|
January
1
|
April
27
|
May
30
|
December
25
|
April
19
|
May
4
|
June
10
|
December
26
|
April
22
|
May
5
|
|
|
NEW
ZEALAND
|
|
|
|
January
1
|
April
19
|
June
3
|
December
26
|
January
2
|
April
22
|
October
28
|
|
February
6
|
April
25
|
December
25
|
|
NIGERIA
|
|
|
|
January
1
|
May
1
|
June
12
|
December
26
|
March
8
|
May
27
|
August
12
|
|
April
19
|
May
29
|
October
1
|
|
April
22
|
June
5
|
December
25
|
|
NORWAY
|
|
|
|
January
1
|
April
22
|
May
30
|
December
25
|
April
18
|
May
1
|
June
10
|
December
26
|
April
19
|
May
17
|
December
24
|
|
OMAN
|
|
|
|
January
1
|
June
6
|
August
13
|
November
18
|
April
3
|
July
23
|
August
14
|
November
19
|
June
5
|
August
12
|
August
15
|
|
*
The Omani market is closed every Friday.
|
PAKISTAN
|
|
|
|
February
5
|
June
6
|
August
13
|
September
10
|
May
1
|
June
7
|
August
14
|
December
25
|
June
5
|
August
12
|
September
9
|
|
PERU
|
|
|
|
January
1
|
May
1
|
July
29
|
November
1
|
April
18
|
June
29
|
August
30
|
December
8
|
April
19
|
July
28
|
October
8
|
December
25
|
PHILIPPINES
|
|
|
|
January
1
|
May
1
|
August
21
|
December
25
|
April
9
|
June
5
|
August
26
|
December
31
|
April
18
|
June
12
|
November
1
|
|
April
19
|
August
12
|
November
30
|
|
POLAND
|
|
|
|
January
1
|
May
1
|
November
1
|
December
26
|
January
6
|
May
3
|
November
11
|
|
April
19
|
June
20
|
December
24
|
|
April
22
|
August
15
|
December
25
|
|
PORTUGAL
|
|
|
|
January
1
|
April
22
|
December
25
|
December
26
|
April
19
|
May
1
|
|
|
QATAR
|
|
|
|
February
12
|
June
6
|
August
13
|
August
15
|
June
4
|
August
12
|
August
14
|
December
18
|
June
5
|
|
|
|
*
The Qatari market is closed every Friday.
|
RUSSIA
|
|
|
|
January
1
|
January
4
|
March
8
|
June
12
|
January
2
|
January
7
|
May
1
|
November
4
|
January
3
|
February
23
|
May
9
|
|
SINGAPORE
|
|
|
|
January
1
|
April
19
|
June
5
|
October
27
|
February
5
|
May
1
|
August
9
|
December
25
|
February
6
|
May
19
|
August
12
|
|
SOUTH
AFRICA
|
|
|
|
January
1
|
April
22
|
August
9
|
December
25
|
March
21
|
May
1
|
September
25
|
December
26
|
April
19
|
June
17
|
December
16
|
|
SOUTH
KOREA
|
|
|
|
January
1
|
May
7
|
August
15
|
September
26
|
February
15
|
May
22
|
September
23
|
October
3
|
March
1
|
June
6
|
September
24
|
October
9
|
May
1
|
June
13
|
September
25
|
December
25
|
SPAIN
|
|
|
|
January
1
|
April
22
|
September
11
|
December
6
|
January
6
|
May
1
|
October
12
|
December
8
|
April
18
|
July
25
|
November
1
|
December
25
|
April
19
|
August
15
|
|
|
SWEDEN
|
|
|
|
January
1
|
May
1
|
June
22
|
December
25
|
January
6
|
May
30
|
November
2
|
December
26
|
April
19
|
June
6
|
December
24
|
December
31
|
April
22
|
June
21
|
|
|
SWITZERLAND
|
|
|
|
January
1
|
April
22
|
June
10
|
December
25
|
April
19
|
May
30
|
August
1
|
December
26
|
TAIWAN
|
|
|
|
January
1
|
February
7
|
February
28
|
June
7
|
February
4
|
February
8
|
April
4
|
September
13
|
February
5
|
February
19
|
April
5
|
October
10
|
February
6
|
|
|
|
THAILAND
|
|
|
|
January
1
|
April
16
|
July
17
|
October
23
|
February
19
|
April
17
|
July
29
|
December
5
|
April
8
|
May
1
|
August
12
|
December
10
|
April
15
|
May
19
|
October
14
|
December
31
|
UNITED
ARAB EMIRATES
|
|
|
|
January
1
|
June
5
|
August
12
|
December
2
|
April
3
|
June
6
|
August
14
|
December
3
|
*
The United Arab Emirates markets are closed every Friday.
|
UNITED
KINGDOM
|
|
|
|
January
1
|
May
6
|
August
5
|
December
25
|
April
19
|
May
27
|
August
6
|
December
26
|
April
22
|
|
|
|
VIETNAM
|
|
|
|
January
1
|
February
6
|
April
15
|
May
1
|
February
4
|
February
7
|
April
30
|
September
2
|
February
5
|
February
8
|
|
|
The longest redemption cycle for
Foreign Funds is a function of the longest redemption cycle among the countries whose securities comprise the Funds.
For the period June 2018 —
May 2019, the dates of regular holidays affecting the following securities markets present the worst-case (longest) redemption cycle* for Foreign Funds as follows:
SETTLEMENT PERIODS GREATER THAN SEVEN DAYS FOR
THE PERIOD JUNE 2018 — MAY 2019
|
Beginning
of
Settlement Period
|
|
End
of Settlement
Period
|
|
Number
of Days in
Settlement Period
|
Australia
|
12/19/2018
|
|
12/27/2018
|
|
8
|
|
12/20/2018
|
|
12/28/2018
|
|
8
|
|
12/21/2018
|
|
1/2/2019
|
|
12
|
|
4/15//2019
|
|
4/23/2019
|
|
8
|
|
4/16//2019
|
|
4/24/2019
|
|
8
|
|
4/17//2019
|
|
4/26/2019
|
|
9
|
|
4/18//2019
|
|
4/29/2019
|
|
11
|
Brazil
|
2/27/2019
|
|
3/7/2019
|
|
8
|
|
2/28/2019
|
|
3/8/2019
|
|
8
|
|
3/1/2019
|
|
3/11/2019
|
|
10
|
Belgium
|
12/19/2018
|
|
12/27/2018
|
|
8
|
|
12/20/2018
|
|
12/28/2018
|
|
8
|
|
12/21/2018
|
|
12/31/2018
|
|
10
|
|
Beginning
of
Settlement Period
|
|
End
of Settlement
Period
|
|
Number
of Days in
Settlement Period
|
China
|
9/26/2018
|
|
10/8/2018
|
|
12
|
|
9/27/2018
|
|
10/9/2018
|
|
12
|
|
9/28/2018
|
|
10/10/2018
|
|
12
|
|
1/30/2019
|
|
2/11/2019
|
|
12
|
|
1/31/2019
|
|
2/12/2019
|
|
12
|
|
2/1/2019
|
|
2/13/2019
|
|
12
|
Czech
Republic
|
12/21/2018
|
|
12/31/2018
|
|
10
|
|
1/30/2019
|
|
2/11/2019
|
|
12
|
|
1/31/2019
|
|
2/12/2019
|
|
12
|
|
2/1/2019
|
|
2/13/2019
|
|
12
|
|
2/4/2019
|
|
2/13/2019
|
|
9
|
|
2/5/2019
|
|
2/13/2019
|
|
8
|
|
9/25/2019
|
|
10/8/2019
|
|
13
|
|
9/26/2019
|
|
10/8/2019
|
|
12
|
|
9/27/2019
|
|
10/9/2019
|
|
12
|
Denmark
|
12/19/2018
|
|
12/27/2018
|
|
8
|
|
12/20/2018
|
|
12/28/2018
|
|
8
|
Egypt
|
8/20/2018
|
|
8/28/2018
|
|
8
|
|
8/7/2019
|
|
8/19/2019
|
|
12
|
|
8/8/2019
|
|
8/20/2019
|
|
12
|
|
8/9/2019
|
|
8/20/2019
|
|
11
|
Finland
|
12/19/2018
|
|
12/27/2018
|
|
8
|
|
12/20/2018
|
|
12/28/2018
|
|
8
|
|
12/21/2018
|
|
12/31/2018
|
|
10
|
|
12/23/2019
|
|
12/31/2019
|
|
8
|
Ireland
|
12/19/2018
|
|
12/27/2018
|
|
8
|
|
12/20/2018
|
|
12/28/2018
|
|
8
|
|
12/21/2018
|
|
1/2/2019
|
|
12
|
Israel
|
9/4/2018
|
|
9/12/2018
|
|
8
|
|
9/5/2018
|
|
9/13/2018
|
|
8
|
|
9/6/2018
|
|
9/17/2018
|
|
11
|
|
9/13/2018
|
|
9/25/2018
|
|
12
|
|
10/7/2019
|
|
10/15/2019
|
|
8
|
Japan
|
12/26/2018
|
|
1/4/2019
|
|
9
|
|
12/27/2018
|
|
1/7/2019
|
|
11
|
Kuwait
|
8/8/2019
|
|
8/19/2019
|
|
11
|
|
8/9/2019
|
|
8/19/2019
|
|
10
|
Morocco
|
8/17/2018
|
|
8/28/2018
|
|
11
|
|
8/9/2019
|
|
8/19/2019
|
|
10
|
Oman
|
5/30/2019
|
|
6/10/2019
|
|
10
|
|
5/31/2019
|
|
6/10/2019
|
|
9
|
|
8/8/2019
|
|
8/20/2019
|
|
12
|
|
8/9/2019
|
|
6/10/2019
|
|
11
|
|
8/12/2019
|
|
8/21/2019
|
|
9
|
Qatar
|
5/30/2019
|
|
6/11/2019
|
|
11
|
|
5/31/2019
|
|
6/11/2019
|
|
10
|
|
6/3/2019
|
|
6/12/2019
|
|
9
|
|
6/4/2019
|
|
6/12/2019
|
|
8
|
|
Beginning
of
Settlement Period
|
|
End
of Settlement
Period
|
|
Number
of Days in
Settlement Period
|
South
Africa
|
4/12/2019
|
|
4/23/2019
|
|
11
|
|
4/15/2019
|
|
4/24/2019
|
|
9
|
|
4/16/2019
|
|
4/25/2019
|
|
9
|
|
4/17/2019
|
|
4/26/2019
|
|
9
|
|
4/18/2019
|
|
4/29/2019
|
|
11
|
|
4/19/2019
|
|
4/29/2019
|
|
10
|
|
12/19/2019
|
|
12/30/2019
|
|
11
|
|
12/20/2019
|
|
12/31/2019
|
|
11
|
|
12/23/2019
|
|
1/1/2020
|
|
9
|
|
12/24/2019
|
|
1/2/2020
|
|
9
|
South
Korea
|
2/1/2019
|
|
2/13/2019
|
|
12
|
|
2/4/2019
|
|
2/13/2019
|
|
9
|
|
2/5/2019
|
|
2/12/2019
|
|
8
|
|
9/20/2019
|
|
9/30/2019
|
|
10
|
Spain
|
12/19/2018
|
|
12/27/2018
|
|
8
|
|
12/20/2018
|
|
12/28/2018
|
|
8
|
|
12/21/2018
|
|
12/31/2018
|
|
10
|
Taiwan
|
1/31/2019
|
|
2/11/2019
|
|
11
|
|
2/1/2019
|
|
2/12/2019
|
|
11
|
Turkey
|
5/31/2019
|
|
6/10/2019
|
|
10
|
United
Arab Emirates
|
5/30/2019
|
|
6/11/2019
|
|
12
|
|
5/31/2019
|
|
6/11/2019
|
|
11
|
|
6/3/2019
|
|
6/12/2019
|
|
9
|
|
6/4/2019
|
|
6/12/2019
|
|
8
|
Vietnam
|
1/31/2019
|
|
2/11/2019
|
|
11
|
|
2/1/2019
|
|
2/12/2019
|
|
11
|
|
2/4/2019
|
|
2/12/2019
|
|
8
|
*
|
These worst-case
redemption cycles are based on information regarding regular holidays, which may be out of date. Based on changes in holidays, longer (worse) redemption cycles are possible.
|
PART C: OTHER INFORMATION
Item 28. Exhibits
(a)(1)
|
Certificate of Trust dated February 25, 2010. Incorporated herein by reference to the Registrants
Registration Statement as filed with the Securities and Exchange Commission on October 21, 2013 (Accession Number 0001193125-13-405484).
|
(a)(2)
|
Amended and Restated Declaration of Trust dated February 19, 2014. Incorporated herein by reference to the
Registrants Registration Statement as filed with the Securities and Exchange Commission on February 25, 2014 (Accession Number 0001193125-14-067429).
|
(a)(3)
|
Amended Schedule A to the Amended and Restated Declaration of Trust as of December 4, 2018. Incorporated
herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on December 6, 2018 (Accession Number 0001193125-18-343231).
|
(a)(4)
|
Memorandum of Association and Articles of Association of Diversified Alternatives Fund CS Ltd. Incorporated
herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on March 15, 2017 (Accession Number 0001193125-17-083544).
|
(a)(5)
|
Memorandum of Association and Articles of Association of Managed Futures Fund CS Ltd. Incorporated herein by
reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on December 4, 2017 (Accession Number 0001193125-17-360066).
|
(b)
|
Amended and Restated By-Laws dated February 19, 2014. Incorporated herein by reference to the
Registrants Registration Statement as filed with the Securities and Exchange Commission on February 25, 2014 (Accession Number 0001193125-14-067429).
|
(c)
|
Instruments Defining Rights of Security Holders. Incorporated by reference to Exhibits (a) and (b).
|
(d)(1)
|
Investment Advisory Agreement dated May 9, 2014 for JPMorgan Diversified Return Global Equity ETF,
JPMorgan Diversified Return International Equity ETF and JPMorgan Diversified Return Emerging Markets Equity ETF. Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission
on May 14, 2014 (Accession Number 0001193125-14-198331).
|
(d)(2)
|
Form of Amended Schedule A to the Investment Advisory Agreement for JPMorgan Diversified Return Global Equity
ETF, JPMorgan Diversified Return International Equity ETF and JPMorgan Diversified Return Emerging Markets Equity ETF, dated December 24, 2014. Incorporated herein by reference to the Registrants Registration Statement as filed with the
Securities and Exchange Commission on December 24, 2014 (Accession Number 0001193125-14-453627).
|
(d)(3)
|
Investment Advisory Agreement for JPMorgan Diversified Return U.S. Equity ETF, dated September 9, 2015.
Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on September 25, 2015 (Accession Number 0001193125-15-328882).
|
(d)(4)
|
Form of Amended Schedule A to the Investment Advisory Agreement as of January 23, 2019. Filed herewith.
|
(d)(5)
|
Form of Investment Advisory Agreement for Diversified Alternatives Fund CS Ltd. Incorporated herein by
reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on June 14, 2016 (Accession Number 0001193125-16-621353).
|
(d)(6)
|
Form of Investment Management Agreement for Managed Futures Fund CS Ltd. Incorporated herein by reference to
the Registrants Registration Statement as filed with the Securities and Exchange Commission on December 4, 2017 (Accession Number 0001193125-17-360066).
|
(e)(1)
|
Distribution Agreement dated October 1, 2017. Incorporated herein by reference to the Registrants
Registration Statement as filed with the Securities and Exchange Commission on November 3, 2017 (Accession Number
0001193125-17-332834).
|
(e)(2)
|
Amended Schedule A to the Distribution Agreement as of December 4, 2018. Filed herewith.
|
(g)(1)
|
Amended and Restated Global Custody and Fund Accounting Agreement dated October 1, 2017, between
J.P. Morgan Exchange-Traded Fund Trust and JPMorgan Chase Bank, N.A. Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on November 3, 2017 (Accession
Number 0001193125-17-332834).
|
(g)(2)
|
Amendment to the Amended and Restated Global Custody and Fund Accounting Agreement as of December 19,
2018, including Amended Schedule A. Filed herewith.
|
(g)(3)
|
Third Party Securities Lending Rider, dated June 18, 2018 to the Amended and Restated Global Custody and
Fund Accounting Agreement, dated October 1, 2017 among J.P. Morgan Exchange-Traded Fund Trust, JPMorgan Chase Bank, N.A. and Citibank, N.A. Filed herewith.
|
(g)(4)
|
Amendment to Third Party Securities Lending Rider as of December 11, 2018. Filed herewith.
|
(h)(1)(a)
|
Administration Agreement dated May 9, 2014. Incorporated herein by reference to the Registrants
Registration Statement as filed with the Securities and Exchange Commission on May 14, 2014 (Accession
Number 0001193125-14-198331).
|
(h)(1)(b)
|
Amendment to Administration Agreement as of December 4, 2018. Filed herewith.
|
(h)(1)(c)
|
Amended Schedule A to the Administration Agreement as of December 4, 2018. Filed herewith.
|
(h)(2)(a)
|
Agency Services Agreement dated May 8, 2014. Incorporated herein by reference to the
Registrants Registration Statement as filed with the Securities and Exchange Commission on May 14, 2014 (Accession Number 0001193125-14-198331).
|
(h)(2)(b)
|
Amendment to the Agency Services Agreement as of December 19, 2018, including Amended
Exhibit A. Filed herewith.
|
(h)(3)(a)
|
Fee Waiver Agreement dated March 1, 2018 for certain ETFs with FYE of 10/31/17. Incorporated
herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on December 6, 2018 (Accession Number 0001193125-18-343231).
|
(h)(3)(b)
|
Fee Waiver Agreement dated March 1, 2018 for JPMorgan Diversified Alternatives ETF.
Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on December 6, 2018 (Accession Number 0001193125-18-343231).
|
(h)(3)(c)
|
Fee Waiver Agreement dated May 11, 2017 for JPMorgan Ultra-Short Income ETF. Incorporated
herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on June 28, 2017 (Accession Number 0001193125-17-216521).
|
(h)(3)(d)
|
Fee Waiver Agreement dated November 3, 2017 for JPMorgan U.S. Dividend ETF, JPMorgan U.S.
Minimum Volatility ETF, JPMorgan U.S. Momentum Factor ETF, JPMorgan U.S. Quality Factor ETF and JPMorgan U.S. Value Factor ETF. Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and
Exchange Commission on November 27, 2017 (Accession Number 0001193125-17-352154).
|
(h)(3)(e)
|
Fee Waiver Agreement dated November 27, 2017 for JPMorgan Event Driven ETF. Incorporated
herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on January 17, 2018 (Accession Number 0001193125-18- 012121).
|
(h)(3)(f)
|
Fee Waiver Agreement dated December 4, 2017 for JPMorgan Managed Futures Strategy ETF.
Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on January 25, 2018 (Accession Number 0001193125-18-019391).
|
(h)(3)(g)
|
Fee Waiver Agreement dated January 17, 2018 for JPMorgan Long/Short ETF. Incorporated herein
by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on January 25, 2018 (Accession Number 0001193125-18-019391).
|
(h)(3)(h)
|
Fee Waiver Agreement dated January 26, 2018 for JPMorgan USD Emerging Markets Sovereign Bond
ETF. Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on March 1, 2018. (Accession Number 0001193125-18-066254).
|
(h)(3)(i)
|
Fee Waiver Agreement dated May 1, 2018 for JPMorgan Diversified Return Europe Currency Hedged
ETF, JPMorgan Diversified Return Europe Equity ETF, JPMorgan Diversified Return International Currency Hedged ETF and JPMorgan Diversified Return International Equity ETF. Incorporated herein by reference to the Registrants Registration
Statement as filed with the Securities and Exchange Commission on June 27, 2018 (Accession Number
0001193125-18-205847).
|
(h)(3)(j)
|
Fee Waiver Agreement dated June 13, 2018 for JPMorgan BetaBuilders Europe ETF, JPMorgan
BetaBuilders Japan ETF and JPM BetaBuilders MSCI US REIT ETF. Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on June 27, 2018 (Accession Number
0001193125-18-205847).
|
(h)(3)(k)
|
Fee Waiver Agreement dated July 1, 2018 for Funds with a FYE as of the last day of February.
Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on December 6, 2018 (Accession Number 0001193125-18-343231).
|
(h)(3)(l)
|
Fee Waiver Agreement dated June 29, 2018 for JPMorgan BetaBuilders Canada ETF and JPM
BetaBuilders Developed Asia ex-Japan ETF. Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on December 6, 2018 (Accession Number 0001193125-18-343231).
|
(h)(3)(m)
|
Fee Waiver Agreement dated October 15, 2018 for JPMorgan Ultra-Short Municipal ETF.
Incorporated herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on October 19, 2018 (Accession Number 0001193125-18-302915).
|
(h)(3)(n)
|
Fee Waiver Agreement dated October 22, 2018 for JPMorgan Municipal ETF. Incorporated herein
by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on December 6, 2018 (Accession Number 0001193125-18-343231).
|
(h)(3)(o)
|
Fee Waiver Agreement dated December 6, 2018 for JPMorgan Corporate Bond Research
Enhanced ETF and JPMorgan U.S. Aggregate Bond ETF. Filed herewith.
|
(h)(3)(p)
|
Form of Fee Waiver Agreement dated January 23, 2019 for JPMorgan Core Plus Bond ETF.
Filed herewith.
|
(h)(4)(a)
|
Accounting Services Agreement dated June 12, 2014. Incorporated herein by reference to
the Registrants Registration Statement as filed with the Securities and Exchange Commission on July 14, 2014 (Accession Number
0001193125-14-267514).
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(h)(4)(b)
|
Amendment No. 1 to Accounting Services Agreement dated September 14, 2016. Incorporated
herein by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on May 11, 2017 (Accession Number 0001193125-17-167076).
|
(h)(5)
|
Sublicense Agreement. Incorporated herein by reference to the Registrants Registration
Statement as filed with the Securities and Exchange Commission on June 27, 2018 (Accession Number
0001193125-18-205847).
|
(h)(6)(a)
|
Global Securities Lending Agency Agreement, dated June 18, 2018, between J.P. Morgan
Exchange-Traded Fund Trust and Citibank, N.A. Filed herewith.
|
(h)(6)(b)
|
Amendment to the Global Securities Lending Agency Agreement as of October 4, 2018. Filed
herewith.
|
(h)(6)(c)
|
Amendment to the Global Securities Lending Agency Agreement as of December 11, 2018. Filed
herewith.
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(i)
|
Opinion and consent of counsel. Filed herewith.
|
(p)(1)
|
Code of Ethics of the Trust. Incorporated herein by reference to the Registrants Registration Statement
as filed with the Securities and Exchange Commission on May 14, 2014 (Accession Number 0001193125-14-198331).
|
(p)(2)
|
Code of Ethics of J.P. Morgan Asset Management, Inc., including JPMIM, effective February 1, 2005; Revised
March 31, 2016. Incorporated by reference to the Registrants Registration Statement as filed with the Securities and Exchange Commission on May 9, 2016 (Accession Number 0001193125-16-583868).
|
(p)(3)
|
Code of Ethics of the Distributor dated February 1, 2005, as amended. Incorporated herein by reference to the
Registrants Registration Statement as filed with the Securities and Exchange Commission on November 3, 2017 (Accession Number
0001193125-17-332834).
|
(99)(a)
|
Power of Attorney for the Trustees. Incorporated herein by reference to the Registrants Registration
Statement as filed with the Securities and Exchange Commission on February 25, 2014 (Accession Number 0001193125-14-067429).
|
(99)(b)
|
Power of Attorney for Lauren A. Paino. Incorporated herein by reference to the Registrants Registration
Statement as filed with the Securities and Exchange Commission on March 30, 2016 (Accession Number 0001193125-16-523855).
|
(99)(c)
|
Power of Attorney for Joanna Gallegos. Incorporated herein by reference to the Registrants Registration
Statement as filed with the Securities and Exchange Commission on August 4, 2017 (Accession Number 0001193125-17-248496).
|
(99)(d)
|
Power of Attorney for Ogden Hammond. Filed herewith.
|
Item 29. Persons Controlled by or Under Common Control with the Fund
Not applicable.
Item 30. Indemnification
Reference is made to Article VII, Section 4 of Registrants Declaration of Trust. Registrant, its Trustees and officers are insured against certain
expenses in connection with the defense of claims, demands, actions, suits, or proceedings, and certain liabilities that might be imposed as a result of such actions, suits or proceedings.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the
1933 Act), may be permitted to directors, trustees, officers and controlling persons of the Registrant and the principal underwriter pursuant to the foregoing provisions or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, trustee, officer, or controlling person of the Registrant and the principal underwriter in connection with the successful defense of any action, suite or proceeding) is asserted against the
Registrant by such director, trustee, officer or controlling person or principal underwriter in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue.
Item 31. Business and Other Connections of the Investment Adviser
See Management of the Trust in Part B. The business or other connections of each director and officer of J.P. Morgan Investment Management Inc. is
currently listed in the investment advisor registration on Form ADV for J.P. Morgan Investment Management Inc. (File No. 801-21011) and is incorporated herein by reference.
Item 32. Principal Underwriters
(a)
JPMorgan Distribution Services, Inc. is the principal underwriter of the Registrants shares. JPMorgan Distribution Services, Inc. is registered with the Securities and Exchange Commission as a broker-dealer and is a member of the National
Association of Securities Dealers. JPMorgan Distribution Services, Inc. is located at 1111 Polaris Parkway, Columbus, Ohio 43240. JPMorgan Distribution Services, Inc. acts as the principal underwriter for the following additional investment
companies:
J.P. Morgan Fleming Mutual Fund Group, Inc.
J.P. Morgan Mutual Fund Investment Trust
JPMorgan Trust I
JPMorgan Trust
II
JPMorgan Trust III
JPMorgan Trust IV
Undiscovered
Managers Funds
JPMorgan Insurance Trust
J.P. Morgan Exchange-Traded Fund Trust
(b) The directors and officers of JPMorgan Distribution Services, Inc. are set forth below. The business address of each director or officer is
1111 Polaris Parkway, Columbus, Ohio 43240.
|
|
|
|
|
Name with Registrant
|
|
Positions and Offices with JPMorgan Distributions Services,
Inc.
|
|
Positions
|
Susan Montgomery
|
|
Director & President
|
|
None
|
Michael R. Machulski
|
|
Director, Managing Director & Treasurer
|
|
None
|
Anthony J. Horan
|
|
Senior Vice President & Assistant Secretary
|
|
None
|
Aisling V. DeSola
|
|
Vice President & Secretary
|
|
None
|
James A. Hoffman
|
|
Executive Director
|
|
None
|
Jessica K. Ditullio
|
|
Assistant Secretary
|
|
Assistant Secretary
|
Christine N. Bannerman
|
|
Assistant Secretary & Vice President
|
|
None
|
Frank J. Drozek
|
|
Assistant Treasurer
|
|
None
|
Christopher J. Mohr
|
|
Assistant Treasurer
|
|
None
|
(c) Not applicable.
|
|
|
|
|
Item 33. Location of Accounts and Records
All accounts, books, records and documents required pursuant to Section 31(a) of the Investment Company Act of 1940, as amended, and the rules promulgated
thereunder will be maintained at the offices of:
J.P. Morgan Investment Management Inc., the Registrants investment adviser, at 270 Park Avenue,
New York, NY 10017 (records relating to its functions as investment adviser).
Effective October 1, 2017, JPMorgan Distribution Services, Inc., the
Registrants distributor, at 1111 Polaris Parkway, Columbus, OH 43240 (records relating to its functions as distributor).
Prior to October 1, 2017, SEI Investments Distribution Co., the Registrants distributor, at One
Freedom Valley Drive, Oaks, PA 19456 (records relating to its functions as distributor).
JPMorgan Chase Bank, N.A. at 270 Park Avenue, New York, NY 10017
(records relating to its functions as custodian and sub-administrator).
J.P. Morgan Investment Management Inc., the Registrants administrator, at
1111 Polaris Parkway, Westerville, Ohio 43082 (relating to its functions as administrator).
Item 34. Management Services
Not applicable.
Item 35. Undertakings
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant, J.P. Morgan
Exchange-Traded Fund Trust, certifies that it meets all the requirements for effectiveness of the Registration Statement under Rule 485(b) under the Securities Act of 1933, and has duly caused this Post-Effective Amendment to the Registration
Statement to be signed on its behalf by the undersigned, duly authorized, in the City of New York and State of New York on the 22
nd
day of January, 2019.
|
|
|
J.P. Morgan Exchange-Traded Fund Trust
|
|
|
By:
|
|
Ogden Hammond*
|
Name:
|
|
Ogden Hammond
|
Title:
|
|
Interim President and Principal Executive Officer
|
Pursuant to the requirements of the Securities Act, this registration statement has been signed below by the following
persons in the capacities indicated on January 22, 2019.
|
|
|
|
|
|
|
|
|
Gary L. French *
|
|
|
|
Robert J. Grassi *
|
|
|
Gary L. French
Trustee
|
|
|
|
Robert J. Grassi
Trustee
|
|
|
|
|
|
|
Thomas P. Lemke *
|
|
|
|
Lawrence Maffia *
|
|
|
Thomas P. Lemke
Trustee
|
|
|
|
Lawrence Maffia
Trustee
|
|
|
|
|
|
|
Emily Youssouf *
|
|
|
|
Robert Deutsch *
|
|
|
Emily Youssouf
Trustee
|
|
|
|
Robert Deutsch
Trustee
|
|
|
|
|
|
|
Lauren A. Paino*
|
|
|
|
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|
|
Lauren A. Paino
Treasurer and Principal Financial Officer
|
|
|
|
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|
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|
|
*By:
|
|
/s/ Zachary Vonnegut-Gabovitch
|
|
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|
|
Zachary Vonnegut-Gabovitch
Attorney-in-Fact
|
|
|
|
|
EXHIBIT INDEX
|
|
|
Exhibit
No.
|
|
Description
|
|
|
(d)(4)
|
|
Form of Amended Schedule A to the Investment Advisory Agreement as of January 23, 2019.
|
|
|
(e)(2)
|
|
Amended Schedule A to the Distribution Agreement as of December 4, 2018.
|
|
|
(g)(2)
|
|
Amendment to the Amended and Restated Global Custody and Fund Accounting Agreement as of December 19, 2018, including Amended Schedule A.
|
|
|
(g)(3)
|
|
Third Party Securities Lending Rider, dated June 18, 2018 to the Amended and Restated Global Custody and Fund Accounting Agreement, dated
October 1, 2017 among J.P. Morgan Exchange-Traded Fund Trust, JPMorgan Chase Bank, N.A. and Citibank, N.A.
|
|
|
(g)(4)
|
|
Amendment to Third Party Securities Lending Rider as of December 11, 2018.
|
|
|
(h)(1)(b)
|
|
Amendment to Administration Agreement as of December 4, 2018.
|
|
|
(h)(1)(c)
|
|
Amended Schedule A to the Administration Agreement as of December 4, 2018.
|
|
|
(h)(2)(b)
|
|
Amendment to the Agency Services Agreement as of December 19, 2018, including Amended Exhibit A.
|
|
|
(h)(3)(o)
|
|
Fee Waiver Agreement dated December 6, 2018 for JPMorgan Corporate Bond Research Enhanced ETF and JPMorgan U.S. Aggregate Bond ETF.
|
|
|
(h)(3)(p)
|
|
Form of Fee Waiver Agreement dated January 23, 2019 for JPMorgan Core Plus Bond ETF.
|
|
|
(h)(6)(a)
|
|
Global Securities Lending Agency Agreement, dated June 18, 2018, between J.P. Morgan Exchange-Traded Fund Trust and Citibank,
N.A.
|
|
|
(h)(6)(b)
|
|
Amendment to the Global Securities Lending Agency Agreement as of October 4, 2018.
|
|
|
(h)(6)(c)
|
|
Amendment to the Global Securities Lending Agency Agreement as of December 11, 2018.
|
|
|
(i)
|
|
Opinion and consent of counsel.
|
|
|
(99)(d)
|
|
Power of Attorney for Ogden Hammond.
|
THIS
THIRD PARTY SECURITIES LENDING RIDER
(
Rider
) to the Custody Agreement (as defined below) is
made on June 18, 2018, among J.P. Morgan Exchange-Traded Fund Trust on behalf of its series listed on Schedule A hereto severally and not jointly (each, a
Lender
), having its principal place of business at 270 Park Avenue,
New York, NY 10017, JPMorgan Chase Bank, N.A., with a place of business at 383 Madison Avenue, New York, NY 10179 (
Bank
) and Citibank, N.A., with a place of business at 390 Greenwich Street, 4
th
Floor, New York, NY 10013 (
Agent
).
WHEREAS, Bank currently acts as custodian for
securities held by it in the Account(s) (as defined below) pursuant to the terms of the Amended and Restated Global Custody and Fund Accounting Agreement (
Custody Agreement
) dated October 1, 2017 (as may be amended from time
to time) between Bank and Lender.
WHEREAS, Lender and Agent have entered into the Securities Lending Agency Agreement (each as defined below);
WHEREAS, Lender shall manage all collateral received in connection with the securities lending activity conducted under the Securities Lending Agency
Agreement (as defined below); and
WHEREAS, Lender wishes to appoint Bank to provide the Services (as defined below) which support the Lenders
securities lending program with the Agent, and the Bank is willing to do so pursuant to the terms and conditions of this Rider.
IT IS THEREFORE agreed as
follows:
Section 1 Definitions
For the
purpose of this Rider, the following terms shall have the meanings set out below. Unless otherwise expressly defined herein, capitalized terms used in this Rider shall have the meaning given to them under the Custody Agreement:
Accounts
means those Accounts (as defined under the Custody Agreement) identified in Schedule A to this Rider.
Agent
means Citibank, N.A., acting in its capacity as securities lending agent to Lender under the Securities Lending Agency Agreement.
Borrower
means any entity with whom Agent has entered into a Borrowing Agreement.
Borrowing Agreement
means a securities borrowing agreement or other legal agreement entered into by Agent on Lenders behalf from time
to time, and notified to Bank by Agent in connection with this Rider.
J.P.
Morgan
|
1
Distributions
means a cash entitlement accruing to a Security on Loan and consisting of a
dividend, interest or other payment paid by an issuer of a Security on Loan or means an entitlement accruing to a Security on Loan and consisting of a stock dividend, stock split, rights or other distribution.
Loan
means a loan of Securities by Lender pursuant to a Borrowing Agreement.
Securities Lending Agency Agreement
means the securities lending agreement between Lender and Agent.
Security(ies) on Loan
means any Security(ies) held by bank for and on behalf of Lender under the Custody Agreement which are subject to a
Loan.
Services
shall have the meaning given to it in Section 3 below.
Section 2 Terms of Rider
This Rider shall be
incorporated into the Custody Agreement and form a part thereof. Accordingly, save as otherwise expressly set forth in or modified by this Rider, the terms of the Custody Agreement shall extend and apply to any Services provided by Bank under this
Rider and neither Lender nor Bank shall be (i) released from any of its duties and/or obligations, and/or (ii) limited in any rights and/or remedies available to them under the Custody Agreement. In the event of any conflict between the
terms of the Custody Agreement and the terms of this Rider with respect to the Bank´s duties and/or obligations in connection with Securities on Loan for which Bank provides Services, the terms of this Rider shall prevail and govern.
Section 3 Appointment
Lender hereby appoints
Bank as its agent to provide securities lending support services in connection with Loans of Securities held in Accounts established under the Custody Agreement which may be described in service level documentation among the Agent and the parties
hereto (
Services
), and Bank accepts such appointment and agrees to act in accordance with the terms of this Rider and, pursuant to Section 8(a) below, the Custody Agreement, when providing its services hereunder.
Section 4 Description of Services
|
(a)
|
Transaction Processing
: Lender shall notify Bank of which Account(s) are available for Loans.
|
|
i.
|
Designation of Securities for Lending; Delivery of Lent Securities
. Bank acknowledges that Securities
eligible for lending shall be as designated from time to time to Bank by Lender. Securities eligible for lending shall be as shown on JPM ACCESS (and/or reported via SWIFT messaging), it being understood that Lender shall designate Agent as an
Authorized Third Party under the applicable licensing agreement so that Agent has access to JPM ACCESS. Upon the sale of Security(ies) by a Lender, the availability file produced by Bank via JPM ACCESS, removes securities from the
lendable asset list as of trade date. Bank shall, in accordance with Instructions, deliver to Borrowers Securities from an Account and shall reflect the status of such Securities on its records as being on Loan for the applicable Account. Lender
acknowledges that Bank shall have no responsibility for: (A) not processing a transaction where Agent identifies a transaction with the same reference number as had been used for a prior transaction, (B) any other identification error by
Agent, and (C) any transmission error by Agent.
|
J.P.
Morgan
|
2
|
ii.
|
Termination of Loans
. Bank shall accept Instructions from Lender or Agent in writing (which may be
electronic) of when to expect the return of a Security on Loan in those cases other than where the Borrower terminates the Loan. Where a Borrower terminates a Loan, Lender or Agent shall so advise Bank and confirm to Bank whether or not the return
should be accepted and Bank shall act accordingly. Upon its receipt of Securities back from Loan, Bank shall reflect the status of such Securities on its records as having been returned to custody.
|
|
iii.
|
Sale Proceeds
. (A) Bank shall advance settlement proceeds to the Lender on settlement date for the
sale of a Security on Loan when sufficient stock is held and the sale instruction is received by Bank by the specified
cut-off
time, even where such proceeds are not received, it being understood that Bank may
reverse such advance if the sale proceeds are not received in a reasonable amount of time as determined by Bank. Lender shall pay compensation to Bank for any such advance, upon receipt of such proceeds during the term of the advance (or upon
Banks reversing such advance) in accordance with the Custody Agreement. (B) Bank shall update its records to reflect the status of such Securities as having been sold.
|
|
iv.
|
Loan Record Keeping and Reports
. As part of custody reporting, Bank shall provide Lender and Agent with
such statements and reports as are reasonably necessary in Banks judgment in connection with Services.
|
|
(b)
|
Distributions and Corporate Actions
: Notwithstanding anything to the contrary in the Custody Agreement,
Lender acknowledges that in respect of Securities on Loan, Banks obligations are modified as follows:
|
|
i.
|
Distributions.
(A)
Cash Distributions
. Bank shall notify the Lender and Agent of any cash
payments (by way of dividend or other income) due on Securities on Loan and shall post the same as an entitlement due to Lender on the Lenders Account. Bank shall credit Lenders Account with the amount of any cash Distributions from
Securities on Loan which Bank actually receives and these will only be credited to the Cash Account on actual receipt and reconciliation by Bank notwithstanding any provision to the contrary in the Custody Agreement. In respect of Securities on
Loan, Lender or Agent may need to instruct the Borrower or the Securities Depository holding such Securities that Distributions thereon are to be paid to Bank for the benefit of Lender. (B)
Non-Cash
Distributions
. With respect to Securities on Loan, Bank need not claim any
non-cash
Distribution thereon from the Borrower thereof or from the Agent, and Bank shall credit the same to the Account only upon
its actual receipt thereof (and Bank shall not accrue the same). Lender acknowledges that if, and only if, Lender holds a Security in custody which is the same as the Security on Loan, Bank shall advise Lender (but not the Agent) of
non-cash
Distributions on such Security on Loan to the same extent it would under the Custody Agreement.
|
|
ii.
|
Corporate Actions
. Bank shall make available to Lender any corporate action notifications with respect
to the total position of Lender in a given Security, regardless of the extent to which the position is on Loan (provided that at least one share of the affected Security is in Banks custody) and Lender may provide the contents of such notice
to Agent. Bank will provide Agent with access to corporate action notifications for all Securities on Loan pursuant to the terms of the service level documentation agreed to between Agent, Bank and Lender from time to time.
|
J.P.
Morgan
|
3
Section 5 Representations and Warranties
Each party represents and warrants to the others that: (i) it has the power to execute and deliver this Rider, to enter into the transactions contemplated
by this Rider, and to perform its obligations hereunder; (ii) it has taken all necessary action to authorize such execution, delivery, and performance; (iii) this Rider constitutes a legal, valid, and binding obligation enforceable against
it; and (iv) the execution, delivery, and performance by it of this Rider shall at all times comply with all Applicable Law.
Section 6
Liabilities & Indemnification
|
(a)
|
Bank shall have no responsibility or liability for (i) any breach of any obligation by any Borrower under
or in connection with any Loan and/or Borrowing Agreement or other agreement relating to such Loan or in any other way in respect of any Loan, (ii) Securities on Loan or collateral held in a collateral account with a third party, other than to
provide the Services under this Rider and to act upon any Instructions received under the Custody Agreement to deliver or receive such Securities or Collateral or (iii) any losses whatsoever incurred by any person as a result or in connection
with a sale failure that has resulted from a failure to recall Securities on Loan in time for settlement.
|
|
(b)
|
Lender expressly acknowledges and agrees that Lenders obligation to indemnify the Bank as set out in
sections 3.1, 6.1 and 7.1(c) of the Custody Agreement shall remain in full force and effect and apply,
mutatis mutandis
, to any Liabilities that may be imposed on, incurred by or asserted against any of the Bank and/or any J.P. Morgan
Indemnitees in connection with, or arising out of the provision of the Services under this Rider and/or any instruction(s), act(s) and/or omission(s) of Lender and/or Agent. Bank expressly acknowledges and agrees that Banks obligation to
exercise reasonable care, prudence and diligence in carrying out all its duties and obligations as set out in section 7.1(a) of the Custody Agreement shall remain in full force and effect and apply,
mutatis mutandis
, to the Services provided
by Bank under this Rider.
|
|
(c)
|
Under no circumstances will Bank be liable to Agent or Lender for any lost profits (whether direct or indirect)
or any indirect, incidental, consequential or special damages of any form incurred by any person or entity, whether or not foreseeable and regardless of the type of action in which such a claim may be brought, with respect to Banks performance
under this Rider.
|
|
(d)
|
In order to satisfy any Liabilities of Lender to Bank arising under or in connection with this Rider and
without prejudice to Banks rights under Applicable Law, Lender expressly acknowledges and agrees that the Banks rights under section 4.3 (Banks Right Over Securities;
Set-off)
of
the Custody Agreement shall remain in full force and effect and apply
mutatis mutandis
to the satisfaction and recovery by Bank of any Liabilities and/or any other amounts owed to Bank arising out of or in connection with this Rider.
|
Section 7 Administration matters
|
(a)
|
Access to Accounts
: Lender hereby designates Agent as an Authorized Person in accordance with the terms
of the Custody Agreement, to act on behalf of Lender under this Rider. Agent is authorized to access the Account(s) and give Instructions in respect of such accounts in accordance with the terms of the Custody Agreement. Lender will make Agent aware
of, and Agent will comply with, the relevant provisions of section 3 (Instructions) and Annex A (Electronic Access) of the Custody Agreement as set out in Schedule C to this Rider when submitting or delivering Instructions to
Bank in connection with the Services.
|
J.P.
Morgan
|
4
|
a.
|
Notwithstanding anything to the contrary in the Custody Agreement, Lender acknowledges that Bank shall not be
responsible for and provides no services in relation to any filings, tax returns, withholding tax reclaims and reports on any Securities on Loan.
|
|
b.
|
Lender is responsible for the payment of all taxes (including, without limitation, any value added tax),
imposts, levies or duties due on any principal or interest, or any other liability or payment arising out of or in connection with any Securities on Loan or any collateral, which payment shall be made from the assets of Lender, and in so far as Bank
is under any obligation (whether of a governmental nature or otherwise) to pay the same on Lenders behalf Bank may do so out of any monies or assets held by it pursuant to the terms of the Custody Agreement or hereunder.
|
|
c.
|
With respect to Loans of U.S. Securities that are eligible to be held and serviced at the Depository Trust
Company, Lender hereby acknowledges that such Loans will only be made via the Depository Trust Company Stock Loan Income Tracking System and from Accounts which Lender has declared and properly documented to Bank as being exempt from U.S.
withholding tax on U.S. sourced dividend income.
|
|
d.
|
Lender hereby agrees to indemnify Bank and to hold it harmless from and against: (A) any withholding tax
imposed by any relevant authority, whether governmental or otherwise, on any payment in respect of any Loans, and any interest, penalty, fine or addition to tax imposed for failure to properly remit such tax, including without limitation any U.S.
federal income withholding tax imposed on any substitute dividend payment made from a Borrower to the Lender in respect of the loan of U.S. Securities which Bank pays, (B) any payment of any such taxes, interest, penalty, fine and/or addition
to tax otherwise due with respect to the foregoing; and (C) any other Liabilities (including, but not limited to expenses of counsel) that may be imposed on, incurred or asserted by Bank or any J.P. Morgan Indemnitee(s), directly or indirectly,
in connection with any of the representations and warranties given by Lender with respect to this section 7(b) being not true in all material respects.
|
|
e.
|
Ahead of any account opening or provision of service by Bank after the effective date of this Rider, Lender
shall provide to Bank (or cause Agent to do so) a schedule of manufactured income rates that will be used and relied upon by Bank when claiming and collecting manufactured income from Borrowers. This information will be used by Bank in the
set-up
of appropriate accounts for Lender and will not confer any additional responsibilities upon Bank.
|
|
f.
|
The Lender will be responsible, in all cases, for the completion and delivery of any necessary tax
documentation to Bank or to any Borrower.
|
|
g.
|
Lender acknowledges that: (i) Bank provides no services with regard to the provision of tax advice; and
(ii) it has made its own determination as to the tax treatment of any loan made under this Rider, of any in lieu of payments made by a Borrower and of any remuneration and any other amounts that may be received by it under this Rider.
|
|
(c)
|
Fees
: Agent shall pay or cause to be paid to Bank the fees as set forth in Schedule B for the Services.
|
J.P.
Morgan
|
5
|
(d)
|
Reporting:
Lender or Agent shall provide to Bank any information reasonably required by Bank and
requested by Bank to allow Bank with reasonable advance notice to satisfy any regulatory reporting obligations with which it is required to comply.
|
|
(e)
|
Supported Countries and Jurisdictions:
The Securities on Loan may only be held in the countries and
jurisdictions referred to in Schedule B. The Bank may modify Schedule B to this Rider upon written notice to the Lender.
|
Section 8 Termination & Amendments
|
(a)
|
Termination
: This Rider will be terminated automatically if the Custody Agreement is terminated. In
addition: (i) this Rider may be terminated at any time by either party upon delivery to the other parties of notice specifying the date of such termination, which shall be not less than 30 days, or the termination period specified in the
Custody Agreement if such period is less than 30 days, after the date of receipt of such notice, and (ii) Bank may terminate this Rider immediately if the requirements of Sections 7(d) or 7(e) of this Rider are not met.
|
Notwithstanding any such notice, this Rider shall continue in full force and effect with respect to all Loans outstanding on the termination
date, which Loans shall, however, be terminated as soon as reasonably practicable. The indemnities provided for herein shall survive any termination hereof.
|
(b)
|
Amendments. Waiver
: Except as otherwise expressly provided herein, this Rider may be modified only by a
written amendment signed by the parties, and no waiver of any provision hereof shall be effective unless expressed in writing and signed by the party against whom the waiver is to be enforced.
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Section
9 Termination of the Custody Agreement and Application of the Securities Lending Agency Agreement
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(a)
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Lender undertakes to notify the Agent of the termination of the Custody Agreement, in which case
Section 7(a) of this Rider shall apply and this Rider shall automatically terminate.
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(b)
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Securities Lending Agency Agreement
: In relation to any Securities Lending Agency Agreement or other
legal agreement executed between Lender and Agent, Lender shall have responsibility for ensuring that the terms and conditions of that legal agreement are consistent with the terms and conditions of this Rider and the Custody Agreement. Lender shall
have responsibility for requesting Banks consent to conditions placed on Bank by the terms and conditions of the Securities Lending Agency Agreement or other legal agreement.
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Section 10 Miscellaneous; Confidentiality
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(a)
|
Section 10 (Miscellaneous) of the Custody Agreement shall apply,
mutatis, mutandis
, to
this Rider, as if set out herein in full.
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(b)
|
Conflicts of interest
: Lender grants Bank the authority set forth herein notwithstanding its awareness
that Bank, in its individual capacity or acting in a fiduciary capacity for other accounts, may have transactions with the same institutions to which Lender may be lending Securities from time to time, which transactions may give rise to actual or
potential conflict of interest situations. Bank shall not be bound to: (i) account to Lender for any sum received or profit made by Bank for its own account or
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J.P.
Morgan
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6
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the account of any other person or (ii) disclose or refuse to disclose any information or take any other action if the same would or might in Banks judgment, made in good faith,
constitute a breach of any law or regulation or be otherwise actionable with respect to Bank; provided that, in circumstances mentioned in (ii) above, Bank shall promptly inform Lender of the relevant facts (except where doing so would, or
might in Banks judgment, made in good faith, constitute a breach of any law or regulation or be otherwise actionable as aforesaid). Nothing in the foregoing shall derogate from Banks obligation to deal with Lender in good faith.
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For the purposes of section 10.12(c) (Confidentiality) of the Custody Agreement, Lender hereby authorizes Bank to disclose
Confidential Information of Lender to Agent as reasonably required to enable Bank to provide the Services under this Rider.
IN WITNESS WHEREOF, the
parties have executed this Rider as of the date first above-written.
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JPMorgan Chase Bank, N.A.
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J.P. Morgan Exchange-Traded Fund Trust
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on behalf of its series listed on Schedule A hereto severally and not jointly
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By:
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/s/ Nigel Boyle
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By:
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/s/ Brian Shlissel
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Title: Executive Director
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Title: V. P.
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Date: 19/06/18
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Date: 6/18/18
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Citibank, N.A.
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By:
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/s/ Richard Kissinger
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Title: Director
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Date: 6/18/18
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J.P.
Morgan
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7
Schedule A
List of Lenders & Accounts
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Fund Name
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Custody Account
Number
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JPMORGAN DIVERSIFIED RETURN GLOBAL EQUITY ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN EMERGING MARKETS EQUITY ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN INTERNATIONAL EQUITY ETF
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[Redacted]
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JPMORGAN DISCIPLINED HIGH YIELD ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN EUROPE EQUITY ETF
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[Redacted]
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JPMORGAN EVENT DRIVEN ETF
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[Redacted]
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JPMORGAN ULTRA-SHORT INCOME ETF
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[Redacted]
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JPMORGAN LONG/SHORT ETF
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[Redacted]
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JPMORGAN USD EMERGING MARKETS SOVEREIGN BOND ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN U.S. EQUITY ETF
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[Redacted]
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JPMORGAN U.S. DIVIDEND ETF
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[Redacted]
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JPMORGAN U.S. MINIMUM VOLATILITY ETF
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[Redacted]
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JPMORGAN U.S. MOMENTUM FACTOR ETF
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[Redacted]
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JPMORGAN U.S. QUALITY FACTOR ETF
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[Redacted]
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JPMORGAN U.S. VALUE FACTOR ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN U.S. MID CAP EQUITY ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN U.S. SMALL CAP EQUITY ETF
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[Redacted]
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JPMORGAN BETABUILDERS EUROPE ETF
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[Redacted]
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JPMORGAN BETABUILDERS DEVELOPED ASIA
ex-JAPAN
ETF
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[Redacted]
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JPMORGAN BETABUILDERS JAPAN ETF
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[Redacted]
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JPMORGAN BETABUILDERS CANADA ETF
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[Redacted]
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JPMORGAN BETABUILDERS MSCI US REIT ETF
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[Redacted]
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J.P.
Morgan
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8
Schedule B
Fees and Markets
[Redacted]
J.P.
Morgan
|
9
Fee: Assumptions and Notes
Assumptions
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Fees quoted in this proposal are based upon information provided by Lender and, where necessary, assumptions that
Bank believes to be reasonable.
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Lender and its investment managers (if applicable) and Agent will instruct Bank of trades and other account
activity in a mutually agreed electronic format that enables straight-through processing (STP), using Banks proprietary systems, SWIFT messages, direct electronic transmissions or other means deemed acceptable by Bank.
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Notes
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The Bank may propose reasonable amendments to the fee schedule at any time should either (i) the
Lenders actual investment portfolio and/or trading activity differ significantly from the assumptions used to develop the Banks fee proposal, (ii) the Lenders service requirements change, or (iii) the Lenders use of
any other Bank products that were included in the Banks pricing proposal to the Lender is discontinued or modified in any respect material to the Banks pricing proposal.
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Fees for additional service(s) and/or market(s) added at the request of Lender while this fee schedule is in
effect will be assessed at J.P. Morgans standard price(s), unless an alternative pricing arrangement is agreed upon in advance by Lender and Bank.
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Where minimum fees are specified for one or more service categories, if during any billing period total fee(s)
for
in-scope
services in a category are less than the prorated minimum fee for the category, the prorated minimum fee will apply.
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Bank will present invoices monthly in arrears, with payment due 30 days after the date of the invoice, unless an
alternative billing arrangement is negotiated between Agent and Bank.
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10
Schedule C
Section 7(a): Excerpts from Section 3 (Instructions) and Annex A (Electronic Access) of the Custody Agreement
Section 3 (Instructions) of the Custody Agreement
3.1.
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Acting on Instructions; Unclear Instructions
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(a)
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Customer authorizes Bank to accept, rely upon and/or act upon any Instructions received by it without inquiry.
[
Remainder not applicable
]
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(b)
|
Unless otherwise expressly provided, all Instructions will continue in full force and effect until canceled or
superseded.
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(c)
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To the extent possible, Instructions to Bank shall be sent via electronic instruction or trade information
system acceptable to Bank or via facsimile transmission. Where reasonably practicable, the Customer will use automated and electronic methods of sending Instructions.
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(d)
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Bank may (in its sole discretion and without affecting any part of this Section 3.1) seek clarification or
confirmation of an Instruction from an Authorized Person and may decline to act upon an Instruction if it does not receive clarification or confirmation satisfactory to it. Bank will not be liable for any loss arising from any reasonable delay in
carrying out any such Instruction while it seeks such clarification or confirmation or in declining to act upon any Instruction for which it does not receive clarification satisfactory to it.
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(e)
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In executing or paying a payment order Bank may rely upon the identifying number (e.g. Fedwire routing number
or account) of any party as instructed in the payment order. Customer assumes full responsibility for any inconsistency between the name and identifying number of any party in payment orders issued to Bank in Customers name.
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3.2.
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Verification and Security Procedures
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(a)
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Bank and the Customer shall comply with any applicable Security Procedures with respect to the delivery or
authentication of Instructions and shall ensure that any codes, passwords or similar devices are reasonably safeguarded.
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3.3.
|
Instructions Contrary to Law/Market Practice
|
Bank need not act upon Instructions that it reasonably believes are contrary to Applicable Law or market practice, but Bank will be under no
duty to investigate whether any Instructions comply with Applicable Law or market practice. [
Remainder not applicable
]
11
Bank has established
cut-off
times for receipt of some categories of Instructions, which will be made
available to Customer. If Bank receives an Instruction after its established
cut-off
time, Bank will attempt to act upon the Instruction on the day requested if Bank deems it practicable to do so or otherwise
as soon as practicable on the next business day. Bank will provide Customer with reasonable prior notice of any changes to the
cut-off
times previously communicated to Customer.
Access by the Customer to certain applications or products of Bank via Banks web site or otherwise shall be governed by this Agreement
and the terms and conditions set forth in Annex A.
Annex A (Electronic Access) of the Custody Agreement
1. Bank may permit the Customer and its Authorized Persons to access certain electronic systems and applications (collectively, the Products) and
to access or receive electronically Data (as defined below) in connection with the Agreement. Bank may, from time to time, introduce new features to the Products or otherwise modify or delete existing features of the Products in its sole discretion.
Bank shall endeavor to give the Customer reasonable notice of its termination or suspension of access to the Products, but may terminate or suspend access immediately if Bank determines, in its sole discretion, that providing access to the Products
would violate Applicable Law or that the security or integrity of the Products is at risk. Access to the Products shall be subject to the Security Procedures.
2. In consideration of the fees paid by the Customer to Bank and subject to any applicable software license addendum in relation to Bank-owned or sublicensed
software provided for a particular application and Applicable Law, Bank grants to the Customer a
non-exclusive,
non-transferable,
limited and revocable license to use
the Products and the information and data made available through the Products or transferred electronically (the Data) for the Customers internal business use only. The immediately preceding sentence does not apply to the records
described in Section 2.13 of the Agreement. The Customer may download the Data and print out hard copies for its reference, provided that it does not remove any copyright or other notices contained therein. The license granted herein will
permit use by the Customers Authorized Person, provided that such use shall be in compliance with the Agreement, including this Annex. The Customer acknowledges that elements of the Data, including prices, corporate action information, and
reference data, may have been licensed by Bank from third parties and that any use of such Data beyond that authorized by the foregoing license, may require the permission of one or more third parties in addition to Bank.
3. The Customer acknowledges that there are security, corruption, transaction error and access availability risks associated with using open networks such as
the internet, and the Customer hereby expressly assumes such risks. The Customer is solely responsible for obtaining, maintaining and operating all software (including antivirus software, anti-spyware software, and other internet security software)
and personnel necessary for the Customer to access and use the Products. All such software must be interoperable with Banks software. Each of the Customer and Bank shall be responsible for the proper functioning, maintenance and security of
its own systems, services, software and other equipment.
12
4. In cases where Banks web site is unexpectedly down or otherwise unavailable, Bank shall, absent a force
majeure event, provide other appropriate means for the Customer or its Authorized Persons to instruct Bank or obtain reports from Bank. Bank shall not be liable for any Liabilities arising out of the Customers use of, access to or inability to
use the Products via Banks web site in the absence of Banks gross negligence or willful misconduct.
5. Use of the Products may be monitored,
tracked, and recorded. In using the Products, the Customer hereby expressly consents to such monitoring, tracking, and recording. Individuals and organizations should have no expectation of privacy unless local law, regulation, or contract provides
otherwise. Bank shall own all right, title and interest in the data reflecting the Customer usage of the Products or Banks web site (including, but not limited to, general usage data and aggregated transaction data). Bank may use and
sublicense data obtained by it regarding the Customers use of the Products or Banks website, as long as Bank does not disclose to others that the Customer was the source of such data or the details of individual transactions effected
using the Products or web site.
6. The Customer shall not knowingly use the Products to transmit (i) any virus, worm, or destructive element or any
programs or data that may be reasonably expected to interfere with or disrupt the Products or servers connected to the Products; (ii) material that violates the rights of another, including but not limited to the intellectual property rights of
another; and (iii) junk mail, spam, chain letters or unsolicited mass distribution of
e-mail.
7. The Customer shall promptly and accurately designate in writing to Bank the geographic location of its users upon written request. The Customer further
represents and warrants to Bank that the Customer shall not access the service from any jurisdiction which Bank informs the Customer or where the Customer has actual knowledge that the service is not authorized for use due to local regulations or
laws, including applicable software export rules and regulations. Prior to submitting any document which designates the persons authorized to act on the Customers behalf, the Customer shall obtain from each individual referred to in such
document all necessary consents to enable Bank to process the data set out therein for the purposes of providing the Products.
8. The Customer will be
subject to and shall comply with all applicable laws, rules and regulations concerning restricting collection, use, disclosure, processing and free movement of the Data (collectively, the Privacy Regulations). The Privacy Regulations may
include, as applicable, the Federal Privacy of Consumer Financial Information Regulation (12 CFR Part 30), as amended from time to time, issued pursuant to Section 504 of the Gramm-Leach-Bliley Act of 1999 (15 U.S.C. §6801, et
seq.), the Health and Insurance Portability and Accountability Act of 1996 (42 U.S.C. §1320d), The Data Protection Act 1998 and Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of
individuals with regard to processing of personal data and the free movement of such data.
9. The Customer shall be responsible for the compliance of its
Authorized Persons with the terms of the Agreement, including this Annex.
13
GLOBAL SECURITIES LENDING AGENCY AGREEMENT
This
Global
Securities Lending Agency Agreement
, dated as of June 18, 2018 (this
Agency Agreement
), is entered into by
and between (i)
CITIBANK, N.A.
, a national banking organization (the
Agent
) and (ii)
J.P. Morgan Exchange-Traded Fund
Trust,
a Delaware Statutory Trust on behalf of each series portfolio listed on
Exhibit A severally and not jointly, (each series portfolio, a
Lender
). Capitalized terms used herein without definition shall have the meaning assigned thereto in the Lending Agreements (as defined below).
WHEREAS
, each Lender wishes to appoint the Agent, and the Agent is willing to accept such appointment, to lend certain of the
Lenders securities upon the terms and conditions set forth in this Agency Agreement.
THEREFORE
, for good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the Agent and the Lender agree as follows:
1.
|
Appointment and Acceptance
; the Agent
s Authorization
.
|
a. The Lender hereby appoints the Agent, and the Agent hereby accepts its appointment, as the Lenders
securities lending agent with the duties and obligations set forth in this Agency Agreement. No covenants or obligations not set forth herein shall be implied as a result of this Agency Agreement.
b. The Lender hereby authorizes and directs the Agent to arrange and administer loans of securities (the
Loans
) maintained
in accounts listed on Exhibit A or as agreed upon by the parties from time to time (such accounts, the
Designated Accounts
and the assets and securities contained therein, the
Securities
). Securities that are
the subject of a Loan shall be referred to as
Loaned Securities
. Lender may instruct Agent not to lend certain securities or security types, or to not lend Securities held by certain Lenders and Agent agrees to comply with any
such Instruction.
c. The Agent may utilize one or more omnibus securities accounts, opened on its own books for the account of its
customers (the
Administration Account(s)
), for the temporary receipt and delivery of Loaned Securities. Assets and securities comprised in the Administration Account(s) will become Loaned Securities when the Loans are consummated.
Agent will promptly credit such delivery of Loaned Securities into the Lenders account.
d. The Lender hereby authorizes and
instructs the Agent to enter into Loans on behalf of the Lender solely with the entities identified in
Schedule I
hereto or as otherwise identified by the Lender in writing from time to time (each, a
Borrower
).
e. Prior to arranging a Loan with a Borrower, the Agent will, on behalf of the Lender, enter into lending agreements substantially in the form
of the agreements included in
Schedule VI
hereto (such agreements shall be collectively or individually referred to as
Lending Agreements
). The Lender agrees to be bound by the terms and conditions of each Lending Agreement
entered into by the Agent on its behalf. Agent shall notify Lender of any changes or updates to the forms listed in Schedule VI. Agent will verify, at the initiation of each Loan, that the Lenders lending limit and other limitations specified
by Lender will not be exceeded after giving effect to such Loan.
2.
|
The Agent
s Services
.
In addition to the
foregoing, the Lender hereby authorizes the Agent to perform the following functions:
|
a. To negotiate rebates and/or
lending fees with the Borrowers within the parameters provided by the Lender.
b. To collect from Borrowers the cash, securities or other
financial instruments that will serve as collateral for the Loans (
Collateral
). The Lender hereby authorizes and instructs the Agent to accept on behalf of the Lender as collateral for Loans the types of financial instruments
identified in
Schedule II
to this Agency Agreement.
c. To enter into and sign, as agent for the Lender, such documents and
instruments, including but not limited to subscription agreements, asset management agreements or other relevant agreements as are required for the investment of Collateral. The Lender agrees to be bound to the terms of any such agreement.
d. To hold in custody, or enter into any required agreement with a third party custodian that will hold in custody, any and all Collateral
delivered by the Borrowers in respect of Loans. Subject to the terms hereof, Collateral held by the Agent shall be segregated on the Agents books and records as being maintained solely for the benefit of the Lender and segregated from
Agents own assets. To the extent Citibank, N.A. does not act as custodian for the Designated Accounts, the parties agree to the additional custody terms outlined in Exhibit B.
e. Subject to the terms hereof, Lender assets and securities in the Administration Account shall be segregated on the Agents books and
records as being maintained solely for the benefit of the Lenders and segregated from Agents own assets. Agent maintains books and records which identify the interest of each applicable Lender in assets in the Administration Account.
f. If requested by the Lender, to invest on the Lenders behalf all cash Collateral delivered by Borrowers in respect of Loans. The Lender
hereby authorizes and instructs the Agent to invest cash Collateral pursuant to the parameters outlined on
Schedule III
to this Agency Agreement. The Agents obligation with respect to the investments of cash Collateral shall be to make
initial investments of cash Collateral within the parameters of
Schedule III
or as otherwise instructed by Lender.
g. To perform
daily the
mark-to-market
function described in the Lending Agreements as the Lenders agent and to request and return Collateral as set forth in the
Lending Agreements. The Lender acknowledges that the Agent will calculate the value of Loaned Securities and Collateral by reference to information provided by recognized pricing services, and shall have no liability for any errors or omissions in
such information provided by such sources. In recognition of the obligation of Lenders board of directors to oversee fund asset valuation, Agent shall provide Lender with such information as Lender may reasonably request about the pricing
services used by Agent.
h. To collect or arrange for the collection of any interest, dividends or other distributions or other payments of
any kind on Loaned Securities (including but not limited to manufactured dividends, if any, and other distributions due to the Lender in respect of the Loan) and pay the same to the Lender.
i. To pay at Agents expense third party lending agent fees charged by Lenders Custodian as set forth on Schedule IV.
j. Agent shall provide such reports, statements and presentations as agreed upon by Lender and Agent from time to time. At a minimum,
Agent shall provide the following reports and statements: Agent (i) will, upon request by Lender, mail to Lender a daily statement of activity setting forth information relating to loaned securities,
marks-to-market
and terminations and (ii) will send to each Lender on or about the 7th (seventh) Business Day of each month, a statement indicating for the preceding calendar month the securities lent
from the Custody Account, the value
of such securities, the identity of the borrowers, the nature and amount of Collateral received as security for Loans, the income received (or loss incurred) from such invested Collateral, the
amounts of any fees or payments paid or to be paid with respect to each loan and such other information as Agent and Lender may agree to from time to time. In addition to the foregoing, Agent shall provide the following:
(1) on each Business Day via a system of on line reporting, a daily report for each Lender including loan detail, outstanding collateral report, percent on loan report, and restricted securities report; (2) on each Business Day, compliance
reporting and attestations including loans conducted with unapproved borrowers, loans conducted in unapproved markets, loans collateralized under 102%, restricted securities
on-loan,
and any Lender above the
lending limit; (3) on a weekly basis, a mark to market report; (4) on a quarterly basis, the amount of any payments made by borrowers including a description of substitution payments made pursuant to this Agreement; (5) on an as
needed basis, a report concerning substitute or manufactured dividend income; and (6) such additional reporting as agreed upon by the parties from time to time.
k. Agent shall make appropriate persons available for the purpose of reviewing with representatives of the Lender and the Board on a regular
basis at reasonable times the services provided under this Agreement and general conditions affecting the securities lending market. Agent agrees to render to the Lender and the Board on a timely basis such other periodic and special reports
regarding its activities under this Agreement as the Lender or the Board may reasonably request.
l. Agent shall not initiate negative
loans (loans for which the rebate exceeds the earnings on the investment of Collateral). This provision may be varied by the Lender by a direction in writing without a formal amendment of this Agreement.
m. In all its lending transactions on behalf of Lender (whether in the U.S. or outside of the U.S., and whether with U.S. or
non-U.S.
Borrowers) Agents securities lending shall comply with the requirements of Section 1058 of the U.S. Internal Revenue Code. Furthermore, Agents securities lending shall comply with the
following requirements in the proposed U.S. Treasury Regulations under Section 1058: (A) the securities transfer agreement must be in writing; and (B) the agreement must provide that Lender may terminate the securities loan transaction
upon notice of not more than five (5) Business Days. If in the future further U.S. Treasury Regulations are proposed under Section 1058, Agent shall within thirty (30) days of learning of any such further proposed regulations
advise Lender if it is unable or unwilling to comply with new requirements contained in such proposed regulations.
n. Agent may:
(i) terminate or subject to any limitations specified herein (including in the Schedules hereto) modify any Loan at any time and (ii) review and delete any Borrowers and/or investment counterparties at any time. Agent hereby acknowledges
that Lender itself may instruct Agent to terminate any Loan on any date subject to the conditions of the relevant Lending Agreement and impose additional limitations on any Borrower.
3.
|
Representations and Warranties
.
|
a. The Lender and the Agent each hereby represent and warrant that, throughout the term of this Agency Agreement, and for as long thereafter as
a Loan is outstanding: (i) Each party is authorized, under the terms of its organizational documents, the terms of any agreements with any third party, and the laws, rules and regulations that govern it, to enter into this Agency Agreement and
be bound thereby, to enter into the Loans, and to invest cash received as Collateral, in the case of the Lender as principal and in the case of the Agent as agent; and (ii) The person executing this Agency Agreement on its behalf has been, and
all Authorized Persons acting on behalf of such party will have been, duly and properly authorized to do so.
b. Lender represents and warrants that, throughout the term of this Agency Agreement, and as long
thereafter as a Loan is outstanding: (i) the Securities in the Designated Accounts are, and shall be at the time Loans are made, free and clear of all liens and encumbrances except as may be set forth in a custody agreement with Citibank, N.A.
or JP Morgan Chase Bank N.A., and except for any lien or other encumbrance routinely imposed on securities held in a relevant settlement or clearing system, and the Lender has full right, title and interest in and to and has not transferred,
assigned or encumbered any interest or rights with respect to the Securities, this Agency Agreement, the Lending Agreements or transactions contemplated hereby or thereby and (ii) the Lender is not relying on the Agent to advise it on the
suitability for the Lender of entering into any of the Lending Agreements nor the credit worthiness of any particular Borrower.
c. Both
parties agree that the representations and warranties contained in this Section 3 shall be ongoing in nature, and shall continue throughout the term of this Agency Agreement. If, during the term of this Agency Agreement, either party has reason
to believe that any representation or warranty made hereunder is or soon will not be true and correct, then that party is obliged to notify the other party thereof as soon as reasonably practicable.
4.
|
Liability of Agent; Indemnification
.
|
a. Indemnification by Agent. Subject to the limitations contained in Section 5 of this Agency Agreement, and in addition to the
indemnification set forth in Section 4(b) below, the Agent agrees to indemnify and hold harmless each Lender from and against damages, losses, costs and fees incurred by the Lender that result from Agents negligence, willful misconduct or
fraud in performing its duties hereunder.
b. Indemnification for Borrower Defaults. If there occurs an event of default by the Borrower
under a Lending Agreement, the Agent shall indemnify the Lender as follows: the Agent shall liquidate the Collateral for its use in connection with this indemnification and within five (5) business days after the date of declaration of the
default: (i) replace the Loaned Securities or purchase
Replacement Securities
or
Equivalent Securities
as such terms are defined in the relevant Lending Agreement (as more fully set forth on Schedule VI);
or (ii) if Replacement Securities or Equivalent Securities cannot be obtained within five (5) business days, pay the Applicable Lender an amount that is equal to the value of the Loaned Securities at the time at which the Loaned Securities
were due to have been returned by the Borrower, or, if at such time a value is not determinable, the latest prior time at which a value is determinable. Replacement under clause (b)(i) or payment under clause (b)(ii) shall include payment by the
Agent for any manufactured income which remains unpaid through the date of replacement or payment, the amount of any overdraft charges charged by the custodian and (if the replacement occurs through a
buy-in)
the costs and penalties associated with such
buy-in.
Consistent with market practice, the Agent may decline to declare an event of default in cases where it determines that a solvent Borrowers failure to
return a Loaned Security is temporary or administrative in nature and such failure is remedied within two (2) business days, but in no event shall the delivery of Replacement Securities or Equivalent Securities exceed the five (5) business
days provided under clause (b)(i). To the extent that there is a conflict between this provision and the indemnification of Agent in Section 4(c) below, the terms of this provision shall govern.
c. Indemnification by Lender. The Lender agrees to indemnify and hold harmless the Agent from and against any and all damages, losses, costs,
Taxes (as hereinafter defined) and fees incurred by the Agent that result from: (i) any action taken or omitted to be taken by the Agent in acting in accordance with the terms of this Agency Agreement, or the Lending Agreements; or (ii) as a
consequence of carrying out any Instructions of the Lender except where the Agent is negligent or acts with willful misconduct or fraud in carrying out those instructions.
5.
|
Limitation of Liability.
|
Except with respect to the indemnification set forth in section 4(b), in addition to any other limits set forth herein:
a. Agents liability under section 4.a of this Agency Agreement, whether to Lender or any creditor of Lender shall be limited to an amount
equal to the market value of the securities that are the subject of the loan, investment or transaction to which the damage relates calculated at the time of the alleged act or omission giving rise to the loss. If the act or omission resulted in the
imposition of
buy-in
or similar penalties against lender in addition to the market value of the securities, Agent shall also be liable for such penalties.
b. Under no circumstances shall Agent be liable for (i) special, consequential or indirect damages, lost profits or loss of business,
(ii) any liability incurred as a result of the actions or inactions of any pricing agencies, depositories or any third party custodian, or (iii) any loss arising out of any suspension of the agents duties and obligations hereunder as
a result of any law, regulation, decree, order or governmental act that prevents or limits the performance of such duties and obligations (including the suspension of trading), except insofar as that decree, order or governmental act is imposed as a
sanction against Agent due to an act or omission of the Agent in violation of Applicable Law (as hereinafter defined). Notwithstanding the foregoing, in the event that Agent appoints a
sub-agent
or
sub-custodian
to perform duties under this Agency Agreement, the Agent shall be responsible for acts and omissions of the
sub-agent
or
sub-custodian
as though any action or omission was the act or omission of the Agent. The Agent agrees that any
sub-custodian
appointed by it shall comply with the
requirements of Section 17(g) of the Investment Company Act of 1940, as amended. For the avoidance of doubt, the Lender agrees to indemnify the Agent and to defend and hold the Agent harmless from all Losses incurred by the Agent as a result of
a third party custodian appointed at the direction of Lender failing to comply with the instructions given to it under Clause 9(c).
c. The
Agent may refrain from beginning or defending any legal action or proceedings arising out of or in connection with any loan until it shall have received such indemnity and security as it may require for all costs, claims, expenses (including
reasonable attorneys fees) and liabilities which it will or may expend or incur in relation thereto.
a. In addition to any other remedies available to the Agent under Applicable Law, the Agent shall have, and the Lender hereby grants, a
continuing general lien on all securities in Agents possession and control (provided that Agent shall have no lien or security interest in any Security issued or guaranteed by Agent or its affiliates or if such lien or security interest in
prohibited by law) and any Collateral sitting in any collateral account held by the Agent until the satisfaction of liabilities arising under this Agency Agreement of the Lender to the Agent in respect to any fees and expenses incurred in the
performance of services under, or any advances of funds made by the Agent under, this Agency Agreement; and
b. In additional to any other
remedies available to the Agent under Applicable Law, the Agent may without prior notice to the Lender, set off any payment obligation due and owed to it by the Lender in connection with all liabilities arising under this Agency Agreement against
any payment obligation owed by it to the Lender under this Agency Agreement regardless of the place of payment or currency of either obligation (and for such purpose may make any currency conversion necessary).
7.
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Subrogation
.
If the Agent makes any transfer or payment to Lender as a result of a failure by a
Borrower to return any Loaned Securities, the Lender agrees that the Agent is and will be subrogated to all the Lenders rights with respect to such failure in and to the Lending Agreements and the Collateral under such Lending Agreements and
the Lender hereby assigns to the Agent all such rights.
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8.
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Duties of the Lender;
Fees; Taxes
.
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a. Notwithstanding any other provision in this Agency Agreement to the contrary, the Lender acknowledges and agrees that the investment of cash
or other property received as Collateral is for the Lenders account and risk provided that such investment is made by Agent in accordance with Schedule III. The Lender agrees that to the extent any investment losses reduce the amount of cash
below the amount required by the Loan and/or mark to market process, the Lender will, on the Agents demand, pay to the Agent such amount in cash, which the Agent will receive and use as, or reimburse for, Collateral. If the Lender fails to
make any payment due to the Agent, the Lender will be liable to the Agent for the amount of any such payment, together with interest on such amount at the rate specified in Section 11, from the date of the Agents demand referred to above
until payment of such liability.
b. In consideration of the services provided hereunder the Lender agrees to pay to the Agent an amount
equal to a fixed percentage of (i) the investment income (net of rebates) on cash Collateral delivered to the Agent on the Lenders behalf in respect of any Loans by the Borrowers, and (ii) fees paid in connection with transactions
for which
non-cash
Collateral is provided by Borrowers. These amounts shall be set forth on
Schedule IV
of this Agency Agreement. The Lender authorizes and directs the Agent to withhold such fees on a
monthly basis from the amounts payable to the Lender in respect of such investment and fee income or as otherwise agreed in writing.
c.
The Agent shall not be liable for any taxes, assessments or governmental charges that may be levied or assessed on any basis whatsoever in connection with the Lender (
Taxes
; Taxes shall not, however, include taxes
assessed against the Agent related to its own income or assets). The Lender agrees that Taxes shall be paid by the Lender. The Agent will deduct or withhold for or on account of Taxes from any payment to the Lender if required by any law including,
but not limited to (i) any statute or regulation, (ii) any agreement entered into by the Agent and any governmental authority or between any two or more governmental authorities, or (iii) a requirement of any legal, governmental or
regulatory authority, where any statute, regulation or governmental authority may be domestic or foreign (any of (i), (ii) or (iii) referred to herein as
Applicable Law
). The Lender acknowledges that the Agent may debit any
amount available in any balance held for the Lender and apply such amount in satisfaction of Taxes. The Agent will timely pay the full amount debited or withheld to the relevant governmental authority in accordance with the Applicable Law as
provided in this Clause. If any Taxes become payable with respect to any prior credit to the Lender by the Agent, the Lender acknowledges that the Agent may debit any balance held for the Lender in satisfaction of such prior Taxes. The Lender shall
remain liable for any deficiency and agrees that it shall pay it upon notice from the Agent or any governmental authority. If Taxes are paid by the Agent or any of its affiliates, the Lender shall promptly reimburse the Agent for such payment to the
extent not covered by withholding from any payment or debited from any balance held for the Lender.
a. The Agent is entitled to rely and act upon any and all instructions (including, consents and notices) received by the Agent, communciated
through any manual or electronic medium or system as agreed to by the parties (
Instructions
) of any person identified by the Lender as an
Authorized Person
in connection with the transaction contemplated hereby
until the Agent has received notice of any change from the Lender and has had a reasonable time to note and implement such change. The Agent is authorized to rely upon any Instructions received by any means, provided that the Agent and the Lender
have agreed upon the means of transmission and the method of identification for the Instructions. In particular:
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(i)
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The Lender and the Agent will comply with security procedures designed and agreed upon to verify the
origination of Instructions.
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(ii)
|
The Agent is not responsible for errors or omissions made by the Lender or resulting from fraud or the
duplication of any Instruction by the Lender (except that this exculpation shall not apply if such fraud or duplication by the Lender is ultimately attributable to an act of fraud or duplication by the Agent), and the Agent may act on any
Instruction by reference to an account number only, even if no account name is provided.
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(iii)
|
The Agent may act on an Instruction if it reasonably believes it contains sufficient information.
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(iv)
|
The Agent may decide not to act on an Instruction where it reasonably doubts its contents, completeness,
authorization, origination or compliance with any security procedures or where Instructions are given which conflict with each other but the Agent will promptly notify the Lender of its decision.
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(v)
|
If the Agent acts on any Instruction sent manually (including by facsimile or telephone), then, if the Agent
complies with the security procedures as referred to under
Sub-Clause
9(a)(i) above, the Lender will be responsible for any loss the Agent may incur in connection with that Instruction. The Lender expressly
acknowledges that the Lender is aware that the use of manual forms of communication to convey Instructions increases the risk of error, security and privacy issues and fraudulent activities.
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(vi)
|
Instructions are to be given in the English language.
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(vii)
|
The Agent may refuse to execute Instructions if, in the Agents reasonable opinion, they are contrary to
any Applicable Law, rule or other regulatory requirement, whether arising from any governmental authority,
self-regulatory
organization or that of a relevant stock exchange, clearing house, settlement system
or market.
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(viii)
|
In some securities markets, securities deliveries and payments therefor may not be or are not customarily made
simultaneously. Accordingly, notwithstanding the relevant Instruction to deliver any part of the Collateral against payment or to pay for any part of the Collateral against delivery, the Agent may make or accept payment for or delivery of any part
of the Collateral at such time and in such form and manner as is in accordance with relevant local law and practice or with the customs prevailing in the relevant market; provided that Agent shall not deliver Secureities for Loan unless the
Collateral therefor has been received concurrently or prior thereto.
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b. The Lender agrees to provide written instructions related to the termination or modification
of the terms of a Loan or otherwise as to the recall of Loaned Securities: (i) by electronic mail or SWIFT message; (ii) to the department or desk of the Agent that is separately identified to the Lender; and (iii) in accordance with
the deadlines and cutoff times set forth on
Schedule V
to this Agency Agreement, and to cause all of its investment managers and/or advisors with access to the Designated Accounts to so advise the Agent, or of any securities in the Designated
Accounts it or they, as applicable, shall sell or have sold. The Lender understands that the Agent shall have no liability as a result of the failure of the Lender and/or its investment managers/advisors to give this notice in accordance with the
terms of this Section 9.b.
c. The Lender agrees to give irrevocable instructions to its custodian substantially in the form of those
set out in Annex 1 to Exhibit A (unless a custody rider is agreed in lieu thereof) : (i) to act in accordance with any instructions given from time to time by the Agent (acting through duly authorised individuals as notified to the Lenders
custodian in writing), including instructions relating to the settlement of transactions effected by the Agent on behalf of the Lender pursuant to any Lending Agreement and the transfer of Securities to or from the Designated Accounts at the
direction of the Agent to enable the Agent to meet its obligations hereunder and the Lending Agreements; (ii) to provide, at such times and in such form as the Agent may require, regular update information regarding the status of any action by
the Lenders custodian required by an instruction given by the Lender to such custodian; and (iii) to provide the Agent with information about the Loaned Securities, provided that such irrevocable instructions may be revoked by the Lender
upon the termination of this Agency Agreement.
10.
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Lender Information
.
a.
The Agent may rely on the information received from
Lender, including but not limited to
tax-related
information, in connection herewith, particularly in agreeing and collecting any income due under a Lending Agreement. Request for such information by the Agent
hereunder may be made from time to time during the term of this Agency Agreement. The Agent shall not incur any liability for any loss, damages or costs arising directly or indirectly from the inaccuracy of information provided by the Lender or a
failure by the Lender to supply information requested hereunder.
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b. The Lender shall provide the Agent with information
and proof (copies or originals) as to the Lenders and/or its underlying beneficial owners Tax status or residence or other information as the Agent reasonably requests in order for the Agent to comply with Applicable Law. Information and
proof may include executed certificates, representations and warranties, or other documentation the Agent reasonably deems necessary or proper to fulfill the requirements of relevant Tax authorities. The Lender shall notify the Agent in writing
within 30 days of any material change in, or in the validity of, information previously provided to the Agent.
11.
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Advances
.
The Lender agrees to repay the Agent promptly for any advances of funds
that the Agent may from time to time, in its reasonable discretion, make to or for the account of the Lender in connection with and to facilitate the transactions contemplated in this Agency Agreement and the Lending Agreements. In such event, Agent
shall notify Lender that it will be making or has made an advance and the Lender shall be liable to the Agent for the amount of such advance or payment, together with interest on such amounts, at a rate per annum equal to Citis Pool
Rate (the rate charged to Agent by Citigroup Treasury, currently Overnight LIBOR plus a liquidity premium charge), from the date of the Agents advance or the due date of such payment, as appropriate, until payment by the Lender of such
liability. The Agent may withhold all such amounts from the amounts payable to the Lender hereunder. Agent will provide notice of the rate charged and of any changes to the Pool Rate setting methodology.
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12.
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Disclosure/Confidentiality/Data Security
.
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a. The Agent shall treat, any information acquired as a result of or pursuant to this Agreement as confidential. Agent shall keep confidential,
and will cause its employees to keep confidential, all
non-public
information concerning each Lenders portfolio holdings and other confidential information (collectively Lender Confidential
Information) obtained hereunder from or on behalf of the Lender to the extent provided hereunder. Agent will use Lender Confidential Information only for the purposes of providing services under this Agreement and will disclose such Lender
Confidential Information only to the extent Agent determines in good faith to be reasonably necessary to provide the services specified in this Agreement or as otherwise required by law. The Lender, on behalf of itself and on behalf of its
employees, agents and subcontractors, authorizes the transfer and disclosure of any Lender Confidential Information to and between the Agent and its branches, subsidiaries, representative offices, affiliates and administrative support providers and
third parties selected by any of them, wherever situated, for confidential use solely in connection with the provision of services under this Agreement (including for data processing, statistical and risk analysis purposes and for compliance with
Applicable Law), and further agrees that the Agent and any such branch, subsidiary, representative office, affiliate, agent or third party may transfer or disclose any such information to any payor or payee as required by Applicable Law, as required
by any regulatory agency, court, other governmental body or self-regulatory agency with jurisdiction over a Party or pursuant to Applicable Law. Agent acknowledges that the Lender has additional disclosure requirements relating to securities
lending, Loans and the appointment of Agent required by the Securities and Exchange Commission, including, without limitation disclosures on Form
N-PORT,
disclosures in the Lenders Registration
Statements including disclosure of the Agency Agreement as an Exhibit on Part C of the Lenders Registration Statements and disclosures in the Lenders shareholder reports. Citi will cooperate with Lender in providing such information.
Confidential Information shall not include information which the receiving party (i) knew at the time of disclosure to it, (ii) is or becomes generally known in the industry or public knowledge without the default by the receiving party of
its obligations hereunder, (iii) can demonstrate from written records has been independently developed through employees, none of whom had access to Confidential Information; or (iv) is generally furnished to third parties by the
disclosing party without confidentiality restrictions.
b. The Lender also specifically authorizes the Agent to: (i) disclose
information to Borrowers regarding the Lender as those Borrowers request or are required to obtain pursuant to Applicable Law, or as deemed necessary in connection with the consummation or maintenance of any Loans; (ii) disclose to third
parties (on an anonymized basis or otherwise with Lenders consent) information concerning the Securities in the Designated Accounts for the purpose of estimating the potential fees to be paid by Borrowers with respect thereto; and
(iii) disclose to its agents and affiliates such information as required or necessary in connection with the consummation of Loans hereunder. Such information shall be provided to such Borrowers, third parties, agents and affiliates under
conditions of confidentiality and only for the purposes of effecting or maintaining loans and providing the services contemplated by this Agency Agreement.
c. The Agent shall take commercially reasonable measures to maintain a comprehensive data security and cybersecurity program that contains
appropriate administrative, technical and physical security measures designed to detect, prevent and mitigate the risk of destruction, loss, unauthorized access, disclosure, use and/or alteration of Confidential Information. If either party
discovers or is notified of an event that results in destruction, loss and/or unauthorized access, disclosure, use and/or alteration of Confidential Information, it shall promptly notify the other party in accordance with this Agency Agreement.
d. Except as provided in Section 12(c), the Lender agrees that no printed materials or other
matter (in any language) that mention Citi, Citigroup Inc., Citibank, N.A., Citibank Europe plc, the rights, powers or duties of the Agent or the terms of this Agency Agreement shall be published or disclosed to any third party by the Lender or on
the Lenders behalf unless: (i) Citibank, N.A. shall first have given its specific written consent; or (ii) the Lender is legally required to do so pursuant to any Applicable Law to which it is subject. Agent agrees that no printed
materials or other matter (in any language) that mention JPMorgan, JP Morgan Chase N.A. the rights, powers or duties of the Lender or the terms of this Agency Agreement shall be published or disclosed to any third party by the Agent or on the
Agents behalf unless: (i) Lender shall first have given its specific written consent; or (ii) as part of the SIFMA Agent-Lender Disclosure industry standard; or (iii) the Agent is legally required to do so pursuant to any
Applicable Law to which it is subject.
13.
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Non-Public
Information, Bank Business and Roles
.
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a. Notwithstanding anything else contained in this Agency Agreement and any other agreement between the Lender and
Citibank, N.A. and its affiliates (collectively,
Citi
):
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(i)
|
the Lender acknowledges that Citibank, N.A. and its affiliates perform a variety of services for a variety of
entities, including banking and financial services for Borrowers, and advisor to issuers of the Loaned Securities and Collateral investments of the Lender;
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(ii)
|
the Lender shall not hold Citibank, N.A. or its affiliates liable for its or their failure to make use of, in
its role as the Agent within the terms of this Agency Agreement,
non-public
information it obtains in the course of doing so, the use of which may be prohibited by the legal and regulatory environment and by
internal Citi policies, whether or not the use of such information in a specific instance might constitute a breach of any such Applicable Laws or polices; and
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(iii)
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the Agent has entered, and may enter, into agreements similar to this Agency Agreement with others and the
Agent or its affiliates may from time to time lend Securities to or through, or enter into similar transactions with, any Borrower or, where relevant, act as discretionary manager for other clients and therefore agrees that:
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(A) the selection of a lender for any particular lending opportunity among all persons having entered into such agreements with the Agent
shall be at the Agents sole discretion provided that Agent has adopted procedures for fair treatment of client lenders and shall use it best efforts to treat each Lender equitably with other lenders of like circumstances in making lending
opportunities available to such Lender hereunder taking into account the demand for specific securities, availability of securities, types of collateral, eligibility of borrowers, deadline for final cash and limitations on investments of cash
collateral; and
(B) if consistent with its obligations in (A) above the Agent shall have no duty to inform the Lender of any lending
or similar opportunity presented to the Agent or its affiliates or to refrain from taking advantage of any such opportunity but may avail itself of any such opportunity as freely as if there were no relation of principal and agent between the Lender
and the Agent.
b. The Lender acknowledges and agrees that the obligations and duties of Citibank, N.A. under
this Agency Agreement shall be performed only by Citibank, N.A. and its agents, and shall not be deemed obligations or duties of any other member of the Citi organization.
14.
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Notices
.
Except as otherwise specifically provided herein, all notices and other
communications shall be in writing in the English language and shall be made either by facsimile or by prepaid first class mail (except that notice of termination, if mailed, shall be sent by prepaid registered or certified mail) at the address
listed in
Schedule VII
or at such other address as a party may advise the other parties hereto in writing from time to time.
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a. Each party may terminate this Agency Agreement and the Agents authorization as securities lending agent for the Lender at any time
upon giving not less than fifteen (15) days prior written notice to the other. The parties hereby acknowledge and agree that, even after notice of termination of this Agency Agreement is given and effective, the Agent shall continue (unless
specifically instructed to terminate or novate the Loans) to act as the Agent for the Lender as set forth herein with respect to any Loans outstanding at the time notice of termination is given until such Loans terminate including termination by
Lender unless such continuation would cause the Agent, Citigroup, Inc. or any affiliate of either to breach Applicable Law.
b.
Notwithstanding anything else contained herein, the following terms shall survive the termination of this Agency Agreement: 4, 5, 6, 7, 8, 11, and 12.
a.
No Advice, No Duty to Monitor
. The Lender acknowledges and agrees that the Agent does not owe to, nor is it obligated to perform on
behalf of, the Lender any investment advisory duties or responsibilities, nor shall the Agent have any duty to monitor investments of cash received as Collateral after the time of initial investment.
b.
No Third Party Beneficiaries
. This Agency Agreement is between the parties hereto and is not intended to confer any benefits on third
parties, including without limitation any Borrower, any counterparty in a transaction with the Lender, or any third party service provider for the Lender or the Agent.
c.
Force Majeure
. Neither party shall be responsible to the other for any loss caused by a natural, regulatory or societal event due to
any cause beyond its reasonable control, such as a natural disaster, nationalization, currency restriction, act of war, act of terrorism, act of God, postal or other strike affecting the market infrastructure, unavailability of communications
systems, sabotage or the failure, suspension or disruption of any relevant stock exchange, clearance system or market provided that it has adopted and maintained such business continuity, data security and cybersecurity policies and procedures as
are commercially reasonable and standard for its activities.
d.
Amendments
. This Agency Agreement shall not be amended except by a
written agreement between the parties and any purported amendment made in contravention of this section shall be null and void and of no effect whatsoever.
e.
Assignment
. This Agency Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and
permitted assigns. Neither party may assign, transfer or charge all or any rights, benefits or obligations hereunder without the consent of the other party. Any purported assignment, transfer or charge made in contravention of this section shall be
null and void and of no effect whatsoever. However, nothing in this Agreement shall be interpreted to limit, qualify or affect in any way the rights of any resolution authority having jurisdiction over Agent, Lender or any affiliate of either.
f.
Entire Agreement
. This Agency Agreement, and all current executed Schedules and
Exhibits hereto shall constitute the entire agreement between the parties and, unless otherwise expressly agreed in writing, shall supersede all prior agreements and understandings, written or oral relating thereto, between the parties.
g.
No Implied Waiver
. The parties hereto agree that (i) the rights, powers, privileges and remedies stated in this Agency Agreement
are cumulative and not exclusive of any rights, powers, privileges and remedies provided by law, unless specifically waived, and (ii) any failure or delay in exercising any right, power, privilege or remedy will not be deemed to constitute a
waiver thereof and a single or partial exercise of any right, power, privilege or remedy will not preclude any subsequent or further exercise of that or any other right, power, privilege or remedy.
h.
Further Assurances
. The Lender agrees to provide such additional information and execute and deliver such further documentation as
the Agent may reasonably request in connection with and in furtherance of the transactions authorized herein. In addition to additional documentation as noted in the preceding sentence, the parties agree to the additional terms outlined in
Schedule VII
in furtherance of the transactions authorized herein.
i.
Partial Invalidity
. In the event that any provision of
this Agency Agreement, or the application thereof to any person or circumstances, shall be determined by a court of proper jurisdiction to be invalid or unenforceable to any extent, the remaining provisions of this Agency Agreement, and the
application of such provisions to persons or circumstances other than those as to which it is held invalid or unenforceable, shall be unaffected thereby and such provisions shall be valid and enforced to the fullest extent permitted by law in such
jurisdiction.
j.
Governing Law and Jurisdiction; Compliance with Laws
.
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(i)
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This Agency Agreement shall be governed by and construed in accordance with the internal laws (and not laws of
conflicts) of the State of New York. The parties agree that the courts of the State of New York, shall have jurisdiction to hear and determine any suit, action and proceeding and settle any dispute which may arise out of or in connection with this
Agency Agreement; and for such purposes, each irrevocably submits to the
non-exclusive
jurisdiction of such courts. The specific office and jurisdiction are identified in
Schedule VII
, in addition to
such additional terms or conditions as may be applicable.
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(ii)
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Each party hereto irrevocably waives (A) any right to a trial by jury, if applicable; (B) any
objection it may have at any time to the laying of venue of any actions or proceedings brought in any court designated hereby, any claim that such actions or proceedings have been brought in an inconvenient forum and the right to object that any
court designated hereby does not have jurisdiction over such party; and (C) to the fullest extent permitted by Applicable Law, with respect to itself and its revenues and assets (irrespective of their use or intended use), all immunity on the
grounds of sovereignty or similar grounds from actions or proceedings by or in any court, and irrevocably agrees, to the fullest extent permitted by Applicable Law, that it will not claim such immunity in any such actions or proceedings.
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(iii)
|
The Lender acknowledges and agrees that the Agents performance of this Agency Agreement is subject to
Applicable Law and to relevant decrees, orders and government acts and the rules, operating procedures and practices of any relevant stock exchanges, clearance systems or market where or through Loans are to be carried out or to which the Agent may
be subject or as exist in the country in which any Securities or Collateral are held.
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k.
Counterparts
. This
Agency Agreement may be executed in several counterparts, each of which shall be an original, but all of which together shall constitute one and the same agreement.
l.
Limited Recourse
. It is understood and agreed by each of the parties that this Agency Agreement constitutes a separate Agency
Agreement between each Lender and Agent, as if each such Lender had executed a separate agreement with Agent naming only itself as Lender. The assets of a particular Lender shall under no circumstances be charged with liabilities attributable to any
other Lender and any claim by Agent or a Borrower against a particular Lender shall look only to the assets of that particular Lender for payment of such claim. It is understood that, with respect to any Lender that is a portfolio of assets
specifically allocated to a series of shares of a series company, as defined in
Rule18f-2(a)
promulgated under the Investment Company Act of 1940, as amended, all persons extending credit to,
contracting with or having any claim against such Lender (including any claims arising hereunder) shall look only to the assets specifically allocated to the Lender for payment under such credit, contract or claim and not to any assets specifically
allocated to another series of shares or the series company or to any other assets of the series company.
IN WITNESS WHEREOF
, the parties hereto
have caused this Global Securities Lending Agency Agreement to be executed as of the date set forth above.
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CITIBANK, N.A., Agent
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Lender: J.P. MORGAN EXCHANGE-TRADED FUND TRUST on behalf of each of its series listed on Exhibit A severally and not jointly
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By:
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/s/ Richard Kissinger
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By:
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/s/ Brian Shlissel
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Name: Richard Kissinger
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Name: Brian Shlissel
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Title: Director
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Title:
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Schedule I
to the Global Securities Lending Agency Agreement,
Between
CITIBANK, N.A.
, As the Agent
and the Lender
SECURITIES
LENDING BORROWERS
LENDER: J.P. Morgan Exchange-Traded Fund Trust on behalf of each of its series listed on Exhibit A severally and not jointly
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MSLA
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Borrower Name
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[Redacted]
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GMSLA
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[Redacted]
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AMSLA
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[Redacted]
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1.
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By choosing Citigroup Global Markets Inc. (
CGMI
) or Citigroup Global Markets Limited
(
CGML
) as an approved borrower, you acknowledge that such entity is an affiliate of Citibank, N.A. (
Citibank
).
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2.
|
By choosing Citibank as an approved borrower you agree that, from time to time, Citibank may (1) borrow
securities for its own proprietary transactions or (2) borrow securities from you, and
on-lend
them to other borrowers as riskless principal/conduit lender. As to only these loans, the Agent shall have
all the rights and obligations of the Borrower as set forth in the Lending Agreements, provided however that:
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With respect to loans
made pursuant to (1) above, Citibank acknowledges and agrees that such loans:
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(a)
|
shall be made pursuant to terms and conditions substantively equivalent to the terms and conditions of loans
with other Borrowers under the Lending Agreement; and
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(b)
|
shall be made at rates and pricing equal to or better than rates or pricing negotiated with other borrowers for
a similarly structured loan.
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With respect to loans made pursuant to (2) above:
|
(a)
|
Citibank will do so only upon receipt of a request by a potential borrower (which may include entities
affiliated with Citibank), and not for its own account.
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(b)
|
Citibank will only do so if a potential borrower is not on your list of approved borrowers (such a borrower, a
non-approved
borrower).
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(c)
|
Citibank will only do so if, at the time that a
non-approved
borrower
offers to borrow the same securities from Citibank, we have not received nor have actual knowledge of an offer to borrow the same securities from an approved borrower.
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(d)
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You acknowledge that Citibank will be compensated by means of a spread between the fees paid to you by Citibank
and the fees charged by Citibank to the ultimate borrower.
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(e)
|
You confirm that you are not a fund or plan subject to the Employee Retirement Income Security Act of 1974
(ERISA), are not an affiliate of Citibank under section 23A of the Federal Reserve Act, and that no Citibank affiliate has investment discretion over the assets to be lent (unless specific authorization exists under Applicable Law).
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(f)
|
Loans are not currently being made pursuant to (2) and Citibank will notify Lender if it intends to
propose a Loan to be made under (2).
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Update
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By:
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/s/ Brian Shlissel
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Name: Brian Shlissel
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Title: V. P.
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Date:
6/18/18
Schedule II
to the Global Securities Lending Agency Agreement,
Between
CITIBANK, N.A.
, As the Agent
and the Lender
Collateralization
Parameters
The Agent shall accept only the following types of Collateral in an amount equal to or greater than the designated maintenance
requirement (for the specific type of Loan) for any Loans entered into pursuant to authority in the Securities Lending Agency Agreement:
(i) Cash (US Dollars);
(ii) US
Government Securities if approved in writing by the Lender.
B.
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Maintenance Requirements
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(i)
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Loans of US or OECD Government Securities: l02% plus accrued interest.
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(ii)
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Loans of US Corporate Debt Securities: 102% plus accrued interest.
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(iii)
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Loans of US Equity Securities: 102%.
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(iv)
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Loans of
non-US
Securities: 105%.
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(v)
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All other Securities: 102%.
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CITIBANK, N.A.
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J.P. MORGAN EXCHANGE-TRADED FUND TRUST on behalf of each of its series listed on Exhibit A severally and not jointly
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as Agent
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as Lender
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By:
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/s/ Richard Kissinger
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By:
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/s/ Brian Shlissel
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Name: Richard Kissinger
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Name: Brian Shlissel
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Title: Director
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Title: V.P.
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Dated as of: June 18, 2018
Schedule III
to the Global Securities Lending Agency Agreement,
Between
CITIBANK, N.A.
, As the Agent
and the Lender
INVESTMENT
GUIDELINES FOR
SECURITIES LENDING CASH COLLATERAL
LENDER: J.P. Morgan Exchange-Traded Fund Trust on behalf of each of its series listed on Exhibit C severally and not jointly
The Agent is instructed to invest all cash in
IM Shares of JPMorgan Prime Money Market Fund
IM Shares of JPMorgan U.S. Government Money Market Fund
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The Lender may amend this Schedule III by the delivery to Agent from time to time of Investment Guidelines signed
by or otherwise authenticated by J.P. Morgan Exchange-Traded Fund Trust on behalf of each
Lender.
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Miscellaneous
The two following paragraphs are not applicable to Lenders initial election to invest all cash Collateral into money market
mutual funds, but may be relevant if investment directions are subsequently changed to permit term investments.
The Lender recognizes and
understands that the term of the investments made at its direction in accordance with the above guidelines may not match and may extend beyond the term of the loans of the relevant securities. In the event that Citibank, N.A.s appointment as
securities lending agent is terminated, the Lender, at its option, may either (1) permit loans of securities, equal in market value to the original purchase price of the investment, to remain outstanding until the investment matures, or
(2) purchase such investment into its own portfolio at the original purchase price plus the interest (or principal if originally purchased at a discount) that would have accrued, or (3) instruct the Agent to liquidate the investment
promptly.
In connection with loans of securities and reverse repurchase transactions (if previously approved as investment vehicles for
securities lending cash collateral) within the terms of the securities lending program, we authorize the use of the following entities as third party custodians of (a) collateral for securities lent under the securities lending program, and
(b) securities purchased under repurchase transactions (if previously approved) and cash collateral remitted for such purchases: The Bank of New York and JP Morgan Chase Bank. We further authorize Citibank, N.A. as our agent to enter into the
necessary agreements to effectuate the foregoing.
J.P. MORGAN EXCHANGE-TRADED FUND TRUST
on behalf of each of its series listed on Exhibit A severally and not jointly
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By:
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/s/ Brian Shlissel
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Name: Brian Shlissel
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Title: V.P.
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Date:
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June 18, 2018
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Schedule IV
to the Global Securities Lending Agency Agreement,
Between
CITIBANK, N.A.
, As the Agent
and the Lender
F
EES
A
ND
R
EVENUE
P
ERCENTAGE
P
AYMENT
B
Y
THE
L
ENDER
Pursuant to section 8.b. of the Agency Agreement, the Lender agrees to pay to the Agent 8% of
(i) the investment income (net of rebates) on cash Collateral delivered to the Agent on the Lenders behalf in respect of any Loans by the Borrowers and (ii) fees paid by a Borrower with respect to a Loan for which
non-cash
Collateral is provided.
Other Fees: Citi shall pay the fees and expenses of Custodian in accordance with the
Third Party Custody Rider and Fee Schedule attached hereto as Exhibit C.
Schedule V
to the Global Securities Lending Agency Agreement,
Between
CITIBANK, N.A.
, As the Agent
and the Lender
C
UTOFF
T
IMES
F
OR
S
ALES
N
OTIFICATION
The Lender and the Agent hereby agree to the additional procedures outlined below for Loans, if any, conducted in the markets indicated below. Listing below
does not (without more) constitute Lenders approval to lend in such market.
1. Daily deadlines for the Lenders requests to terminate a loan
under Section 9.b. of the Agency Agreement are as follows:
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For UK Equities via Crest Trade date - 3 PM, GMT
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For U.S. Equities Trade date 5pm GMT
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For European Equities (except as detailed below)- Trade date notification by 3pm GMT
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For Asian/ASPAC Equities (except as detailed below) Trade date notification 3pm Local time.
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Market
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Additional Market Lending Procedures
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Hong Kong
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Lender agrees to provide sale notification to the trading desk on Trade date by 12 noon Hong Kong time
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Mexico
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Lender agrees to provide trading desk sale notification on Trade date by 12 noon New York time
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Singapore
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Lender agrees to always provide trading desk sale notification on Trade date by 12 noon Hong Kong time
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South Korea
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Lender agrees to provide trading desk sale notification on Trade date by 12 noon Hong Kong time
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Spain
|
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Lender agrees to always provide trading desk sale notification on Trade date by 12 noon Spain time.
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Taiwan
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Lender agrees to provide trading desk sale notification on Trade date minus two, by 9am Hong Kong time.
Note: Lender shall be required to agree to the additional documentation as provided by
the agent prior to entering into loans in this market.
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Thailand
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Lender agrees to provide trading desk sale notification on Trade date by 12 noon Hong Kong time
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Schedule VI
to the Global Securities Lending Agency Agreement,
Between
CITIBANK, N.A.
, As the Agent
and the Lender
MARKET
STANDARD LENDING AGREEMENTS
|
APPLICABLE LENDING AGREEMENT*
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Global Master Securities Lending Agreement (2010 or later)**
Master Securities Loan Agreement (2000 version or later)***
Australian Master Securities Lending Agreement
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**
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Will be executed by Citibank, N.A., London Branch and
tri-party
agreements with Agents (if any) used under Schedule VII D III will be executed by Citibank, N.A., London Branch.
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***
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Will be executed by Citibank, N.A., NY offices and any
tri-party
agreements with Agents (if any) used under Schedule VII D III will be executed by Citibank, N.A., New York offices.
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Definitions for
Section 4(b):
Replacement Securities is defined in Section 13.1 of the Master Securities Loan Agreement (2000) (the
MSLA) as a like amount of Loaned Securities, with like amount referring to the amount of Loaned Securities not
re-transferred
to Lender upon Termination of the related Loan.
Loaned Security is defined in MSLA §25.33 to mean any Security transferred in a Loan under the MSLA, until such Security (or an identical Security) is transferred back to Lender. Such term includes any new or replacement Security
which is exchanged for any Loaned Security due to recapitalization, merger, consolidation or other corporate action. For purposes of return of Loaned Securities pursuant to §13 [Defaults], Loaned Securities shall include Securities
of the same issuer, class, and quantity as the Loaned Securities, as adjusted pursuant to the preceding sentence.
Equivalent is defined in
paragraph 2.1 of the Global Master Securities Lending Agreement (2010) (GMSLA) in relation to Loaned Securities to mean Securities or other property, of an identical type, nominal value, description and amount to particular Loaned
Securities so provided. If and to the extent that such Loaned Securities consist of Securities that are partly paid or have been converted, subdivided, consolidated, made the subject of a takeover, rights of
pre-emption,
rights to receive securities or a certificate which may at a future date be exchanged for Securities, the expression shall include such Securities or other assets to which Lender is entitled
following the occurrence of the relevant event, and, if appropriate, the giving of the relevant notice in accordance with paragraph 6.7 of the GMSLA and provided that Lender has paid to the Borrower all and any sums due in respect thereof. In the
event that such Loaned Securities have been redeemed, are partly paid, are the subject of a capitalisation issue or are subject to an event similar to any of the foregoing events described in this paragraph, the expression shall have the following
meanings:
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(a)
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in the case of redemption, a sum of money equivalent to the proceeds of the redemption;
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(b)
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in the case of a call on partly-paid Securities, Securities equivalent to the relevant Loaned Securities,
provided that Lender shall have paid Borrower, in respect of Loaned Securities an amount of money equal to the sum due in respect of the call;
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(c)
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in the case of a capitalisation issue, Securities equivalent to the relevant Loaned Securities, together with
the securities allotted by way of bonus thereon;
|
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(d)
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in the case of any event similar to any of the foregoing events described in this paragraph, Securities
equivalent to the Loaned Securities together with or replaced by a sum of money or Securities or other property equivalent to that received in respect of such Loaned Securities be, resulting from such event.
|
---
Note: capitalized terms used in the
preceding definitions and not otherwise defined shall have the respective meanings accorded such terms in the MSLA or GMSLA, as the case may be.
Schedule VII
to the Global Securities Lending Agency Agreement,
Between
CITIBANK, N.A.
, As the Agent
and the Lender
A.
|
Office of Agent in which relationship and transactions for Lender are managed:
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Citibank, N.A. New York Branch
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B. Notices: If to Agent: Citibank, N.A. Agency Securities
Lending
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390 Greenwich Street 4
th
fl
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New York NY 10013
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Attn: Business Compliance Officer
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Tel: 212
723-5272
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Fax: 212
723-8502
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If to Lender:
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J.P. Morgan Exchange-Traded Fund Trust
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270 Park Avenue
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New York, NY 10017
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Attention: Brian Shlissel, Managing Director, Client Service
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Tel: 212 648-2532
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Fax:
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C.
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Governing Law and Jurisdiction: New York law/Courts in State of New York
|
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I.
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The Lender hereby confirms the information provided on the Tax Matrix attached hereto as Annex 1 and instructs
the Agent to utilize such information in processing Loans hereunder until further instructed by the Lender.
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II.
|
US Jurisdictional Requirements
|
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a.
|
Lender represents and warrants that, throughout the term of this Agency Agreement, and as long thereafter as a
Loan is outstanding: (i) the Lender is an accredited investor as that term is defined in Regulation D under the Securities Act of 1933, as amended; (ii) the Lender is a qualified purchaser for purposes of
Section 3(c)(7) of the Investment Company Act of 1940, as amended; (iii) the Lender is a qualified client as defined in Rule
205-3
under the Investment Advisers Act of 1940, as amended;
and (iv) the Lender is a qualified institutional buyer, as that term is defined by Rule 144A promulgated under the Securities Act of 1933.
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b.
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To the extent that the lien over Collateral granted by Section 6(a) is subject to the laws of the State of
New York, such lien shall constitute a continuing security interest in and a lien on, the Collateral and the proceeds thereof and the Agent shall have, with respect thereto, all of the rights and remedies of a secured party under the New York
Uniform Commercial Code.
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E.
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Lender agrees to the additional procedures outlined in Annex 2 to this Schedule VII for Loans conducted in the
indicated jurisdictions outside the United States.
|
F.
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UK Jurisdictional Requirements
|
FCA and/or PRA Requirements
|
a.
|
The Agent is regulated by both the FCA and the PRA and shall treat the Lender as a professional client (as
defined in the rules established by the FCA and the PRA from time to time contained in both the CAs Handbook of rules and guidance (the
FCA Rules
) and the PRAs Handbook of rules and guidance (the
PRA
Rules
)
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b.
|
The Agent is an approved bank within the definition of the FCA Rules and PRA Rules
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c.
|
To the extent the Agent holds Lenders assets and securities in an Administration Account, such assets and
securities will be treated as safe custody assets in accordance with the FCA Rules. The Administration Account shall be designated so as to make it clear that the assets and securities belong to Lender and other customers of the Agent and the assets
and securities held in the Administration Account will be segregated from the Agents own assets
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d.
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The Administration Account is a pooled omnibus account, in which Lenders assets and securities will be
held together with assets held by the Agent for other customers for the purpose of facilitating receipt and delivery of Loaned Securities. Agent will promptly credit such deliveries or receipts of Loaned Securities into the Lenders account.
Lenders entitlement to the assets in such account and any income, interest, dividends and other payments or distributions, or other rights, entitlements and benefits that arise in respect of the assets shall correspond
pro-rata
to the assets held by the Agent for the Lender. There is a risk that Lenders Assets could be withdrawn or used to meet obligations of other customers of the Agent. For the avoidance of doubt, such
withdrawals or actions by Agent shall be subject to the indemnification provisions of the Agency Agreement. Lender understand that Loaned Securities when on Loan will no longer be held by the Agent as safe custody assets in accordance with the FCA
Rules.
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e.
|
The Borrower will be contractually obligated to redeliver securities equivalent to the Loaned Securities to the
Lender, however Lender will be subject to the credit risk of the Borrower. In the event the Borrower does not redeliver the Loaned Securities (and the Collateral is insufficient to cover the Borrowers obligations to the Lender), the Agent will
not be liable for any diminution in the value of Loaned Securities resulting from the default of the Borrower except as otherwise provided in Section 4(b) of the Agency Agreement.
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f.
|
Lender understands that securities lending is conducted
off-exchange.
Lender confirms that it does not require the Agent to supply it with contract notes or confirmations in respect of securities lending transactions undertaken by virtue of the agency arrangements established under this Agency Agreement.
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g.
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The Agent has in place procedures for addressing any complaints Lender might have regarding the services
provided by the Agent under this Agency Agreement and shall advise Lender of these procedures should it wish to make a complaint.
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UK MiFID Disclosure
For
the purpose of the disclosure in paragraphs 1 thru 7 below, Citi and we shall mean Citibank, N.A., London Branch, and you and your shall mean the Lender.
Citi is required to draw your attention to the following information pursuant to Directive 2004/39/EC on the Market in Financial Instruments
(MiFID).
Citi will treat you as a professional client under applicable regulatory client classification rules. As a professional client, you will
receive limited protections under applicable regulatory rules. However, you are entitled to request to be treated as a retail client: as a retail client you would be entitled to additional protections under applicable regulations, including but not
limited to greater information provided to you. However, if you seek classification as a retail client we may not be able to provide the same services to you. If you have any questions about or wish to discuss your classification, please contact
your Relationship Manager.
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2.
|
Conflicts and Inducements
|
Conflicts
Citi has
arrangements in place to manage conflicts of interest (Conflicts Policy). If the arrangements are not sufficient to ensure, with reasonable confidence on Citis part, that risks of damage to you will be prevented, we will clearly disclose the
general nature and/or the sources of the conflict of interest to you before undertaking the relevant business with or for you.
Inducements
We
may share any fees and
non-monetary
benefits with any Citi entity or other third parties (including a person acting on their behalf) or receive fees and
non-monetary
benefits from them in respect of the services provided pursuant to this Agreement. Details of the nature and amount of any such fees or
non-monetary
benefits (excluding exempt fees, which for these purposes
mean custody costs, settlement and exchange fees, regulatory levies or legal fees) will be available on your written request.
When providing the service of portfolio management or reception and transmission of orders, unless, and to the extent that, we act on your
specific instructions, Citi will comply with its best results policy when placing an order with, or transmitting an order to, another entity for execution.
The most recent version of Citis best results policy is available.
If you would like to receive a paper-based copy of the most recent version of the policy please contact your Relationship Manager.
When providing the service of portfolio management to clients who have requested cash reinvestment services in relation to their securities
lending activities, in circumstances in which we execute the decision to deal ourselves and you consent to our best execution policy, unless, and to the extent that, we act on your specific instructions, Citi will comply with its best execution
policy.
The most recent version of Citis best execution policy is available.
If you would like to receive a paper-based copy of the most recent version of the policy, please contact your Relationship Manager.
Where we act as your custodian, we have put in place a number of processes and procedures aimed at ensuring that assets held on your behalf
will be protected. These processes include but are not limited to:
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Maintaining clear and accurate internal records of the assets held on your behalf;
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Having security procedures in relation to accepting instructions;
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Regularly undertaking internal reconciliation of our records;
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Satisfying our auditors that we have maintained systems adequate to protect your assets;
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Hiring and training professional and competent staff; and
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Using due care and skill in the selection of
sub-custodians.
|
Citibank, N.A., London Branch is a member of the Financial Services Compensation Scheme in the United Kingdom. The
Financial Services Compensation Scheme is only available to certain types of claimants and claims where such eligible claims are against members of the Financial Services Compensation Scheme. Details of the Financial Services Compensation Scheme and
who is eligible to claim are available on request or at the Financial Services Compensation Schemes official website at www.fscs.org.uk.
|
6.
|
Product Risk Information
|
Citi may provide you with services in relation to all types of financial instruments. The following is a list of such instruments based on the
list set out in Annex 1 of MiFID. For the avoidance of doubt, the product risk information contained in this paragraph 6 is only given insofar as the following financial instruments are relevant to this Agreement:
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transferable securities
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money market instruments
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units in collective investment undertakings
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options, futures, swaps, forward rate agreements and any other derivatives contracts relating to:
|
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-
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commodities, whether cash and/or physical settled and whether or not traded on a regulated market and/or
multilateral trading facility
|
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-
|
climatic variables, freight rates, commission allowances or inflation rates or other official economic
statistics
|
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derivative instruments for the transfer of credit risk
|
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financial contracts for differences
|
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other derivative contracts
|
In deciding to deal with Citi in such products generally, and in any particular case, you will have already assessed the risks involved in
those products and in any related services and strategies which, in any particular case may (as relevant) include any of, or a combination of any of, the following:
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|
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FX risk, business, operational and insolvency risk
|
|
|
|
the risks of OTC, as opposed to
on-exchange,
trading, in terms of issues
like the clearing house guarantee, transparency of prices and ability to close out positions
|
|
|
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contingent liability risk
|
|
|
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regulatory and legal risk
|
In relation to any particular product or service there may be particular risks which are drawn to your attention in the relevant terms sheet,
offering memorandum or prospectus.
You must not rely on the above as investment advice based on your personal circumstances, nor as a
recommendation to enter into any of the services or invest in any of the products listed above. Where you are unclear as to the meaning of any of the above disclosures or warnings, we would strongly recommend that you seek independent legal or
financial advice.
|
7.
|
Receiving orders in the context of custody services
|
Whenever Citi is given an order by you in relation to its acting as custodian of the Assets (as defined in this Agreement), Citis role is
restricted to reception and transmission of the order, unless Citi acts as discretionary investment manager of Cash Collateral pursuant to Schedule 5 of this Agreement. Citi does not execute orders as part of custody services though Citi may pass
the order to a Citi affiliate for execution where appropriate.
Securities held in a clearance system may be subject to a lien or other
security interests under the rules, terms and conditions of the relevant clearance system.
Citi may register financial instruments which
are subject to the law or market practice of certain jurisdictions in the name of a third party or Citi itself.
Where our relationship is
also subject to standard industry terms of business, those terms may be updated in due course. When this happens, the terms will be made available to you in an appropriate manner (which may include via a page on our website).
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VI.
|
Australian Jurisdictional Requirements
|
ASIC Class Order Exemption
Citibank, N.A. is incorporated in the United States of America and its principal regulators are the US Office of the Comptroller of Currency
and the Federal Reserve under US laws, which differ from Australian laws. It does not hold an Australian Financial Services Licence under the Corporations Act 2001 as it enjoys the benefit of an exemption under ASIC Class Order CO 03/1101.
[ATTACH APPLICABLE TAX MATRIX]
Exhibit A
to the Global Securities Lending Agency Agreement,
Between
CITIBANK, N.A.
, As the Agent
and the Lender
LIST OF DESIGNATED
ACCOUNTS
|
|
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Fund Name
|
|
Custody Account Number
|
JPMORGAN DIVERSIFIED RETURN GLOBAL EQUITY ETF
|
|
[Redacted]
|
JPMORGAN DIVERSIFIED RETURN EMERGING MARKETS EQUITY ETF
|
|
[Redacted]
|
JPMORGAN DIVERSIFIED RETURN INTERNATIONAL EQUITY ETF
|
|
[Redacted]
|
JPMORGAN DISCIPLINED HIGH YIELD ETF
|
|
[Redacted]
|
JPMORGAN DIVERSIFIED RETURN EUROPE EQUITY ETF
|
|
[Redacted]
|
JPMORGAN EVENT DRIVEN ETF
|
|
[Redacted]
|
JPMORGAN ULTRA-SHORT INCOME ETF
|
|
[Redacted]
|
JPMORGAN LONG/SHORT ETF
|
|
[Redacted]
|
JPMORGAN USD EMERGING MARKETS SOVEREIGN BOND ETF
|
|
[Redacted]
|
JPMORGAN DIVERSIFIED RETURN U.S. EQUITY ETF
|
|
[Redacted]
|
JPMORGAN U.S. DIVIDEND ETF
|
|
[Redacted]
|
JPMORGAN U.S. MINIMUM VOLATILITY ETF
|
|
[Redacted]
|
JPMORGAN U.S. MOMENTUM FACTOR ETF
|
|
[Redacted]
|
JPMORGAN U.S. QUALITY FACTOR ETF
|
|
[Redacted]
|
JPMORGAN U.S. VALUE FACTOR ETF
|
|
[Redacted]
|
JPMORGAN DIVERSIFIED RETURN U.S. MID CAP EQUITY ETF
|
|
[Redacted]
|
JPMORGAN DIVERSIFIED RETURN U.S. SMALL CAP EQUITY ETF
|
|
[Redacted]
|
JPMORGAN BETABUILDERS EUROPE ETF
|
|
[Redacted]
|
JPMORGAN BETABUILDERS DEVELOPED ASIA ex-JAPAN ETF
|
|
[Redacted]
|
JPMORGAN BETABUILDERS JAPAN ETF
|
|
[Redacted]
|
JPMORGAN BETABUILDERS CANADA ETF
|
|
[Redacted]
|
JPMORGAN BETABUILDERS MSCI US REIT ETF
|
|
[Redacted]
|
Each Lender agrees to give irrevocable instructions to its custodian (JPMorgan Chase Bank, N.A.) substantially in the form of
those set out in Annex 1 to this Exhibit A or as may be otherwise agreed with Agent.
[Balance of Page Intentionally Left Blank]
|
|
|
CITIBANK, N.A., Agent
|
|
J.P. MORGAN EXCHANGE-TRADED FUND TRUST on behalf of each of its series listed on Exhibit A severally and not jointly, Lender
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ Richard Kissinger
|
|
By:
|
|
/s/ Brian Shlissel
|
|
|
Name:
|
|
Richard Kissinger
|
|
|
|
Name: Brian Shlissel
|
|
|
Title:
|
|
Director
|
|
|
|
Title: V. P.
|
Dated as of: June 18, 2018
Annex 1 to Exhibit A to
Securities Lending Agency Agreement
THIS
THIRD PARTY SECURITIES LENDING RIDER
(
Rider
) to the Custody Agreement (as defined below) is
made on June 18, 2018, among J.P. Morgan Exchange-Traded Fund Trust on behalf of its series listed on Schedule A hereto severally and not jointly (each, a
Lender
), having its principal place of business at 270 Park Avenue,
New York, NY 10017, JPMorgan Chase Bank, N.A., with a place of business at 383 Madison Avenue, New York, NY 10179 (
Bank
) and Citibank, N.A., with a place of business at 390 Greenwich Street, 4
th
Floor, New York, NY 10013 (
Agent
).
WHEREAS, Bank currently acts as custodian for
securities held by it in the Account(s) (as defined below) pursuant to the terms of the Amended and Restated Global Custody and Fund Accounting Agreement (
Custody Agreement
) dated October 1, 2017 (as may be amended from time
to time) between Bank and Lender.
WHEREAS, Lender and Agent have entered into the Securities Lending Agency Agreement (each as defined below);
WHEREAS, Lender shall manage all collateral received in connection with the securities lending activity conducted under the Securities Lending Agency
Agreement (as defined below); and
WHEREAS, Lender wishes to appoint Bank to provide the Services (as defined below) which support the Lenders
securities lending program with the Agent, and the Bank is willing to do so pursuant to the terms and conditions of this Rider.
IT IS THEREFORE agreed as
follows:
Section 1 Definitions
For the
purpose of this Rider, the following terms shall have the meanings set out below. Unless otherwise expressly defined herein, capitalized terms used in this Rider shall have the meaning given to them under the Custody Agreement:
Accounts
means those Accounts (as defined under the Custody Agreement) identified in Schedule A to this Rider.
Agent
means Citibank, N.A., acting in its capacity as securities lending agent to Lender under the Securities Lending Agency Agreement.
Borrower
means any entity with whom Agent has entered into a Borrowing Agreement.
Borrowing Agreement
means a securities borrowing agreement or other legal agreement entered into by Agent on Lenders behalf from time
to time, and notified to Bank by Agent in connection with this Rider.
J.P.
Morgan
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1
Distributions
means a cash entitlement accruing to a Security on Loan and consisting of a
dividend, interest or other payment paid by an issuer of a Security on Loan or means an entitlement accruing to a Security on Loan and consisting of a stock dividend, stock split, rights or other distribution.
Loan
means a loan of Securities by Lender pursuant to a Borrowing Agreement.
Securities Lending Agency Agreement
means the securities lending agreement between Lender and Agent.
Security(ies) on Loan
means any Security(ies) held by bank for and on behalf of Lender under the Custody Agreement which are subject to a
Loan.
Services
shall have the meaning given to it in Section 3 below.
Section 2 Terms of Rider
This Rider shall be
incorporated into the Custody Agreement and form a part thereof. Accordingly, save as otherwise expressly set forth in or modified by this Rider, the terms of the Custody Agreement shall extend and apply to any Services provided by Bank under this
Rider and neither Lender nor Bank shall be (i) released from any of its duties and/or obligations, and/or (ii) limited in any rights and/or remedies available to them under the Custody Agreement. In the event of any conflict between the
terms of the Custody Agreement and the terms of this Rider with respect to the Bank´s duties and/or obligations in connection with Securities on Loan for which Bank provides Services, the terms of this Rider shall prevail and govern.
Section 3 Appointment
Lender hereby appoints
Bank as its agent to provide securities lending support services in connection with Loans of Securities held in Accounts established under the Custody Agreement which may be described in service level documentation among the Agent and the parties
hereto (
Services
), and Bank accepts such appointment and agrees to act in accordance with the terms of this Rider and, pursuant to Section 8(a) below, the Custody Agreement, when providing its services hereunder.
Section 4 Description of Services
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(a)
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Transaction Processing
: Lender shall notify Bank of which Account(s) are available for Loans.
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i.
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Designation of Securities for Lending; Delivery of Lent Securities
. Bank acknowledges that Securities
eligible for lending shall be as designated from time to time to Bank by Lender. Securities eligible for lending shall be as shown on JPM ACCESS (and/or reported via SWIFT messaging), it being understood that Lender shall designate Agent as an
Authorized Third Party under the applicable licensing agreement so that Agent has access to JPM ACCESS. Upon the sale of Security(ies) by a Lender, the availability file produced by Bank via JPM ACCESS, removes securities from the
lendable asset list as of trade date. Bank shall, in accordance with Instructions, deliver to Borrowers Securities from an Account and shall reflect the status of such Securities on its records as being on Loan for the applicable Account. Lender
acknowledges that Bank shall have no responsibility for: (A) not processing a transaction where Agent identifies a transaction with the same reference number as had been used for a prior transaction, (B) any other identification error by
Agent, and (C) any transmission error by Agent.
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J.P.
Morgan
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ii.
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Termination of Loans
. Bank shall accept Instructions from Lender or Agent in writing (which may be
electronic) of when to expect the return of a Security on Loan in those cases other than where the Borrower terminates the Loan. Where a Borrower terminates a Loan, Lender or Agent shall so advise Bank and confirm to Bank whether or not the return
should be accepted and Bank shall act accordingly. Upon its receipt of Securities back from Loan, Bank shall reflect the status of such Securities on its records as having been returned to custody.
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iii.
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Sale Proceeds
. (A) Bank shall advance settlement proceeds to the Lender on settlement date for the
sale of a Security on Loan when sufficient stock is held and the sale instruction is received by Bank by the specified
cut-off
time, even where such proceeds are not received, it being understood that Bank may
reverse such advance if the sale proceeds are not received in a reasonable amount of time as determined by Bank. Lender shall pay compensation to Bank for any such advance, upon receipt of such proceeds during the term of the advance (or upon
Banks reversing such advance) in accordance with the Custody Agreement. (B) Bank shall update its records to reflect the status of such Securities as having been sold.
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iv.
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Loan Record Keeping and Reports
. As part of custody reporting, Bank shall provide Lender and Agent with
such statements and reports as are reasonably necessary in Banks judgment in connection with Services.
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(b)
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Distributions and Corporate Actions
: Notwithstanding anything to the contrary in the Custody Agreement,
Lender acknowledges that in respect of Securities on Loan, Banks obligations are modified as follows:
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i.
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Distributions.
(A)
Cash Distributions
. Bank shall notify the Lender and Agent of any cash
payments (by way of dividend or other income) due on Securities on Loan and shall post the same as an entitlement due to Lender on the Lenders Account. Bank shall credit Lenders Account with the amount of any cash Distributions from
Securities on Loan which Bank actually receives and these will only be credited to the Cash Account on actual receipt and reconciliation by Bank notwithstanding any provision to the contrary in the Custody Agreement. In respect of Securities on
Loan, Lender or Agent may need to instruct the Borrower or the Securities Depository holding such Securities that Distributions thereon are to be paid to Bank for the benefit of Lender. (B)
Non-Cash
Distributions
. With respect to Securities on Loan, Bank need not claim any
non-cash
Distribution thereon from the Borrower thereof or from the Agent, and Bank shall credit the same to the Account only upon
its actual receipt thereof (and Bank shall not accrue the same). Lender acknowledges that if, and only if, Lender holds a Security in custody which is the same as the Security on Loan, Bank shall advise Lender (but not the Agent) of
non-cash
Distributions on such Security on Loan to the same extent it would under the Custody Agreement.
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ii.
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Corporate Actions
. Bank shall make available to Lender any corporate action notifications with respect
to the total position of Lender in a given Security, regardless of the extent to which the position is on Loan (provided that at least one share of the affected Security is in Banks custody) and Lender may provide the contents of such notice
to Agent. Bank will provide Agent with access to corporate action notifications for all Securities on Loan pursuant to the terms of the service level documentation agreed to between Agent, Bank and Lender from time to time.
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J.P.
Morgan
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Section 5 Representations and Warranties
Each party represents and warrants to the others that: (i) it has the power to execute and deliver this Rider, to enter into the transactions contemplated
by this Rider, and to perform its obligations hereunder; (ii) it has taken all necessary action to authorize such execution, delivery, and performance; (iii) this Rider constitutes a legal, valid, and binding obligation enforceable against
it; and (iv) the execution, delivery, and performance by it of this Rider shall at all times comply with all Applicable Law.
Section 6
Liabilities & Indemnification
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(a)
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Bank shall have no responsibility or liability for (i) any breach of any obligation by any Borrower under
or in connection with any Loan and/or Borrowing Agreement or other agreement relating to such Loan or in any other way in respect of any Loan, (ii) Securities on Loan or collateral held in a collateral account with a third party, other than to
provide the Services under this Rider and to act upon any Instructions received under the Custody Agreement to deliver or receive such Securities or Collateral or (iii) any losses whatsoever incurred by any person as a result or in connection
with a sale failure that has resulted from a failure to recall Securities on Loan in time for settlement.
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(b)
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Lender expressly acknowledges and agrees that Lenders obligation to indemnify the Bank as set out in
sections 3.1, 6.1 and 7.1(c) of the Custody Agreement shall remain in full force and effect and apply,
mutatis mutandis
, to any Liabilities that may be imposed on, incurred by or asserted against any of the Bank and/or any J.P. Morgan
Indemnitees in connection with, or arising out of the provision of the Services under this Rider and/or any instruction(s), act(s) and/or omission(s) of Lender and/or Agent. Bank expressly acknowledges and agrees that Banks obligation to
exercise reasonable care, prudence and diligence in carrying out all its duties and obligations as set out in section 7.1(a) of the Custody Agreement shall remain in full force and effect and apply,
mutatis mutandis
, to the Services provided
by Bank under this Rider.
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(c)
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Under no circumstances will Bank be liable to Agent or Lender for any lost profits (whether direct or indirect)
or any indirect, incidental, consequential or special damages of any form incurred by any person or entity, whether or not foreseeable and regardless of the type of action in which such a claim may be brought, with respect to Banks performance
under this Rider.
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(d)
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In order to satisfy any Liabilities of Lender to Bank arising under or in connection with this Rider and
without prejudice to Banks rights under Applicable Law, Lender expressly acknowledges and agrees that the Banks rights under section 4.3 (Banks Right Over Securities;
Set-off)
of
the Custody Agreement shall remain in full force and effect and apply
mutatis mutandis
to the satisfaction and recovery by Bank of any Liabilities and/or any other amounts owed to Bank arising out of or in connection with this Rider.
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Section 7 Administration matters
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(a)
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Access to Accounts
: Lender hereby designates Agent as an Authorized Person in accordance with the terms
of the Custody Agreement, to act on behalf of Lender under this Rider. Agent is authorized to access the Account(s) and give Instructions in respect of such accounts in accordance with the terms of the Custody Agreement. Lender will make Agent aware
of, and Agent will comply with, the relevant provisions of section 3 (Instructions) and Annex A (Electronic Access) of the Custody Agreement as set out in Schedule C to this Rider when submitting or delivering Instructions to
Bank in connection with the Services.
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J.P.
Morgan
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a.
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Notwithstanding anything to the contrary in the Custody Agreement, Lender acknowledges that Bank shall not be
responsible for and provides no services in relation to any filings, tax returns, withholding tax reclaims and reports on any Securities on Loan.
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b.
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Lender is responsible for the payment of all taxes (including, without limitation, any value added tax),
imposts, levies or duties due on any principal or interest, or any other liability or payment arising out of or in connection with any Securities on Loan or any collateral, which payment shall be made from the assets of Lender, and in so far as Bank
is under any obligation (whether of a governmental nature or otherwise) to pay the same on Lenders behalf Bank may do so out of any monies or assets held by it pursuant to the terms of the Custody Agreement or hereunder.
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c.
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With respect to Loans of U.S. Securities that are eligible to be held and serviced at the Depository Trust
Company, Lender hereby acknowledges that such Loans will only be made via the Depository Trust Company Stock Loan Income Tracking System and from Accounts which Lender has declared and properly documented to Bank as being exempt from U.S.
withholding tax on U.S. sourced dividend income.
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d.
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Lender hereby agrees to indemnify Bank and to hold it harmless from and against: (A) any withholding tax
imposed by any relevant authority, whether governmental or otherwise, on any payment in respect of any Loans, and any interest, penalty, fine or addition to tax imposed for failure to properly remit such tax, including without limitation any U.S.
federal income withholding tax imposed on any substitute dividend payment made from a Borrower to the Lender in respect of the loan of U.S. Securities which Bank pays, (B) any payment of any such taxes, interest, penalty, fine and/or addition
to tax otherwise due with respect to the foregoing; and (C) any other Liabilities (including, but not limited to expenses of counsel) that may be imposed on, incurred or asserted by Bank or any J.P. Morgan Indemnitee(s), directly or indirectly,
in connection with any of the representations and warranties given by Lender with respect to this section 7(b) being not true in all material respects.
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e.
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Ahead of any account opening or provision of service by Bank after the effective date of this Rider, Lender
shall provide to Bank (or cause Agent to do so) a schedule of manufactured income rates that will be used and relied upon by Bank when claiming and collecting manufactured income from Borrowers. This information will be used by Bank in the
set-up
of appropriate accounts for Lender and will not confer any additional responsibilities upon Bank.
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f.
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The Lender will be responsible, in all cases, for the completion and delivery of any necessary tax
documentation to Bank or to any Borrower.
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g.
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Lender acknowledges that: (i) Bank provides no services with regard to the provision of tax advice; and
(ii) it has made its own determination as to the tax treatment of any loan made under this Rider, of any in lieu of payments made by a Borrower and of any remuneration and any other amounts that may be received by it under this Rider.
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(c)
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Fees
: Agent shall pay or cause to be paid to Bank the fees as set forth in Schedule B for the Services.
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J.P.
Morgan
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(d)
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Reporting:
Lender or Agent shall provide to Bank any information reasonably required by Bank and
requested by Bank to allow Bank with reasonable advance notice to satisfy any regulatory reporting obligations with which it is required to comply.
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(e)
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Supported Countries and Jurisdictions:
The Securities on Loan may only be held in the countries and
jurisdictions referred to in Schedule B. The Bank may modify Schedule B to this Rider upon written notice to the Lender.
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Section 8 Termination & Amendments
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(a)
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Termination
: This Rider will be terminated automatically if the Custody Agreement is terminated. In
addition: (i) this Rider may be terminated at any time by either party upon delivery to the other parties of notice specifying the date of such termination, which shall be not less than 30 days, or the termination period specified in the
Custody Agreement if such period is less than 30 days, after the date of receipt of such notice, and (ii) Bank may terminate this Rider immediately if the requirements of Sections 7(d) or 7(e) of this Rider are not met.
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Notwithstanding any such notice, this Rider shall continue in full force and effect with respect to all Loans outstanding on the termination
date, which Loans shall, however, be terminated as soon as reasonably practicable. The indemnities provided for herein shall survive any termination hereof.
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(b)
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Amendments. Waiver
: Except as otherwise expressly provided herein, this Rider may be modified only by a
written amendment signed by the parties, and no waiver of any provision hereof shall be effective unless expressed in writing and signed by the party against whom the waiver is to be enforced.
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Section
9 Termination of the Custody Agreement and Application of the Securities Lending Agency Agreement
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(a)
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Lender undertakes to notify the Agent of the termination of the Custody Agreement, in which case
Section 7(a) of this Rider shall apply and this Rider shall automatically terminate.
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(b)
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Securities Lending Agency Agreement
: In relation to any Securities Lending Agency Agreement or other
legal agreement executed between Lender and Agent, Lender shall have responsibility for ensuring that the terms and conditions of that legal agreement are consistent with the terms and conditions of this Rider and the Custody Agreement. Lender shall
have responsibility for requesting Banks consent to conditions placed on Bank by the terms and conditions of the Securities Lending Agency Agreement or other legal agreement.
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Section 10 Miscellaneous; Confidentiality
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(a)
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Section 10 (Miscellaneous) of the Custody Agreement shall apply,
mutatis, mutandis
, to
this Rider, as if set out herein in full.
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(b)
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Conflicts of interest
: Lender grants Bank the authority set forth herein notwithstanding its awareness
that Bank, in its individual capacity or acting in a fiduciary capacity for other accounts, may have transactions with the same institutions to which Lender may be lending Securities from time to time, which transactions may give rise to actual or
potential conflict of interest situations. Bank shall not be bound to: (i) account to Lender for any sum received or profit made by Bank for its own account or
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J.P.
Morgan
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the account of any other person or (ii) disclose or refuse to disclose any information or take any other action if the same would or might in Banks judgment, made in good faith,
constitute a breach of any law or regulation or be otherwise actionable with respect to Bank; provided that, in circumstances mentioned in (ii) above, Bank shall promptly inform Lender of the relevant facts (except where doing so would, or
might in Banks judgment, made in good faith, constitute a breach of any law or regulation or be otherwise actionable as aforesaid). Nothing in the foregoing shall derogate from Banks obligation to deal with Lender in good faith.
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For the purposes of section 10.12(c) (Confidentiality) of the Custody Agreement, Lender hereby authorizes Bank to disclose
Confidential Information of Lender to Agent as reasonably required to enable Bank to provide the Services under this Rider.
IN WITNESS WHEREOF, the
parties have executed this Rider as of the date first above-written.
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JPMorgan Chase Bank, N.A.
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J.P. Morgan Exchange-Traded Fund Trust
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on behalf of its series listed on Schedule A hereto severally and not jointly
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By:
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/s/ Nigel Boyle
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By:
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/s/ Brian Shlissel
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Title: Executive Director
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Title: V. P.
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Date: 19/06/18
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Date: 6/18/18
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Citibank, N.A.
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By:
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/s/ Richard Kissinger
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Title: Director
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Date: 6/18/18
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J.P.
Morgan
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7
Schedule A
List of Lenders & Accounts
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Fund Name
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Custody Account
Number
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JPMORGAN DIVERSIFIED RETURN GLOBAL EQUITY ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN EMERGING MARKETS EQUITY ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN INTERNATIONAL EQUITY ETF
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[Redacted]
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JPMORGAN DISCIPLINED HIGH YIELD ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN EUROPE EQUITY ETF
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[Redacted]
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JPMORGAN EVENT DRIVEN ETF
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[Redacted]
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JPMORGAN ULTRA-SHORT INCOME ETF
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[Redacted]
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JPMORGAN LONG/SHORT ETF
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[Redacted]
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JPMORGAN USD EMERGING MARKETS SOVEREIGN BOND ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN U.S. EQUITY ETF
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[Redacted]
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JPMORGAN U.S. DIVIDEND ETF
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[Redacted]
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JPMORGAN U.S. MINIMUM VOLATILITY ETF
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[Redacted]
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JPMORGAN U.S. MOMENTUM FACTOR ETF
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[Redacted]
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JPMORGAN U.S. QUALITY FACTOR ETF
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[Redacted]
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JPMORGAN U.S. VALUE FACTOR ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN U.S. MID CAP EQUITY ETF
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[Redacted]
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JPMORGAN DIVERSIFIED RETURN U.S. SMALL CAP EQUITY ETF
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[Redacted]
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JPMORGAN BETABUILDERS EUROPE ETF
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[Redacted]
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JPMORGAN BETABUILDERS DEVELOPED ASIA
ex-JAPAN
ETF
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[Redacted]
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JPMORGAN BETABUILDERS JAPAN ETF
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[Redacted]
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JPMORGAN BETABUILDERS CANADA ETF
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[Redacted]
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JPMORGAN BETABUILDERS MSCI US REIT ETF
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[Redacted]
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J.P.
Morgan
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Schedule B
Fees and Markets
[Redacted]
J.P.
Morgan
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9
Fee: Assumptions and Notes
Assumptions
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Fees quoted in this proposal are based upon information provided by Lender and, where necessary, assumptions that
Bank believes to be reasonable.
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Lender and its investment managers (if applicable) and Agent will instruct Bank of trades and other account
activity in a mutually agreed electronic format that enables straight-through processing (STP), using Banks proprietary systems, SWIFT messages, direct electronic transmissions or other means deemed acceptable by Bank.
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Notes
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The Bank may propose reasonable amendments to the fee schedule at any time should either (i) the
Lenders actual investment portfolio and/or trading activity differ significantly from the assumptions used to develop the Banks fee proposal, (ii) the Lenders service requirements change, or (iii) the Lenders use of
any other Bank products that were included in the Banks pricing proposal to the Lender is discontinued or modified in any respect material to the Banks pricing proposal.
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Fees for additional service(s) and/or market(s) added at the request of Lender while this fee schedule is in
effect will be assessed at J.P. Morgans standard price(s), unless an alternative pricing arrangement is agreed upon in advance by Lender and Bank.
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Where minimum fees are specified for one or more service categories, if during any billing period total fee(s)
for
in-scope
services in a category are less than the prorated minimum fee for the category, the prorated minimum fee will apply.
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Bank will present invoices monthly in arrears, with payment due 30 days after the date of the invoice, unless an
alternative billing arrangement is negotiated between Agent and Bank.
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Schedule C
Section 7(a): Excerpts from Section 3 (Instructions) and Annex A (Electronic Access) of the Custody Agreement
Section 3 (Instructions) of the Custody Agreement
3.1.
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Acting on Instructions; Unclear Instructions
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(a)
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Customer authorizes Bank to accept, rely upon and/or act upon any Instructions received by it without inquiry.
[
Remainder not applicable
]
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(b)
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Unless otherwise expressly provided, all Instructions will continue in full force and effect until canceled or
superseded.
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(c)
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To the extent possible, Instructions to Bank shall be sent via electronic instruction or trade information
system acceptable to Bank or via facsimile transmission. Where reasonably practicable, the Customer will use automated and electronic methods of sending Instructions.
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(d)
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Bank may (in its sole discretion and without affecting any part of this Section 3.1) seek clarification or
confirmation of an Instruction from an Authorized Person and may decline to act upon an Instruction if it does not receive clarification or confirmation satisfactory to it. Bank will not be liable for any loss arising from any reasonable delay in
carrying out any such Instruction while it seeks such clarification or confirmation or in declining to act upon any Instruction for which it does not receive clarification satisfactory to it.
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(e)
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In executing or paying a payment order Bank may rely upon the identifying number (e.g. Fedwire routing number
or account) of any party as instructed in the payment order. Customer assumes full responsibility for any inconsistency between the name and identifying number of any party in payment orders issued to Bank in Customers name.
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3.2.
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Verification and Security Procedures
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(a)
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Bank and the Customer shall comply with any applicable Security Procedures with respect to the delivery or
authentication of Instructions and shall ensure that any codes, passwords or similar devices are reasonably safeguarded.
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3.3.
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Instructions Contrary to Law/Market Practice
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Bank need not act upon Instructions that it reasonably believes are contrary to Applicable Law or market practice, but Bank will be under no
duty to investigate whether any Instructions comply with Applicable Law or market practice. [
Remainder not applicable
]
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Bank has established
cut-off
times for receipt of some categories of Instructions, which will be made
available to Customer. If Bank receives an Instruction after its established
cut-off
time, Bank will attempt to act upon the Instruction on the day requested if Bank deems it practicable to do so or otherwise
as soon as practicable on the next business day. Bank will provide Customer with reasonable prior notice of any changes to the
cut-off
times previously communicated to Customer.
Access by the Customer to certain applications or products of Bank via Banks web site or otherwise shall be governed by this Agreement
and the terms and conditions set forth in Annex A.
Annex A (Electronic Access) of the Custody Agreement
1. Bank may permit the Customer and its Authorized Persons to access certain electronic systems and applications (collectively, the Products) and
to access or receive electronically Data (as defined below) in connection with the Agreement. Bank may, from time to time, introduce new features to the Products or otherwise modify or delete existing features of the Products in its sole discretion.
Bank shall endeavor to give the Customer reasonable notice of its termination or suspension of access to the Products, but may terminate or suspend access immediately if Bank determines, in its sole discretion, that providing access to the Products
would violate Applicable Law or that the security or integrity of the Products is at risk. Access to the Products shall be subject to the Security Procedures.
2. In consideration of the fees paid by the Customer to Bank and subject to any applicable software license addendum in relation to Bank-owned or sublicensed
software provided for a particular application and Applicable Law, Bank grants to the Customer a
non-exclusive,
non-transferable,
limited and revocable license to use
the Products and the information and data made available through the Products or transferred electronically (the Data) for the Customers internal business use only. The immediately preceding sentence does not apply to the records
described in Section 2.13 of the Agreement. The Customer may download the Data and print out hard copies for its reference, provided that it does not remove any copyright or other notices contained therein. The license granted herein will
permit use by the Customers Authorized Person, provided that such use shall be in compliance with the Agreement, including this Annex. The Customer acknowledges that elements of the Data, including prices, corporate action information, and
reference data, may have been licensed by Bank from third parties and that any use of such Data beyond that authorized by the foregoing license, may require the permission of one or more third parties in addition to Bank.
3. The Customer acknowledges that there are security, corruption, transaction error and access availability risks associated with using open networks such as
the internet, and the Customer hereby expressly assumes such risks. The Customer is solely responsible for obtaining, maintaining and operating all software (including antivirus software, anti-spyware software, and other internet security software)
and personnel necessary for the Customer to access and use the Products. All such software must be interoperable with Banks software. Each of the Customer and Bank shall be responsible for the proper functioning, maintenance and security of
its own systems, services, software and other equipment.
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4. In cases where Banks web site is unexpectedly down or otherwise unavailable, Bank shall, absent a force
majeure event, provide other appropriate means for the Customer or its Authorized Persons to instruct Bank or obtain reports from Bank. Bank shall not be liable for any Liabilities arising out of the Customers use of, access to or inability to
use the Products via Banks web site in the absence of Banks gross negligence or willful misconduct.
5. Use of the Products may be monitored,
tracked, and recorded. In using the Products, the Customer hereby expressly consents to such monitoring, tracking, and recording. Individuals and organizations should have no expectation of privacy unless local law, regulation, or contract provides
otherwise. Bank shall own all right, title and interest in the data reflecting the Customer usage of the Products or Banks web site (including, but not limited to, general usage data and aggregated transaction data). Bank may use and
sublicense data obtained by it regarding the Customers use of the Products or Banks website, as long as Bank does not disclose to others that the Customer was the source of such data or the details of individual transactions effected
using the Products or web site.
6. The Customer shall not knowingly use the Products to transmit (i) any virus, worm, or destructive element or any
programs or data that may be reasonably expected to interfere with or disrupt the Products or servers connected to the Products; (ii) material that violates the rights of another, including but not limited to the intellectual property rights of
another; and (iii) junk mail, spam, chain letters or unsolicited mass distribution of
e-mail.
7. The Customer shall promptly and accurately designate in writing to Bank the geographic location of its users upon written request. The Customer further
represents and warrants to Bank that the Customer shall not access the service from any jurisdiction which Bank informs the Customer or where the Customer has actual knowledge that the service is not authorized for use due to local regulations or
laws, including applicable software export rules and regulations. Prior to submitting any document which designates the persons authorized to act on the Customers behalf, the Customer shall obtain from each individual referred to in such
document all necessary consents to enable Bank to process the data set out therein for the purposes of providing the Products.
8. The Customer will be
subject to and shall comply with all applicable laws, rules and regulations concerning restricting collection, use, disclosure, processing and free movement of the Data (collectively, the Privacy Regulations). The Privacy Regulations may
include, as applicable, the Federal Privacy of Consumer Financial Information Regulation (12 CFR Part 30), as amended from time to time, issued pursuant to Section 504 of the Gramm-Leach-Bliley Act of 1999 (15 U.S.C. §6801, et
seq.), the Health and Insurance Portability and Accountability Act of 1996 (42 U.S.C. §1320d), The Data Protection Act 1998 and Directive 95/46/EC of the European Parliament and of the Council of 24 October 1995 on the protection of
individuals with regard to processing of personal data and the free movement of such data.
9. The Customer shall be responsible for the compliance of its
Authorized Persons with the terms of the Agreement, including this Annex.
13
Exhibit B
to the Global Securities Lending Agency Agreement (the Agreement),
Between
CITIBANK, N.A.
, As the Agent
and the Lender
A
DDITIONAL
C
USTODY
T
ERMS
1.
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APPOINTMENT OF AGENT AS CUSTODIAN OF THE ASSETS
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(A)
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The Agent does not serve as the Lenders securities custodian, but in the course of performing its
activities under this Agreement, the Agent will have certain custodial-type obligations relating to the safekeeping of Securities and Collateral, the settlement of Loans and the servicing of assets. These activities may be undertaken in different
markets. Accordingly, the Lender hereby authorizes and instructs the Agent:
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(i)
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subject to this Exhibit, to hold on behalf of Lender the Loaned Securities and/or securities, bonds, notes,
other financial assets or cash which form part of the Collateral (collectively, the
Assets
) from time to time; and
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(ii)
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to establish on its books a securities account (the
Securities Account
) and a collateral
account (the
Collateral Account
) in connection with the foregoing.
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2.
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PERFORMANCE BY THE AGENT ACTING AS CUSTODIAN OF THE ASSETS
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(A)
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Lender authorizes the Agent to do all such things as may be necessary to effect the purposes of this Agreement
without any instructions from Lender, including without limitation signing any documentation required under the laws of the relevant jurisdiction, collecting income, payments and distributions in respect of the Assets, and making cash disbursements
for any expenses incurred in respect of the Assets or otherwise pursuant to this Agreement.
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(B)
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In providing the safekeeping services contemplated hereunder, insofar as its activities are subject to the laws
of England, the Agent shall comply with the FCA and PRA Rules applicable or other applicable rules to it as custodian and shall treat Lender as a professional client for the purposes of the FCA Rules.
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(C)
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Administrative support providers are those persons utilized by the Agent to perform ancillary services of a
purely administrative nature such as couriers, messengers or other commercial transport systems.
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(D)
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Market infrastructures are public utilities, external telecommunications facilities and other common carriers
of electronic and other messages, and external postal services. Market infrastructures are not delegates of the Agent and the Agent has no responsibility for selection or appointment of, or for performance by, any market infrastructure.
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(E)
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Assets deposited with clearance systems hereunder will be subject to the laws, rules, statements of principle
and practices of such clearance systems. Assets held in a clearance system may be subject to a lien or other security interests under such laws, rules, statements of principle and practices. Clearance Systems are not delegates of the Agent and the
Agent has no responsibility for selection or appointment of, or for performance by, any clearance system.
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(F)
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The Agent may deposit or procure the deposit of Assets with any clearance system as required by law, regulation
or best market practice.
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(G)
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The Agent shall act in good faith and use reasonable care in the selection and continued appointment of
Subcustodians. Subject to paragraph 3(B) below, the Agent shall also be responsible for the negligence, willful misconduct or fraud of any branch or subsidiary of the Agent that is a Subcustodian. As to Subcustodians which are not branches or
subsidiaries of the Agent, the Agent shall bear responsibility as set forth in the first sentence of this paragraph (I) and section 5(b) of the Agreement.
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(H)
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The Agent does not provide shareholder voting services for Lender.
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(I)
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The Agent shall be under no duty to take or omit to take any action with respect to the safekeeping of, or any
other matter relating to the Assets held by it, except in accordance with this Agreement (including, for the avoidance of doubt, any reporting, accounting or auditing obligations).
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3.
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STANDARD OF CARE; SCOPE OF RESPONSIBILITY
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(A)
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In performing its custodial duties, the Agent shall exercise the due care of a professional custodian for hire.
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(B)
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The scope of responsibility of the Agent in its capacity as Custodian and any qualifications upon or exclusions
relating to such responsibility shall be as set forth in the Agreement.
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(C)
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In performing its custodial functions, the Agent is responsible for the performance of only those duties as are
expressly set forth herein and shall have no implied duties or obligations. The Agent is not responsible for supervising the Lenders principal custodian.
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(D)
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In the event of the insolvency or any other analogous proceedings of a third party holding Lenders
Assets, the Agent will typically only have an unsecured claim against the third party on Lenders behalf, and Lender will be exposed to the risk that the securities, cash or any other property received by the Agent from the third party is
insufficient to satisfy Lenders claim and the claims of all other relevant clients. Agent requires all subcustodians to segregate securities held for Agents clients from Subcustodians own securities and Agent obtains legal opinions
covering, among other things, a custodial clients right to recover securities in the event of the insolvency of the subcustodian or a central securities depository.
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(E)
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Lender understands and agrees that the Agents performance under this Exhibit B is subject to the relevant
local laws, regulations, decrees, orders and government acts, and the rules, operating procedures and practices of any relevant stock exchange, clearance system or market where or through which Instructions are to be carried out and to which the
Agent is subject and as exist in the country in which any Assets are held.
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(F)
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The Agent shall exercise reasonable care in receiving Assets but does not warrant or guarantee the form,
authenticity, value or validity of any Security received by the Agent. If the Agent becomes aware of any defect in title or forgery of any Security, the Agent shall promptly notify Lender.
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(G)
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The Agent is not responsible for the form, accuracy or content of any notice, circular, report, announcement or
other material not prepared by the Agent but provided by Agent pursuant to this Exhibit B.
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4
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CITIGROUP ORGANIZATION INVOLVEMENT
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Lender agrees and understands that any member of the Citigroup Organization can be engaged as principal in connection with foreign exchange
transactions and may otherwise be engaged in any transaction effected by Lender or by any person for its account and benefit, or by or on behalf of any counterparty or issuer. Subject to Schedules II and III, the Agent is entitled to effect any
transaction by or with itself or any member of the Citigroup Organization and to pay or keep any fee, commissions or compensation as specified in any Instruction or, if no specification is provided, any charges, fees, commissions or similar payments
generally in effect from time to time with regard to such or similar transactions.
6.
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ADDITIONAL FCA and PRA REGULATORY REQUIREMENTS
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The following requirements apply (I) to Lender assets wherever located, in those cases where Citibank, N.A. (London Branch) is the
contracting party under the Agreement; (II) where Citibank, N.A. (London Branch) is not the contracting party under the Agreement, (i) to assets of the Lender held in the United Kingdom or (ii) to custodial services performed by the
Agent within the United Kingdom; or (III) to Lender assets which otherwise fall under the jurisdiction of the U.K. FCA or PRA.
(A)
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Legal title to Assets that are subject to the law or market practice of the United Kingdom shall be registered
or recorded by the Agent in Lenders name or in the name of an eligible nominee as permitted by the FCA Rules.
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(B)
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Where Citibank, N.A. (London Branch) has contracted with Lender as its Agent: legal title to Assets that are
subject to the law or market practice of a jurisdiction outside the United Kingdom may be registered or recorded as the Agent may direct, either (as appropriate): in Lenders name; in the name of any eligible nominee as permitted by the FCA
Rules; in the Agents name; in the name of a subcustodian, settlement system or depositary; or in the name of any other third party. Registration or recording shall only be made: in the Agents
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name; in the name of a subcustodian, settlement system or depositary; or in the name any other third party, due to the nature of the applicable law or market practice of the relevant overseas
jurisdiction, and the Agent has taken reasonable steps to determine that it is in Lenders best interests to do so or it is not feasible to do so otherwise.
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(C)
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If securities are registered in the Agents own name, the Assets may not be segregated from the securities
of the Agent and, in the event of a failure by the Agent, the Assets may not be as well protected from the claims made on behalf of the Agents general creditors .
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(D)
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Where Securities are held in an omnibus account, the Agent shall take appropriate measures to prevent the
unauthorized use of the Customers Securities for the account of other persons, in particular by monitoring its ability to deliver Securities on the settlement date and undelivered Securities outstanding on and beyond the settlement
date.
Nevertheless, there is a risk that as a result of certain events which may include settlement delays or time differences Customers Securities could be withdrawn or used to meet obligations of other persons. Due to the
nature of omnibus client custody accounts, events such as settlement delays and timing differences may on occasion result in the omnibus accounts experiencing shortfalls in number of assets held (a shortfall).
Should
this occur, to provide protection to the overall omnibus pool; whilst the shortfall is being resolved, in accordance with the Financial Conduct Authoritys Client Assets Rules (CASS Rules) and where appropriate, Agent will cover the
shortfall by appropriating a sufficient number of Agents own assets to cover the equivalent value of the shortfall and hold them for the relevant clients under the CASS Rules as provided in clause
(J)
below.
If there is a shortfall of Securities in the event of Agents insolvency, all Customers who hold Securities in the omnibus account may share in the shortfall on a pro rata basis
.
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(E)
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Lender is hereby advised that, where the Agent arranges for any part of the Assets to be held overseas, there
may be different settlement, legal and regulatory requirements in overseas jurisdictions from those applying in the UK, together with different practices for the separate identification of the Assets.
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(F)
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The Securities Account and the Collateral Account shall be designated so as to make it clear that the Assets
belong to Lender and not to other customers of Agent, and shall be segregated from the Agents securities or securities belonging to an affiliated company of the Agent that is not being treated as an arms length customer in accordance
with the FCA Rules.
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(G)
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Statements delivered by the Agent to Lender shall contain the information and be dispatched with the frequency
set out in the FCA Rules and any other information relating to the Assets will be dispatched by the Agent at intervals agreed with Lender. On request from Lender, the Agent will provide a statement of all Assets held under this Agreement for the
benefit of Lender.
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(H)
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Where applicable, the Agent shall notify Lender of notices, circulars, reports and announcements which the
Agent has received, in the course of acting in the capacity of custodian, concerning the Assets held on Lenders behalf that require discretionary action, including the exercise of voting rights, conversion and subscription rights, takeovers,
other offer or capital
re-organizations.
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(I)
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(i) Except in the circumstances described in (ii) below, money held for Lender in an account with the
Agent will be held by the Agent as banker and not as trustee. As a result, the money will be held in accordance with the Client Asset Rules and not the Client Money Rules and, in the event of the Agents insolvency (or analogous event), Lender
will not be entitled to share in any distribution under the Client Money Rules.
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(ii) Where, in the circumstances
contemplated in paragraph (J) below, the Agent holds money for Lender in accordance with the Client Money Rules, the Agent holds such money as trustee and not as banker. In such case, in the event of the Agents insolvency (or analogous
event), the Client Money Rules will apply and you will be entitled to share in any relevant distribution under the Client Money Rules.
(J)
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(i) From 1 June 2015, where the Agent chooses to hold an amount of its money to cover a shortfall (as such
term is used in the CASS Rules), the Agent will hold that amount for Lender in accordance with the Client Money Rules (
Cover Amount
) until the shortfall is resolved (unless otherwise agreed) and in such case the terms set out in
paragraphs (ii) to (v) shall apply. Where the relevant shortfall reduces or is otherwise resolved, the Cover Amount (or the portion thereof in excess of the relevant shortfall) shall become immediately due and payable to the Agent. In the event
of termination of this Agreement, the Agent will treat payment to Lender of such money covering a shortfall as fully discharging its obligation to return the securities which were the subject of that shortfall to Lender.
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(ii) The Agent may transfer client money in respect of the Cover Amount to be held by a third party bank or credit institution (the
Third Party Bank
). Except as provided for in this Agreement, the Agent accepts no liability for the acts or omissions of the Third Party Bank. In the event of the insolvency or analogous proceedings of the Third Party Bank, the
money received by the Agent from the Third Party Bank may be insufficient to satisfy Lenders claim.
(iii) The Agent may arrange for
client money to be held outside the United Kingdom. Such money may be held in accounts with the Third Party Bank in a state which is not an EEA state and, in such case, the relevant accounts will be subject to the laws of that state and the client
money may be treated in a different manner from that which would apply if the client money were held by a person located in the EEA.
(iv)
Where client money is deposited into an account with the Third Party Bank, such Third Party Bank may have a security interest or lien over, or right of
set-off
in relation to, such money, to the extent we are
permitted to grant such rights by the Client Money Rules.
(v) Any interest received by us in respect of the Cover Amount shall be retained
by the Agent and shall not be credited to Lenders account.