STATEMENT OF ADDITIONAL INFORMATION
Investor Class Shares TOSLX
Institutional Class Shares TOSZX
June 30, 2016
This Statement of Additional Information
(“SAI”) is meant to be read in conjunction with the prospectus for the Toreador
Select Fund (the “Fund”) dated the same date as this SAI (“Prospectus”), and is incorporated by reference in its entirety into the Prospectus. Because
this SAI is not itself a prospectus, no investment in shares of the Fund should
be made solely upon the information contained herein.
Copies of the Fund’s Prospectus, Annual
Report, and/or Semi-Annual Report may be obtained free of charge, by writing to
World Funds Trust, 8730 Stony Point Parkway, Suite 205, Richmond, Virginia 23235
or by calling (800) 673-0550. Capitalized terms used but not defined herein have
the same meanings as in the Prospectus.
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TABLE OF CONTENTS
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PAGE
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GENERAL INFORMATION
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1
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ADDITIONAL
INFORMATION ABOUT THE FUND’S INVESTMENTS
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1
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INVESTMENT
TECHNIQUES
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1
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OTHER INVESTMENTS
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10
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INVESTMENT
RESTRICTIONS
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11
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DISCLOSURE
OF PORTFOLIO SECURITIES HOLDINGS
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12
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TRUSTEES AND
OFFICERS OF THE TRUST
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14
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CONTROL PERSONS
AND PRINCIPAL SECURITIES HOLDERS
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19
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ADVISER AND
ADVISORY AGREEMENT
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19
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MANAGEMENT-RELATED
SERVICES
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21
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PORTFOLIO
TRANSACTIONS
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22
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DESCRIPTION
OF SHARES
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23
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PLAN OF DISTRIBUTION
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24
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ADDITIONAL
INFORMATION ABOUT PURCHASES AND SALES
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26
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SPECIAL SHAREHOLDER
SERVICES
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27
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TAX STATUS
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28
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FINANCIAL
INFORMATION
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39
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TRUST’S
PROXY VOTING POLICY
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EXHIBIT A
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ADVISER’S
PROXY AND CORPORATE ACTION VOTING POLICIES AND PROCEDURES
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EXHIBIT B
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NOMINATING
AND CORPORATE GOVERNANCE COMMITTEE CHARTER
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EXHIBIT C
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i
GENERAL INFORMATION
World Funds Trust (the “Trust”)
was organized as a Delaware statutory trust on April 9, 2007. The Trust is an open-end
management investment company registered under the Investment Company Act of 1940,
as amended (the “1940 Act”) and commonly known as a “mutual fund”. The Declaration of Trust permits the Trust to offer separate series (“funds”) of shares of beneficial interest (“shares”). The Trust reserves
the right to create and issue shares of additional funds. Each fund is a separate
mutual fund, and each share of each fund represents an equal proportionate interest
in that fund. All consideration received by the Trust for shares of any fund and
all assets of such fund belong solely to that fund and would be subject to liabilities
related thereto. Each fund of the Trust pays its (i) operating expenses, including
fees of its service providers, expenses of preparing prospectuses, proxy solicitation
material and reports to shareholders, costs of custodial services and registering
its shares under federal and state securities laws, pricing, insurance expenses,
brokerage costs, interest charges, taxes and organization expenses; and (ii) pro
rata share of the fund’s other expenses, including audit and legal expenses.
Expenses attributable to a specific fund shall be payable solely out of the assets
of that fund. Expenses not attributable to a specific fund are allocated across
all of the funds on the basis of relative net assets. The other funds of the Trust
are described in one or more separate Statements of Additional Information.
The Fund is a “diversified” Fund.
As of the date of this SAI, the Fund is
authorized to issue two classes of shares: Investor Class Shares charging a distribution
and service (i.e., 12b-1) fee and Institutional Class Shares not charging any 12b-1
fees. Each class of shares are substantially the same as they represent interests
in the same portfolio of securities and differ only to the extent that they bear
different expenses.
ADDITIONAL INFORMATION ABOUT THE FUND’S
INVESTMENTS
The following information supplements the
discussion of the Fund’s investment objectives and policies as described in
the prospectus.
INVESTMENT TECHNIQUES
The following discussion of investment techniques
and instruments supplements, and should be read in conjunction with, the investment
information in the Fund’s prospectus. In seeking to meet its investment objective,
the Fund may invest in any type of security whose characteristics are consistent
with its investment program described below.
Common Stock – Common stock represents
an equity or ownership interest in an issuer. In the event an issuer is liquidated
or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence
over the claims of those who own common stock.
Preferred Stock – Preferred stock is a class
of capital stock that pays dividends at a specified rate and that has preference
over common stock in the payment of dividends and the liquidation of assets. Preferred
stock does not ordinarily carry voting rights. Most preferred stock is cumulative;
if dividends are passed (not paid for any reason), they accumulate and must be paid
before common stock dividends. Passed dividend on non-cumulative preferred stock
is generally gone forever. Participating preferred stock entitles its holders to
share in profits above and beyond the declared dividend, along with common shareholders,
as distinguished from non-participating preferred, which is limited to stipulated
dividend. Adjustable rate preferred stock pays a dividend that is adjustable, usually
quarterly, based on changes in the Treasury bill rate or other money market rates.
Convertible preferred stock is exchangeable for a given number of common shares
and thus tends to be more volatile than non-convertible preferred, which behaves
more like a fixed-income bond.
Convertible Securities – The Fund may invest
in convertible securities. Traditional convertible securities include corporate
bonds, notes and preferred stocks that may be converted into or exchanged for common
stock or other equity securities, and other securities that also provide an opportunity
for equity participation. These securities are convertible either at a stated price
or a stated rate (that is, for a specific number of shares of common stock or other
equity securities). As with other fixed income securities, the price of a convertible
security generally varies inversely with interest rates. While providing a fixed
income stream, a convertible security also affords the investor an opportunity,
through its conversion feature, to participate in the capital appreciation of the
common stock into which
1
it is convertible. As the market price of
the underlying common stock declines, convertible securities tend to trade increasingly
on a yield basis and therefore may not experience market value declines to the same
extent as the underlying common stock. When the market price of the underlying common
stock increases, the price of a convertible security tends to rise as a reflection
of higher yield or capital appreciation. In such situations, the price of a convertible
security may be greater than the value of the underlying common stock.
Warrants – The Fund may invest in warrants.
Warrants are options to purchase equity securities at a specific price for a specific
period of time. They do not represent ownership of the securities, but only the
right to buy them. Hence, warrants have no voting rights, pay no dividends and have
no rights with respect to the assets of the corporation issuing them. The value
of warrants is derived solely from capital appreciation of the underlying equity
securities. Warrants differ from call options in that the underlying corporation
issues warrants, whereas call options may be written by anyone.
Debentures – Debentures are a general debt
obligation backed only by the integrity of the borrower and documented by an agreement
called an Indenture. An unsecured bond is a debenture.
Illiquid Securities – The Fund may hold
up to 15% of its net assets in illiquid securities. For this purpose, the term “illiquid securities” means securities that cannot be disposed of within
seven days in the ordinary course of business at approximately the amount at which
the Fund has valued the securities. Illiquid securities include generally, among
other things, certain written over–the–counter options, securities or other liquid
assets as cover for such options, repurchase agreements with maturities in excess
of seven days, certain loan participation interests and other securities whose disposition
is restricted under the federal securities laws.
Debt Securities – The Fund may invest in
debt securities. It generally will invest in debt securities rated Baa or higher
by Moody’s Investor Service, Inc. (“Moody’s”) or BBB or higher
by Standard & Poor’s Rating Group (“S&P”) or foreign securities
not subject to standard credit ratings, which the Adviser believes are of comparable
quality.
Debt securities consist of bonds, notes,
government and government agency securities, zero coupon securities, convertible
bonds, asset–backed and mortgage–backed securities, and other debt securities whose
purchase is consistent with the Fund’s investment objective. The Fund’s
investments may include international bonds that are denominated in foreign currencies,
including the European Currency Unit or “Euro.” International bonds are
defined as bonds issued in countries other than the United States. The Fund’s
investments may include debt securities issued or guaranteed by supranational organizations,
corporate debt securities, and bank or holding company debt securities.
Depositary Receipts – Assets of the Fund
may be invested on a global basis to take advantage of investment opportunities
both within the United States and other countries. The Fund may buy foreign securities
directly in their principal markets or indirectly through the use of depositary
receipts. The Fund may invest in sponsored and unsponsored American Depositary Receipts
(“ADRs”), European Depositary Receipts (“EDR’s”), and other similar depositary
receipts. ADRs are issued by an American bank or trust company and represent ownership
of underlying securities of a foreign company. EDRs are issued in Europe, usually
by foreign banks, and represent ownership of either foreign or domestic underlying
securities. The foreign country may withhold taxes on dividends or distributions
paid on the securities underlying ADRs and EDRs, thereby reducing the dividend or
distribution amount received by shareholders.
Unsponsored ADRs and EDRs are issued without
the participation of the issuer of the underlying securities. As a result, information
concerning the issuer may not be as current as for sponsored ADRs and EDRs. Holders
of unsponsored ADRs generally bear all the costs of the ADR facilities. The depositary
of an unsponsored facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited securities or to pass through
voting rights to the holders of such receipts in respect of the deposited securities.
Therefore, there may not be a correlation between information concerning the issuer
of the security and the market value of an unsponsored ADR.
Borrowing – As required by the
1940 Act, the Fund must maintain continuous asset coverage (total assets, including
assets acquired with borrowed funds, less liabilities exclusive of borrowings) of
300% of all amounts borrowed. If, at any time, the value of the Fund’s assets
should fail to meet this 300% coverage test, the Fund, within three days
2
(not including Sundays and holidays), will
reduce the amount of the Fund’s borrowings to the extent necessary to meet
this 300% coverage. Maintenance of this percentage limitation may result in the
sale of portfolio securities at a time when investment considerations otherwise
indicate that it would be disadvantageous to do so. Investment strategies that either
obligate the Fund to purchase securities or require the Fund to segregate assets
are not considered to be borrowing.
Strategic Transactions.
The Fund
may utilize a variety of investment strategies to hedge various market risks (such
as interest rates, currency exchange rates, and broad specific equity or fixed–income
market movements). Such strategies are generally accepted as modern portfolio management
and are regularly utilized by many mutual funds and institutional investors. Techniques
and instruments may change over time as new instruments and strategies develop and
regulatory changes occur.
In the course of pursuing these investment
strategies, the Fund may purchase and sell exchange–listed and over–the–counter
put and call options on securities, fixed–income indices and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter into
various currency transactions such as currency forward contracts, currency futures
contracts, currency swaps or options on currencies or currency futures (collectively,
all the above are called “Strategic Transactions”).
When conducted outside the United States,
Strategic Transactions may not be regulated as rigorously as they are in the United
States, may not involve a clearing mechanism and related guarantees, and are subject
to the risk of governmental actions affecting trading in, or the prices of, foreign
securities, currencies and other instruments. The value of such positions could
also be adversely affected by: (1) other complex foreign political, legal and economic
factors, (2) lesser availability than in the United States of data on which to make
trading decisions, (3) delays in the Fund’s ability to act upon economic events
occurring in foreign markets during non–business hours in the United States, (4)
the imposition of different exercise and settlement terms and procedures and margin
requirements than in the United States, and (5) lower trading volume and liquidity.
Options.
The Fund may purchase and
sell options as described herein.
Put and Call Options.
A put option
gives the purchaser of the option, upon payment of a premium, the right to sell,
and the writer the obligation to buy, the underlying security, commodity, index,
currency or other instrument at the exercise price. The Fund may purchase a put
option on a security to protect its holdings in the underlying instrument (or, in
some cases, a similar instrument) against a substantial decline in market value
by giving the Fund the right to sell such instrument at the option exercise price.
Such protection is, of course, only provided during the life of the put option when
the Fund is able to sell the underlying security at the put exercise price regardless
of any decline in the underlying security’s market price. By using put options
in this manner, the Fund will reduce any profit it might otherwise have realized
in its underlying security by the premium paid for the put option and by transaction
costs.
A call option, upon payment of a premium,
gives the purchaser of the option the right to buy, and the seller the obligation
to sell, the underlying instrument at the exercise price. The Fund’s purchase
of a call option on a security, financial future, index, currency or other instrument
might be intended to protect the Fund against an increase in the price of the underlying
instrument. When writing a covered call option, the Fund, in return for the premium,
gives up the opportunity to profit from a market increase in the underlying security
above the exercise price, but conversely retains the risk of loss should the price
of the security decline. If a call option which the Fund has written expires, it
will realize a gain in the amount of the premium; however, such gain may be offset
by a decline in the market value of the underlying security during the option period.
If the call option is exercised, the Fund will realize a gain or loss from the sale
of the underlying security.
The premium received is the market value
of an option. The premium the Fund will receive from writing a call option, or,
which it will pay when purchasing a put option, will reflect, among other things,
the current market price of the underlying security, the relationship of the exercise
price to such market price, the historical price volatility of the underlying security,
the length of the option period, the general supply and demand for credit conditions,
and the general interest rate environment. The premium received by the Fund for
writing covered call options will be recorded as a liability in its statement of
assets and liabilities. This liability will be adjusted daily to the option’s
current market value, which will be the latest sale price at the time at which the
Fund’s net asset value (“NAV”) per
3
share is computed (currently, the close
of regular trading on the New York Stock Exchange (“NYSE”)), or, in the absence
of such sale, the latest asked price. The liability will be extinguished upon expiration
of the option, the purchase of an identical option in a closing transaction, or
delivery of the underlying security upon the exercise of the option.
The premium paid by the Fund when purchasing
a put option will be recorded as an asset in its statement of assets and liabilities.
This asset will be adjusted daily to the option’s current market value, which
will be the latest sale price at the time at which the Fund’s NAV per share
is computed, or, in the absence of such sale, the latest bid price. The asset will
be extinguished upon expiration of the option, the selling (writing) of an identical
option in a closing transaction, or the delivery of the underlying security upon
the exercise of the option.
The purchase of a put option will constitute
a short sale for federal tax purposes. The purchase of a put at a time when the
substantially identical security held long has not exceeded the long term capital
gain holding period could have adverse tax consequences. The holding period of the
long position will be cut off so that even if the security held long is delivered
to close the put, short term gain will be recognized. If substantially identical
securities are purchased to close the put, the holding period of the securities
purchased will not begin until the closing date. The holding period of the substantially
identical securities not delivered to close the short sale will commence on the
closing of the short sale.
The Fund will purchase a call option only
to close out a covered call option it has written. It will write a put option only
to close out a put option it has purchased. Such closing transactions will be effected
in order to realize a profit on an outstanding call or put option, to prevent an
underlying security from being called or put, or, to permit the sale of the underlying
security.
Furthermore, effecting a closing transaction
will permit the Fund to write another call option, or purchase another put option,
on the underlying security with either a different exercise price or expiration
date or both. If the Fund desires to sell a particular security from its portfolio
on which it has written a call option, or purchased a put option, it will seek to
effect a closing transaction prior to, or concurrently with, the sale of the security.
There is, of course, no assurance that the Fund will be able to effect such closing
transactions at a favorable price. If it cannot enter into such a transaction, it
may be required to hold a security that it might otherwise have sold, in which case
it would continue to be at market risk on the security. This could result in higher
transaction costs, including brokerage commissions. The Fund will pay brokerage
commissions in connection with the writing or purchase of options to close out previously
written options. Such brokerage commissions are normally higher than those applicable
to purchases and sales of portfolio securities.
Options written by the Fund will normally
have expiration dates between three and nine months from the date written. The exercise
price of the options may be below, equal to, or above the current market values
of the underlying securities at the time the options are written. From time to time,
the Fund may purchase an underlying security for delivery in accordance with an
exercise notice of a call option assigned to it, rather than delivering such security
from its portfolio. In such cases, additional brokerage commissions will be incurred.
The Fund will realize a profit or loss from
a closing purchase transaction if the cost of the transaction is less or more than
the premium received from the writing of the option; however, any loss so incurred
in a closing purchase transaction may be partially or entirely offset by the premium
received from a simultaneous or subsequent sale of a different call or put option.
Also, because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting from
the repurchase of a call option is likely to be offset in whole or in part by appreciation
of the underlying security owned by the Fund.
An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange–listed options and
over–the–counter options (“OTC options”). Exchange–listed options are issued by
a regulated intermediary such as the Options Clearing Corporation (“OCC”), which
guarantees the performance of the obligations of the parties to such options. The
discussion below uses the OCC as an example, but is also applicable to other financial
intermediaries.
4
With certain exceptions, OCC issued and
exchange listed options generally settle by physical delivery of the underlying
security or currency, although cash settlement may become available in the future.
Index options and Eurocurrency instruments are cash settled for the net amount,
if any, by which the option is “in–the–money” (i.e., where the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case of
a put option, the exercise price of the option) at the time the option is exercised.
Frequently, rather than taking or making delivery of the underlying instrument through
the process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund’s ability to close out its
position as a purchaser or seller of an OCC or exchange–listed put or call option
is dependent, in part, upon liquidity of the option market. Among the possible reasons
for the absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options; (2) restrictions on transactions imposed by an exchange;
(3) trading halts, suspensions or other restrictions imposed with respect to particular
classes or series of options or underlying securities including reaching daily price
limits; (4) interruption of the normal operations of the OCC or an exchange; (5)
inadequacy of the facilities of an exchange or OCC to handle current trading volume;
or (6) a decision by one or more exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the relevant market
for that option on that exchange would cease to exist, although outstanding options
on that exchange would generally continue to be exercisable in accordance with their
terms.
The hours of trading for listed options
may not coincide with the hours during which the underlying financial instruments
are traded. To the extent that the option markets close before the markets for the
underlying financial instruments, significant price and rate movements can take
place in the underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to
securities dealers, financial institutions or other parties (“Counterparties”) through
a direct bilateral agreement with the Counterparty. In contrast to exchange–listed
options, which generally have standardized terms and performance mechanics, all
the terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium, guarantees and security, are set by negotiation of the
parties. The Fund will only sell OTC options (other than OTC currency options) that
are subject to a buy–back provision permitting the Fund to require the Counterparty
to sell the option back to the Fund at a formula price within seven days.
Although not required to do so, the Fund
generally expects to enter into OTC options that have cash settlement provisions.
Unless the parties provide otherwise, there is no central clearing or guaranty function
in an OTC option.
As a result, if the Counterparty fails to
make or take delivery of the security, currency or other instrument underlying an
OTC option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the transaction.
Accordingly, the Fund’s investment adviser must assess the creditworthiness
of each such Counterparty or any guarantor or credit enhancement of the Counterparty’s credit to determine the likelihood that the terms of the OTC option will
be satisfied. The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as “primary dealers,” or broker dealers, domestic or foreign banks or other financial
institutions which have received (or the guarantors of the obligation of which have
received) a short–term credit rating of A–1 from S&P or P–1 from Moody’s
or an equivalent rating from any other nationally recognized statistical rating
organization (a “NRSRO”). The staff of the U.S. Securities and Exchange Commission
(the “SEC”) currently takes the position that OTC options purchased by the Fund
and portfolio securities “covering” the amount of the Fund’s obligation pursuant
to an OTC option sold by it (the cost of the sell–back plus the in–the–money amount,
if any) are illiquid, and are subject to the Fund’s limitation on investing
no more than 15% of its assets in illiquid securities.
If the Fund sells a call option, the premium
that it receives may serve as a partial hedge against a decrease in the value of
the underlying securities or instruments in its portfolio. The premium may also
increase the Fund’s income. The sale of put options can also provide income.
The Fund may purchase and sell call options
on securities, including U.S. Treasury and agency securities, mortgage–backed securities,
corporate debt securities, and Eurocurrency instruments (see “Eurocurrency Instruments”
below
5
for a description of such instruments) that
are traded in U.S. and foreign securities exchanges and in the over–the–counter
markets, and futures contracts. The Fund may purchase and sell call options on currencies.
All calls sold by the Fund must be "covered" (i.e., the Fund must own the securities
or futures contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will receive
the option premium to help protect it against loss, a call sold by the Fund exposes
the Fund during the term of the option to possible loss of opportunity to realize
appreciation in the market price of the underlying security or instrument and may
require the Fund to hold a security or instrument which it might otherwise have
sold.
The Fund may purchase and sell put options
on securities including U.S. Treasury and agency securities, mortgage–backed securities,
foreign sovereign debt, corporate debt securities, convertible securities, and Eurocurrency
instruments (whether or not the Fund holds the above securities in its portfolio),
and futures contracts. The Fund may not purchase or sell futures contracts on individual
corporate debt securities. The Fund may purchase and sell put options on currencies.
The Fund will not sell put options if, as a result, more than 50% of the Fund’s
assets would be required to be segregated to cover its potential obligations under
such put options other than those with respect to futures and options thereon. In
selling put options, there is a risk that the Fund may be required to buy the underlying
security at a disadvantageous price above the market price. For tax purposes, the
purchase of a put is treated as a short sale, which may cut off the holding period
for the security. Consequently, the purchase of a put is treated as generating gain
on securities held less than three months or short term capital gain (instead of
long term) as the case may be.
Options on Securities Indices and Other
Financial Indices.
The Fund may also purchase and sell call and put options
on securities indices and other financial indices. By doing so, the Fund can achieve
many of the same objectives that it would achieve through the sale or purchase of
options on individual securities or other instruments. Options on securities indices
and other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying instrument,
they settle by cash settlement. For example, an option on an index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the closing
level of the index upon which the option is based exceeds, in the case of a call,
or is less than, in the case of a put, the exercise price of the option. This amount
of cash is equal to the excess of the closing price of the index over the exercise
price of the option, which also may be multiplied by a formula value.
The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or loss
on an option on an index depends on price movements in the instruments making up
the market, market segment, industry or any other composite on which the underlying
index is based, rather than price movements in individual securities, as is the
case with respect to options on securities.
Futures.
The Fund may enter into
financial futures contracts or purchase or sell put and call options on such futures
as a hedge against anticipated interest rate or currency market changes and for
risk management purposes. The use of futures for hedging is intended to protect
the Fund from (1) the risk that the value of its portfolio of investments in a foreign
market may decline before it can liquidate its interest, or (2) the risk that a
foreign market in which it proposes to invest may have significant increases in
value before it actually invests in that market. In the first instance, the Fund
will sell a future based upon a broad market index which it is believed will move
in a manner comparable to the overall value of securities in that market. In the
second instance, the Fund will purchase the appropriate index as an “anticipatory”
hedge until it can otherwise acquire suitable direct investments in that market.
As with the hedging of foreign currencies, the precise matching of financial futures
on foreign indices and the value of the cash or portfolio securities being hedged
may not have a perfect correlation. The projection of future market movement and
the movement of appropriate indices is difficult, and the successful execution of
this short–term hedging strategy is uncertain.
Regulatory policies governing the use of
such hedging techniques require the Fund to provide for the deposit of initial margin
and the segregation of suitable assets to meet its obligations under futures contracts.
Futures are generally bought and sold on the commodities exchanges where they are
listed with payment of initial and variation margin as described below. The sale
of a futures contract creates a firm obligation by the Fund, as seller, to deliver
to the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index futures
and Eurocurrency instruments, the net cash amount). Options on futures contracts
are similar to options on securities except that an option on a futures contract
gives the purchaser the right
6
in return for the premium paid to assume
a position in a futures contract and obligates the seller to deliver such position.
The Fund’s use of financial futures
and options thereon will in all cases be consistent with applicable regulatory requirements,
particularly the rules and regulations of the Commodity Futures Trading Commission.
The Fund will use such techniques only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically, maintaining
a futures contract or selling an option thereon requires the Fund to deposit an
amount of cash or other specified assets (initial margin), which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some circumstances)
with a financial intermediary as security for its obligations. Additional cash or
assets (variation margin) may be required to be deposited thereafter on a daily
basis as the mark to market value of the contract fluctuates. The purchase of an
option on financial futures involves payment of a premium for the option without
any further obligation on the part of the Fund. If the Fund exercises an option
on a futures contract, it will be obligated to post initial margin (and potential
subsequent variation margin) for the resulting futures position. Futures contracts
and options thereon are generally settled by entering into an offsetting transaction,
but there can be no assurance that the position can be offset prior to settlement
at an advantage price or that delivery will occur.
Currency Transactions.
The Fund may
engage in currency transactions with counterparties in order to hedge the value
of portfolio holdings denominated in particular currencies against fluctuations
in relative value. Currency transactions include forward currency contracts, exchange–listed
currency futures, exchange–listed and OTC options on currencies, and currency swaps.
A forward currency contract involves a privately negotiated obligation to purchase
or sell (with delivery generally required) a specific currency at a future date,
which may be any fixed number of days from the date of the contract between the
parties, at a specified price. These contracts are traded in the interbank market
and conducted directly between currency traders (usually large, commercial banks)
and their customers. A forward foreign currency contract generally has no deposit
requirement or commissions charges. A currency swap is an agreement to exchange
cash flows based on the notional difference among two or more currencies. Currency
swaps operate similarly to an interest rate swap (described below). The Fund may
enter into currency transactions with counterparties which have received (or the
guarantors of the obligations of which have received) a credit rating of A–1 or
P–1 by S&P or Moody’s, respectively, or that have an equivalent rating
from a NRSRO, or (except for OTC currency options) are determined to be of equivalent
credit quality by the Fund’s investment adviser.
Currency hedging involves some of the same
risks and considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged fluctuates
in value to a degree or in a direction that is not anticipated. Furthermore, there
is the risk that the perceived linkage between various currencies may not be present
or may not be present during the particular time the Fund is engaging in proxy hedging
(see “Proxy Hedging,” below). If the Fund enters into a currency hedging transaction,
it will comply with the asset segregation requirements described below. Cross currency
hedges may not be considered “directly related” to the Fund’s principal business
of investing in stock or securities (or options and futures thereon), resulting
in gains there from not qualifying under the “less than 30% of gross income” test
of Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”).
Currency transactions are also subject to
risks different from those of other portfolio transactions. Because currency control
is of great importance to the issuing governments and influences economic planning
and policy, purchases and sales of currency and related instruments can be negatively
affected by government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if it
is unable to deliver or receive currency or funds in settlement of obligations and
could also cause hedges the Fund has entered into to be rendered useless, resulting
in full currency exposure and transaction costs. Buyers and sellers of currency
futures are subject to the same risks that apply to the use of futures generally.
Furthermore, settlement of a currency futures contract for the purchase of most
currencies must occur at a bank based in the issuing nation. Trading options on
currency futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not always
be available. Currency exchange rates may fluctuate based on factors extrinsic to
that country’s economy. Although forward
7
foreign currency contracts and currency
futures tend to minimize the risk of loss due to a decline in the value of the hedged
currency, they tend to limit any potential gain which might result should the value
of such currency increase.
The Fund’s dealing in forward currency
contracts and other currency transactions such as futures, options on futures, options
on currencies and swaps will be limited to hedging involving either specific transactions
(“Transaction Hedging”) or portfolio positions (“Position Hedging”).
Transaction Hedging.
Transaction
Hedging occurs when the Fund enters into a currency transaction with respect to
specific assets or liabilities. These specific assets or liabilities generally arise
in connection with the purchase or sale of the Fund’s portfolio securities
or the receipt of income there from.
The Fund may use transaction hedging to
preserve the United States dollar price of a security when they enter into a contract
for the purchase or sale of a security denominated in a foreign currency. The Fund
will be able to protect itself against possible losses resulting from changes in
the relationship between the U.S. dollar and foreign currencies during the period
between the date the security is purchased or sold and the date on which payment
is made or received by entering into a forward contract for the purchase or sale,
for a fixed amount of dollars, of the amount of the foreign currency involved in
the underlying security transactions.
Position Hedging.
Position hedging
is entering into a currency transaction with respect to portfolio security positions
denominated or generally quoted in that currency. The Fund may use position hedging
when the Fund’s investment adviser believes that the currency of a particular
foreign country may suffer a substantial decline against the U.S. dollar. The Fund
may enter into a forward foreign currency contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all of
its portfolio securities denominated in such foreign currency. The precise matching
of the forward foreign currency contract amount and the value of the portfolio securities
involved may not have a perfect correlation since the future value of the securities
hedged will change as a consequence of market movements between the date the forward
contract is entered into and the date it matures. The projection of short–term currency
market movement is difficult, and the successful execution of this short–term hedging
strategy is uncertain.
The Fund will not enter into a transaction
to hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate market
value (at the time of entering into the transaction) of the securities held in its
portfolio that are denominated or generally quoted in or currently convertible into
such currency, other than with respect to proxy hedging as described below.
Cross Hedging.
The Fund may also
cross–hedge currencies by entering into transactions to purchase or sell one or
more currencies that are expected to decline in value relative to other currencies
to which the Fund has or expects to have portfolio exposure.
Proxy Hedging.
To reduce the effect
of currency fluctuations on the value of existing or anticipated holdings of portfolio
securities, the Fund may also engage in proxy hedging. Proxy hedging is often used
when the currency to which the Fund’s portfolio is exposed is difficult to
hedge or to hedge against the U.S. dollar. Proxy hedging entails entering into a
forward contract to sell a currency whose changes in value are generally considered
to be linked to a currency or currencies in which some or all of the Fund’s
portfolio securities are or are expected to be denominated, and buying U.S. dollars.
The amount of the contract would not exceed the value of the Fund’s securities
denominated in linked currencies. For example, if the investment adviser considers
that the Swedish krona is linked to the euro, the Fund holds securities denominated
in Swedish krona and the investment adviser believes that the value of Swedish krona
will decline against the U.S. dollar, the investment adviser may enter into a contract
to sell euros and buy U.S. dollars.
Combined Transactions.
The Fund may
enter into multiple transactions, including multiple options transactions, multiple
futures transactions, multiple currency transactions (including forward foreign
currency contracts) and multiple interest rate transactions and any combination
of futures, options, currency and interest rate transactions (“component transactions”),
instead of a single Strategic Transaction or when the investment adviser believes
that it is in the Fund’s best interests to do so. A combined transaction will
usually contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the investment
adviser’s judgment that the combined strategies will reduce risk or otherwise
more effectively achieve
8
the desired portfolio management goal, it
is possible that the combination will instead increase such risks or hinder achievement
of the portfolio management objective.
Eurocurrency Instruments.
The Fund
may make investments in Eurocurrency instruments. Eurocurrency instruments are futures
contracts or options thereon which are linked to the London Interbank Offered Rate
(“LIBOR”) or to the interbank rates offered in other financial centers. Eurocurrency
futures contracts enable purchasers to obtain a fixed rate for the lending of funds
and sellers to obtain a fixed rate for borrowings. The Fund might use Eurocurrency
futures contracts and options thereon to hedge against changes in LIBOR and other
interbank rates, to which many interest rate swaps and fixed income instruments
are linked.
Segregated and Other Special Accounts.
In addition to other requirements, many transactions require the Fund to segregate
liquid high grade assets with its custodian to the extent Fund obligations are not
otherwise “covered” through the ownership of the underlying security, financial
instruments or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high grade securities at
least equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to hold
the securities subject to the call (or securities convertible into the needed securities
without additional consideration) or to segregate liquid high grade securities sufficient
to purchase and deliver the securities if the call is exercised. A call option sold
by the Fund on an index will require the Fund to own portfolio securities which
correlate with the index or segregate liquid high grade assets equal to the excess
of the index value over the exercise price on a current basis. A put option written
by the Fund requires the Fund to segregate liquid, high grade assets equal to the
exercise price. A currency contract which obligates the Fund to buy or sell currency
will generally requires the Fund to hold an amount of that currency or liquid securities
denominated in that currency equal to the Fund’s obligations or to segregate
liquid high grade assets equal to the amount of the Fund’s obligation.
OTC options entered into by the Fund, including
those on securities, currency, financial instruments or indices and OCC issued and
exchange–listed index options, will generally provide for cash settlement. As a
result, when the Fund sells these instruments it will only segregate an amount of
assets equal to its accrued net obligations, as there is no requirement for payment
or delivery of amounts in excess of the net amount. These amounts will equal 100%
of the exercise price in the case of a non cash–settled put, the same as an OCC
guaranteed listed option sold by the Fund, or in–the–money amount plus any sell–back
formula amount in the case of a cash–settled put or call. In addition, when the
Fund sells a call option on an index at a time when the in–the–money amount exceeds
the exercise price, the Fund will segregate, until the option expires or is closed
out, cash or cash equivalents equal in value to such excess. OCC issued and exchange–listed
options sold by the Fund generally settle with physical delivery, and the Fund will
segregate an amount of liquid assets equal to the full value of the option. OTC
options settling with physical delivery, or with an election of either physical
delivery or cash settlement will be treated the same as other options settling with
physical delivery.
In the case of a futures contract or an
option thereon, the Fund must deposit initial margin and possible daily variation
margin in addition to segregating sufficient liquid assets. Such assets may consist
of cash, cash equivalents, liquid debt securities or other liquid assets.
With respect to swaps, the Fund will accrue
the net amount of the excess, if any, of its obligations over its entitlements with
respect to each swap on a daily basis and will segregate an amount of cash or liquid
high grade securities having a value equal to the accrued excess. Caps, floors and
collars require segregation of assets with a value equal to the Fund’s net
obligation, if any.
Strategic Transactions may be covered by
other means when consistent with applicable regulatory policies. The Fund may also
enter into offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related options and
Strategic Transactions. For example, the Fund could purchase a put option if the
strike price of that option is the same or higher than the strike price of a put
option sold by the Fund. Moreover, instead of segregating assets, if the Fund holds
a futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offered in combinations.
9
If the offsetting transaction terminates
at the time of or after the primary transaction, no segregation is required, but
if it terminates prior to such time, liquid assets equal to any remaining obligation
would need to be segregated.
The Fund’s activities involving Strategic
Transactions may be limited by the requirements of Subchapter M of the Code for
qualification as a regulated investment company.
In addition to the foregoing, the Fund is
authorized to borrow money as a temporary measure for extraordinary or emergency
purposes in amounts not in excess of 5% of the value of the Fund’s total assets.
This borrowing is not subject to the foregoing 300% asset coverage requirement.
Borrowing may subject the Fund to interest
costs, which may exceed the interest received on the securities purchased with the
borrowed funds. The Fund may borrow at times to meet redemption requests rather
than sell portfolio securities to raise the necessary cash. Borrowing can involve
leveraging when securities are purchased with the borrowed money.
Temporary Investments
The Fund may take temporary defensive measures
that are inconsistent with the Fund’s normal fundamental or non–fundamental
investment policies and strategies in response to adverse market, economic, political,
or other conditions as determined by the Adviser. Such measures could include, but
are not limited to, investments in (1) highly liquid short–term fixed income securities
issued by or on behalf of municipal or corporate issuers, obligations of the U.S.
Government and its agencies, commercial paper, and bank certificates of deposit;
(2) repurchase agreements involving any such securities; and (3) other money market
instruments. The Fund may also invest in shares of money market mutual funds to
the extent permitted under applicable law. Money market mutual funds are investment
companies, and the investments in those companies by the Fund are in some cases
subject to certain fundamental investment restrictions. As a shareholder in a mutual
fund, the Fund will bear its ratable shares of its expenses, including management
fees, and will remain subject to payment of the fees to the Adviser, with respect
to assets so invested. The Fund may not achieve its investment objectives during
temporary defensive periods.
Cash Defensive Position
When deemed appropriate by the Adviser for
short term defensive purposes, the Fund may hold up to 100% of its assets in cash
and equivalents including government obligations in the local currency of any developed
country including the United States, commercial paper and certificates of deposit.
OTHER INVESTMENTS
Initial Public Offerings – The Fund may
participate in the initial public offering (“IPO”) market, and a portion
of the Fund’s returns may be attributed to IPO investments; the impact on the
Fund’s performance of IPO investments will be magnified if the Fund has a small
asset base. Although the IPO market in recent years has been strong, there is no
guarantee that it will continue to be so or that suitable IPO’s will be available
and, as the Fund’s assets grow, there is no guarantee that the impact of IPO
investing will produce positive performance.
Miscellaneous – The Board may, in the future,
authorize the Fund to invest in securities other than those listed in this SAI and
in the prospectus, provided that such investments would be consistent with the Fund’s investment objective and that such investments would not violate the Fund’s fundamental investment policies or restrictions.
10
INVESTMENT RESTRICTIONS
Fundamental
.
The investment limitations
described below have been adopted by the Trust with respect to the Fund and are
fundamental (“Fundamental”), i.e, they may not be changed without the affirmative
vote of a majority of the outstanding shares of the Fund. As used in the Prospectus
and the Statement of Additional Information, the term “majority” of the outstanding
shares of the Fund means the lesser of: (1) 67% or more of the outstanding shares
of the Fund present at a meeting, if the holders of more than 50% of the outstanding
shares of the Fund are present or represented at such meeting; or (2) more than
50% of the outstanding shares of the Fund. Other investment practices which may
be changed by the Board of Trustees without the approval of shareholders to the
extent permitted by applicable law, regulation or regulatory policy are considered
non–fundamental (“Non–Fundamental”).
The Fund:
1. May not
borrow money except as permitted under the 1940 Act, and as interpreted or modified
by regulatory authority having jurisdiction from time to time.
2. May not
issue any senior securities to others, except as permitted under the 1940 Act, and
as interpreted or modified by regulatory authority having jurisdiction from time
to time.
3. May not
underwrite securities issued by others except to the extent the Fund may be deemed
to be an underwriter under the federal securities laws, in connection with the disposition
of portfolio securities.
4. May not
invest more than 25% of the value of its net assets in any one industry or group
of industries (except that securities of the U.S. government, its agencies and instrumentalities
are not subject to these limitations).
5. May not
purchase or sell real estate except as permitted under the 1940 Act, and as interpreted
or modified by regulatory authority having jurisdiction, from time to time.
6. May not
make loans to others, except as permitted under the 1940 Act, and as interpreted
or modified by regulatory authority having jurisdiction, from time to time.
7. May invest
in commodities only as permitted by the 1940 Act or other governing statute, by
the Rules thereunder, or by the SEC or other regulatory agency with authority over
the Fund.
8. Shall be
a “diversified company” as that term is defined in the 1940 Act, as interpreted
or modified by regulatory authorities from time to time.
Except with respect to borrowing and circumstances
where the Fund is required to “cover” its positions, if a percentage or
rating restriction on investment or use of assets set forth herein or in the Prospectus
is adhered to at the time a transaction is effected, later changes in percentage
resulting from any cause other than actions by the Fund will not be considered a
violation. Currently, subject to modification to conform to the 1940 Act as interpreted
or modified from time to time, the Fund is permitted, consistent with the 1940 Act,
to borrow, and pledge its Shares to secure such borrowing, provided, that immediately
thereafter there is asset coverage of at least 300% for all borrowings by the Fund
from a bank. If borrowings exceed this 300% asset coverage requirement by reason
of a decline in net assets of the Fund, the Fund will reduce its borrowings within
three days (not including Sundays and holidays) to the extent necessary to comply
with the 300% asset coverage requirement. The 1940 Act also permits a Fund to borrow
for temporary purposes only in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. A loan shall be presumed to be for temporary
purposes if it is repaid within 60 days and is not extended or renewed. To the extent
outstanding borrowings of the Fund exceed 5% of the value of the total assets of
the Fund, the Fund will not make additional purchases of securities – the foregoing
shall not be construed to prevent the Fund from settling portfolio transactions
or satisfying shareholder redemptions orders. The SEC has indicated, however, that
certain types of transactions, which could be deemed “borrowings” (such
as firm
11
commitment
agreements and reverse repurchase agreements), are permissible if a Fund “covers” the agreements by establishing and maintaining segregated accounts.
Currently,
with respect to senior securities, the 1940 Act and regulatory interpretations of
relevant provisions of the 1940 Act establish the following general limits, subject
to modification to conform to the 1940 Act as interpreted or modified from time
to time: Open–end registered investment companies such as the Fund are not permitted
to issue any class of senior security or to sell any senior security of which they
are the issuers. The Trust is, however, permitted to issue separate series of Shares
(the Fund is a series of the Trust) and to divide those series into separate classes.
Individual class and institutional class are separate classes. The Fund has no intention
of issuing senior securities, except that the Trust has issued its Shares in separate
series and may divide those series into classes of Shares. Collateral arrangements
with respect to forward contracts, futures contracts or options, including deposits
of initial and variation margin, are not considered to be the issuance of a senior
security for purposes of this restriction.
DISCLOSURE OF PORTFOLIO SECURITIES HOLDINGS
This Disclosure of Portfolio Securities
Holdings Policy (the “Policy”) shall govern the disclosure of the portfolio
securities holdings of each series (individually and collectively the “Fund” or “Funds”) of the Trust. The Trust maintains this Policy to ensure
that disclosure of information about portfolio securities is in the best interests
of the Fund and the Fund’s shareholders. The Board reviews these policies and
procedures as necessary and compliance will be periodically assessed by the Board
in connection with a report from the Trust’s Chief Compliance Officer. In addition,
the Board has reviewed and approved the provision of portfolio holdings information
to entities described below that may be prior to and more frequently than the public
disclosure of such information (i.e., “non–standard disclosure”). The
Board has also delegated authority to the officers of the Trust and Adviser to provide
such information in certain circumstances (see below).
The Trust is required by the SEC to file
its complete portfolio holdings schedule with the SEC on a quarterly basis. This
schedule is filed with the Trust’s annual and semi–annual reports on Form N–CSR
for the second and fourth fiscal quarters and on Form N–Q for the first and third
fiscal quarters. The portfolio holdings information provided in these reports is
as of the end of the respective quarter. Form N–CSR must be filed with the SEC no
later than ten (10) calendar days after the Trust transmits its annual or semi–annual
report to its shareholders. Form N–Q must be filed with the SEC no later than sixty
(60) calendar days after the end of the applicable quarter.
Additionally, the Trust’s service providers
which have contracted to provide services to the Trust and its funds, including,
for example, the custodian and the fund accountants, and that require portfolio
holdings information in order to perform those services, may receive non–standard
disclosure. Non–standard disclosure of portfolio holdings information may also be
provided to a third–party when the Trust has a legitimate business purpose for doing
so. The Trust has the following ongoing arrangements with certain third parties
to provide the Fund’s portfolio holdings information:
12
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to the Trust’s auditors within sixty (60) days after the applicable fiscal period or other periods as necessary for use in providing audit opinions and other advice related to financial, regulatory, or tax reporting;
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2.
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to financial
printers within sixty (60) days after the applicable fiscal period for the purpose
of preparing Trust regulatory filings; and
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3.
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to the Trust’s administrator, custodian, transfer agent and accounting services provider on a daily basis in connection with their providing services to the Fund.
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The Trust’s service providers may also
disclose non–public portfolio holdings information if such disclosure is required
by applicable laws, rules or regulations, or by regulatory authorities. Additionally,
the Adviser may establish ongoing arrangements with certain third parties to provide
the Fund’s portfolio holdings information that the Adviser determines that
the Fund has a legitimate business purpose for doing so and the recipient is subject
to a duty of confidentiality. These third parties may include:
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1.
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financial
data processing companies that provide automated data scanning and monitoring services
for the Fund;
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2.
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research companies
that allow the Adviser to perform attribution analysis for the Fund; and
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3.
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the Adviser’s proxy voting agent to assess and vote proxies on behalf of the Fund.
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From time to time, employees of the Adviser
may express their views orally or in writing on the Fund’s portfolio securities
or may state that the Fund has recently purchased or sold, or continues to own,
one or more securities. The securities subject to these views and statements may
be ones that were purchased or sold since a Fund’s most recent quarter–end
and therefore may not be reflected on the list of the Fund’s most recent quarter–end
portfolio holdings. These views and statements may be made to various persons, including
members of the press, brokers and other financial intermediaries that sell shares
of the Fund, shareholders in the Fund, persons considering investing in the Fund
or representatives of such shareholders or potential shareholders, such as fiduciaries
of a 401(k) plan or a trust and their advisers, and other entities for which the
Adviser may determine. The nature and content of the views and statements provided
to each of these persons may differ. From time to time, employees of the Adviser
also may provide oral or written information (“portfolio commentary”)
about the Fund, including, but not limited to, how the Fund’s investments are divided among
various sectors, industries, countries, investment styles and capitalization sizes,
and among stocks, bonds, currencies and cash, security types, bond maturities, bond
coupons and bond credit quality ratings. This portfolio commentary may also include
information on how these various weightings and factors contributed to Fund performance.
The Adviser may also provide oral or written information (“statistical information”) about various financial characteristics of the Fund or its underlying portfolio
securities including, but not limited to, alpha, beta, R–squared, coefficient of
determination, duration, maturity, information ratio, sharpe ratio, earnings growth,
payout ratio, price/book value, projected earnings growth, return on equity, standard
deviation, tracking error, weighted average quality, market capitalization, percent
debt to equity, price to cash flow, dividend yield or growth, default rate, portfolio
turnover, and risk and style characteristics. This portfolio commentary and statistical
information about the Fund may be based on the Fund’s portfolio as of the most
recent quarter–end or the end of some other interim period, such as month–end. The
portfolio commentary and statistical information may be provided to various persons,
including those described in the preceding paragraph. The nature and content of
the information provided to each of these persons may differ.
13
Additionally, employees of the Adviser may
disclose one or more of the portfolio securities of the Fund when purchasing and
selling securities through broker–dealers, requesting bids on securities, obtaining
price quotations on securities, or in connection with litigation involving the Fund’s portfolio securities. The Adviser does not enter into formal non–disclosure
or confidentiality agreements in connection with these situations; however, the
Fund would not continue to conduct business with a person who the Adviser believed
was misusing the disclosed information.
The Adviser or its affiliates may manage
products sponsored by companies other than itself, including investment companies,
offshore funds, and separate accounts and affiliates of the Adviser may provide
investment related services, including research services, to other companies, including
other investment companies, offshore funds, institutional investors and other entities.
In each of these instances, the sponsors of these other companies and the affiliates
of the Adviser may receive compensation for their services. In many cases, these
other products may be managed in a similar fashion to the Fund and thus have similar
portfolio holdings, and the other investment related services provided by affiliates
of the Adviser may involve disclosure of information that is also utilized by the
Adviser in managing the Fund. The sponsors of these other products may disclose
the portfolio holdings of their products at different times than the Adviser discloses
portfolio holdings for the Fund, and affiliates of the Adviser may provide investment
related services to its clients at times that are different from the times disclosed
to the Fund.
The Trust and the Adviser currently have
no other arrangements for the provision of non–standard disclosure to any party
or shareholder. Other than the non–standard disclosure discussed above, if a third–party
requests specific, current information regarding the Fund’s portfolio holdings,
the Trust will refer the third–party to the latest regulatory filing.
All of the arrangements above are subject
to the policies and procedures adopted by the Board to ensure such disclosure is
for a legitimate business purpose and is in the best interests of the Trust and
its shareholders. The Trust’s CCO is responsible for monitoring the use and
disclosure of information relating to Portfolio Securities. Although no material
conflicts of interest are believed to exist that could disadvantage the Fund and
its shareholders, various safeguards have been implemented to protect the Fund and
its shareholders from conflicts of interest, including: the adoption of Codes of
Ethics pursuant to Rule 17j–1 under the 1940 Act designed to prevent fraudulent,
deceptive or manipulative acts by officers and employees of the Trust, the Adviser
and the Distributor in connection with their personal securities transactions; the
adoption by the Adviser and Distributor of insider trading policies and procedures
designed to prevent their employees’ misuse of material non–public information;
and the adoption by the Trust of a Code of Ethics for Officers that requires the
Chief Executive Officer and Chief Financial Officer of the Trust to report to the
Board any affiliations or other relationships that could potentially create a conflict
of interest with the Fund. There may be instances where the interests of the Trust’s shareholders respecting the disclosure of information about portfolio holdings
may conflict or appear to conflict with the interests of the Adviser, any principal
underwriter for the Trust or an affiliated person of the Trust. In such situations,
the conflict must be disclosed to the Board and the Board will attempt to resolve
the situation in a manner that it deems in the best interests of the Fund.
Affiliated persons of the Trust who receive
non–standard disclosure are subject to restrictions and limitations on the use and
handling of such information, including requirements to maintain the confidentiality
of such information, pre–clear securities trades and report securities transactions
activity, as applicable. Except as provided above, affiliated persons of the Trust
and third party service providers of the Trust receiving such non–standard disclosure
will be instructed that such information must be kept confidential and that no trading
on such information should be allowed.
Neither the Trust, the Fund, nor the Adviser
receives compensation or other consideration in connection with the non–standard
disclosure of information about portfolio securities.
TRUSTEES AND OFFICERS OF THE TRUST
The Trust is governed by the Board, which
is responsible for protecting the interests of shareholders. The trustees are experienced
businesspersons who meet throughout the year to oversee the Trust’s activities,
review contractual arrangements with companies that provide services to the Fund
and review performance. The names, addresses and
14
ages of the trustees and officers of the
Trust, together with information as to their principal occupations during the past
five years, are listed below.
Each Trustee was nominated to serve on the
Board of Trustees based on their particular skill set. The Board believes each Trustee
is competent to serve because of their individual overall merits including: (i)
experience, (ii) qualifications, (iii) attributes and (iv) skills. Mr. David J.
Urban has been a Professor of Education since 1989. His strategic planning, organizational
and leadership skills help the Board set long–term goals. Ms. Mary Lou H. Ivey has
over 10 years of business experience as a practicing tax accountant and, as such,
brings tax, budgeting and financial reporting skills to the Board. Mr. Theo H. Pitt
has experience as an investor, including his role as a trustee of several other
investment companies and business experience as Senior Partner of a financial consulting
company, as a partner of a real estate partnership and as an Account Administrator
for a money management firm. The Trust does not believe any one factor is determinative
in assessing a Trustee’s qualifications, but that the collective experience
of each Trustee makes them each highly qualified.
The Chairman of the Board of Trustees is
Ms. Ivey, who is not an “interested person” of the Trust, within the meaning
of the 1940 Act. The Trust also has an independent Audit Committee that allows the
Board to access the expertise necessary to oversee the Trust, identify risks, recognize
shareholder concerns and needs and highlight opportunities. The Audit Committee
is able to focus Board time and attention to matters of interest to shareholders
and, through its private sessions with the Trust’s auditor, Chief Compliance
Officer and legal counsel, stay fully informed regarding management decisions.
Mutual funds face a number of risks, including
investment risk, compliance risk and valuation risk. The Board oversees management
of the Fund’s risks directly and through its officers. While day–to–day risk
management responsibilities rest with the each Fund’s Chief Compliance Officer,
investment advisers and other service providers, the Board monitors and tracks risk
by: (1) receiving and reviewing quarterly reports related to the performance and
operations of the Funds; (2) reviewing and approving, as applicable, the compliance
policies and procedures of the Trust, including the Trust’s valuation policies
and transaction procedures; (3) periodically meeting with the portfolio manager
to review investment strategies, techniques and related risks; (4) meeting with
representatives of key service providers, including the Fund’s investment advisers,
administrator, distributor, transfer agent and the independent registered public
accounting firm, to discuss the activities of the Funds; (5) engaging the services
of the Chief Compliance Officer of the each Fund to monitor and test the compliance
procedures of the Trust and its service providers; (6) receiving and reviewing reports
from the Trust’s independent registered public accounting firm regarding the
Fund’s financial condition and the Trust’s internal controls; and (7)
receiving and reviewing an annual written report prepared by the Chief Compliance
Officer reviewing the adequacy of the Trust’s compliance policies and procedures
and the effectiveness of their implementation. The Board has concluded that its
general oversight of the investment advisers and other service providers as implemented
through the reporting and monitoring process outlined above allows the Board to
effectively administer its risk oversight function.
Each Trustee was nominated to serve on the
Board of Trustees based on their particular experiences, qualifications, attributes
and skills. The characteristics that have led the Board to conclude that each of
the Trustees should continue to serve as a Trustee of the Trust are discussed below.
Following is a list of the Trustees and
executive officers of the Trust and their principal occupation over the last five
years.
15
NON–INTERESTED TRUSTEES
NAME, ADDRESS
AND AGE
|
POSITION(S)
HELD WITH
THE TRUST
|
TERM OF
OFFICE AND
LENGTH OF
TIME
SERVED
|
PRINCIPAL OCCUPATION(S)
DURING THE PAST FIVE
YEARS
|
NUMBER
OF FUNDS
IN FUND
COMPLEX
OVERSEEN
BY
TRUSTEE
|
OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE
|
David J. Urban
8730 Stony Point
Pkwy
Suite 205
Richmond, VA
23235
Age: 61
|
Trustee
|
Indefinite,
Since
June 2010
|
Dean, Jones
College of Business, Middle Tennessee State University since July 2013; Virginia
Commonwealth University, Professor of Marketing from 1989 to 2013.
|
36
|
None
|
Mary Lou H.
Ivey
8730 Stony Point
Pkwy
Suite 205
Richmond, VA
23235
Age: 58
|
Trustee
|
Indefinite,
Since
June 2010
|
Accountant,
Harris, Hardy & Johnstone, P.C., accounting firm, since 2008.
|
36
|
None
|
Theo H. Pitt,
Jr.
8730 Stony Point
Pkwy
Suite 205
Richmond, VA
23235
Age: 80
|
Trustee
|
Indefinite;
Since
August 2013
|
Senior Partner,
Community Financial Institutions Consulting (bank consulting) 1997 to present.
|
36
|
Independent
Trustee of Gardner Lewis Investment Trust for the one series of that trust; Leeward
Investment Trust for the one series of that trust; Hillman Capital Management Investment
Trust for the one series of that trust; and Starboard Investment Trust for the 28
series of that trust; (all registered investment companies).
|
OFFICERS WHO ARE NOT TRUSTEES
NAME, ADDRESS
AND AGE
|
POSITION(S)
HELD WITH
THE TRUST
|
TERM OF
OFFICE AND
LENGTH OF
TIME
SERVED
|
PRINCIPAL OCCUPATION(S)
DURING THE PAST FIVE
YEARS
|
NUMBER
OF FUNDS
IN FUND
COMPLEX
OVERSEEN
BY
TRUSTEE
|
OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE
|
John Pasco
III
8730 Stony Point
Pkwy Suite 205
Richmond, VA 23235
Age: 71
|
President
and Principal Executive Officer
|
Indefinite,
Since June
2010
|
Commonwealth
Fund Services, Inc. (“CFS”), the Trust’s Administrator, Transfer
Agent, Disbursing Agent, and Accounting Services Agent since 1993; and President
and Director of First Dominion Capital Corp. (“FDCC”), the Trust’s
underwriter. Mr. Pasco is a certified public accountant.
|
N/A
|
N/A
|
Karen M. Shupe
8730 Stony Point
Pkwy
Suite 205
Richmond, VA 23235
Age: 52
|
Treasurer
|
Indefinite,
Since June
2008
|
Managing Director
of Fund Operations, Commonwealth Fund Services, Inc., 2003 – present.
|
N/A
|
N/A
|
16
NAME, ADDRESS
AND AGE
|
POSITION(S)
HELD WITH
THE TRUST
|
TERM OF
OFFICE AND
LENGTH OF
TIME
SERVED
|
PRINCIPAL OCCUPATION(S)
DURING THE PAST FIVE
YEARS
|
NUMBER
OF FUNDS
IN FUND
COMPLEX
OVERSEEN
BY
TRUSTEE
|
OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE
|
David Bogaert
8730 Stony Point
Pkwy
Suite 205
Richmond, VA 23235
Age: 52
|
Vice President
|
Indefinite,
Since
November
2013
|
Managing Director
of Business Development, Commonwealth Fund Services, Inc., October 2013 – present;
Senior Vice President of Business Development and other positions for Huntington
Asset Services, Inc. from 1986 to 2013.
|
N/A
|
N/A
|
Ann T. MacDonald
8730 Stony Point
Pkwy
Suite 205
Richmond, VA 23235
Age: 61
|
Assistant
Treasurer
|
Indefinite,
Since
November
2015
|
Director,
Fund Administration and Fund Accounting, Commonwealth Fund Services, Inc., 2003
– present.
|
N/A
|
N/A
|
John H. Lively
8730 Stony Point
Pkwy
Suite 205
Richmond, VA 23235
Age: 47
|
Secretary
|
Indefinite,
Since
November
2013
|
Attorney,
The Law Offices of John H. Lively & Associates, Inc. (law firm), March 2010
to present: Attorney, Husch Blackwell Sanders LLP (law firm), March 2007 to February
2010.
|
N/A
|
N/A
|
Holly B. Giangiulio
8730 Stony Point
Pkwy
Suite 205
Richmond, VA 23235
Age: 53
|
Assistant
Secretary
|
Indefinite,
Since May
2015
|
Managing Director,
Corporate Operations, Commonwealth Fund Services, Inc., January 2015 to present;
Corporate Accounting and HR Manager from 2010 to 2015.
|
N/A
|
N/A
|
Julian G.
Winters
8730 Stony Point
Pkwy
Suite 205
Richmond, VA 23235
Age: 47
|
Chief
Compliance
Officer
|
Indefinite,
Since August
2013
|
Managing Member
of Watermark Solutions, LLC (investment compliance and consulting) since March 2007.
|
N/A
|
N/A
|
Trustee Committees
. The Board
of Trustees oversees the Trust and certain aspects of the services provided by the
Adviser and the Fund’s other service providers. Each trustee will hold office
until their successors have been duly elected and qualified or until their earlier
resignation or removal. Each officer of the Trust serves at the pleasure of the
Board and for a term of one year or until their successors have been duly elected
and qualified.
The Audit Committee of the Board is comprised
of Mr. Urban, Ms. Ivey and Mr. Pitt. The functions of the Audit Committee are to
meet with the Trust’s independent auditors to review the scope and findings
of the annual audit, discuss the Trust’s accounting policies, discuss any recommendations
of the independent auditors with respect to the Trust’s management practices,
review the impact of changes in accounting standards on the Trust’s financial
statements, recommend to the Board the selection of independent registered public
accounting firm, and perform such other duties as may be assigned to the Audit Committee
by the Board. For the Fund’s most recent fiscal year ended, April 30, 2016,
the Audit Committee met five times.
The Nominating and Corporate Governance
Committee is comprised of Mr. Urban, Ms. Ivey and Mr. Pitt. The Nominating and Corporate
Governance Committee’s purposes, duties and powers are set forth in its written
charter, which is described in Exhibit C – the charter also describes the process
by which shareholders of the Trust may make nominations. For the Fund’s most
recent fiscal year ended April 30, 2016, the Committee met once.
The Valuation Committee is comprised of
Mr. Urban, Ms. Ivey and Mr. Pitt. The Valuation Committee meets as needed in the
event that the Funds hold any securities that are subject to valuation and it reviews
the fair valuation of such securities on an as needed basis. For the Fund’s
most recent fiscal year ended April 30, 2016, the Committee did not meet.
The Qualified Legal Compliance Committee
is comprised of Mr. Urban, Ms. Ivey and Mr. Pitt. The Qualified Legal Compliance
Committee receives, investigates, and makes recommendations as to the appropriate
remedial action in connection with any report of evidence of a material violation
of the securities laws or breach of fiduciary duty or similar violation by the Trust,
its officers, Trustees, or agents. For the fiscal year ended April 30, 2015, the
Committee did not meet.
17
Trustee Compensation
. Each
Trustee who is not an “interested person” of the Trust may receive compensation
for their services to the Trust. All Trustees are reimbursed for any out–of–pocket
expenses incurred in connection with attendance at meetings. Effective January 1,
2015, each Trustee will receive an annual retainer of $18,000. Effective April 1,
2016, each Trustee will receive an annual retainer of $22,000. Compensation received
from the Trust for the fiscal year ended April 30, 2016 is as follows:
Name
of
Person /
Position
|
Aggregate
Compensation
From Fund
|
Pension
or Retirement
Benefits Accrued As Part
of Funds Expenses
|
Estimated
Annual
Benefits upon
Retirement
|
Total
Compensation From
Trust/Fund Complex Paid To
Trustees
(*)(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
David J. Urban,
Trustee
|
$0
|
$0
|
$0
|
$18,333
|
|
|
|
|
|
|
Mary Lou H.
Ivey, Trustee
|
$0
|
$0
|
$0
|
$18,333
|
|
|
|
|
|
|
Theo H. Pitt, Jr.,
Trustee
|
$0
|
$0
|
$0
|
$18,333
|
|
|
* Trust does
not pay deferred compensation.
(1)
The “Fund Complex” consists
of the Trust, which is comprised of the 36 Funds.
Trustee Ownership of Fund Shares.
The table below shows for each Trustee, the amount of Fund equity securities beneficially
owned by each Trustee, and the aggregate value of all investments in equity securities
of the Funds of the Trust, as of December 31, 2015, and stated as one of the following
ranges: A = None; B = $1–$10,000; C = $10,001–$50,000; D = $50,001–$100,000; and
E = over $100,000.
|
Name
of Trustee
|
Dollar
Range of Equity
Securities in the Funds
|
Aggregate
Dollar Range of Equity
Securities in all Registered Investment
Companies Overseen
by the Trustees in
Family of Investment Companies
|
|
Non–Interested
Trustees
|
|
|
|
David J. Urban
|
A
|
A
|
|
Mary Lou H.
Ivey
|
A
|
A
|
|
Theo H. Pitt,
Jr.
|
A
|
A
|
Code of Ethics – The Fund, the Adviser and
the principal underwriter have each adopted a Code of Ethics, pursuant to Rule 17j–1
under the 1940 Act that permit investment personnel, subject to their particular
code of ethics, to invest in securities, including securities that may be purchased
or held by the Fund, for their own accounts. The Codes of Ethics are on file with,
and can be reviewed and copied at the SEC Public Reference Room in Washington, D.C.
In addition, the Codes of Ethics are also available on the EDGAR Database on the
SEC’s Internet website at http://www.sec.gov.
Proxy Voting Policies – The Trust is required
to disclose information concerning the Fund’s proxy voting policies and procedures
to shareholders. The Board has delegated to the Adviser responsibility for decisions
regarding proxy voting for securities held by the Fund. The Adviser will vote such
proxies in accordance with its proxy policies and procedures, which have been reviewed
by the Board. The Trust’s Proxy Voting Policy is attached as Exhibit A and
the Adviser’s Proxy Voting Policy is attached as Exhibit B. Any material changes
to the proxy policies and procedures will be submitted to the Board for approval.
Information regarding how the Fund voted proxies relating to portfolio securities
for the most recent 12–month period ending June 30 is available (1) without charge,
upon request by calling 800–673–0550 and (2) on the SEC’s website at http://www.sec.gov.
18
CONTROL PERSONS AND PRINCIPAL
SECURITIES HOLDERS
A principal shareholder is any person who
owns (either of record or beneficially) 5% or more of the outstanding shares of
the Fund. A control person is one who owns, either directly or indirectly, more
than 25% of the voting securities of the Fund or acknowledges the existence of such
control. As a controlling shareholder, each of these persons could control the outcome
of any proposal submitted to the shareholders for approval, including changes to
the Fund’s fundamental policies or the terms of the management agreement with
the Adviser.
The Fund has not commenced operations prior
to the date of this SAI and therefore the Fund does not have any shareholders who
beneficially own of record 5% or more of the outstanding shares of the Fund.
ADVISER AND ADVISORY AGREEMENT
Toreador Research & Trading, LLC, located
at 422 Fleming Street, Suite 7, Key West, Florida 33040 (the “Adviser”)
manages the investments of the Fund. The Adviser is registered as an adviser under
the Advisers Act of 1940, as amended. The Adviser is a privately held, limited liability
company. The Adviser is controlled by Paul Blinn and The Applied Finance Group,
Ltd. The Applied Finance Group, Ltd. is controlled by Rafael Resendes and Daniel
Obrycki.
Pursuant to an Advisory Agreement, the Adviser,
subject to the supervision of the trustees, provides a continuous investment program
for the Fund, including investment research and management with respect to securities,
investments and cash equivalents, in accordance with the Fund’s investment
objective, policies, and restrictions as set forth in the prospectus and this SAI.
The Adviser is responsible for effecting all security transactions on behalf of
the Fund, including the allocation of principal business and portfolio brokerage
and the negotiation of commissions. The Adviser also maintains books and records
with respect to the securities transactions of the Fund and furnishes to the trustees
such periodic or other reports as the trustees may request.
Pursuant to the terms of the Advisory Agreement,
the Adviser pays all expenses incurred by it in connection with its activities thereunder,
except the cost of securities (including brokerage commissions, if any) purchased
for the Fund. The services furnished by the Adviser under the Advisory Agreement
are not exclusive, and the Adviser is free to perform similar services for others.
For its services under the Advisory Agreement,
the Adviser is entitled to a fee which is calculated daily and paid monthly at an
annual rate of 0.90% on the average daily net assets of the Fund (and deducted proportionately
from each class of shares). The fee payable pursuant to the Advisory Agreement is
calculated and accrued daily, and, subject to the provisions of an applicable expense
limitation agreement, paid monthly.
In the interest of limiting the Fund’s
expenses, the Adviser has entered into a contractual expense limitation agreement
with the Trust. Pursuant to the agreement, the Adviser has agreed to waive or limit
the fees and/or assume other expenses until August 31, 2017 so that the ratio of
net expenses is limited to 0.95% for the Fund’s Investor Class Shares’
and Institutional Class Shares’ average daily net assets, respectively. This
limit does not apply to interest, taxes, acquired fund fees and expenses, distribution
fees pursuant to Rule 12b–1 Plans, brokerage commissions, dividend expenses on short
sales, and other expenditures capitalized in accordance with generally accepted
accounting principles or other extraordinary expenses not incurred in the ordinary
course of business. The Adviser will be entitled to reimbursement of fees waived
or expenses reimbursed pursuant to the agreement. The total amount of reimbursement
recoverable by the Adviser (the “Reimbursement Amount”) is the sum of
all fees previously waived or reimbursed by the Adviser to the Fund during any of
the previous three (3) years, less any reimbursement previously paid by the Fund
to the Adviser with respect to any waivers, reductions, and payments made with respect
to the Fund. The Reimbursement Amount may not include any additional charges or
fees, such as interest accruable on the Reimbursement Amount. Each waiver and/or
reimbursement of an expense by the Adviser is subject to repayment by the Fund within
three fiscal years following the fiscal year in which the expense was incurred,
provided that the Fund is able to make the repayment without exceeding the expense
limitation in place at the time of the waiver or reimbursement and at the time the
waiver or reimbursement is recouped. Such reimbursement must be authorized by the
Board.
19
Portfolio Managers
Mr. Paul Blinn, portfolio manager, is jointly
responsible for the day–to–day management of the Fund’s portfolio, including
stock selection, investment monitoring and trading. Mr. Blinn is a founding member
of the Adviser. Mr. Blinn has over 25 years of capital market experience. Mr. Blinn
was an Executive Director at UBS, a global financial firm, and its predecessor entities
from 1985 to 2000. Subsequent to UBS, Mr. Blinn was a Vice President of a leading
option market maker and then a Senior Equity derivatives trader for a hedge fund
from 2000 to 2005. Mr. Blinn graduated with honors from The University of Texas
at Austin with a BBA in Finance. Mr. Blinn is also the founder and sole shareholder
of Beacon Pin, Inc. (“BPI”). BPI is a holding company which contracts
with the Adviser to provide Mr. Blinn’s services as a portfolio manager to
the Fund. BPI has no other business operations.
Mr. Resendes, portfolio manager, is jointly
responsible for the day–to–day management of the Fund’s portfolio, including
stock selection and investment monitoring. Mr. Resendes is a founding member of
the Adviser. Mr. Resendes is also a co–founder of The Applied Finance Group, Ltd.
(“AFG”) in 1995 and The Applied Finance Group International, LLC (“AFGI”) in 2014. Mr. Resendes has over 25 years of capital market experience and
has spent the majority of those years in the areas of equity research and valuation.
Mr. Resendes was an adjunct professor of finance at DePaul University in Chicago
from 1998 to 1999. He graduated Phi Beta Kappa from The University of California,
Berkeley with a BS in Finance and received his MBA from the University of Chicago.
The Adviser makes payments to BPI and AFGI
for services rendered to the Adviser by BPI and AFGI. Each Portfolio Manager is
compensated by BPI or AFGI, as applicable, out of the fees received from the Adviser.
Further, Mr. Blinn and Mr. Resendes receive a share of the net profits of the Adviser,
if any, based on each person’s percentage ownership interest in the Adviser.
As stated above, Portfolio Manager Rafael
Resendes is a co–founder and executive of AFG and AFGI. AFG is an investment consulting
firm that provides financial analyses, equity research, and valuation services to
financial institutions. AFG provides research and operational support services to
the Adviser, and the Adviser pays AFG for these services. In order to avoid conflicts
of interest or potential misuse of information, the Adviser has implemented policies
and procedures to restrict access to certain types of information until generally
published, and requires outside compliance involvement to oversee and pre–approve
certain types of transactions where conflicts may arise. Further, the Adviser has
engaged an outside compliance firm to oversee this program and implement and monitor
the adopted policies and procedures.
AFGI is a Puerto Rican limited liability
company that provides marketing and portfolio management services to the Adviser.
Each Portfolio Manager may carry on investment
activities for his own account(s) and/or the accounts of immediate family members;
as a result, each Portfolio Manager may engage in activities other than on behalf
of the Fund. Conflicts may arise as a result of the Portfolio Manager’s differing
economic interests in respect of such activities, such as with respect to allocating
investment opportunities. Pursuant to the Code of Ethics adopted by each of the
Trust and the Adviser, the Portfolio Managers are prohibited from effecting transactions
for their personal accounts unless such transactions receive the prior written consent
of the Adviser’s Chief Compliance Officer, who is independent of the Adviser.
As of April 30, 2016, information on other
accounts managed by Messrs. Blinn and Resendes is as follows:
Portfolio
Manager
|
Other
Registered
Investment
Company
Accounts
|
Assets
Managed
($ millions)
|
Other
Pooled
Investment
Vehicle
Accounts
|
Assets
Managed
($ millions)
|
Other
Accounts
|
Assets
Managed
($ millions)
|
Total
Assets
Managed
($ millions)
|
|
Paul Blinn
|
3
|
$200.5
|
0
|
0
|
0
|
0
|
$200.5
|
|
Rafael Resendes
|
3
|
$200.5
|
0
|
0
|
0
|
0
|
$200.5
|
20
As of the date of this SAI, the Fund has
not commenced operations and, as such, the Portfolio Managers do not own shares
of the Fund.
MANAGEMENT–RELATED SERVICES
Administrator, Fund Accountant and Transfer Agent
. Pursuant to a Fund Services Agreement, Commonwealth
Fund Services, Inc. (“CFS”), 8730 Stony Point Parkway, Suite 205, Richmond,
Virginia 23235, serves as the Fund’s administrator, transfer agent and accounting
agent.
In its capacity
as administrator, CFS supervises all aspects of the operations of the Fund except
those performed by the Adviser. CFS will provide certain administrative services
and facilities for the Fund, including preparing and maintaining certain books,
records, and monitoring compliance with state and federal regulatory requirements.
CFS, as administrative agent for the Fund, will provide shareholder, recordkeeping,
administrative and blue–sky filing services.
As transfer
agent, CFS provides certain shareholder and other services to the Fund, including
furnishing account and transaction information and maintaining shareholder account
records. CFS will be responsible for processing orders and payments for share purchases.
CFS will mail proxy materials (and receive and tabulate proxies), shareholder reports,
confirmation forms for purchases and redemptions and prospectuses to shareholders.
CFS will disburse income dividends and capital distributions and prepare and file
appropriate tax–related information concerning dividends and distributions to shareholders.
CFS also provides
accounting services to the Fund. CFS will be responsible for accounting relating
to the Fund and its investment transactions; maintaining certain books and records
of the Fund; determining daily the net asset value per share of the Fund; and preparing
security position, transaction and cash position reports. CFS also monitors periodic
distributions of gains or losses on portfolio sales and maintains a daily listing
of portfolio holdings. CFS is responsible for providing expenses accrued and payment
reporting services, tax–related financial information to the Trust, and for monitoring
compliance with the regulatory requirements relating to maintaining accounting records.
CFS receives,
for administrative services, an asset–based fee based computed daily and paid monthly
on the average daily net assets of the Fund, subject to a minimum fee plus out–of–pocket
expenses. CFS receives, for transfer agency services, per account fees computed
daily and paid monthly, subject to a minimum fee plus out–of–pocket expenses. CFS
receives, for fund accounting services, an asset–based fee, computed daily and paid
monthly on the average daily net assets of the Fund, subject to a minimum fee plus
out–of–pocket expenses.
Custodian
. Fifth Third Bank.
(the “Custodian”), 38 Fountain Square Plaza, Cincinnati, Ohio 45263, serves as the
custodian of the Fund’s assets. The Custodian has entered into a foreign sub–custody
arrangement with The Bank of New York, as the approved foreign custody manager (the
Delegate) to perform certain functions with respect to the custody of the Fund’s
assets outside of the United States of America. The Delegate shall place and maintain
the Fund’s assets with an eligible foreign custodian; provided that, the Delegate
shall be required to determine that the Fund’s assets will be subject to reasonable
care based on the standards applicable to custodians in the relevant market.
Distributor and Principal Underwriter
. First Dominion Capital Corp. (“FDCC” or the “Distributor”), located at
8730 Stony Point Parkway, Suite 205, Richmond, Virginia 23235, serves as the principal
underwriter and national distributor for the shares of the Fund pursuant to a Distribution
Agreement (the “Distribution Agreement”). Under the Distribution Agreement, the
distributor serves as the Fund’s principal underwriter and acts as exclusive
agent for the Fund in selling its shares to the public on a “best efforts”
basis and then only in respect to orders placed – that is, the Distributor
is under no obligations to sell any specific number of Shares. The continuance of
the Distribution Agreement must be specifically approved at least annually (i) by
the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by
the vote of a majority of the Trustees who are not “interested persons” of the
21
Trust and have no direct or indirect financial
interest in the operations of the Distribution Agreement or any related agreement,
cast in person at a meeting called for the purpose of voting on such approval.
FDCC is registered as a broker–dealer and
is a member of the Financial Industry Regulatory Authority. The offering of the
Fund’s shares is continuous. The Distributor is entitled to a portion of the
front–end sales charge on the sale of shares as described in the prospectus and
this SAI. The Distributor is also entitled to the payment of deferred sales charges
upon the redemption of Fund shares as described in the applicable prospectus and
this SAI. In addition, the Distributor may receive Distribution 12b–1 and Service
Fees from the Fund, as described in the applicable prospectus and this SAI.
Legal Counsel
. The Law Offices
of John H. Lively & Associates, Inc., a member firm of The 1940 Act Law Group
TM
,
11300 Tomahawk Creek Parkway, Suite 310, Leawood, KS 66211, serves as legal counsel
to the Trust and the Fund.
Independent Registered Public Accounting
Firm
. The Fund’s independent registered public accounting firm, Tait,
Weller & Baker LLP, audits the Fund’s annual financial statements, assists
in the preparation of certain reports to the SEC, and prepares the Trust’s
tax returns. Tait, Weller & Baker LLP is located at 1818 Market Street, Suite
2400, Philadelphia, Pennsylvania 19103.
PORTFOLIO TRANSACTIONS
It is the policy of the Adviser, in placing
orders for the purchase and sale of the Fund’s securities, to seek to obtain
the best price and execution for securities transactions, taking into account such
factors as price, commission, where applicable, (which is negotiable in the case
of U.S. national securities exchange transactions but which is generally fixed in
the case of foreign exchange transactions), size of order, difficulty of execution
and the skill required of the executing broker/dealer. After a purchase or sale
decision is made by the Adviser, the Adviser arranges for execution of the transaction
in a manner deemed to provide the best price and execution for the Fund.
Exchange–listed securities are generally
traded on their principal exchange, unless another market offers a better result.
Securities traded only in the over–the–counter market may be executed on a principal
basis with primary market makers in such securities, except for fixed price offerings
and except where the Fund may obtain better prices or executions on a commission
basis or by dealing with other than a primary market maker.
The Adviser, when placing transactions,
may allocate a portion of the Fund’s brokerage to persons or firms providing
the Adviser with investment recommendations, statistical, research or similar services
useful to the Adviser’s investment decision–making process. The term “investment
recommendations or statistical, research or similar services” means: (1) advice
as to the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of securities;
and (2) furnishing analysis and reports concerning issuers, industries, securities,
economic factors and trends, and portfolio strategy.
Such services are one of the many ways the
Adviser can keep abreast of the information generally circulated among institutional
investors by broker–dealers. While this information is useful in varying degrees,
its value is indeterminable. Such services received on the basis of transactions
for the Fund may be used by the Adviser for the benefit of other clients, and the
Fund may benefit from such transactions effected for the benefit of other clients.
For the most recent fiscal year end, the
Fund did not pay any commissions on brokerage transactions directed to brokers pursuant
to an agreement or understanding whereby the broker provides research or other brokerage
services to the Adviser.
The Adviser may be authorized, when placing
portfolio transactions for the Fund, to pay a brokerage commission in excess of
that which another broker might have charged for executing the same transaction
solely on account of the receipt of research, market or statistical information.
22
Except for implementing the policy stated
above, there is no intention to place portfolio transactions with particular brokers
or dealers or groups thereof.
The Trustees of the Trust have adopted policies
and procedures governing the allocation of brokerage to affiliated brokers. The
Adviser has been instructed not to place transactions with an affiliated broker–
dealer, unless that broker–dealer can demonstrate to the Trust that the Fund will
receive: (1) a price and execution no less favorable than that available from unaffiliated
persons; and (2) a price and execution equivalent to that which that broker–dealer
would offer to unaffiliated persons in a similar transaction. The trustees review
all transactions which have been placed pursuant to those policies and procedures
at its meetings.
When two or more clients managed by the
Adviser are simultaneously engaged in the purchase or sale of the same security,
the transactions are allocated in a manner deemed equitable to each client. In some
cases this procedure could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. In other cases, however, the ability to
participate in volume transactions will be beneficial to the Fund. The Board believes
that these advantages, when combined with the other benefits available because of
the Adviser’s organization, outweigh the disadvantages that may exist from
this treatment of transactions.
The Fund may execute brokerage or other
agency transactions through registered broker–dealer affiliates of either the Fund,
the Adviser or the Distributor for a commission in conformity with the 1940 Act,
the 1934 Act and rules promulgated by the SEC. Under the 1940 Act and the 1934 Act,
affiliated broker–dealers are permitted to receive and retain compensation for effecting
portfolio transactions for the Fund on an exchange if a written contract is in effect
between the affiliate and the Fund expressly permitting the affiliate to receive
and retain such compensation. These rules further require that commissions paid
to the affiliate by the Fund for exchange transactions not exceed “usual and
customary” brokerage commissions. The rules define “usual and customary” commissions to include amounts which are “reasonable and fair compared
to the commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of time.” The Board, including those who are not “interested persons”, has
adopted procedures for evaluating the reasonableness of commissions paid to affiliates
and review these procedures periodically.
Securities of “Regular Broker–Dealers.” The Fund is required to identify any securities of its “regular brokers
and dealers” (as such term is defined in the 1940 Act) which the Fund may hold
at the close of its most recent fiscal year.
Portfolio Turnover – Average annual portfolio
turnover rate is the ratio of the lesser of sales or purchases to the monthly average
value of the portfolio securities owned during the year, excluding from both the
numerator and the denominator all securities with maturities at the time of acquisition
of one year or less. A higher portfolio turnover rate involves greater transaction
expenses to a fund and may result in the realization of net capital gains, which
would be taxable to shareholders when distributed. The Adviser makes purchases and
sales for the Fund’s portfolio whenever necessary, in the Adviser’s opinion,
to meet the Fund’s objective.
DESCRIPTION OF SHARES
The Trust was organized as a Delaware statutory
trust on April 9, 2007. The Trust’s Agreement and Declaration of Trust authorizes
the Board to issue an unlimited number of full and fractional shares of beneficial
interest in the Trust and to classify or reclassify any unissued shares into one
or more series of shares. The Agreement and Declaration of Trust further authorizes
the trustees to classify or reclassify any series of shares into one or more classes.
The Trust’s shares of beneficial interest have no par value.
Shares have no 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 applicable prospectus, shares will be fully
paid and non–assessable. In the event of a liquidation or dissolution of the Trust
or an individual fund, shareholders of a fund are entitled to receive the assets
available for distribution belonging to the particular fund, and a proportionate
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distribution, based upon the relative asset
values of the respective fund, of any general assets of the Trust not belonging
to any particular fund which are available for distribution.
Shareholders are entitled to one vote for
each full share held, and a proportionate fractional vote for each fractional share
held, and will vote in the aggregate and not by class, except as otherwise expressly
required by law or when the Board determines that the matter to be voted on affects
only the interests of shareholders of a particular class. Voting rights are not
cumulative and, accordingly, the holders of more than 50% of the aggregate of the
Trust’s outstanding shares may elect all of the trustees, irrespective of the
votes of other shareholders.
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 each fund affected by the matter. A particular fund is deemed to be affected
by a matter unless it is clear that the interests of each fund in the matter are
substantially identical or that the matter does not affect any interest of the fund.
Under the Rule, the approval of an investment management agreement or any change
in an investment objective, if fundamental, or in a fundamental investment policy
would be effectively acted upon with respect to a fund only if approved by a majority
of the outstanding shares of such fund. However, the Rule also provides that the
ratification of the appointment 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 or class.
The Trust does not presently intend to hold
annual meetings of shareholders except as required by the 1940 Act or other applicable
law. Upon the written request of shareholders owning at least 25% of the Trust’s
shares, the Trust will call for a meeting of shareholders to consider the removal
of one or more trustees and other certain matters. To the extent required by law,
the Trust will assist in shareholder communication in such matters.
The Board has full power and authority,
in its sole discretion, and without obtaining shareholder approval, to divide or
combine the shares of any class or series thereof into a greater or lesser number,
to classify or reclassify any issued shares or any class or series thereof into
one or more classes or series of shares, and to take such other action with respect
to the Trust’s shares as the Board may deem desirable. The Agreement and Declaration
of Trust authorizes the trustees, without shareholder approval, to cause the Trust
to merge or to consolidate with any corporation, association, trust or other organization
in order to change the form of organization and/or domicile of the Trust or to sell
or exchange all or substantially all of the assets of the Trust, or any series or
class thereof, in dissolution of the Trust, or any series or class thereof. The
Agreement and Declaration of Trust permits the termination of the Trust or of any
series or class of the Trust by the trustees without shareholder approval. However,
the exercise of such authority by the Board without shareholder approval may be
subject to certain restrictions or limitations under the 1940 Act.
Rule 18f–3 Plan – The Board has adopted
a Rule 18f–3 Multiple Class Plan on behalf of the Trust for the benefit of each
of its series. The key features of the Rule 18f–3 Plan are as follows: (i) shares
of each class of the Fund represent an equal pro rata interest in the Fund and generally
have identical voting, dividend, liquidation, and other rights, preferences, powers,
restrictions, limitations qualifications, terms and conditions, except that each
class bears certain specific expenses and has separate voting rights on certain
matters that relate solely to that class or in which the interests of shareholders
of one class differ from the interests of shareholders of another class; (ii) subject
to certain limitations described in the prospectus, shares of a particular class
of the Fund may be exchanged for shares of the same class of another Fund. At present,
the Fund offers Investor Class Shares charging a 0.25% 12b–1 fee and Institutional
Class Shares, not charging 12b–1 fees.
PLAN OF DISTRIBUTION
The Fund has a Distribution and Service
Plan (the “Plan”) for its Investor Class Shares under which it may finance
certain activities primarily intended to sell such class of shares. The Trust has
adopted the Plan in accordance with the provisions of Rule 12b–1 under the 1940
Act, which regulates circumstances under which an investment company may directly
or indirectly bear expenses relating to the distribution of its shares. The Trust
intends to operate the Plan in accordance with its terms and with the Financial
Industry Regulatory Authority rules concerning sales charges.
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The Plan provides
that the Fund will pay a fee at an annual rate of 0.25% of the average daily net
assets attributable to the Fund’s outstanding Investor Class Shares in consideration
for distribution and other services, which are described more fully below. The fee
is generally paid to the Distributor as compensation for distribution–related activities
although the Fund may pay the fee directly to other Financial Intermediaries.
As noted above,
payments for distribution expenses under the Plan are subject to Rule 12b–1 under
the 1940 Act. Rule 12b–1 defines distribution expenses to include the cost of “any
activity which is primarily intended to result in the sale of shares issued by the
Trust.” Rule 12b–1 provides, among other things, that an investment company may
bear such expenses only pursuant to a plan adopted in accordance with Rule 12b–1.
In accordance with Rule 12b–1, the Plan provides that a report of the amounts expended
under the Plan, and the purposes for which such expenditures were incurred, will
be made to the Board for its review at least quarterly. The Plan provides that it
may not be amended to increase materially the costs which shares of the Fund may
bear for distribution pursuant to the Plan without shareholder approval, and that
any other type of material amendment must be approved by a majority of the Board,
and by a majority of the trustees who are neither “interested persons” (as defined
in the 1940 Act) of the Trust nor have any direct or indirect financial interest
in the operation of the Plan or in any related agreement (the “12b–1 Trustees”),
by vote cast in person at a meeting called for the purpose of considering such amendments.
The Trust
understands that Financial Intermediaries may charge fees to their customers who
are the beneficial owners of Fund shares, in connection with their accounts with
such Financial Intermediaries. Any such fees would be in addition to any amounts
which may be received by an institution under the Plan.
The Board
has concluded that there is a reasonable likelihood that the Plan will benefit the
Fund. It is anticipated that the Plan will benefit shareholders because an effective
sales program typically is necessary for the Fund to reach and maintain a sufficient
size to achieve efficiently its investment objectives and to realize economies of
scale. The Plan is subject to annual re–approval by a majority of the 12b–1 Trustees
and each is terminable at any time with respect to the Fund by a vote of a majority
of the 12b–1 Trustees or by vote of the holders of a majority of the applicable
classes’ outstanding shares of the Fund. Any agreement entered into pursuant
to the Plan with a Financial Intermediary is terminable with respect to the Fund
without penalty, at any time, by vote of a majority of the 12b–1 Trustees, by vote
of the holders of a majority of the applicable classes’ outstanding shares
of the Fund, by FDCC or by the Financial Intermediary. An agreement will also terminate
automatically in the event of its assignment.
As long as
the Plan is in effect, the nomination of the trustees who are not interested persons
of the Trust (as defined in the 1940 Act) must be committed to the discretion of
the 12b–1 Trustees.
The Plan provides that expenditures may
include, without limitation: (a) payments to the Distributor and to securities dealers
and others in respect of the sale of shares of the Fund; (b) payment of compensation
to and expenses of personnel (including personnel of organizations with which the
Trust has entered into agreements related to these Plans) who engage in or support
distribution of shares of the Fund or who render shareholder support services not
otherwise provided by the Trust’s transfer agent, administrator, or custodian,
including but not limited to, answering inquiries regarding the Trust, processing
shareholder transactions, providing personal services and/or the maintenance of
shareholder accounts, providing other shareholder liaison services, responding to
shareholder inquiries, providing information on shareholder investments in the Shares
of the Fund, and providing such other shareholder services as the Trust may reasonably
request, arranging for bank wires, assisting shareholders in changing dividend options,
account designations and addresses, providing information periodically to shareholders
showing their positions in the Fund, forwarding communications from the Fund such
as proxies, shareholder reports, annual reports, and dividend distribution and tax
notices to shareholders, processing purchase, exchange, and redemption requests
from shareholders and placing orders with the Fund or its service providers; (c)
formulation and implementation of marketing and promotional activities, including,
but not limited to, direct mail promotions and television, radio, newspaper, magazine
and other mass media advertising; (d) preparation, printing and distribution of
sales literature; (e) preparation, printing and distribution of prospectuses and
statements of additional information and reports of the Trust for recipients other
than existing shareholders of the Trust; (f) obtaining information and providing
explanations to wholesale and retail distributors of contracts regarding Fund investment
objectives and policies and other information about the Fund, including the performance
of the Fund; (g) obtaining such
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information, analyses and reports with respect
to marketing and promotional activities as the Trust may, from time to time, deem
advisable.
ADDITIONAL INFORMATION ABOUT PURCHASES AND
SALES
Purchasing Shares
– You may purchase shares
of the Fund directly from FDCC. You may also buy shares through accounts with brokers
or dealers and other institutions (“authorized institutions”) that are
authorized to place trades in Fund shares for their customers. If you invest through
an authorized institution, you will have to follow its procedures. You will also
generally have to address your correspondence or questions regarding the Fund to
your authorized institution.
The offering price per share for the Fund’s Investor and Institutional Shares is equal to the NAV next determined after the Fund or authorized institution receives your purchase order, plus any applicable sales charge.
Authorized institutions may charge their
customers a processing or service fee in connection with the purchase or redemption
of Fund shares. The amount and applicability of such a fee is determined and disclosed
to its customers by each individual authorized institution. Processing or service
fees typically are fixed, nominal dollar amounts and are in addition to the sales
and other charges described in the prospectuses and statements of additional information.
Your authorized institution will provide you with specific information about any
processing or service fees you will be charged.
Your authorized institution is responsible
for transmitting all subscription and redemption requests, investment information,
documentation and money to the Fund on time. Certain authorized institutions have
agreements with the Fund that allow them to enter confirmed purchase or redemption
orders on behalf of clients and customers. Under this arrangement, the authorized
institution must send your order to the Fund by the time they price their shares
on the following day. If your authorized institution fails to do so, it may be responsible
for any resulting fees or losses.
The Fund reserves the right to reject any
purchase order and to suspend the offering of shares of the Fund. Under certain
circumstances the Trust or the Adviser may waive the minimum initial investment
for purchases by officers, trustees, and employees of the Trust and its affiliated
entities and for certain related advisory accounts and retirement accounts (such
as IRAs). The Fund may also change or waive policies concerning minimum investment
amounts at any time.
Exchange Privilege
– To the extent
that the Adviser manages other funds in the Trust, shareholders may exchange all
or a portion of your shares in the Fund for shares of the same class of certain
other funds of the Trust managed by the Adviser having different investment objectives,
provided that the shares of the fund you are exchanging into are registered for
sale in your stated of residence. As of the date of this prospectus, the Adviser
manages three other funds in the Trust.
A written request must have been completed
and be on file with the Transfer Agent. Also, to make an exchange, an exchange order
must comply with the requirements for a redemption or repurchase order and must
specify the value or the number of shares to be exchanged. An exchange will take
effect as of the next determination of the Fund’s NAV per share (usually at
the close of business on the same day). The Transfer Agent will charge the shareholder’s account a $10 service fee each time there is a telephone exchange. The Trust
reserves the right to limit the number of exchanges or to otherwise prohibit or
restrict shareholders from making exchanges at any time, without notice, should
the Trust determine that it would be in the best interest of its shareholders to
do so. For tax purposes, an exchange constitutes the sale of the shares of the fund
from which you are exchanging and the purchase of shares of the fund into which
you are exchanging. Consequently, the sale may involve either a capital gain or
loss to the shareholder for federal income tax purposes. The exchange privilege
is available only in states where it is legally permissible to do so.
If you request the exchange of the total
value of your account from one fund to another, we will reinvest any declared but
unpaid income dividends and capital gain distributions in the new fund at its net
asset value. Backup
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withholding and information reporting may
apply. Information regarding the possible tax consequences of an exchange appears
in the tax section in this SAI.
If a substantial number of shareholder sell
their shares of the Fund under the exchange privilege, within a short period, the
Fund may have to sell portfolio securities that it would otherwise have held, thus
incurring additional transactional costs. Increased use of the exchange privilege
may also result in periodic large inflows of money. If this occurs, it is the Fund’s general policy to initially invest in short–term, interest–bearing money
market instruments.
However, if the Adviser believes that attractive
investment opportunities (consistent with the Fund’s investment objective and
policies) exist immediately, then it will invest such money in portfolio securities
in an orderly a manner as is possible.
The proceeds from the sale of shares of
the Fund may not be available until the third business day following the sale. The
fund you are seeking to exchange into may also delay issuing shares until that third
business day. The sale of Fund shares to complete an exchange will be effected at
net asset value of the Fund next computed after your request for exchange is received
in proper form.
Eligible Benefit Plans
– An eligible benefit
plan is an arrangement available to the employees of an employer (or two or more
affiliated employers) having not less than ten employees at the plan’s inception,
or such an employer on behalf of employees of a trust or plan for such employees,
their spouses and their children under the age of 21 or a trust or plan for such
employees, which provides for purchases through periodic payroll deductions or otherwise.
There must be at least five initial participants with accounts investing or invested
in shares of one or more of the Funds and/or certain other funds.
The initial purchase by the eligible benefit
plan and prior purchases by or for the benefit of the initial participants of the
plan must aggregate not less than $5,000 and subsequent purchases must be at least
$50 per account and must aggregate at least $250. Purchases by the eligible benefit
plan must be made pursuant to a single order paid for by a single check or federal
funds wire and may not be made more often than monthly. A separate account will
be established for each employee, spouse or child for which purchases are made.
The requirements for initiating or continuing purchases pursuant to an eligible
benefit plan may be modified and the offering to such plans may be terminated at
any time without prior notice.
You may redeem shares of the Fund at any
time and in any amount by mail or telephone. The Fund will use reasonable procedures
to confirm that instructions communicated by telephone are genuine and, if the procedures
are followed, will not be liable for any losses due to unauthorized or fraudulent
telephone transactions.
The Fund’s procedure is to redeem shares
at the NAV next determined after the Fund, Transfer Agent or Authorized Institution
receives the redemption request in proper order. Payment will be made promptly,
but no later than the seventh day following the receipt of the redemption request
in proper order. The Board may suspend the right of redemption or postpone the date
of payment during any period when (a) trading on the New York Stock Exchange is
restricted as determined by the SEC or such exchange is closed for other than weekends
or holidays, (b) the SEC has by order permitted such suspension, or (c) an emergency,
as defined by rules of the SEC, exists during which time the sale of Fund shares
or valuation of securities held by the Fund are not reasonably practicable.
SPECIAL SHAREHOLDER SERVICES
As described briefly in the prospectus,
the Fund offers the following shareholder services:
Regular Account – A regular account allows
a shareholder to make voluntary investments and/or withdrawals at any time. Regular
accounts are available to individuals, custodians, corporations, trusts, estates,
corporate retirement plans and others. You may use the account application provided
with the prospectus to open a regular account.
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Telephone Transactions – You may redeem
shares or transfer into another fund by telephone if you request this service on
your initial account application. If you do not elect this service at that time,
you may do so at a later date by sending a written request and signature guarantee
to the Transfer Agent.
The Trust employs reasonable procedures
designed to confirm the authenticity of your telephone instructions and, if it does
not, it may be liable for any losses caused by unauthorized or fraudulent transactions.
As a result of this policy, a shareholder that authorizes telephone redemption bears
the risk of losses, which may result from unauthorized or fraudulent transactions
which the Trust believes to be genuine. When you request a telephone redemption
or transfer, you will be asked to respond to certain questions. The Trust has designed
these questions to confirm your identity as a shareholder of record.
Your cooperation with these procedures will
protect your account and the Fund from unauthorized transactions.
Automatic Investment Plan – The Automatic
Investment Plan allows shareholders to make automatic monthly investments into their
account. Upon request, the Transfer Agent will withdraw a fixed amount each month
from a shareholder’s checking account and apply that amount to additional shares.
This feature does not require you to make a commitment for a fixed period of time.
You may change the monthly investment, skip a month or discontinue your Automatic
Investment Plan as desired by notifying the Transfer Agent. To receive more information,
please call the offices of the Trust at (800) 673–0550 or the Transfer Agent at
(800) 628–4077. Any shareholder may utilize this feature.
Retirement Plans – Shares of the Fund are
available for purchase in connection with the following tax–deferred prototype retirement
plans:
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Individual
Retirement Accounts (IRAs). IRAs are available for use by individuals with compensation
for services rendered who wish to use shares of the Fund as a funding medium for
individual retirement savings. IRAs include traditional IRAs, Roth IRAs and Rollover
IRAs.
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Simplified
Employee Pension Plans (SEPs). SEPs are a form of retirement plan for sole proprietors,
partnerships and corporations.
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For information about eligibility requirements
and other matters concerning these plans and to obtain the necessary forms to participate
in these plans, please call the Trust at (800) 673–0550. Each plan’s custodian
charges nominal fees in connection with plan establishment and maintenance. These
fees are detailed in the plan documents. You may wish to consult with your attorney
or other tax adviser for specific advice concerning your tax status and plans.
TAX STATUS
The following discussion is a summary of
certain U.S. federal income tax considerations affecting the Fund and its shareholders.
The discussion reflects applicable federal income tax laws of the U.S. as of the
date of this SAI, which tax laws may be changed or subject to new interpretations
by the courts or the Internal Revenue Service (the “IRS”), possibly with
retroactive effect. No attempt is made to present a detailed explanation of all
U.S. income, estate or gift tax, or foreign, state or local tax concerns affecting
a Fund and its shareholders (including shareholders owning large positions in the
Fund). The discussion set forth herein does not constitute tax advice. Investors
are urged to consult their own tax advisors to determine the tax consequences to
them of investing in a Fund.
In addition, no attempt is made to address
tax concerns applicable to an investor with a special tax status such as a financial
institution, real estate investment trust, insurance company, regulated investment
company (“RIC”), individual retirement account, other tax–exempt entity,
dealer in securities or non–U.S. investor. Furthermore, this discussion does not
reflect possible application of the alternative minimum tax (“AMT”). Unless
otherwise noted, this discussion assumes shares of the Fund are held by U.S. shareholders
and that such shares are held as capital assets.
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A U.S. shareholder is a beneficial owner
of shares of the Fund that is for U.S. federal income tax purposes:
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a citizen
or individual resident of the United States (including certain former citizens and
former long–term residents);
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a corporation
or other entity treated as a corporation for U.S. federal income tax purposes, created
or organized in or under the laws of the United States or any state thereof or the
District of Columbia;
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an estate,
the income of which is subject to U.S. federal income taxation regardless of its
source; or
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a trust with
respect to which a court within the United States is able to exercise primary supervision
over its administration and one or more U.S. shareholders have the authority to
control all of its substantial decisions or the trust has made a valid election
in effect under applicable Treasury regulations to be treated as a U.S. person.
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A “Non–U.S. shareholder” is a
beneficial owner of shares of the Fund that is an individual, corporation, trust
or estate and is not a U.S. shareholder. If a partnership (including any entity
treated as a partnership for U.S. federal income tax purposes) holds shares of the
Fund, the tax treatment of a partner in the partnership generally depends upon the
status of the partner and the activities of the partnership. A prospective shareholder
who is a partner of a partnership holding the Fund shares should consult its tax
advisors with respect to the purchase, ownership and disposition of its Fund shares.
TAXATION AS A RIC – The Fund intends
to qualify and remain qualified as a RIC under the Internal Revenue Code of 1986,
as amended (the “Internal Revenue Code”). The Fund will qualify as a RIC
if, among other things, it meets the source–of–income and the asset–diversification
requirements. With respect to the source–of–income requirement, the Fund must derive
in each taxable year at least 90% of its gross income (including tax–exempt interest)
from (i) dividends, interest, payments with respect to certain securities loans,
gains from the sale or other disposition of stock, securities or foreign currencies,
or other income (including but not limited to gains from options, futures and forward
contracts) derived with respect to its business of investing in such shares, securities
or currencies and (ii) net income derived from an interest in a “qualified
publicly traded partnership.” A “qualified publicly traded partnership” is generally defined as a publicly traded partnership under Internal Revenue
Code section 7704. However, for these purposes, a qualified publicly traded partnership
does not include a publicly traded partnership if 90% or more of its income is described
in (i) above. Income derived from a partnership (other than a qualified publicly
traded partnership) or trust is qualifying income to the extent such income is attributable
to items of income of the partnership or trust which would be qualifying income
if realized by the Fund in the same manner as realized by the partnership or trust.
If a RIC fails this 90% income test it is
no longer subject to a 35% penalty as long as such failure is inadvertent. Instead,
such RIC is only required to pay the tax the amount of shortfall to the amount that
would have satisfied the 90% income test.
With respect to the asset–diversification
requirement, the fund must diversify its holdings so that, at the end of each quarter
of each taxable year (i) at least 50% of the value of the Fund’s total assets
is represented by cash and cash items, U.S. government securities, the securities
of other RICs and other securities, if such other securities of any one issuer do
not represent more than 5% of the value of the Fund’s total assets or 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 in the securities
other than U.S. government securities or the securities of other RICs of (a) one
issuer, (b) two or more issuers that are controlled by the Fund and that are engaged
in the same, similar or related trades or businesses, or (c) one or more qualified
publicly traded partnerships.
If a RIC fails this asset–diversification
test, such RIC, in addition to other cure provisions previously permitted, has a
6–month period to correct any failure without incurring a penalty if such failure
is “de minimis.” Such cure right is similar to that previously and currently
permitted for a REIT.
Similarly, if a RIC fails this asset–diversification
test and the failure is not de minimis, a RIC can cure failure if: (a) the RIC files
with the Treasury Department a description of each asset that causes the RIC to
fail the diversification
29
tests; (b) the failure is due to reasonable
cause and not willful neglect; and (c) the failure is cured within six months (or
such other period specified by the Treasury). In such cases, a tax is imposed on
the RIC equal to the greater of: (a) $50,000 or (b) an amount determined by multiplying
the highest rate of tax (currently 35%) by the amount of net income generated during
the period of diversification test failure by the assets that caused the RIC to
fail the diversification test.
If the Fund qualifies as a RIC and distributes
to its shareholders, for each taxable year, at least 90% of the sum of (i) its “investment company taxable income” as that term is defined in the Internal
Revenue Code (which includes, among other things, dividends, taxable interest, the
excess of any net short–term capital gains over net long–term capital losses and
certain net foreign exchange gains as reduced by certain deductible expenses) without
regard to the deduction for dividends paid, and (ii) the excess of its gross tax–exempt
interest, if any, over certain deductions attributable to such interest that are
otherwise disallowed, the Fund will be relieved of U.S. federal income tax on any
income of the Fund, including long–term capital gains, distributed to shareholders.
However, any ordinary income or capital gain retained by the Fund will be subject
to U.S. federal income tax at regular corporate federal income tax rates (currently
at a maximum rate of 35%). The Fund intends to distribute at least annually substantially
all of its investment company taxable income, net tax–exempt interest, and net capital
gain.
The Fund will generally be subject to a
nondeductible 4% federal excise tax on the portion of its undistributed ordinary
income with respect to each calendar year and undistributed capital gains if it
fails to meet certain distribution requirements with respect to the one–year period
ending on October 31 in that calendar year. To avoid the 4% federal excise tax,
the required minimum distribution is generally equal to the sum of (i) 98% of the
Fund’s ordinary income (computed on a calendar year basis), (ii) 98.2% of the
Fund’s capital gain net income (generally computed for the one–year period
ending on October 31) and (iii) any income realized, but not distributed, and on
which we paid no federal income tax in preceding years. The Fund generally intends
to make distributions in a timely manner in an amount at least equal to the required
minimum distribution and therefore, under normal market conditions, do not expect
to be subject to this excise tax.
The Fund may be required to recognize taxable
income in circumstances in which it does not receive cash. For example, if the Fund
holds debt obligations that are treated under applicable tax rules as having original
issue discount (such as debt instruments with payment in kind interest or, in certain
cases, with increasing interest rates or that are issued with warrants), the Fund
must include in income each year a portion of the original issue discount that accrues
over the life of the obligation regardless of whether cash representing such income
is received by the Fund in the same taxable year. Because any original issue discount
accrued will be included in the Fund’s “investment company taxable income” (discussed below) for the year of accrual, the Fund may be required to make
a distribution to its shareholders to satisfy the distribution requirement, even
though it will not have received an amount of cash that corresponds with the income
earned.
A RIC is permitted to carry forward net
capital losses indefinitely and may allow losses to retain their original character
(as short or as long–term). For net capital losses recognized prior to 2011, such
losses are permitted to be carried forward up to 8 years and are characterized as
short–term. These capital loss carryforwards may be utilized in future years to
offset net realized capital gains of the Fund, if any, prior to distributing such
gains to shareholders.
Gain or loss realized by the Fund from the
sale or exchange of warrants acquired by the Fund as well as any loss attributable
to the lapse of such warrants generally will be treated as capital gain or loss.
Such gain or loss generally will be long–term or short–term, depending on how long
the Fund held a particular warrant. Upon the exercise of a warrant acquired by the
Fund, the Fund’s tax basis in the stock purchased under the warrant will equal
the sum of the amount paid for the warrant plus the strike price paid on the exercise
of the warrant.
Except as set forth in “Failure to
Qualify as a RIC,” the remainder of this discussion assumes that the Fund will
qualify as a RIC for each taxable year.
FAILURE TO QUALIFY AS A RIC – If the
Fund is unable to satisfy the 90% distribution requirement or otherwise fails to
qualify as a RIC in any year, it will be subject to corporate level income tax on
all of its income and gain, regardless of whether or not such income was distributed.
Distributions to the Fund’s shareholders of such income and gain will not be
deductible by the Fund in computing its taxable income. In such event, the Fund’s distributions, to the extent derived from the Fund’s current or accumulated
earnings and profits, would constitute
30
ordinary dividends, which would generally
be eligible for the dividends received deduction available to corporate shareholders,
and non–corporate shareholders would generally be able to treat such distributions
as “qualified dividend income” eligible for reduced rates of U.S. federal
income taxation, provided in each case that certain holding period and other requirements
are satisfied.
Distributions in excess of the Fund’s
current and accumulated earnings and profits would be treated first as a return
of capital to the extent of the shareholders’ tax basis in their Fund shares,
and any remaining distributions would be treated as a capital gain. To qualify as
a RIC in a subsequent taxable year, the Fund would be required to satisfy the source–of–income,
the asset diversification, and the annual distribution requirements for that year
and dispose of any earnings and profits from any year in which the Fund failed to
qualify for tax treatment as a RIC. Subject to a limited exception applicable to
RICs that qualified as such under the Internal Revenue Code for at least one year
prior to disqualification and that requalify as a RIC no later than the second year
following the nonqualifying year, the Fund would be subject to tax on any unrealized
built–in gains in the assets held by it during the period in which the Fund failed
to qualify for tax treatment as a RIC that are recognized within the subsequent
10 years, unless the Fund made a special election to pay corporate–level tax on
such built–in gain at the time of its requalification as a RIC.
The Board reserves the right not to maintain
the qualifications of the Fund as a RIC if it determines such course of action to
be beneficial to shareholders.
TAXATION FOR U.S. SHAREHOLDERS – Distributions
paid to U.S. shareholders by the Fund from its investment company taxable income
(which is, generally, the Fund’s ordinary income plus net realized short–term
capital gains in excess of net realized long–term capital losses) are generally
taxable to U.S. shareholders as ordinary income to the extent of the Fund’s
earnings and profits, whether paid in cash or reinvested in additional shares. Such
distributions (if designated by the Fund) may qualify (i) for the dividends received
deduction in the case of corporate shareholders under Section 243 of the Internal
Revenue Code to the extent that the Fund’s income consists of dividend income
from U.S. corporations, excluding distributions from tax–exempt organizations, exempt
farmers’ cooperatives or real estate investment trusts or (ii) in the case
of individual shareholders, as qualified dividend income eligible to be taxed at
reduced rates under Section 1(h)(11) of the Internal Revenue Code (which provides
for a maximum 20% rate) to the extent that the Fund receives qualified dividend
income, and provided in each case certain holding period and other requirements
are met. Qualified dividend income is, in general, dividend income from taxable
domestic corporations and qualified foreign corporations (e.g., generally, foreign
corporations incorporated in a possession of the United States or in certain countries
with a qualified comprehensive income tax treaty with the United States, or the
stock with respect to which such dividend is paid is readily tradable on an established
securities market in the United States). A qualified foreign corporation generally
excludes any foreign corporation, which for the taxable year of the corporation
in which the dividend was paid, or the preceding taxable year, is a passive foreign
investment company. Dividends received by the Fund from an exchange traded fund
(“ETF”) or other investment company taxable as a RIC may be treated as
qualified dividend income only to the extent the dividend distributions are attributable
to qualified dividend income received by such ETF. If you lend your Fund shares
pursuant to a securities lending or similar arrangement, you may lose the ability
to treat dividends (paid while the Fund shares are held by the borrower) as qualified
dividend income. Distributions made to a U.S. shareholder from an excess of net
long–term capital gains over net short–term capital losses (“capital gain dividends”), including capital gain dividends credited to such shareholder but retained
by the Fund, are taxable to such shareholder as long–term capital gain if they have
been properly designated by the Fund, regardless of the length of time such shareholder
owned the shares of the Fund. The maximum tax rate on capital gain dividends received
by individuals is generally 20%. Distributions in excess of the Fund’s earnings
and profits will be treated by the U.S. shareholder, first, as a tax–free return
of capital, which is applied against and will reduce the adjusted tax basis of the
U.S. shareholder’s shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gain to the U.S. shareholder (assuming the shares
are held as a capital asset). The Fund is not required to provide written notice
designating the amount of any qualified dividend income or capital gain dividends
and other distributions.
As a RIC, the Fund will be subject to the
AMT, but any items that are treated differently for AMT purposes must be apportioned
between the Fund and the shareholders and this may affect the shareholders’
AMT liabilities. The Fund intends in general to apportion these items in the same
proportion that dividends paid to each shareholder bear to the Fund’s taxable
income (determined without regard to the dividends paid deduction.
31
For purpose of determining (i) whether the
annual distribution requirement is satisfied for any year and (ii) the amount of
capital gain dividends paid for that year, the Fund may, under certain circumstances,
elect to treat a dividend that is paid during the following taxable year as if it
had been paid during the taxable year in question. If the Fund makes such an election,
the U.S. shareholder will still be treated as receiving the dividend in the taxable
year in which the distribution is made. However, any dividend declared by the Fund
in October, November or December of any calendar year, payable to shareholders of
record on a specified date in such a month and actually paid during January of the
following year, will be treated as if it had been received by the U.S. shareholders
on December 31 of the year in which the dividend was declared.
The Fund intends to distribute all realized
capital gains, if any, at least annually. If, however, the Fund were to retain any
net capital gain, the Fund may designate the retained amount as undistributed capital
gains in a notice to shareholders who, if subject to U.S. federal income tax on
long–term capital gains, (i) will be required to include in income as long–term
capital gain, its proportionate shares of such undistributed amount, and (ii) will
be entitled to credit its proportionate shares of the federal income tax paid by
the Fund on the undistributed amount against its U.S. federal income tax liabilities,
if any, and to claim refunds to the extent the credit exceeds such liabilities.
If such an event occurs, the tax basis of shares owned by a shareholder of the Fund
will, for U.S. federal income tax purposes, generally be increased by the difference
between the amount of undistributed net capital gain included in the shareholder’s gross income and the tax deemed paid by the shareholders.
Sales and other dispositions of the shares
of the Fund generally are taxable events. U.S. shareholders should consult their
own tax advisor with reference to their individual circumstances to determine whether
any particular transaction in the shares of the Fund is properly treated as a sale
or exchange for federal income tax purposes, as the following discussion assumes,
and the tax treatment of any gains or losses recognized in such transactions. The
sale or other disposition of shares of the Fund will generally result in capital
gain or loss to the shareholder equal to the difference between the amount realized
and his adjusted tax basis in the shares sold or exchanged, and will be long–term
capital gain or loss if the shares have been held for more than one year at the
time of sale. Any loss upon 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 (including amounts credited as an undistributed capital gain
dividend) by such shareholder with respect to such shares. A loss realized on a
sale or exchange of shares of the Fund generally will be disallowed if other substantially
identical shares are acquired within a 61–day period beginning 30 days before and
ending 30 days after the date that the shares are disposed. In such case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. Present
law taxes both long–term and short–term capital gain of corporations at the rates
applicable to ordinary income of corporations. For non–corporate taxpayers, short–term
capital gain will currently be taxed at the rate applicable to ordinary income,
currently a maximum of 35%, while long–term capital gain generally will be taxed
at a maximum rate of 15%. Capital losses are subject to certain limitations.
Federal law requires that mutual fund companies
report their shareholders’ cost basis, gain/loss, and holding period to the
Internal Revenue Service on the Fund’s shareholders’ Consolidated Form
1099s when “covered” securities are sold. Covered securities are any regulated
investment company and/or dividend reinvestment plan shares acquired on or after
January 1, 2012.
The Fund has chosen average cost as its
standing (default) tax lot identification method for all shareholders. A tax lot
identification method is the way the Fund will determine which specific shares are
deemed to be sold when there are multiple purchases on different dates at differing
net asset values, and the entire position is not sold at one time. The Fund’s
standing tax lot identification method is the method covered shares will be reported
on your Consolidated Form 1099 if you do not select a specific tax lot identification
method. You may choose a method different than the Fund’s standing method and
will be able to do so at the time of your purchase or upon the sale of covered shares.
Please refer to the appropriate Internal Revenue Service regulations or consult
your tax advisor with regard to your personal circumstances.
For those securities defined as “covered”
under current Internal Revenue Service cost basis tax reporting regulations, the
fund is responsible for maintaining accurate cost basis and tax lot information
for tax reporting purposes. The Fund is not responsible for the reliability or accuracy
of the information for those securities that are not “covered.” The Fund and its
service providers do not provide tax advice. You should consult independent sources,
which may include a tax professional, with respect to any decisions you may make
with respect to choosing a tax lot identification method.
32
For taxable years beginning after December
31, 2012, certain U.S. shareholders, including individuals and estates and trusts,
will be subject to an additional 3.8% Medicare tax on all or a portion of their
“net investment income,” which should include dividends from the Fund
and net gains from the disposition of shares of the Fund. U.S. shareholders are
urged to consult their own tax advisors regarding the implications of the additional
Medicare tax resulting from an investment in the Fund.
The Fund is required in certain circumstances
to backup withhold at a current rate of 28% on taxable distributions and certain
other payments paid to non–corporate holders of the Fund’s shares who do not
furnish the Fund with their correct taxpayer identification number (in the case
of individuals, their social security number) and certain certifications, or who
are otherwise subject to backup withholding. Backup withholding is not an additional
tax. Any amounts withheld from payments made to you may be refunded or credited
against your U.S. federal income tax liability, if any, provided that the required
information is furnished to the IRS.
TAX SHELTER REPORTING REGULATIONS –
Under U.S. Treasury regulations, if a shareholder recognizes a loss with respect
to the 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 IRS 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 of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisers
to determine the applicability of these regulations in light of their individual
circumstances.
SHAREHOLDER REPORTING OBLIGATIONS WITH RESPECT
TO FOREIGN FINANCIAL ASSETS – Certain individuals (and, if provided in future
guidance, certain domestic entities) must disclose annually their interests in “specified foreign financial assets” on IRS Form 8938, which must be attached
to their U.S. federal income tax returns for taxable years beginning after March
18, 2010. The IRS has not yet released a copy of the Form 8938 and has suspended
the requirement to attach Form 8938 for any taxable year for which an income tax
return is filed before the release of Form 8938. Following Form 8938’s release,
individuals will be required to attach to their next income tax return required
to be filed with the IRS a Form 8938 for each taxable year for which the filing
of Form 8938 was suspended. Until the IRS provides more details regarding this reporting
requirement, including in Form 8938 itself and related Treasury regulations, it
remains unclear under what circumstances, if any, a shareholder’s (indirect)
interest in the Fund’s “specified foreign financial assets,” if any,
will be required to be reported on this Form 8938.
OTHER REPORTING AND WITHHOLDING REQUIREMENTS
– Rules enacted in March 2010 require the reporting to the IRS of direct and
indirect ownership of foreign financial accounts and foreign entities by U.S. persons.
Failure to provide this required information can result in a 30% withholding tax
on certain payments (“withholdable payments”) made after December 31,
2012. Specifically, withholdable payments subject to this 30% withholding tax include
payments of U.S.–source dividends and interest made on or after January 1, 2014,
and payments of gross proceeds from the sale or other disposal of property that
can produce U.S.–source dividends or interest made on or after January 1, 2015.
The IRS has issued only very preliminary
guidance with respect to these new rules; there scope remains unclear and potentially
subject to material change. Very generally, it is possible that distributions made
by the Fund after the dates noted above (or such later dates as may be provided
in future guidance) to a shareholder, including a distribution in redemption of
shares and a distribution of income or gains otherwise exempt from withholding under
the rules applicable to non–U.S. shareholders described above (e.g., Capital Gain
Dividends, Short–Term Capital Gain Dividends and interest–related dividends, as
described above) will be subject to the new 30% withholding requirement. Payments
to a foreign shareholder that is a “foreign financial institution” will
generally be subject to withholding, unless such shareholder enters into a timely
agreement with the IRS. Payments to shareholders that are U.S. persons or foreign
individuals will generally not be subject to withholding, so long as such shareholders
provide the Fund with such certifications or other documentation, including, to
the extent required, with regard to such shareholders’ direct and indirect
owners, as the Fund requires to comply with the new rules. Persons investing
33
in the Fund through an intermediary should
contact their intermediary regarding the application of the new reporting and withholding
regime to their investments in the Fund.
Shareholders are urged to consult a tax
advisor regarding this new reporting and withholding regime, in light of their particular
circumstances.
SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS
– Special tax rules apply to investments through defined contribution plans
and other tax–qualified plans. Shareholders should consult their tax advisers to
determine the suitability of shares of the Fund as an investment through such plans,
and the precise effect of an investment on their particular tax situation.
U.S. GOVERNMENT OBLIGATIONS – Many states
grant tax–free status to dividends paid to shareholders from interest earned on
direct obligations of the U.S. government, subject in some states to minimum investment
requirements that must be met by the Fund. This preferential treatment may not be
available to the extent the Fund receives such interest indirectly through an investment
in an ETF. Investments in Government National Mortgage Association or Federal National
Mortgage Association securities, bankers’ acceptances, commercial paper and
repurchase agreements collateralized by U.S. Government securities do not generally
qualify for tax–free treatment. The rules on exclusion of this income are different
for corporations.
ORIGINAL ISSUE DISCOUNT, PAY-IN-KIND SECURITIES,
MARKET DISCOUNT AND COMMODITY-LINKED NOTES – Some debt obligations with a fixed
maturity date of more than one year from the date of issuance (and zero–coupon debt
obligations with a fixed maturity date of more than one year from the date of issuance)
that may be acquired by the Fund may be treated as debt obligations that are issued
originally at a discount. Generally, the amount of the original issue discount (“OID”) is treated as interest income and is included in the Fund’s
taxable income (and required to be distributed by the Fund) over the term of the
debt obligation, even though payment of that amount is not received until a later
time, upon partial or full repayment or disposition of the debt security.
Some debt obligations (with a fixed maturity
date of more than one year from the date of issuance) that may be acquired by the
Fund in the secondary market may be treated as having “market discount.”
Very generally, market discount is the excess of the stated redemption price of
a debt obligation (or in the case of an obligations issued with OID, its “revised
issue price”) over the purchase price of such obligation. Generally, any gain
recognized on the disposition of, and any partial payment of principal on, a debt
obligation 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 obligation. Alternatively, the Fund may elect to accrue market discount
currently, in which case the Fund will be required to include the accrued market
discount in the Fund’s income (as ordinary income) and thus distribute it over
the term of the debt security, even though payment of that amount is not received
until a later time, upon partial or full repayment or disposition of the debt security.
The rate at which the market discount accrues, and thus is included in the Fund’s income, will depend upon which of the permitted accrual methods the Fund
elects. In the case of higher–risk securities, the amount of market discount may
be unclear. See “Higher–Risk Securities.”
Some debt obligations (with a fixed maturity
date of one year or less from the date of issuance) that may be acquired by the
Fund may be treated as having “acquisition discount” (very generally,
the excess of the stated redemption price over the purchase price), or OID in the
case of certain types of debt obligations. The Fund will be required to include
the acquisition discount, or OID, in income (as ordinary income) over the term of
the debt obligation, even though payment of that amount is not received until a
later time, upon partial or full repayment or disposition of the debt security.
The Fund may make one or more of the elections applicable to debt obligations having
acquisition discount, or OID, which could affect the character and timing of recognition
of income.
In addition, payment–in–kind securities
will, and commodity–linked notes may, 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.
If the Fund holds the foregoing kinds of
securities, it may be required to pay out as an income distribution each year an
amount that is greater than the total amount of cash interest the Fund actually
received. Such distributions may be made from the cash assets of the Fund or by
liquidation of portfolio securities, if necessary (including when it is not
34
advantageous to do so). The Fund may realize
gains or losses from such liquidations. In the event the Fund realizes net capital
gains from such transactions, its shareholders may receive a larger capital gain
distribution than they would in the absence of such transactions.
HIGHER–RISK SECURITIES – To the extent
such investments are permissible for the Fund, the Fund may invest in debt obligations
that are in the lowest rating categories or are unrated, including debt obligations
of issuers not currently paying interest or who are in default. Investments in debt
obligations that are at risk of or in default present special tax issues for the
Fund. Tax rules are not entirely clear about issues such as when the Fund may cease
to accrue interest, OID 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. In limited circumstances,
it may also not be clear whether the Fund should recognize market discount on a
debt obligation, and if so, what amount of market discount the Fund should recognize.
These and other related issues will be addressed by the Fund when, as and if it
invests in such securities, 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 or excise tax.
ISSUER DEDUCTIBILITY OF INTEREST –
A portion of the interest paid or accrued on certain high yield discount obligations
owned by the Fund may not be deductible to (and thus, may affect the cash flow of)
the issuer. If a portion of the interest paid or accrued on certain high yield discount
obligations is not deductible, that portion will be treated as a dividend for purposes
of the corporate dividends–received deduction. In such cases, if the issuer of the
high yield discount obligations is a domestic corporation, dividend payments by
the Fund may be eligible for the dividends–received deduction to the extent of the
deemed dividend portion of such accrued interest.
Interest paid on debt obligations owned
by the Fund, if any, that are considered for U.S. tax purposes to be payable in
the equity of the issuer or a related party will not be deductible to the issuer,
possibly affecting the cash flow of the issuer.
SECTION 1256 CONTRACTS – Certain listed
options, regulated futures contracts, and forward foreign currency contracts are
considered “section 1256 contracts” for federal income tax purposes. Section
1256 contracts held by the Fund at the end of each taxable year will be “marked–to–market” and treated for federal income tax purposes as though sold for fair market
value on the last business day of such taxable year. Gain or loss realized by the
Fund on section 1256 contracts (other than certain foreign currency contracts) generally
will be considered 60% long–term and 40% short–term capital gain or loss.
Tax–Exempt Shareholders – A tax–exempt
shareholder could recognize unrelated business taxable income (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 Internal Revenue
Code Section 514(b). Furthermore, a tax–exempt shareholder may recognize UBTI if
the Fund recognizes “excess inclusion income” derived from direct or indirect
investments in residual interests in REMICs or equity interests in TMPs if the amount
of such income recognized by the Fund exceeds the 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
equity interests in TMPs. Under legislation enacted in December 2006, a CRT (as
defined in section 664 of the Internal Revenue Code) that realizes any UBTI for
a taxable year, must pay an excise tax annually of an amount equal to such UBTI.
Under IRS guidance issued in October 2006, a CRT will not recognize UBTI solely
as a result of investing in the 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 United States, a state or political subdivision,
or an agency or instrumentality thereof, and certain energy cooperatives) is a record
holder of a share in the Fund that recognizes “excess inclusion income,”
then the regulated investment company 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, the 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 Fund has not yet determined
whether such an election will
35
be made. CRTs and other tax–exempt investors
are urged to consult their tax advisers concerning the consequences of investing
in the Fund.
PASSIVE FOREIGN INVESTMENT COMPANIES –
A passive foreign investment company (“PFIC”) is any foreign corporation:
(i) 75% or more of the gross income of which for the taxable year is passive income,
or (ii) the average percentage of the assets of which (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 means
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.
Equity investments by the Fund in certain
PFICs could potentially subject the Fund to a U.S. federal income tax or other charge
(including interest charges) on the distributions received from the PFIC or on proceeds
received from the disposition of shares in the PFIC. This tax cannot be eliminated
by making distributions to Fund shareholders. However, the Fund may elect to avoid
the imposition of that tax. For example, if the Fund is in a position to and elects
to treat a PFIC as a “qualified electing fund” (i.e., make a “QEF
election”), the Fund will be required to include its share of the PFIC s income
and net capital gains annually, regardless of whether it receives any distribution
from the PFIC. Alternatively, the Fund may make an election to mark the gains (and
to a limited extent losses) in its PFIC 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 gains and losses are treated as ordinary income and loss.
The QEF and mark–to–market elections may accelerate the recognition of income (without
the receipt of cash) and increase the amount required to be distributed by 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. Dividends paid by PFICs will not
be eligible to be treated as “qualified dividend income.”
Because it is not always possible to identify
a foreign corporation as a PFIC, the Fund may incur the tax and interest charges
described above in some instances.
FOREIGN CURRENCY TRANSACTIONS – The
Fund’s transactions in foreign currencies, foreign currency–denominated debt
obligations and certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may give rise to ordinary income or loss to
the extent such income or loss results from fluctuations in the value of the foreign
currency concerned. Any such net gains could require a larger dividend toward the
end of the calendar year. Any such net losses will generally reduce and potentially
require the recharacterization of prior ordinary income distributions. Such ordinary
income treatment may accelerate Fund distributions to shareholders and increase
the distributions taxed to shareholders as ordinary income. Any net ordinary losses
so created cannot be carried forward by the Fund to offset income or gains earned
in subsequent taxable years.
FOREIGN TAXATION – Income received
by the Fund from sources within foreign countries may be subject to withholding
and other taxes imposed by such countries. Tax conventions between certain countries
and the U.S. may reduce or eliminate such taxes. The Fund does not expect to be
eligible to pass through to shareholders a credit or deduction for such taxes.
The ETFs and other investment companies
in which the Fund invests may invest in foreign securities. Dividends and interest
received by an ETF’s or investment company’s holding of foreign securities
may give rise to withholding and other taxes imposed by foreign countries. As noted
above, tax conventions between certain countries and the United States may reduce
or eliminate such taxes. If the ETF or investment company in which the Fund invests
is taxable as a RIC and meets certain other requirements, which include a requirement
that more than 50% of the value of such ETF’s or investment company’s
total assets at the close of its respective taxable year consists of stocks or securities
of foreign corporations, then the ETF or investment company should be eligible to
file an election with the IRS that may enable its shareholders, including the Fund
in effect, to receive either the benefit of a foreign tax credit, or a tax deduction,
with respect to any foreign and U.S. possessions income taxes paid the Fund, subject
to certain limitations. The Fund, however, is not expected to be able to pass these
benefits along to its shareholders.
36
FOREIGN SHAREHOLDERS – Capital Gain
Dividends are generally not subject to withholding of U.S. federal income tax. Absent
a specific statutory exemption, dividends other than Capital Gain Dividends paid
by the Fund to a shareholder that is not a “U.S. person” within the meaning
of the Internal Revenue Code (such shareholder, a “foreign shareholder”)
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.
In general, a regulated investment company
is not required to withhold any amounts (i) with respect to distributions (other
than distributions to a foreign person (w) that does not provide 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 a
foreign country that has 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 reported as such by the Fund
in a written notice to shareholders (“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 reported by the regulated investment
company (“short–term capital gain dividends”). If the Fund invests in
an underlying fund that pays such distributions to the Fund, such distributions
retain their character as not subject to withholding if properly reported when paid
by the Fund to foreign persons.
The Fund is permitted to report such part
of its dividends as interest–related or short–term capital gain dividends as are
eligible, but is not required to do so. These exemptions from withholding will not
be available to foreign shareholders of the Fund that do not currently report their
dividends as interest–related or short–term capital gain dividends.
In the case of shares held through an intermediary,
the intermediary may withhold even if the Fund reports all or a portion of a payment
as an interest–related or short–term capital gain dividend to shareholders. Foreign
persons should contact their intermediaries regarding the application of these rules
to their accounts.
Under U.S. federal tax law, a beneficial
holder of shares who is a foreign shareholder generally is not 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 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, (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 special rules relating to gain
attributable to the sale or exchange of “U.S. real property interests”
(“USRPIs”) apply to the foreign shareholder’s sale of shares of the
Fund or to the Capital Gain Dividend the foreign shareholder received (as described
below).
Special rules would apply if the Fund were
either a “U.S. real property holding corporation” (“USRPHC”)
or would be a USRPHC but for the operation of certain exceptions to the definition
thereof. Very generally, a USRPHC is a domestic corporation that holds USRPIs the
fair market value of which equals or exceeds 50% of the sum of the fair market values
of the corporation’s USPRIs, interests in real property located outside the
United States, and other assets. USRPIs are generally defined as any interest in
U.S. real property and any interest (other than solely as a creditor) in a USRPHC
or former USRPHC.
If the Fund were a USRPHC or would be a
USRPHC but for the exceptions referred to above, any distributions by the Fund to
a foreign shareholder (including, in certain cases, distributions made by the Fund
in redemption of its shares) attributable to gains realized by the Fund on the disposition
of USRPIs or to 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 generally
would be subject to U.S. tax withholding. In addition, such distributions could
result in the foreign shareholder being required to file a U.S. tax return and pay
tax on the distributions at regular U.S. federal income tax
37
rates. The consequences to a foreign shareholder,
including the rate of such withholding and character of such distributions (e.g.,
as ordinary income or USRPI gain), would vary depending upon the extent of the foreign
shareholder’s current and past ownership of the Fund. On and after January
1, 2012, this “look–through” USRPI treatment for distributions by a Fund,
if it were either a USRPHC or would be a USRPHC but for the operation of the exceptions
referred to above, to foreign shareholders applies only to those distributions that,
in turn, are attributable to distributions received by the Fund from a lower–tier
REIT, unless Congress enacts legislation providing otherwise.
In addition, if the Fund were a USRPHC or
former USRPHC, it could be required to withhold U.S. tax on the proceeds of a share
redemption by a greater–than–5% foreign shareholder, in which case such foreign
shareholder generally would also be required to file U.S. tax returns and pay any
additional taxes due in connection with the redemption.
Whether or not the Fund is characterized
as a USRPHC will depend upon the nature and mix of the Fund’s assets. The Fund
does not expect to be USRPHCs. Foreign shareholders should consult their tax advisors
concerning the application of these rules to their investment in the Fund.
If a beneficial holder of Fund shares who
is a foreign shareholder has a trade or business in the United States, and the dividends
are effectively connected with the beneficial holder’s conduct of that trade
or business, the dividend will be subject to U.S. federal net income taxation at
regular income tax rates.
If a beneficial holder of Fund shares who
is a foreign shareholder is eligible for the benefits of a tax treaty, any effectively
connected income or gain will generally be subject to U.S. federal income tax on
a net basis only if it is also attributable to a permanent establishment maintained
by that beneficial holder in the United States.
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, a foreign shareholder must comply
with special certification and filing requirements relating to its non–US status
(including, in general, furnishing an IRS Form W–8BEN or substitute form). Foreign
shareholders in the Fund should consult their tax advisers in this regard.
A beneficial holder of Fund shares who is
a foreign shareholder 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.
FATCA
–
Payments to a shareholder
that is either a foreign financial institution (“FFI”) or a non–financial
foreign entity (“NFFE”) within the meaning of the Foreign Account Tax
Compliance Act (“FATCA”) may be subject to a generally nonrefundable 30%
withholding tax on: (a) income dividends paid by the Fund after June 30, 2014 and
(b) certain capital gain distributions and the proceeds arising from the sale of
Fund shares paid by the Fund after December 31, 2016. FATCA withholding tax generally
can be avoided: (a) by an FFI, subject to any applicable intergovernmental agreement
or other exemption, if it enters into a valid agreement with the IRS to, among other
requirements, report required information about certain direct and indirect ownership
of foreign financial accounts held by U.S. persons with the FFI and (b) by an NFFE,
if it: (i) certifies that it has no substantial U.S. persons as owners or (ii) if
it does have such owners, reports information relating to them. The Fund may disclose
the information that it receives from its shareholders to the IRS, non–U.S. taxing
authorities or other parties as necessary to comply with FATCA. Withholding also
may be required if a foreign entity that is a shareholder of the Fund fails to provide
the Fund with appropriate certifications or other documentation concerning its status
under FATCA.
The foregoing is a general and abbreviated
summary of the provisions of the Internal Revenue Code and the Treasury regulations
in effect as they directly govern the taxation of the Fund and its shareholders.
These provisions are subject to change by legislative and administrative action,
and any such change may be retroactive. Shareholders are urged to consult their
tax advisers regarding specific questions as to U.S. federal income, estate or gift
taxes, or foreign, state, local taxes or other taxes.
38
FINANCIAL INFORMATION
You can receive free copies of reports,
request other information and discuss your questions about the Fund by contacting
the Fund directly at:
WORLD FUNDS TRUST
8730
Stony Point Parkway, Suite 205
Richmond, Virginia 23235
Telephone: (800) 673–0550
Website:
www.theworldfundstrust.com
e–mail: mail@ccofva.com
39
EXHIBIT A
PROXY VOTING POLICY AND
PROCEDURES
The World
Funds Trust (the “Trust”) is registered as an open–end management investment
company under the Investment Company Act of 1940, as amended (“1940 Act”).
The Trust offers multiple series (each a “Fund” and, collectively, the
“Funds”). Consistent with its fiduciary duties and pursuant to Rule 30b1–4
under the 1940 Act (the “Proxy Rule”), the Board of Trustees of the Trust
(the “Board”) has adopted this proxy voting policy on behalf of the Trust
(the “Policy”) to reflect its commitment to ensure that proxies are voted
in a manner consistent with the best interests of the Funds’ shareholders.
Delegation of Proxy
Voting Authority to Fund Advisers
The Board
believes that the investment advisor of each Fund (each an “Adviser” and,
collectively, the “Advisers”), as the entity that selects the individual
securities that comprise its Fund’s portfolio, is the most knowledgeable and
best–suited to make decisions on how to vote proxies of portfolio companies held
by that Fund. The Trust shall therefore defer to, and rely on, the Adviser of each
Fund to make decisions on how to cast proxy votes on behalf of such Fund.
The Trust
hereby designates the Adviser of each Fund as the entity responsible for exercising
proxy voting authority with regard to securities held in the Fund’s investment
portfolio. Consistent with its duties under this Policy, each Adviser shall monitor
and review corporate transactions of corporations in which the Fund has invested,
obtain all information sufficient to allow an informed vote on all proxy solicitations,
ensure that all proxy votes are cast in a timely fashion, and maintain all records
required to be maintained by the Fund under the Proxy Rule and the 1940 Act. Each
Adviser shall perform these duties in accordance with the Adviser’s proxy voting
policy, a copy of which shall be presented to this Board for its review. Each Adviser
shall promptly provide to the Board updates to its proxy voting policy as they are
adopted and implemented.
Conflict of Interest
Transactions
In some instances, an Adviser may be asked
to cast a proxy vote that presents a conflict between the interests of a Fund’s
shareholders, and those of the Adviser or an affiliated person of the Adviser. In
such case, the Adviser is instructed to abstain from making a voting decision and
to forward all necessary proxy voting materials to the Trust to enable the Board
to make a voting decision. When the Board is required to make a proxy voting decision,
only the Trustees without a conflict of interest with regard to the security in
question or the matter to be voted upon shall be permitted to participate in the
decision of how the Fund’s vote will be cast. In the event that the Board is
required to vote a proxy because an Adviser has a conflict of interest with respect
to the proxy, the Board will vote such proxy in accordance with the Adviser’s
proxy voting policy, to the extent consistent with the shareholders’ best interests,
as determined by the Board in its
40
discretion.
The Board shall notify the Adviser of its final decision on the matter and the Adviser
shall vote in accordance with the Board’s decision.
Availability of Proxy
Voting Policy and Records Available to Fund Shareholders
If a Fund has a website, the
Fund may post a copy of its Adviser’s proxy voting policy and this Policy on
such website. A copy of such policies and of each Fund’s proxy voting record
shall also be made available, without charge, upon request of any shareholder of
the Fund, by calling the applicable Fund’s toll–free telephone number as printed
in the Fund’s prospectus. The Trust’s administrator shall reply to any
Fund shareholder request within three business days of receipt of the request, by
first–class mail or other means designed to ensure equally prompt delivery.
Each Adviser shall provide a complete voting
record, as required by the Proxy Rule, for each series of the Trust for which it
acts as adviser, to the Trust’s administrator within 30 days following the
end of each 12–month period ending June 30. The Trust’s administrator will
file a report based on such record on Form N–PX on an annual basis with the Securities
and Exchange Commission no later than August 31
st
of each year.
41
EXHIBIT B
TOREADOR RESEARCH &
TRADING, LLC
Proxy and Corporate Action Voting
Policies and Procedures
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I.
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POLICY.
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Toreador Research & Trading, LLC (the “Adviser”) acts as a discretionary
investment adviser for various clients, including clients governed by the Employee
Retirement Income Security Act of 1974 (“ERISA”) and registered open–end
management investment companies (i.e., “mutual funds”). The Adviser is
registered with the U.S. Securities and Exchange Commission (the “SEC”)
as an investment adviser pursuant to the Investment Advisers Act of 1940, as amended
(the “Advisers Act”). Some of the Adviser’s clients have delegated
to the Adviser the authority to vote proxies or act with respect to corporate actions
that may arise with respect to securities held within such client’s investment
portfolio. Corporate actions may include, for example and without limitation, tender
offers or exchanges, bankruptcy proceedings, and class actions. The Adviser’s
authority to vote proxies or act with respect to other corporate actions is established
through the delegation of discretionary authority under its investment advisory
agreements. Therefore, unless a client (including a “named fiduciary”
under ERISA) specifically reserves the right, in writing, to vote its own proxies
or to take shareholder action with respect to other corporate actions requiring
shareholder actions, the Adviser will vote all proxies and act on all other actions
in a timely manner as part of its full discretionary authority over client assets
in accordance with these policies and procedures.
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When voting proxies or acting with respect to corporate actions on behalf of clients,
the Adviser’s utmost concern is that all decisions be made solely in the best
interests of the client (and for ERISA accounts, plan beneficiaries and participants,
in accordance with the letter and spirit of ERISA). The Adviser will act in a prudent
and diligent manner intended to enhance the economic value of the assets in the
client’s account.
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II.
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PURPOSE.
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The purpose of these policies and procedures is to memorialize the procedures and
policies adopted by the Adviser to enable it to comply with its fiduciary responsibilities
to clients and the requirements of Rule 206(4)–6 under the Advisers Act. These policies
and procedures also reflect the fiduciary standards and responsibilities set forth
by the Department of Labor for ERISA accounts.
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III.
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PROCEDURES.
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The Adviser is ultimately responsible for ensuring that all proxies received are
voted in a timely manner and in a manner consistent with the Adviser’s determination
of the client’s best interests. Although many proxy proposals may be voted
in accordance with the Guidelines described in Section V below, some proposals require
special consideration which may dictate that the Adviser makes an exception to the
Guidelines.
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The Adviser is also responsible for ensuring that all corporate action notices or
requests which require shareholder action that are received are addressed in a timely
manner and consistent action is taken across all similarly situated client accounts.
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A.
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Conflicts
of Interest.
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Where a proxy proposal raises a material conflict between the Adviser’s interests
and a client’s interest, including a mutual fund client, the Adviser will resolve
such a conflict in the manner described below:
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1.
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Vote in Accordance
with the Guidelines. To the extent that the Adviser has little or no discretion
to deviate from the Guidelines with respect to the proposal in question, the Adviser
shall vote in accordance with such pre–determined voting policy.
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42
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2.
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Obtain Consent
of Clients. To the extent that the Adviser has discretion to deviate from the Guidelines
with respect to the proposal in question, the Adviser will disclose the conflict
to the relevant clients and obtain their consent to the proposed vote prior to voting
the securities. The disclosure to the client will include sufficient detail regarding
the matter to be voted on and the nature of the conflict so that the client will
be able to make an informed decision regarding the vote. If a client does not respond
to such a conflict disclosure request or denies the request, the Adviser will abstain
from voting the securities held by that client’s account.
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3.
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Client Directive
to Use an Independent Third Party. Alternatively, a client may, in writing, specifically
direct the Adviser to forward all proxy matters in which the Adviser has a conflict
of interest regarding the client’s securities to an identified independent
third party for review and recommendation. Where such independent third party’s
recommendations are received on a timely basis, the Adviser will vote all such proxies
in accordance with such third party’s recommendation. If the third party’s
recommendations are not timely received, the Adviser will abstain from voting the
securities held by that client’s account.
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The Adviser will review the proxy proposal for conflicts of interest as part of the
overall vote review process. All material conflicts of interest so identified will
be addressed as described above in this Section III, A.
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B.
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Limitations.
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In certain circumstances, in accordance with a client’s investment advisory
agreement (or other written directive) or where the Adviser has determined that
it is in the client’s best interest, the Adviser will not vote proxies received.
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The following are certain circumstances where the Adviser will limit its role in
voting proxies:
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1.
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Client Maintains
Proxy Voting Authority. Where a client specifies in writing that it will maintain
the authority to vote proxies itself or that it has delegated the right to vote
proxies to a third party, the Adviser will not vote the securities and will direct
the relevant custodian to send the proxy material directly to the client. If any
proxy material is received by the Adviser for such account, it will promptly be
forwarded to the client or specified third party.
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2.
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Terminated
Account. Once a client account has been terminated in accordance with its investment
advisory agreement, the Adviser will not vote any proxies received after the termination
date. However, the client may specify in writing that proxies should be directed
to the client (or a specified third party) for action.
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3.
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Limited Value.
If the Adviser determines that the value of a client’s economic interest or
the value of the portfolio holding is indeterminable or insignificant, the Adviser
may abstain from voting a client’s proxies. The Adviser also will not vote
proxies received for securities which are no longer held by the client’s account.
In addition, the Adviser generally will not vote securities where the economic value
of the securities in the client account is less than $500.
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4.
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Securities
Lending Programs. When securities are out on loan, they are transferred into the
borrower’s name and are voted by the borrower, in its discretion. However,
where the Adviser determines that a proxy vote (or other shareholder action) is
materially important to the client’s account, the Adviser may recall the security
for the purposes of voting.
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5.
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Unjustifiable
Costs. In certain circumstances, after doing a cost–benefit analysis, the Adviser
may abstain from voting where the cost of voting a client’s proxy would exceed
any anticipated benefits from the proxy proposal.
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IV.
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RECORD KEEPING.
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In accordance with Rule 204–2 under the Advisers Act, the Adviser will maintain for
the time periods set forth in the Rule: (i) these proxy voting procedures and policies,
and all amendments thereto; (ii) all proxy statements received regarding client
securities (provided however, that the Adviser may rely on the proxy statement filed
on EDGAR as
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43
its records); (iii) a record of all votes
cast on behalf of clients; (iv) records of all written client requests for proxy
voting information; (v) a copy of any written response made by the Adviser to any
written or oral client request for proxy voting information; (vi) any documents
prepared by the Adviser that were material to making a decision on how to vote or
that memorialized the basis for the decision; and (vii) all records relating to
requests made to clients regarding conflicts of interest in voting the proxy.
The Adviser will describe in its Form ADV,
Part II (or other brochure fulfilling the requirement of Rule 204–3 under the Advisers
Act) its proxy voting policies and procedures and will inform clients how they may
obtain information on how the Adviser voted proxies with respect to the clients’ portfolio securities. The Adviser will also provide to each mutual fund client
a copy of its policies and procedures. Clients may obtain information on how their
securities were voted or a copy of the policies and procedures by written request
addressed to the Adviser.
The Adviser will coordinate with all mutual
fund clients to assist in the provision of all information required to be filed
by such mutual funds on Form N–PX. Form N–PX will provide information concerning
each matter relating to a portfolio security considered at any shareholder meeting
with respect to which a mutual fund was entitled to vote. Each Form N–PX will need
to be filed no later than August 31st of each year, and will cover all proxy votes
with respect to which a mutual fund was entitled to vote for the period July 1st
through June 30th. The Adviser shall maintain and provide the following information
concerning any shareholder meetings with respect to which a mutual fund they manage
was entitled to vote:
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•
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the name of
the issuer of the portfolio security;
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the exchange
ticker symbol of the portfolio security(1);
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the CUSIP
number of the portfolio security(1);
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•
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the shareholder
meeting date;
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a brief description
of the matter voted on;
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•
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whether the
matter was put forward by the issuer or a shareholder;
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•
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whether the
mutual fund voted;
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•
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how the mutual
fund cast its vote; and
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•
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whether the
mutual fund cast its vote for or against management.
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V.
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GUIDELINES.
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Each proxy issue will be considered individually. The following guidelines are a
partial list to be used in voting proposals contained in the proxy statements, but
will not be used as rigid rules.
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A.
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Oppose.
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The Adviser will generally vote against any management proposal that clearly has
the effect of restricting the ability of shareholders to realize the full potential
value of their investment. Proposals in this category would include:
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1.
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Issues regarding
the issuer’s board entrenchment and anti–takeover measures such as the following:
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a.
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Proposals
to stagger board members’ terms;
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b.
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Proposals
to limit the ability of shareholders to call special meetings;
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c.
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Proposals
to require super majority votes;
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d.
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Proposals
requesting excessive increases in authorized common or preferred shares where management
provides no explanation for the use or need of these additional shares;
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e.
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Proposals
regarding “fair price” provisions;
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f.
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Proposals
regarding “poison pill” provisions; and
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g.
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Permitting
“green mail”.
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2.
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Providing
cumulative voting rights.
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B.
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Approve.
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Routine proposals are those which do not change the structure, bylaws, or operations
of the corporation to the detriment of the shareholders. Given the routine nature
of these proposals, proxies will nearly always be voted with management. Traditionally,
these issues include:
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1.
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Election of
independent accountants recommended by management, unless seeking to replace if
there exists a dispute over policies.
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2.
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Date and place
of annual meeting.
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3.
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Limitation
on charitable contributions or fees paid to lawyers.
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4.
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Ratification
of directors’ actions on routine matters since previous annual meeting.
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5.
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Confidential
voting. Confidential voting is most often proposed by shareholders as a means of
eliminating undue management pressure on shareholders regarding their vote on proxy
issues. The Adviser will generally vote to approve these proposals as shareholders
can later divulge their votes to management on a selective basis if a legitimate
reason arises.
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6.
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Limiting directors’ liability.
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7.
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Eliminate
preemptive rights. Preemptive rights give current shareholders the opportunity to
maintain their current percentage ownership through any subsequent equity offerings.
These provisions are no longer common in the U.S., and can restrict management’s
ability to raise new capital.
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8.
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The Adviser
will generally vote to approve the elimination of preemptive rights, but will oppose
the elimination of listed preemptive rights, e.g., on proposed issues representing
more than an acceptable level of total dilution.
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9.
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Employee Stock
Purchase Plans.
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10.
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Establish
40 1(k) Plans.
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C.
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Case–By–Case.
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The Adviser will review each issue in this category on a case–by–case basis. Voting
decisions will he made based on the financial interest of the client involved. These
matters include proposals to:
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1.
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Pay directors solely in stock;
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2.
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Eliminate director’s mandatory retirement policy;
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3.
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Rotate annual meeting location or date;
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4.
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Changes in the state of incorporation;
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5.
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Social and corporate responsibility issues;
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6.
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Option and
stock grants to management and directors; and
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7.
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Allowing indemnification
of directors and/or officers after reviewing the applicable laws and extent of protection
requested.
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D.
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Investment
Company Issues.
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From time to time the Adviser will have to vote shares of investment company securities
that may be held in a client’s account. These matters generally include proposals
to:
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1.
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Elect directors
or trustees;
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2.
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Ratify or
approve independent accountants;
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3.
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Approve a
new investment adviser or sub–adviser;
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4.
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Approve a change to an investment advisory fee;
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5.
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Approve a
Distribution (i.e., Rule 12b–1) Plan;
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6.
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Approve a
change in a fundamental investment objective, policy or limitation;
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7.
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Approve a
change in the state of incorporation; and
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8.
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Approve a
plan of reorganization or merger.
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The Adviser will generally vote with management’s recommendation on the election
of directors and trustees, the approval of independent accountants, the approval
of a change in a fundamental investment objective, policy or limitation, and the
approval of a change in the state of incorporation. On the approval of a new investment
adviser or sub–adviser, approval of a change in investment advisory fee, approval
of a distribution (i.e., Rule 12b–1) plan, or the approval of a plan of reorganization
or merger, the Adviser will review each issue on a case–by–case basis. Voting decisions
will be made based on the financial interest of the client involved.
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(1)
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The exchange
ticker symbol and CUSIP number may be difficult to obtain for certain portfolio
securities, such as foreign issuers. Accordingly, such information may be omitted
if it’s not available through reasonably practicable means.
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46
EXHIBIT C
Nominating and Corporate Governance Committee
Charter
World Funds Trust
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Nominating and Corporate Governance Committee Membership
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1.
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The Nominating
and Corporate Governance Committee of World Funds Trust (the “Trust”)
shall be composed entirely of Independent Trustees.
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Board Nominations and Functions
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1.
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The Committee
shall make nominations for Trustee membership on the Board of Trustees, including
the Independent Trustees. The Committee shall evaluate candidates’ qualifications
for Board membership and their independence from the investment advisers to the
Trust’s series portfolios and the Trust’s other principal service providers.
Persons selected as Independent Trustees must not be “interested person”
as that term is defined in the Investment Company Act of 1940, nor shall Independent
Trustee have and affiliations or associations that shall preclude them from voting
as an Independent Trustee on matters involving approvals and continuations of Rule
12b–1 Plans, Investment Advisory Agreements and such other standards as the Committee
shall deem appropriate. The Committee shall also consider the effect of any relationships
beyond those delineated in the 1940 Act that might impair independence,
e.g.,
business, financial or family relationships with managers or service providers.
See Appendix A for Procedures with Respect to Nominees to the Board.
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2.
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The Committee
shall periodically review Board governance procedures and shall recommend any appropriate
changes to the full Board of Trustees.
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3.
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The Committee
shall periodically review the composition of the Board of Trustees to determine
whether it may be appropriate to add individuals with different backgrounds or skill
sets from those already on the Board.
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4.
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The Committee
shall periodically review trustee compensation and shall recommend any appropriate
changes to the Independent Trustees as a group.
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Committee Nominations and Functions
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1.
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The Committee
shall make nominations for membership on all committees and shall review committee
assignments at least annually.
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2.
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The Committee
shall review, as necessary, the responsibilities of any committees of the Board,
whether there is a continuing need for each committee, whether there is a need for
additional committees of the Board, and whether committees should be combined or
reorganized. The Committee shall make recommendations for any such action to the
full Board.
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Other Powers and Responsibilities
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1.
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The Committee
shall have the resources and authority appropriate to discharge its responsibilities,
including authority to retain special counsel and other experts or consultants at
the expense of the Trust.
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2.
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The Committee
shall review this Charter at least annually and recommend any changes to the full
Board of Trustees.
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47
