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As Filed with the Securities and Exchange Commission on August 24, 2012 |
Registration No. 333-179432 |
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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
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PRE-EFFECTIVE AMENDMENT NO. 1 TO |
FORM S-1 |
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |
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MARKET VECTORS COMMODITY TRUST |
(Exact name of Registrant as specified in its charter) |
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Delaware |
(State or other jurisdiction of incorporation or organization) |
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6799 |
(Primary Standard Industrial Classification Code Number) |
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45-4471648 |
(I.R.S. Employer Identification Number) |
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335 Madison Avenue |
New York, New York 10017 |
(212) 293-2000 |
(Address, including zip code, and telephone number, |
including area code, of Registrants principal executive offices) |
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Joseph J. McBrien, Esq. |
Van Eck Absolute Return Advisers Corp. |
335 Madison Avenue |
New York, New York 10017 |
(212) 293-2000 |
(Name, address, including zip code, and telephone number, |
including area code, of agent for service) |
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Copies to: |
Stuart M. Strauss, Esq. |
Dechert LLP |
1095 Avenue of the Americas |
New York, New York 10036 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. þ
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o |
Accelerated filer o |
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Non-accelerated filer (Do not check if a smaller reporting company) o |
Smaller reporting company þ |
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Calculation of Registration Fee |
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Title
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Market Vectors |
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40,000 |
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25.00 |
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1,000,000 |
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114.60 |
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Morningstar |
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Long/Short |
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Commodity ETF, |
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Common Units of |
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Beneficial Interest |
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1. The proposed maximum aggregate offering has been calculated assuming that all Shares are sold at a price of $25.00 per Share.
2.
The amount of the registration fee of the Shares is calculated in reliance upon
Rule 457(o) under the Securities Act and using the proposed maximum aggregate
offering price as described above. 40,000 Shares were registered and the
registration fee of $114.60 in respect thereof was paid on February 8, 2012.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this Prospectus is not complete and may be changed. We may not sell these securities until the Registration Statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Market Vectors Morningstar Long/Short Commodity ETF
[] Common Units of Beneficial Interest
Market Vectors Commodity Trust (the Trust) is a Delaware statutory trust organized as a series trust. Market Vectors Morningstar Long/Short Commodity ETF (the Fund) is a series of the Trust that will issue common units of beneficial interest, or Shares, which represent units of fractional undivided beneficial interest in and ownership of the Fund. Shares may be purchased from the Fund only by certain eligible financial institutions, called Authorized Participants, and only in one or more blocks of [] Shares, each called a Basket. The Fund will issue its Shares in Baskets to Authorized Participants continuously at the net asset value (NAV) of [] Shares. The Funds Participant Agreements set forth the terms and conditions on which Authorized Participants may create or redeem Baskets.
The
Shares of the Fund are expected to be listed for trading, subject to notice of
issuance, on NYSE Arca, Inc. (NYSE Arca or the Exchange), under the symbol
[] (quoted in U.S. dollars).
The
Fund will seek to track changes, whether positive or negative, in the
performance of the Morningstar® Long/Short Commodity IndexSM (the
Index) over time. The Fund will seek to achieve its investment objective by
investing principally in exchange-traded futures contracts on commodities
comprising the Index (Index Commodity Contracts). The Index is a rules-based
commodity futures index that employs a momentum rule to determine if exposure
to a particular Index Commodity Contract should be maintained with its
prescribed weighting (a long position) or moved to a short weighting (a
short position). For each Index Commodity Contract represented by the Index,
Morningstar®, Inc. (Morningstar) calculates a linked price that
incorporates both price changes and roll yield. Whether a position will be long
or short is determined, at the time of a monthly repositioning (defined below),
by comparing the linked price of each Index Commodity Contract to the 12-month
moving average of the linked price. The Fund does not seek to outperform the
Index. Van Eck Absolute Return Advisers Corp. (the Managing Owner) will seek
to cause the NAV of the Fund to track the Index during periods in which the
Index is flat or declining as well as when the Index is rising.
Except when aggregated in Baskets, the Shares are not redeemable securities.
THE SHARES ARE SPECULATIVE SECURITIES AND THEIR PURCHASE INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CONSIDER ALL RISK FACTORS BEFORE INVESTING IN THE FUND. PLEASE REFER TO THE RISKS YOU FACE BEGINNING ON PAGE [].
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The Fund has no operating history. |
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Futures trading prices are volatile and even a small movement in market prices could cause large losses. |
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Historical performance of the Index is limited and not necessarily indicative of the future performance of the Index or the Fund. |
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Holders of Shares (Shareholders) could lose all or substantially all of their investment in the Fund. |
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The Fund is subject to fees and expenses that are payable regardless of the Funds performance or profitability. |
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The Funds return may not match the return of the Index due to, among other factors, the Fund incurring operating expenses, and speculative position limits imposed by the Commodity Futures Trading Commission (CFTC) and commodity exchanges. Tracking error may reduce the Funds returns. |
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The Fund will be subject to actual and potential conflicts of interest with respect to the Managing Owner and its affiliates, commodity brokers and the Authorized Participants, including the initial Authorized Participant. |
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The Fund will distribute to Shareholders Schedule K-1s that will contain information regarding the income and expenses of the Fund. Schedule K-1 is a complex form and a Shareholder may find that preparing the Shareholders tax return may require the services of an accountant or other tax preparer at the Shareholders expense. |
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On [], 2012, [], as the initial Authorized Participant (the Initial Purchaser), subject to certain conditions, agreed to purchase and take delivery of [] Shares, which comprise the initial Baskets, at a purchase price of $[] per Share ($[] per Basket), as described in Plan of Distribution. This price has been arbitrarily determined inasmuch as the Shares will have no inherent value at the Funds inception, and it is not indicative of prices that will prevail in the trading market. The Initial Purchaser proposes to offer the Shares to the public at a per-Share price that will vary depending upon, among other factors, the trading price of the Shares on the NYSE Arca, the NAV per Share and the supply of and demand for the Shares at the time of offer. Shares offered by the Initial Purchaser at different times may have different offering prices. The Initial Purchaser will not receive from the Fund, the Managing Owner or any of their affiliates any fee or other compensation in connection with its sale of Shares to the public.
Authorized Participants may from time-to-time offer to the public Shares from any Baskets they create. Shares offered to the public by Authorized Participants will be offered at a per-Share offering price that will vary depending upon, among other factors, the trading price of the Shares on the NYSE Arca, the NAV per Share and the supply of and demand for the Shares at the time of offer. Shares initially comprising the same Basket but offered by Authorized Participants to the public at different times may have different offering prices. Authorized Participants will not receive from the Fund, the Managing Owner or any of their affiliates any fee or other compensation in connection with their sale of Shares to the public. An Authorized Participant may receive commissions or fees from Shareholders who purchase Shares through their commission or fee-based brokerage accounts with the Authorized Participant. In addition, the Marketing Agent (defined below) will be paid a fee for its services. For more information regarding items of compensation paid to Financial Industry Regulatory Authority (FINRA) members, please see the Plan of Distribution section on page [].
These securities have not been approved or disapproved by the U.S. Securities and Exchange Commission (SEC) or by any state securities commission. Neither the SEC nor any state securities commission has passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense. The Trust is a not a mutual fund or any other
ii
type of investment company within the meaning of the Investment Company Act of 1940, as amended (the 1940 Act), and is therefore not subject to regulation thereunder.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON
THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE
ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
Shares are neither interests in nor obligations of any of the Managing Owner, the Trustee, the Initial Purchaser, any other Authorized Participant or any of their respective affiliates. Shares are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency.
[], 2012
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COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL
CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU
SHOULD BE AWARE THAT COMMODITY INTEREST TRADING CAN QUICKLY LEAD TO LARGE
LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET
VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN
ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR
PARTICIPATION IN THE POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE 33 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 9.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER
FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL.
THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD
CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE
PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE 12.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
OTHER REGULATORY NOTICES
THIS POOL HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY.
THE BOOKS AND RECORDS OF THE FUND WILL BE MAINTAINED AS FOLLOWS: ACCOUNTING AND CERTAIN OTHER FINANCIAL BOOKS AND RECORDS (INCLUDING THE FUNDS ACCOUNTING RECORDS, LEDGERS WITH RESPECT TO ASSETS, LIABILITIES, CAPITAL, INCOME AND EXPENSES, THE REGISTRAR, TRANSFER JOURNALS AND RELATED DETAILS) AND TRADING AND RELATED DOCUMENTS RECEIVED FROM FUTURES COMMISSION MERCHANTS ARE MAINTAINED BY [], [ADDRESS], TELEPHONE NUMBER (-) []. ALL OTHER MARKETING MATERIALS, BOOKS AND RECORDS OF THE FUND (INCLUDING MINUTE BOOKS AND OTHER GENERAL CORPORATE RECORDS, TRADING RECORDS AND RELATED REPORTS AND OTHER ITEMS RECEIVED FROM THE FUNDS COMMODITY BROKERS) WILL BE MAINTAINED BY [VAN ECK SECURITIES
iv
CORPORATION, 335 MADISON AVENUE, NEW YORK, NEW YORK 10017, TELEPHONE NUMBER (212) 293-2000]. SHAREHOLDERS WILL HAVE THE RIGHT, DURING NORMAL BUSINESS HOURS, TO HAVE ACCESS TO AND COPY (UPON PAYMENT OF REASONABLE REPRODUCTION COSTS) SUCH BOOKS AND RECORDS IN PERSON OR BY THEIR AUTHORIZED ATTORNEY OR AGENT. MONTHLY ACCOUNT STATEMENTS FOR THE FUND CONFORMING TO CFTC AND NATIONAL FUTURES ASSOCIATION (NFA) REQUIREMENTS WILL BE POSTED ON THE MANAGING OWNERS WEBSITE AT HTTP://WWW.VANECK.COM. ADDITIONAL REPORTS MAY BE POSTED ON THE MANAGING OWNERS WEBSITE IN THE DISCRETION OF THE MANAGING OWNER AS REQUIRED BY REGULATORY AUTHORITIES. THERE WILL SIMILARLY BE DISTRIBUTED TO SHAREHOLDERS, NOT MORE THAN 90 DAYS AFTER THE CLOSE OF THE FUNDS FISCAL YEAR, CERTIFIED AUDITED FINANCIAL STATEMENTS AND (IN NO EVENT LATER THAN [] OF THE IMMEDIATELY FOLLOWING YEAR) THE TAX INFORMATION RELATING TO SHARES OF THE FUND NECESSARY FOR THE PREPARATION OF SHAREHOLDERS ANNUAL FEDERAL INCOME TAX RETURNS.
THIS PROSPECTUS DOES NOT INCLUDE ALL OF THE INFORMATION OR EXHIBITS IN THE REGISTRATION STATEMENT OF THE FUND ON FILE WITH THE SEC. YOU CAN READ AND COPY ANY MATERIALS FILED BY THE FUND WITH THE SEC AT THE SECS PUBLIC REFERENCE ROOM AT 100 F STREET, N.E., WASHINGTON, DC 20549. YOU MAY OBTAIN INFORMATION ON THE OPERATION OF THE PUBLIC REFERENCE ROOM BY CALLING THE SEC AT 1-800-SEC-0330. THE SEC MAINTAINS AN INTERNET SITE THAT CONTAINS REPORTS, PROXY AND INFORMATION STATEMENTS AND OTHER INFORMATION REGARDING ISSUERS THAT FILE ELECTRONICALLY WITH THE SEC AT HTTP://WWW.SEC.GOV.
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REGULATORY NOTICES
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, THE MANAGING OWNER, THE AUTHORIZED PARTICIPANTS OR ANY OTHER PERSON.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY OFFER, SOLICITATION OR SALE OF THE SHARES IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION, OR SALE IS NOT AUTHORIZED OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER, SOLICITATION OR SALE.
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AUTHORIZED PARTICIPANTS MAY BE REQUIRED TO DELIVER A PROSPECTUS WHEN TRANSACTING IN SHARES. SEE PLAN OF DISTRIBUTION. |
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MARKET VECTORS COMMODITY TRUST
TABLE OF CONTENTS
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Pricing Information Available on NYSE Arca and Other Sources |
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Suspension or Disruptions of Market Trading May Adversely Affect the Value of Shares |
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An Investment in the Fund May Provide Little or No Diversification Benefits |
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The Funds Short Positions Theoretically Expose It to Unlimited Losses |
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INVESTMENT OBJECTIVE, FEES, RISKS AND INFORMATION ABOUT THE INDEX |
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Organization and Initial Offering Expenses; Continuous Offering Fees and Expenses |
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Routine Operational, Administrative and Other Ordinary Fees and Expenses |
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Fiduciary and Regulatory Duties of the Managing Owner; Limitation of Liability and Indemnification |
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Transactions by the Managing Owner and Its Affiliates Involving the Index Commodities |
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Issuing of Other Derivative Instruments in Respect of the Index Commodities |
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Obtaining of Non-Public Information with Respect to the Index |
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Description of the Shares, the Trust and the Fund; Certain Material Terms of the Trust Agreement |
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Fiduciary and Regulatory Duties of the Managing Owner; Limitation of Liability and Indemnification |
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Possible Repayment of Distributions Received by Shareholders; Indemnification by Shareholders |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
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Dealer Prospectus Delivery Obligation
Until [], all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
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This is only a summary of the Prospectus and, while it contains material information about the Fund, it does not contain or summarize all of the information about the Fund contained in this Prospectus that is material and/or that may be important to you. You should read the entire Registration Statement, including all exhibits to the Registration Statement of which this Prospectus is a part, before deciding to invest in the Shares of the Fund.
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The Trust was formed as a Delaware statutory trust on February 1, 2012. The Fund is a series of the Trust that will issue common units of beneficial interest, or Shares, which represent units of fractional undivided beneficial interest in and ownership of the Fund. The term of the Trust is perpetual (unless terminated in certain circumstances). The principal office of the Trust is located at 335 Madison Avenue, New York, New York 10017, and the telephone number of the Trust is (212) 293-2000.
The Fund will seek to track changes, whether positive or negative, in the performance of the Morningstar® Long/Short Commodity IndexSM (the Index) over time. The Fund seeks to achieve its investment objective by investing under normal market conditions principally in exchange-traded futures contracts on commodities comprising the Index (Index Commodity Contracts) and U.S. Treasury bills maturing in eight weeks or less to reflect flat positions, as described below, and, in certain circumstances, Other Instruments (defined below) and Cash Instruments (defined below).
Advantages of investing in the Shares include:
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Ease and Flexibility of Investment. The Shares will trade on NYSE Arca and provide Shareholders with indirect exposure to certain commodity futures. The Shares may be bought and sold throughout the business day at real-time market prices on NYSE Arca like other exchange-listed securities. Shareholders will be able to purchase and sell Shares through traditional brokerage accounts. |
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Diversification. The Shares may help to diversify a portfolio because historically the Index has tended to exhibit low-to-negative correlation with equities, conventional bonds and alternative investments, including long/short equity strategies that seek to generate positive returns under various market conditions. |
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Margin. Shares will be eligible for margin accounts. |
Investing in the Shares does not insulate Shareholders from certain risks, including price volatility.
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The Shares of the Fund are expected to be listed for trading, subject to notice at issuance, on NYSE Arca under the symbol [] (quoted in U.S. dollars). Shareholders may purchase and sell Shares through traditional brokerage accounts. Secondary market purchases and sales of Shares are subject to customary brokerage commissions and charges. Shareholders are encouraged to review the terms of their brokerage accounts for applicable charges.
Baskets of Shares may be created and redeemed only by Authorized Participants, except that the initial Baskets will be created by the Initial Purchaser.
The market price of the Shares may not be identical to the NAV per Share. The intra-day indicative value per Share is based on the prior days final NAV per Share, adjusted every 15 seconds throughout the day to reflect the continuous price changes of the Funds futures contracts and Other Instruments, if any, to provide a continuously updated indicative intra-day value per Share. The Fund is not involved in or responsible for the calculation or dissemination of the indicative intra-day value per Share and makes no warranty as to the accuracy of the indicative intra-day value per Share.
Pricing Information Available on NYSE Arca and Other Sources
The following table lists NYSE Arca symbols and their descriptions with respect to the Shares and the Index:
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Market price per Share on NYSE Arca |
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Indicative intra-day value per Share |
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End of day NAV |
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Intra-day and Index closing level as of close of NYSE Arca from the prior day |
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Number of outstanding Shares |
The intra-day data in the above table is published once every 15 seconds throughout each trading day.
The current market price per Share (symbol: []) (quoted in U.S. dollars) will be published continuously as trades occur throughout each trading day on the consolidated tape by market data vendors.
The intra-day indicative value per Share (symbol: []) (quoted in U.S. dollars) will be published by NYSE Arca once every 15 seconds throughout each trading day on the consolidated tape by market data vendors.
The most recent end-of-day NAV (symbol: []) (quoted in U.S. dollars) will be published by the Managing Owner as of the close of business by market data vendors and on the Managing Owners website at [], or any successor thereto, and will be published on the consolidated tape.
The number of outstanding Shares (symbol: []) will be published once every 15 seconds throughout the trading day and as of the close of business for NYSE Arca and on the consolidated tape by market data vendors.
3
NYSE ARCA MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. IN NO EVENT SHALL NYSE ARCA HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
An investment in Shares is speculative and involves a high degree of risk. There is no assurance that the Fund will achieve its investment objective. A potential Shareholder should not invest in the Shares unless he or she can afford to lose the entire investment. Before investing in the Shares, a potential Shareholder should be aware of the various risks of investing in the Fund, including those described below. Additional risks and uncertainties not presently known by the Fund or not presently deemed material by the Fund may also impair the Funds operations and performance. The summary risk factors set forth below are intended to highlight certain risks of investing in the Fund. A more extensive discussion of these risks appears beginning on page [] in The Risks You Face.
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The Fund has no operating history. Therefore, a potential Shareholder has no performance history to serve as a factor in evaluating an investment in the Fund. |
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Past performance of the Fund, when available, is not necessarily indicative of future results and past performance history of the Index is limited and not necessarily indicative of the future performance of the Index or the Fund. |
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The Fund is subject to the fees and expenses as described in this Prospectus, which are payable regardless of the Funds performance or profitability. |
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The futures trading activities of the Fund take place in very volatile markets that may be subject to sudden and rapid changes. Consequently, all or substantially all of your investment in the Shares could be lost. |
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CFTC and commodity exchange rules impose speculative position limits on market participants trading in certain commodities. Currently, speculative position limits apply to the following Index Commodity Contracts that may be included in the Index: Brent Crude Oil, WTI Crude Oil, Gas-Oil-Petroleum, Gasoline Blendstock, Heating Oil #2, HHUB Natural Gas, High Grade Copper, |
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Gold, Silver, Colombian Coffee, Sugar #11, No. 2 Yellow Corn, Soybean Meal, Soybean Oil, No. 2 Yellow Soybeans, No. 2 Soft Red Wheat, No. 2 Hard Winter Wheat, Cotton, Live Cattle and Lean Hogs. These position limits establish a maximum net long or short futures position that any participant may hold or control in contracts traded on such exchanges, which may limit the Funds ability to issue new Baskets or the Funds ability to reinvest income in additional commodity futures contracts. |
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The Funds return may not match the return of the Index due to, among other factors, the Fund incurring operating expenses, and speculative position limits imposed by the CFTC and commodity exchanges. Tracking error may reduce the Funds overall returns. Also, the use of Other Instruments could result in tracking error between the Funds NAV and the performance of the Index, or could result in the Shares trading at a premium or discount to its NAV. |
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Because the Fund will invest in short commodity futures positions, it will face the risk of an unlimited loss on a short position, since the price at which the Fund would need to cover a short position could theoretically increase without limit. |
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The long and short positions represented by the Index are not designed to provide the return of any single commodity or to replicate the performance of long-only commodity market benchmarks. The Fund is not expected to provide a hedge against inflation in market environments when the Funds aggregate exposure is predominantly short and flat. |
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Certain potential conflicts of interest exist. The Commodity Broker may have a conflict of interest between its execution of trades for the Fund and for its other customers. More specifically, the Commodity Broker will benefit from executing orders for other clients, whereas the Fund may be harmed to the extent that the Commodity Broker has fewer resources to allocate to the Funds account due to the existence of such other clients. Proprietary trading or trading on behalf of other clients by the Managing Owner and its affiliates, and their respective trading principals, may create conflicts of interest because such proprietary trades or trades on behalf of other clients may take a position that is opposite of that of the Fund or may compete with the Fund for certain positions within the marketplace. See the section Conflicts of Interest for a more complete disclosure of various conflicts. Although the Managing Owner attempts to monitor these conflicts, it is extremely difficult, if not impossible, for the Managing Owner to ensure that these conflicts will not, in fact, result in adverse consequences to the Fund. |
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Shareholders have no right to elect the Managing Owner on an annual
or any other continuing basis or to remove the Managing Owner. Shareholders
may elect a replacement Managing Owner only if the current Managing Owner
resigns voluntarily or loses its corporate charter. Shareholders will not be
permitted to participate in the management or control of the Fund or the
conduct of its business. Shareholders must therefore rely upon the duties and
judgment of the Managing Owner to manage the Funds affairs.
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5
The Managing Owner is registered as a commodity pool operator and commodity trading advisor with the CFTC, and is a member of NFA. As a registered commodity pool operator and commodity trading advisor, with respect to the Fund, the Managing Owner must comply with various regulatory requirements under the Commodity Exchange Act, as amended (the Commodity Exchange Act), and the rules and regulations of the CFTC and NFA, including investor protection requirements, antifraud prohibitions, disclosure requirements and reporting and recordkeeping requirements. The Managing Owner is subject to periodic inspections and audits by the CFTC and NFA.
The Shares are not deposits or other obligations of the Managing Owner, the Trustee or any of their respective subsidiaries or affiliates or any other bank, are not guaranteed by the Managing Owner, the Trustee or any of their respective subsidiaries or affiliates or any other bank and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
Wilmington Trust, National Association, or the Trustee, a national bank with its principal place of business in Delaware, is the sole trustee of the Fund. The Trustee has only nominal duties and liabilities to the Fund.
Van Eck Securities Corporation is the
marketing agent (the Marketing Agent) of the Fund and has entered
into a Marketing Agent Agreement in connection therewith. The Marketing Agent
assists the Administrator with certain functions and duties relating to
distribution and marketing, including reviewing and approving marketing materials.
The Marketing Agent will retain all marketing materials at 335 Madison Avenue,
New York, New York 10017; telephone number (212)
293-2000.
The Marketing Agent will not open or maintain customer accounts or solicit, receive, execute, clear, settle or otherwise handle any orders to purchase or redeem Shares.
6
You cannot lose more than your investment in the Shares. Shareholders will be entitled to limitation on liability equivalent to the limitation on liability enjoyed by stockholders of a Delaware business corporation for profit.
On [], 2012, the Initial Purchaser, subject to certain conditions, agreed to purchase [] Shares, which comprise the initial Baskets, at a purchase price of $[] per Share ($[] per Basket), as described in the section Plan of Distribution.
To be eligible to place orders with the Distributor to create Baskets of the Fund, an entity or person either must be: (1) a Participating Party, i.e., a registered broker-dealer or other securities market participant, such as a bank or other financial institution, which is not required to register as a broker-dealer to engage in securities transactions; and (2) a DTC Participant, i.e., a securities broker or dealer, bank, trust company, clearing corporation or certain other organizations, some of whom (and/or their representatives) own Depository Trust Company, a New York corporation (DTC); and, in either case, must have executed an agreement (Participant Agreement) with the Fund and with the Distributor with respect to creations and redemptions of Baskets outside the Clearing Process. A Participating Party and DTC Participant are collectively referred to herein as an Authorized Participant.
Buying and Selling Exchange-Traded Shares
The Shares of the Fund are expected to be listed for trading, subject to notice of issuance, on NYSE Arca. If you buy or sell Shares in the secondary market, you will incur customary brokerage commissions and charges and may pay some or all of the spread between the bid and the offered price in the secondary market on each leg of a round-trip (purchase and sale) transaction. In times of severe market disruption or low trading volume in the Funds Shares, this spread can increase significantly. It is anticipated that the Shares will trade in the secondary market at prices that may differ to varying degrees from the NAV of the Shares.
NAV means the total assets of the Fund including, but not limited to, all cash and cash equivalents or other debt securities less total liabilities of the Fund, each determined on the basis of generally accepted accounting principles.
7
The Shares are evidenced by a global certificate that the Fund issues to DTC. The Shares are available only in book-entry form. Shareholders may hold their Shares through DTC, if they are participants in DTC, or indirectly through entities that are participants in DTC.
Segregated Accounts/Interest Income
The proceeds of the offering will be deposited in cash in a segregated account in the name of the Fund at either the Commodity Broker in accordance with CFTC investor protection and segregation requirements or with the Custodian. The Fund will be credited with 100% of the interest earned on its average net assets on deposit with the Commodity Broker or the Custodian. The Managing Owner expects to invest in U.S. Treasury bonds, U.S. Treasury bills, U.S. government securities and related securities that are direct obligations of or obligations guaranteed as to principal or interest by the United States, or securities issued or guaranteed by corporations in which the United States has a direct or indirect interest which have been designated as exempted securities pursuant to Section 3(a)(12) of the Securities Exchange Act of 1934, as amended (the Exchange Act), or any certificate of deposit for any of the foregoing, and certain cash items such as money market funds, certificates of deposit (under nine months), time deposits and other high credit quality short-term fixed income securities (collectively, Cash Instruments), which may increase interest income earned. The Cash Instruments used to track flat positions in the Index will be U.S. Treasury bills.
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Management Fee |
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The Fund will pay the Managing Owner a management fee, monthly in arrears, in an amount equal to 0.50% per annum of the daily NAV of the Fund (the Management Fee) in consideration of the Managing Owners trading advisory services. From time to time, the Managing Owner may waive all or a portion of its Management Fee. |
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Organization and Initial |
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Expenses incurred in connection with organizing the Trust and the Fund and up to the initial offering of the Funds Shares upon commencement of its trading operations will be paid by the Managing Owner. Organization and initial offering expenses relating to the Trust and the Fund that are paid by the Managing Owner means those expenses incurred in connection with its formation, the qualification, registration and the anticipated offering of the Funds Shares under applicable federal law, and any other expenses actually incurred and, directly or indirectly, related to the organization of the Trust and the Fund prior to commencing trading operations (which will occur contemporaneously with the commencement of the offering of the Shares). |
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Upon commencement of trading operations (which will occur contemporaneously with the commencement of the offering of the Shares) and thereafter, the Fund will bear the costs of its continuous offering of Shares and continuous offering expenses. Continuous offering fees and expenses include those legal and accounting fees and expenses, filing fees, printing, mailing and duplication costs associated with the continuous offering of the Shares. |
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The Managing Owner expects that the continuous offering fees and expenses of the Fund will be approximately 0.01% per annum of the Funds NAV, although the actual amount of continuous offering fees and expenses in any year or any part of any year may be greater. |
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Brokerage Commissions and |
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The Fund will pay to the Commodity Broker (as defined below) all brokerage commissions, including applicable exchange fees, NFA fees, give-up fees, pit brokerage fees and other transaction-related fees and expenses charged in connection with its trading activities. On average, total charges paid to the Commodity Broker are expected to be approximately $8.00 per round-turn trade, although the Commodity Brokers brokerage commissions and trading fees will be determined on a contract-by-contract basis. A round-turn trade is a completed transaction involving both a purchase and a liquidating sale, or a sale followed by a covering purchase. The Managing Owner does not expect the brokerage commissions and fees to exceed 0.12% of the NAV of the Fund in any year, although the actual amount of brokerage commissions and fees in any year or any part of any year may be greater. |
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Routine Operational, |
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The Fund will be responsible for paying, or for reimbursing the Managing Owner or its affiliates for paying, all of the routine operational, administrative and other ordinary fees and expenses of the Fund, including, but not limited to, the fees and expenses of the Trustee, custody fees, transfer agency fees, distribution and marketing fees, legal, audit and accounting fees and expenses, filing fees, exchange listing fees and printing, mailing and duplication costs, computer services, Index licensing fees and tax preparation expenses. The Managing Owner expects that all of the routine operational, administrative and other ordinary fees and expenses of the Fund will be approximately 0.44% per annum of the Funds NAV. The Managing Owner has agreed to reimburse the Fund, from its Management Fee, the amount of routine operational, administrative and other ordinary fees and expenses in excess of 0.15% per annum of the Funds NAV. |
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Extraordinary Fees and |
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The Fund will be responsible for paying, or for reimbursing the Managing Owner or its affiliates for paying, all the extraordinary fees and expenses, if any, of the Fund as determined by the Managing Owner. Extraordinary fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Extraordinary fees and expenses will also include material expenses which are not currently anticipated obligations of the Fund or of managed futures funds in general. Routine operational, administrative and other ordinary fees and expenses will not be deemed extraordinary fees and expenses. Such extraordinary fees and expenses, by their nature, are unpredictable in terms of timing and amount. |
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Payment of Management Fee |
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Because it is expected that interest income, if any, will not be sufficient to cover the fees and expenses of the Fund, the excess of such fees and expenses over such interest income, if any, will be paid out of income from futures trading, if any, or from sales of a portion of the Funds portfolio. However, if interest income exceeds the fees and expenses of the Fund, the Management Fee and the brokerage commissions and fees of the Fund would be paid first out of interest income from the Funds portfolio. |
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Selling Commission |
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Retail Shareholders may purchase and sell Shares through traditional brokerage accounts. Shareholders are expected to be charged a customary commission by their brokers in connection with purchases of Shares that will vary from investor to investor. Shareholders are encouraged to review the terms of their brokerage accounts for applicable charges. |
10
Federal Income Tax Considerations
Subject to the discussion below in U.S. Federal Income Tax Considerations, the Fund will not be classified as an association taxable as a corporation. Instead, the Fund will be classified as a partnership for U.S. federal income tax purposes. Accordingly, the Fund will not incur U.S. federal income tax liability; rather, each Shareholder will be required to take into account its allocable share of the Funds income, gain, loss, deductions and other items for the Funds taxable year ending with or within the Shareholders taxable year.
Additionally, please refer to the U.S. Federal Income Tax Considerations section below for information on the potential U.S. federal income tax consequences of the purchase, ownership and disposition of Shares in the Fund.
The Fund will make distributions at the discretion of the Managing Owner. To the extent that the Funds actual and projected interest income from its Cash Instruments exceeds the actual and projected fees and expenses of the Fund, the Managing Owner expects periodically to make distributions of the amount of such excess. The Fund currently does not expect to make distributions with respect to capital gains. Depending on the Funds performance for the taxable year and your own tax situation for such year, your income tax liability for the taxable year for your allocable share of the Funds net ordinary income or loss and capital gain or loss may exceed any distributions you receive with respect to such year.
The Breakeven Table below indicates the approximate percentage and dollar returns required for the value of an initial $25.00 investment in a Share of the Fund to equal the amount originally invested twelve months after issuance.
The Breakeven Table, as presented, is an approximation only. The capitalization of the Fund does not directly affect the level of its charges as a percentage of its NAV, other than brokerage commissions.
11
Breakeven Table
Per Share Dollar
Amount and Percentage of Expenses of the Fund
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Fee/Expense(1) |
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Dollar
Amount and Percentage of Expenses of |
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Management Fee(2) |
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$ |
0.13 |
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0.50 |
% |
Organization and Initial Offering Expenses; Continuous Offering Fees and Expenses(3) |
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$ |
0.00 |
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0.01 |
% |
Routine Operational, Administrative & Other Expenses(5)(6) |
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$ |
0.04 |
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0.15 |
% |
Brokerage Commissions and Fees(4) |
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$ |
0.03 |
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0.12 |
% |
Interest Income(7) |
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$ |
(0.02 |
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(0.08 |
)% |
12-Month Breakeven(8)(9) |
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$ |
0.18 |
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0.70 |
% |
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(1) |
The breakeven analysis assumes that the Funds assets are $100 million, the Shares have a constant month-end NAV and is based on $25.00 as the NAV per Share. See Investment Objective, Fees, Risks and Information about the Index - Fund Fees and Expense on page [] for an explanation of the expenses included in the Breakeven Table. |
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(2) |
The Fund pays the Managing Owner a Management Fee, monthly in arrears, in an amount equal to 0.50% per annum of the daily NAV of the Fund. The Management Fee and the brokerage commissions and fees of the Fund are paid first out of interest income from the Funds holdings of U.S. Treasury bills on deposit with the Commodity Broker as margin or otherwise. If, however, the interest income is not sufficient to cover the fees and expenses of the Fund during any period, the excess of such fees and expenses over such interest income will be paid out of income from futures trading, if any, or from sales of the Funds fixed income securities. |
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(3) |
Expenses incurred in connection with organizing the Trust and the Fund and up to the initial offering of the Funds Shares upon commencement of its trading operations will be paid by the Managing Owner. Organization and initial offering expenses relating to the Trust and the Fund that are paid by the Managing Owner means those expenses incurred in connection with its formation, the qualification, registration and the anticipated offering of the Funds Shares under applicable federal law, and any other expenses actually incurred and, directly or indirectly, related to the organization of the Trust and the Fund prior to commencing trading operations (which will occur contemporaneously with the commencement of the offering of the Shares). |
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Upon commencement of trading operations (which will occur contemporaneously with the commencement of the offering of the Shares) and thereafter, the Fund will bear the costs of its continuous offering of Shares and continuous offering expenses. Continuous offering fees and expenses include those legal and accounting fees and expenses, filing fees, printing, mailing and duplication costs associated with the continuous offering of the Shares. |
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The Managing Owner expects that the continuous offering fees and expenses of the Fund will be approximately 0.01% per annum of the Funds NAV, although the actual amount of continuous offering fees and expenses in any year or any part of any year may be greater. |
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(4) |
The Fund pays to the Commodity Broker all brokerage commissions, including applicable exchange fees, NFA fees, give-up fees, pit brokerage fees and other transaction related fees and expenses charged in connection with its trading activities. This assumes that one creation basket was invested in futures contracts for one year, and there was no change in the settlement price of such contracts. On average, total charges paid to the Commodity Broker are expected to be approximately $8.00 per round-turn trade, although the Commodity Brokers brokerage commissions and trading fees will be determined on a contract-by-contract basis. The Managing Owner does not expect brokerage commissions and fees to exceed 0.12% of the NAV of the Fund in any year, although the actual amount of brokerage commissions and fees in any year or any part of any year may be greater. |
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(5) |
The Fund is responsible for paying all routine operational, administrative and other ordinary expenses of the Fund. Pursuant to a written contract (the Waiver Agreement), the Managing Owner has agreed to waive a portion of its advisory fee and has agreed to reimburse the Fund for other expenses and expenses to the extent necessary so that the total expenses incurred by the Fund (excluding continuous offering fees and expenses, brokerage commissions and fees, extraordinary expenses, such as litigation, not incurred in the ordinary course of the Funds business) do not exceed 0.65%. The Bank of New York Mellon also serves as Administrator for |
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the Fund, performing certain administrative and accounting services and preparing certain SEC and CFTC reports. The Fund pays the Administrator an Administration Fee, monthly in arrears, in an amount equal to 0.030% per annum of the daily NAV of the Fund, subject to a minimum of $30,000 per year. |
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Extraordinary fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Such extraordinary fees and expenses, by their nature, are unpredictable in terms of timing and amount. |
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(6) |
In connection with orders to create and redeem Baskets, Authorized Participants pay a transaction fee in the amount of $500 per order. Because these transaction fees are de minimis in amount, are charged on a transaction-by-transaction basis (and not on a Basket-by-Basket basis), and are borne by the Authorized Participants, they have not been included in the Breakeven Table. |
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(7) |
Interest income currently is estimated to be earned at a rate of 0.08%, based upon the yield on three month U.S. Treasury bills as of May 22, 2012. Actual interest income could be higher or lower than the current yield of three-month U.S. Treasury bills. |
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(8) |
The Fund is subject to (i) a Management Fee of 0.50% per annum; (ii) estimated continuous offering fees and expenses of 0.01% per annum; (iii) brokerage commissions and fees of 0.12% per annum; and (iv) routine operational, administrative and other ordinary expenses of 0.15% per annum. The Fund is subject to fees and expenses in the aggregate amount of approximately 0.78% per annum. The Fund is expected to earn 0.08% per annum, based upon the yield of three month U.S. Treasury bills as of May 22, 2012, or $0.02 per annum per Share at $25.00 as the NAV per Share. Therefore, based upon the difference between the current yield of three-month U.S. Treasury bills and the annual fees and expenses, the Fund will be required to earn approximately 0.70% per annum, or $0.18 per annum per Share at $25.00 as the NAV per Share, in order for an investor to break-even on an investment during the first twelve months of an investment. Actual interest income could be higher or lower than the current yield of three-month U.S. Treasury bills. |
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(9) |
You may pay customary brokerage commissions in connection with purchases of the Shares. Because such brokerage commission rates will vary from investor to investor, such brokerage commissions have not been included in the Breakeven Table. Investors are encouraged to review the terms of their brokerage accounts for applicable charges. |
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The Fund has not yet commenced operations as of the date of this Prospectus and therefore does not have a financial history.
13
Cautionary Note Regarding Forward-Looking Statements
This Prospectus includes forward-looking statements that reflect the Managing Owners current expectations about the future results, performance, prospects and opportunities of the Fund. The Managing Owner has tried to identify these forward-looking statements by using words such as may, will, expect, anticipate, believe, intend, should, estimate or the negative of those terms or similar expressions. These forward-looking statements are based on information currently available to the Managing Owner and are subject to a number of risks, uncertainties and other factors, both known, such as those described in Risk Factors in this Summary and in The Risks You Face and elsewhere in this Prospectus, and unknown, that could cause the actual results, performance, prospects or opportunities of the Fund to differ materially from those expressed in, or implied by, these forward-looking statements.
You should not place undue reliance on any forward-looking statements. Except as expressly required by the federal securities laws, the Managing Owner undertakes no obligation to publicly update or revise any forward-looking statements or the risks, uncertainties or other factors described in this Prospectus, as a result of new information, future events or changed circumstances or for any other reason after the date of this Prospectus.
An investment in the Fund involves the risk of losing money. Consider the risks below as well as the rest of the information in the Registration Statement before making an investment decision.
Futures and Commodities Market Related Risks
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Market risk refers to the risk that market prices of commodities and related instruments that the Fund holds will rise or fall, sometimes rapidly or unpredictably. An investment in the Funds Shares is subject to market risk, including the possible loss of the entire principal of the investment. If the Fund experiences in the aggregate more losses than gains during the period in which a Shareholder holds Shares, the Shareholder will experience a loss for the period even if the Funds historical performance is positive. |
Investments in futures contracts historically have had a high degree of price variability and may be subject to rapid and substantial changes. Recently, the commodities markets have experienced periods of extreme volatility. General market uncertainty and consequent repricing of risk have led to market imbalances of sellers and buyers, which in turn have resulted in significant reductions in values of a variety of commodities. Similar future market conditions may result in rapid and substantial valuation increases or decreases in the Funds holdings. In addition, volatility in the commodity and securities markets may directly and adversely affect distribution rates on the Shares.
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of commodities can also fluctuate widely due to supply and demand disruptions in major producing or consuming regions. Because certain commodities may be produced in a limited number of countries and may be controlled by a small number of producers, political, economic and supply-related events in such countries could have a disproportionate impact on the prices of such commodities. These factors may affect the value of the Fund in varying ways, and different factors may cause the value and the volatility of the Fund to move in inconsistent directions at inconsistent rates.
A market disruption, such as a foreign government taking political actions that disrupt the market in its currency, its commodity production or exports, or in another major export, can also make it difficult to liquidate a position. Unexpected market illiquidity may cause major losses to Shareholders at any time. The large size of the positions that the Fund may acquire increases the risk of illiquidity by both making its positions more difficult to liquidate and increasing the losses incurred while trying to do so.
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Authorized Participants or their clients may have an opportunity to realize a riskless profit if they can purchase a Basket at a discount to the public trading price of the Shares or can redeem a Basket at a premium over the public trading price of the Shares. The Managing Owner believes that the exploitation of such arbitrage opportunities by Authorized Participants and their clients and customers should cause the public trading price to track NAV closely over time; however, there can be no assurance that this will be the case.
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global supply and demand of each of the Index Commodity Contracts, which may be influenced by such factors as forward selling by the various commodities producers, purchases made by the commodities producers to unwind their hedge positions and production and cost levels in the major markets of each of the Index Commodity Contracts; |
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domestic and foreign interest rates and Shareholders expectations concerning interest rates; |
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domestic and foreign inflation rates and Shareholders expectations concerning inflation rates; |
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investment and trading activities of mutual funds, hedge funds and commodity funds; |
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global or regional political, economic, geographic, ecological or financial events and situations; and |
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expectations among market participants that a commoditys value will soon change. |
Pursuant to the statutory mandate of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which was signed into law on July 21, 2010, on October 18, 2011, the CFTC adopted regulations that impose new federal position limits on futures and options on a subset of energy, metal, and agricultural commodities (the Referenced Contracts) and economically equivalent swap transactions. The limits will apply to the Funds combined positions across these products. The Referenced Contracts subject to the new rules represent approximately []% (i.e., 2011 production dollar weight) of the Index Commodity Contracts.
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Futures positions cannot always be liquidated at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders in a market. The large size of the positions which the Fund may acquire increases the risk of illiquidity by both making its positions more difficult to liquidate and increasing the losses incurred while trying to do so. A market disruption, such as when foreign governments may take or be subject to political actions which disrupt the markets in their currency or major exports, can also make it difficult to liquidate a position.
In addition, U.S. futures exchanges and some foreign exchanges have regulations that limit the amount of fluctuation in futures contract prices that may occur during a single business day. These limits are generally referred to as daily price fluctuation limits and the maximum or minimum price of a futures contract on any given day as a result of these limits is referred to as a limit price. Once the limit price has been reached in a particular futures contract, no trades may be made at a different price. Limit prices have the effect of precluding trading in a particular futures contract or potentially forcing the liquidation of futures contracts at disadvantageous times or prices.
Furthermore, the above distortions and/or disruptions may cause the Fund to liquidate certain of its holdings of Cash Instruments in order to meet margin requirements or close positions, possibly at inopportune times.
Market illiquidity and price limits may cause losses for the Fund, and in turn, adversely affect the market price of your Shares.
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Markets in which the Fund may effect a transaction in certain Other Commodity Instruments are in the OTC private markets. The participants and dealers in such markets are typically not subject to the same level of credit evaluation and regulatory oversight as are members of the exchange-based markets. This exposes the Fund to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a credit or liquidity problem or a dispute over the terms of the contract (whether or not bona fide), thus causing the Fund to suffer a loss. Such counterparty risk is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or in instances where the Fund has concentrated its transactions with a single or small group of counterparties. Recent events surrounding the bankruptcies or similar proceedings of various counterparties and dealers have demonstrated certain risks of the Fund engaging in these OTC transactions. Therefore, the Fund faces the risk of non-performance by the counterparties to the Other Commodity Instruments and such non-performance may cause some or all of the Funds gain, if any, on these Other Commodity Instruments to be unrealized.
The Fund may experience significant delays in obtaining any recovery in a bankruptcy or other reorganization proceeding from a counterparty and the Fund may obtain only limited recovery or may obtain no recovery in such circumstances.
Because certain Other Commodity Instruments:
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are not traded on an exchange, |
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do not have uniform terms and conditions; |
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|
are entered into on the basis of the creditworthiness of the parties and the availability of credit support, such as collateral; and |
|
|
|
in general, are not transferable without the consent of the counterparty, |
such Other Commodity Instruments are less marketable than Index Commodity Contracts and Other Commodity Contracts (defined below), if any.
21
Brokers acting on behalf of Shareholders in the Funds sale of Shares are also subject to conflicts of interest. The compensation received by brokers gives them an incentive to promote the sale of Shares as well as to discourage redemptions, which may not be in the best interests of Shareholders.
The Fund may be subject to certain conflicts with respect to the Commodity Broker, including, but not limited to, conflicts that result from receiving greater amounts of compensation from other clients, or purchasing opposite or competing positions on behalf of third-party accounts traded through the Commodity Broker.
The Managing Owner has not established formal procedures to resolve all conflicts of interest and, as a result, the Managing Owner could resolve a potential conflict in a manner that is not in the best interest of the Fund or the Shareholders. Consequently, Shareholders may be dependent on the good faith of the respective parties subject to such conflicts to act in the Shareholders best interest. Although the
22
Managing Owner attempts to monitor all of these conflicts, it is extremely difficult, if not impossible, for the Managing Owner to ensure that these conflicts do not, in fact, result in adverse consequences to the Shareholders.
23
24
25
26
27
in the United States. The effect of any future regulatory change on the Fund is impossible to predict, but could be substantial and adverse.
On July 21, 2010, the Dodd-Frank Act was signed into law. The Dodd-Frank Act includes provisions altering the regulation of commodity interests. Provisions in the Dodd-Frank Act include, among other things, the requirement that position limits be established by the CFTC on a wide range of commodity interests including energy-based and other commodity futures contracts and certain commodity OTC contracts; new registration, recordkeeping, capital and margin requirements for swap dealers and major swap participants as determined by the Dodd-Frank Act and applicable regulations; and the required use of clearing house mechanisms for standardized OTC transactions. Additionally, the Dodd-Frank Act requires the aggregation, for purposes of position limits, of all positions in commodity futures and certain commodity OTC contracts held by a single entity and its affiliates, whether such positions exist on U.S. futures exchanges or in OTC contracts. The CFTC, along with the SEC and other federal regulators, has been tasked with developing the rules and regulations enacting the provisions noted above. The Dodd-Frank Act and the rules and regulations promulgated thereunder may negatively impact the Funds ability to meet its investment objective either through limits or requirements imposed on the Fund or upon its counterparties. In particular, new position limits imposed on the Fund or its counterparties may impact their ability to invest in a manner that most efficiently meets their respective investment objectives, and new requirements, including capital and mandatory clearing, may increase the cost of the Funds investments and doing business, which could adversely affect its Shareholders. On October 18, 2011, the CFTC adopted regulations that impose new federal position limits on Referenced Contracts and economically equivalent swap transactions. The limits will apply to the Funds combined positions across these products. The Referenced Contracts subject to the new rules represent approximately []% (i.e., 2011 production dollar weight) of the Index Commodity Contracts.
28
|
|
|
|
|
Component |
|
Exchange |
|
Exchange Position Limits |
|
|
|
|
|
Energy Sector |
||||
|
|
|
|
|
Brent Crude Oil |
|
ICE (Europe) |
|
3,000 Last
Three Trading Days Prior to Contract Expiration |
WTI Crude Oil |
|
NYMEX |
|
3,000 Last
Three Trading Days Prior to Contract Expiration |
Gas-Oil-Petroleum |
|
ICE (Europe) |
|
1,000 Last
Three Trading Days Prior to Contract Expiration |
Gasoline Blendstock |
|
NYMEX |
|
1,000 Spot Month |
Heating Oil #2 / Fuel Oil |
|
NYMEX |
|
1,000 Spot Month |
Natural Gas, Henry Hub |
|
NYMEX |
|
1,000 Spot
Month |
Metals Sector |
||||
Copper High Grade / Scrap No. 2 Wir |
|
NYMEX |
|
1,200 Spot
Month |
Gold |
|
NYMEX |
|
3,000 Spot
Month |
Silver |
|
NYMEX |
|
1,500 Spot Month |
Agricultural Sector |
29
|
|
|
|
|
Coffee C Colombian |
|
ICE (US) |
|
500 Spot
Month On or after the first delivery notice day |
Sugar #11 / World Raw |
|
ICE (US) |
|
5,000 Spot
Month On or after the first delivery notice day |
Corn / No. 2 Yellow |
|
CBOT |
|
600 Spot
Month Net long or short effective at the close of trading two business days
prior to the first trading day of the delivery month |
Soybean Meal / 48% Protein |
|
CBOT |
|
720 Spot
Month Net long or short effective at the close of trading two business days
prior to the first trading day of the delivery month |
Soybean Oil / Crude |
|
CBOT |
|
540 Spot
Month Net long or short effective at the close of trading two business days
prior to the first trading day of the delivery month |
Soybeans / No. 2 Yellow |
|
CBOT |
|
600 Spot Month |
Wheat / No. 2 Soft Red |
|
CBOT |
|
600 Spot Month -- Effective at the close of trade the day before its first delivery
notice day |
Wheat / No. 2 Hard Winter |
|
KCBT |
|
600 Spot
Month Effective at the close of trade the day before its first delivery
notice day |
Cotton / 1-1/16 |
|
ICE (US) |
|
300 Spot
Month On or after the first delivery notice day |
Livestock Sector |
30
|
|
|
|
|
Live Cattle / Choice Average |
|
CME |
|
450 Spot
Month As of the close of business on the first business day following the
first Friday of the contract month |
Lean Hogs / Average Iowa/S Minn |
|
CME |
|
950 Spot
Month As of the close of business on the fifth business day of the contract
month |
|
|
|
|
1 |
LEGEND: |
CME means the Chicago Mercantile Exchange, Inc. or its successor.
ICE means the InterContinental Exchange, Inc. or its successor.
KCBOT means the Kansas City Board of Trade or its successor.
NYMEX means the New York Mercantile Exchange, Inc. or its successor.
Market Disruptions and Resulting Governmental
Interventions are Unpredictable and May Have an Adverse Effect on the Value of
Your Shares.
The global financial markets have recently gone
through pervasive and fundamental disruptions that have led to extensive and
unprecedented governmental intervention. Such intervention has in certain cases
been implemented on an emergency basis, suddenly and substantially
eliminating market participants ability to continue to implement certain
strategies or manage the risk of their outstanding positions. In addition,
these interventions have typically been ambiguous in scope and application,
resulting in confusion and uncertainty which has been materially detrimental to
the efficient functioning of the markets as well as previously successful
investment methodologies.
The Fund may incur major losses in the event of disrupted markets and other extraordinary events in which historical pricing relationships become materially distorted. The risk of loss from pricing distortions is compounded by the fact that in disrupted markets many positions become illiquid, making it difficult or impossible to close out positions against which the markets are moving. The financing available to market participants from their banks, dealers and other counterparties is typically reduced in disrupted markets. Such a reduction may result in substantial losses to the affected market participants. Market disruptions may from time to time cause dramatic losses, and such events can result in otherwise historically low-risk strategies performing with unprecedented volatility and risk.
As discussed above, the Dodd-Frank Act seeks to regulate markets, market participants and financial instruments that previously have been unregulated and substantially alters the regulation of many other markets, market participants and financial instruments. Because many provisions of the Dodd-Frank Act require rulemaking by the applicable regulators before becoming fully effective and the Dodd-Frank Act mandates multiple agency reports and studies (which could result in additional legislative or regulatory action), it is difficult to predict the impact of the Dodd-Frank Act on the Fund, the Managing Owner, and the markets in which the Fund invests. The Dodd-Frank Act could result in certain investment strategies in which the Fund engages or may have otherwise engaged becoming non-viable or non-economic to implement. The Dodd-Frank Act and regulations adopted pursuant to the Dodd-Frank Act could have a material adverse impact on the profit potential of the Fund. See also Regulation of the Commodities
31
Industry Is Extensive and Subject to Change; Future Regulatory Developments Are Impossible to Predict but May Significantly and Adversely Affect the Fund. above.
Trading on Commodity Exchanges Outside the
United States is Not Subject to U.S. Regulation, and May Be Less Reliable than
U.S. Exchanges.
Some of the Funds trading may be conducted on
commodity exchanges outside the United States. Trading on such exchanges is not
regulated by any U.S. governmental agency and may involve certain risks not
applicable to trading on U.S. exchanges, including different or diminished
investor protections. Certain foreign markets may be more susceptible to
disruption than U.S. exchanges due to the lack of a government-regulated clearing house system. Trading on
foreign exchanges also involves certain other risks that are not applicable to
trading on U.S. exchanges. These risks include adverse exchange-rate movements
between the dollar and the functional currencies of such contracts, potential
exchange controls, expropriation, burdensome or confiscatory taxation,
moratorium and political or diplomatic events. It may also be more costly and difficult
for the Fund to enforce laws or regulations of a foreign country or exchange,
and it is possible that the foreign country does not have laws or regulations
to adequately protect the rights and interests of Shareholders of the Fund.
Some foreign exchanges may be in an earlier developmental stage than U.S. exchanges, so that prior price histories may not be indicative of current price dynamics. In addition, the Fund may not have the same access to certain contracts on foreign exchanges as do local market participants, and the historical market data on which the Managing Owner bases its strategies may not be as reliable or as accessible as it is in the United States. All of these factors could adversely affect the performance of the Fund.
Future Regulation of OTC Derivatives Markets
May Have a Detrimental Effect On the Value of Your Shares.
The Dodd-Frank Act includes provisions that
comprehensively regulate the OTC derivatives markets for the first time. The
Dodd-Frank Act provides that a substantial portion of OTC derivatives must be
executed in regulated markets and submitted for clearing to regulated clearing houses. OTC trades submitted
for clearing will be subject to minimum initial and variation margin
requirements set by the relevant clearing
house, as well as possible regulatory margin requirements. The SEC and
CFTC also have broad discretion to impose margin requirements on non-cleared
OTC derivatives and new requirements will apply to the holding of customer
collateral by OTC derivatives dealers. These requirements may increase the
amount of collateral the Fund is required to provide and the costs associated
with providing it with respect to its investments in Other Commodity
Instruments (if any). Although the Dodd-Frank Act includes limited exemptions
from the clearing and margin requirements for so-called end-users, the Fund
will not qualify to rely on such exemptions. In addition, the OTC derivative
dealers with which the Fund executes certain Other Commodity Instruments (if
any) will not be able to rely on the end-user exemptions under the Dodd-Frank Act.
Therefore such Other Commodity Instruments may be subject to mandatory clearing
and the dealers will be subject to margin requirements irrespective of whether
the Fund is subject to such requirements. OTC derivative dealers also will be
required to post margin to the clearing
houses through which they clear their customers trades instead of using
such margin in their operations, as is currently permitted. This will increase
the OTC derivative dealers costs, and these increased costs are expected to be
passed through to other market participants in the form of higher upfront and
mark-to-market margin, less favorable trade pricing, and the possible
imposition of new or increased fees.
32
The SEC or CFTC may also require that a substantial portion of OTC transactions be executed through a regulated securities, futures, or swap exchange or execution facility. Such requirements may make it more difficult and costly for the Fund to engage in tailored or customized transactions. These may also result in certain Other Commodity Instruments (if any) in which the Fund might otherwise invest impossible or uneconomical.
OTC derivative dealers and major OTC derivatives market participants will be required to register with the SEC and/or CFTC. The Fund or the Managing Owner may be required to register as major swap participants in the OTC derivatives markets. Dealers and major swap participants will be subject to minimum capital and margin requirements. These requirements may apply irrespective of whether the OTC derivatives in question are exchange-traded or cleared. OTC derivatives dealers will also be subject to new business conduct standards, disclosure requirements, reporting and recordkeeping requirements, transparency requirements, position limits, limitations on conflicts of interest, and other regulatory burdens. These requirements may further increase the overall costs for OTC derivative dealers, which costs are also likely to be passed along to market participants. The overall impact of the Dodd-Frank Act on the Fund is highly uncertain and it is unclear how the OTC derivatives markets will adapt to this new regulatory regime.
Competing Claims Over Ownership of
Intellectual Property Rights Related to the Fund Could Adversely Affect the
Fund and an Investment in the Shares.
The Managing Owner believes that all intellectual
property rights needed to operate the Fund have been obtained by the Managing
Owner. However, third parties may allege or assert ownership of intellectual
property rights which may be related to the design, structure and operations of
the Fund. The negotiation, litigation or settlement of such claims may result
in expenses or damages that could adversely affect the Fund or lead to its
termination.
33
Shareholders Will Be
Subject to Taxation on Their Allocable Shares of the Funds Taxable Income,
Whether or Not They Receive Cash Distributions.
Shareholders will be subject to U.S. federal income taxation
and, in some cases, state, local, or foreign income taxation on their allocable
shares of the Funds taxable income, whether or not they receive cash
distributions from the Fund. Shareholders may not receive cash distributions
equal to their shares of the Funds taxable income or even the tax liability
that results from such income.
Items Of Income, Gain,
Loss And Deduction With Respect To Shares Could Be Reallocated If The IRS Does
Not Accept The Assumptions Or Conventions Used By The Fund In Allocating Such
Tax Items.
U.S. federal income tax rules applicable to partnerships are
complex and often difficult to apply to publicly traded partnerships. The Fund
will apply certain assumptions and conventions in an attempt to comply with
applicable rules and to report items of income, gain, loss and deduction to
Shareholders in a manner that reflects the Shareholders beneficial interests
in such tax items, but these assumptions and conventions may not be considered
to be in compliance with all aspects of applicable tax requirements. It is
possible that the IRS will successfully assert that the conventions and
assumptions used by the Fund do not satisfy the technical requirements of the
Code and/or Treasury Regulations and could require that items of income, gain,
loss or deduction be adjusted or reallocated in a manner that adversely affects
one or more Shareholders.
The Current Treatment Of
Long-Term Capital Gains Under Current U.S. Federal Income Tax Law May Be
Adversely Affected, Changed Or Repealed In The Future, And In Turn, May
Adversely Affect The Value Of Your Shares.
Under current law, long-term capital gains are taxed to
non-corporate Shareholders at
reduced U.S. federal income tax rates. This tax treatment may be adversely
affected, changed or repealed by future changes in, or the expiration of, tax
laws at any time.
INVESTMENT OBJECTIVE, FEES, RISKS AND INFORMATION ABOUT THE INDEX
The Fund will seek to track changes, whether
positive or negative, in the performance of the Index over time. The Fund will
seek to achieve its investment objective by investing principally in Index
Commodity Contracts and U.S. Treasury bills maturing in eight weeks or less to
reflect flat positions, as described below, and, in certain circumstances,
futures contracts on non-Index commodities traded on U.S. or foreign exchanges
(Other Commodity Contracts). In addition, to a limited extent the Fund may
also invest in commodity-based swap agreements cleared through an a central
clearing house or the clearing houses affiliate (Cleared Swaps) and
exchange-traded options on Other Commodity Contracts, forward contracts,
exchange-traded cash-settled options, OTC swaps and other OTC transactions that
provide economic exposure to the investment returns of the commodities markets,
as represented by the Index and its constituents (collectively, Other
Commodity Instruments, and, together with Other Commodity Contracts and
Cleared Swaps, Other Instruments), as described below. The Fund intends to
invest first in Index Commodity Contracts. Thereafter, if the Fund reaches the
position limits applicable to one or more Index Commodity Contracts or a
Futures Exchange imposes limitations on the Funds ability to maintain or
increase its positions in an Index Commodity Contract after reaching accountability
levels or a price limit is in effect on an Index Commodity Contract during the
last 30 minutes of its regular trading session, the Funds intention is to
invest first in Cleared Swaps to the extent permitted under the position limits
applicable to Cleared Swaps and appropriate in light of the liquidity in the
Cleared Swaps market, and then, using its commercially reasonable judgment, in
Other Commodity Contracts or in Other Commodity Instruments. By using certain
or all of these investments, the
34
Managing Owner will endeavor to cause the Funds performance to closely track that of the Index over time.
The Index is a rules-based commodity futures
index that employs a momentum rule to determine if exposure to a particular
commodity should be maintained with its prescribed weighting (a long
position) or moved to a short weighting (a short position). For each Index Commodity Contract represented by the Index, Morningstar
calculates a linked price series that incorporates both price changes and
roll yield. Roll yield is the amount of return generated (either
positive or negative) by rolling a short-term contract into a longer-term
contract and profiting or losing money from the convergence toward a higher or
lower spot price. Whether a position will be long or short is determined, at
the time of a monthly repositioning, by comparing the linked price of each
Index Commodity Contract to the 12-month moving average of the linked price of
such Index Commodity Contract. For example, if at a monthly repositioning, the
linked price for an Index Commodity Contract exceeds its 12-month moving
average, the Index takes a long position in the subsequent month. Conversely,
if the linked price for an Index Commodity Contract is below its 12-month moving
average, the Index takes the short side. An exception is made for Index
Commodity Contracts in the energy sector. If the signal for an Index Commodity
Contract in the energy sector is short, the weight of that Index Commodity
Contract is moved to cash (i.e., flat). Energy is unique in that its
price is extremely sensitive to geopolitical events and not necessarily driven
purely by demand-supply imbalances.
To be considered for inclusion in the Index, a commodity should have futures contracts traded on one of the U.S. exchanges and rank in the top 95% by total dollar value of open interest. The weight of each individual Index Commodity Contract in the Index is the product of two factors: magnitude and the direction of the momentum signal (i.e., 1 for long, 0 for flat or -1 for short). On the annual reconstitution date, the magnitude is the open interest weight of the Index Commodity Contract, calculated on the second Friday of December, using data through the last trading day of November. Individual contract weights are capped at 10%. Between reconstitution dates, the weights vary based on the performance of the individual Index Commodity Contract positions. The Index is reconstituted annually and directions (i.e., whether long, short or flat) of each Index Commodity Contract are determined monthly on the second Friday of each month, which is one week prior to the repositioning day.
Consistent with seeking to achieve the Funds
investment objective, the Managing Owner may, under the circumstances described
above, cause the Fund to enter into or hold Cleared Swaps and Other Commodity
Instruments. For example, certain Cleared Swaps have standardized terms similar
to, and are priced by reference to, a corresponding Index Commodity Contract.
Additionally, OTC Other Commodity Instruments can generally be structured as
the parties to the contract desire. Therefore, the Fund might enter into
multiple Cleared Swaps and/or OTC Other Commodity Instruments intended to
exactly replicate the performance of one or more Index Commodity Contracts, or
a single OTC Other Commodity Instrument designed to replicate the performance
of the Index as a whole. The Fund expects that investments in OTC Other
Commodity Instruments (if any) will be made on terms that are standard in the
market for such OTC Other Commodity Instruments. In addition, after entering
into or holding Cleared Swaps, the Fund might enter into or hold Other
Instruments that would be expected to alleviate overall deviation between the
Funds performance and that of the Index that may result from certain market
and trading inefficiencies or other reasons. The Fund will invest to the
fullest extent possible in Index Commodity Contracts and Other Instruments
without being leveraged or unable to satisfy its expected current or potential
margin or collateral obligations with respect to its investments in Index
Commodity Contracts and Other Instruments. The Managing Owner has the
discretion to change the Funds investment objective or policies at any time
without prior notice.
35
The Fund will pay the Managing Owner a Management Fee, monthly in
arrears, in an amount equal to 0.50% per annum of the daily NAV of the Fund. The Management Fee
will be paid in consideration of the Managing Owners trading advisory services. From time to time, the Managing Owner
may waive all or a portion of its Management Fee.
Organization and Initial Offering Expenses; Continuous Offering Fees and Expenses
Expenses incurred in connection with organizing the Trust and the Fund and up to the initial offering of the Funds Shares upon commencement of its trading operations will be paid by the Managing Owner. Organization and initial offering expenses relating to the Trust and the Fund that are paid by the Managing Owner means those expenses incurred in connection with its formation, the qualification and registration of the Shares and in offering, distributing and processing the Shares under applicable federal law, and any other expenses actually incurred and, directly or indirectly, related to the organization of the Fund or the offering of the Shares, including, but not limited to, expenses such as initial and ongoing registration fees, filing fees, escrow fees and taxes; costs of preparing, printing (including typesetting), amending, supplementing, mailing and distributing the Registration Statement and the exhibits thereto and the Prospectus; the costs of qualifying, printing (including typesetting), amending, supplementing, mailing and distributing sales materials used in connection with the offering and issuance of the Shares; travel, telefacsimile, telephone and other expenses in connection with the offering and issuance of the Shares; accounting, auditing and legal fees (including disbursements related thereto) incurred in connection therewith; and any extraordinary expenses related thereto (including, but not limited to, legal claims and liabilities and litigation costs and any permitted indemnification associated therewith).
Upon commencement of trading operations (which will occur contemporaneously with the commencement of the offering of the Shares) and thereafter, the Fund will bear the costs of its continuous offering of Shares and continuous offering expenses. Continuous offering fees and expenses include those legal and accounting fees and expenses, filing fees, printing, mailing and duplication costs associated with the continuous offering of the Shares.
The Managing Owner expects that the continuous offering fees and expenses of the Fund will be approximately 0.01% per annum of the Funds NAV, although the actual amount of continuous offering fees and expenses in any year or any part of any year may be greater.
Offering expenses relating to the Fund in connection with the continuous offering of the Shares, include, but are not limited to, expenses such as:
|
|
|
ongoing registration fees, filing fees, escrow fees and taxes; |
|
|
|
costs of preparing, printing (including typesetting), amending, supplementing, mailing and distributing the Registration Statement, the exhibits thereto and this Prospectus; |
|
|
|
the costs of qualifying, printing, (including typesetting), amending, supplementing, mailing and distributing sales materials used in connection with the offering and issuance of the Shares; |
|
|
|
travel, telegraph, telephone and other expenses in connection with the offering and issuance of the Shares; |
36
|
|
|
accounting, auditing and legal fees (including disbursements related thereto) incurred in connection therewith; and |
|
|
|
any extraordinary expenses (including, but not limited to, legal claims and liabilities and litigation costs and any permitted indemnification associated therewith) related thereto. |
Brokerage Commissions and Fees
The Fund will pay to the Commodity Broker all
brokerage commissions, including applicable exchange fees, NFA fees, give-up
fees, pit brokerage fees and other transaction related fees and expenses
charged in connection with its trading activities, which are referred to
collectively as Brokerage Expenses.
Give-up fees are the fees paid in connection with give-up transactions. A broker gives up a transaction when the broker executes a contract for the client of another broker and the client order is turned over to the second broker. The broker accepting the order from the customer collects a fee from the carrying broker for the use of the facilities. Give-ups are often used to consolidate many small orders or to disperse large ones.
Pit brokerage fees are the fees paid to the pit broker, the person with exchange-trading privileges who, in any pit, ring, post, or other place provided by a futures exchange for the meeting of persons similarly engaged, executes for another person any orders for the purchase or sale of any commodity for future delivery.
On average, total charges paid to the
Commodity Broker are expected to be approximately $8.00 per round-turn trade,
although the Commodity Brokers brokerage commissions and fees will be
determined on a contract-by-contract, or round-turn basis. A round-turn trade
is a completed transaction involving both a purchase and a liquidating sale, or
a sale followed by a covering purchase. The Managing Owner does not expect
brokerage commissions and fees to exceed 0.12% of the NAV of the Fund in any year,
although the actual amount of brokerage commissions and fees in any year or any
part of any year may be greater.
Routine Operational, Administrative and Other Ordinary Fees and Expenses
The Fund will be responsible for paying, or
for reimbursing the Managing Owner or its affiliates for paying, all of the
routine operational, administrative and other ordinary fees and expenses of the
Fund, including, but not limited to, the fees and expenses of the Trustee,
custody fees, transfer agency fees, distribution and marketing fees, legal,
audit and accounting fees and expenses, filing fees, exchange listing fees and
printing, mailing and duplication costs, computer services, Index licensing
fees and tax preparation expenses. The Managing Owner expects that all of the
routine operational, administrative and other ordinary fees and expenses of the
Fund will be approximately 0.44% per annum of the Funds NAV. The Managing
Owner has agreed to reimburse the Fund, from its Management Fee, the amount of
routine operational, administrative and other ordinary fees and expenses in
excess of 0.15% per annum of the Funds NAV.
Extraordinary Fees and Expenses
The Fund will be responsible for paying, or for reimbursing the Managing Owner or its affiliates for paying, all the extraordinary fees and expenses, if any, of the Fund. Extraordinary fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal claims and liabilities, litigation costs or indemnification or other unanticipated expenses. Such extraordinary fees and expenses, by their nature, are unpredictable in terms of timing and amount.
37
Retail Shareholders may purchase and sell Shares through traditional brokerage accounts. Shareholders are expected to be charged a customary commission by their brokers in connection with purchases of Shares that will vary from Shareholder to Shareholder. Shareholders are encouraged to review the terms of their brokerage accounts for applicable charges.
The following is a more complete description of the Index, including, without limitation, information about the composition, weighting and method of calculation.
The Index is a fully collateralized commodity
futures index. Whether a position will be long or short is determined by the
linked price of each Index Commodity Contract (described below). The direction of each
position in the Index is determined monthly and is effective on the third
Friday of the month (each, a repositioning). For example, if at a monthly
repositioning, the linked price for an Index Commodity Contract exceeds its 12-month moving average, the
Index takes the long side in the subsequent month. Conversely, if the linked
price for an Index Commodity Contract is below its 12-month moving average, the Index takes a short
position. An exception is made for Index Commodity Contracts in the
energy sector. If the signal for an Index Commodity Contract in the energy
sector is short, the weight of that Index Commodity Contract is moved to cash (i.e.,
flat). Energy is unique in that its price is extremely sensitive to
geopolitical events and not necessarily driven purely by demand-supply
imbalances. As of July 31, 2012,
the sector weightings of the Index were Agriculture (33.44%), Energy (40.73%),
Livestock (8.81%) and Metals (17.02%). The inception date of the Index was August 1, 2007.
The following are excluded:
1) Financial futures (e.g., securities, currencies, interest rates, etc.).
2) Commodity contracts not denominated in U.S. dollars.
3) Commodity contracts with less than twelve months of pricing.
Commodity Selection
Morningstar sorts all
commodity contracts that meet the above eligibility requirements in descending
order by the total U.S. dollar value of open interest. All commodities that
make up the top 95% of the total open interest pool of all eligible
commodities, starting with the one with the largest open interest value, will
be included in the Index.
38
Constituent Weighting
The weight of each Index
Commodity Contract is the product of
two factors: magnitude and the direction of the momentum signal. Morningstar
initially sets the magnitude based on the 12-month average of the dollar value
of open interest of each Index Commodity Contract. Morningstar then caps the top magnitude at 10%, redistributing any overage
to the magnitudes of the remaining commodities. Morningstar chooses this capped
open-interest weighting system in order to reflect the importance of each
commodity in a global economy and to keep the indexes diversified across
commodities.
Reconstitution and
Rebalancing
The Index is
reconstituted and rebalancedi.e., the Index membership and constituent
weights are resetannually, on the third Friday of December after the days
closing Index values have been determined. The reconstitution is effective at
the open of trading on first trading day after the third Friday of December.
Roll Methodology
Morningstar
implements all contract rolls on the third Friday of each month to coincide
with portfolio repositioning and the rolling of the U.S. Treasury bills used
for collateral. If the third Friday of the month is a trading holiday,
Morningstar rolls and rebalances or reconstitutes on the trading day prior to
the third Friday. To ensure that contracts are rolled before becoming committed
to receive physical delivery, contracts are selected so that the delivery month
is at least two months away from the upcoming month. On each potential roll
date, the delivery month of the current contract is compared to the delivery
month of the nearest contract whose delivery month is at least two months away
from the upcoming month. If the latter is further into the future than the
former, the contract is rolled.
A linking factor is
defined for each Index Commodity Contract that converts the price of the contract in effect at each point in time
to a value that accounts for contract rolls called the linked price. Each
time a contract is rolled, the linking factor is adjusted by the ratio of the
closing price of the current contract to the closing price of the new contract.
Commodity Sector
Assignments
The following
reflects sector assignments for eligible commodities:
|
|
|
|
|
Sector |
|
Commodity |
|
Description |
|
|
|
|
|
Agriculture |
|
Butter |
|
Butter Cash Settled |
Agriculture |
|
Butter |
|
Butter, AA |
Agriculture |
|
Cocoa |
|
Cocoa / Ivory Coast |
Agriculture |
|
Coffee |
|
Coffee C / Mini |
Agriculture |
|
Coffee |
|
Coffee C /Colombian |
Agriculture |
|
Corn |
|
Corn / No. 2 Yellow |
Agriculture |
|
Corn |
|
Corn Mini-sized |
Agriculture |
|
Cotton |
|
Cotton / 1-1/16 |
Agriculture |
|
Diammonium Phosphate |
|
Diammonium Phosphate |
Agriculture |
|
Lumber |
|
Lumber / Spruce-Pine Fir 2x4 |
Agriculture |
|
Milk |
|
Milk |
Agriculture |
|
Milk |
|
Milk, Class IV |
Agriculture |
|
Milk |
|
Milk, Nonfat Dry |
Agriculture |
|
Oats |
|
Oats / No. 2 Milling |
Agriculture |
|
Oats |
|
Oats / No. 2 White Heavy |
Agriculture |
|
Orange Juice |
|
Orange Juice, Differential |
39
|
|
|
|
|
|
|
|
|
|
Sector |
|
Commodity |
|
Description |
|
|
|
|
|
Agriculture |
|
Orange Juice |
|
Orange Juice, Frozen Concentrate |
Agriculture |
|
Pulp |
|
Pulp |
Agriculture |
|
Rice |
|
Rough Rice #2 |
Agriculture |
|
Soybean Meal |
|
Soybean Meal / 48% Protein |
Agriculture |
|
Soybean Oil |
|
Soybean Oil / Crude |
Agriculture |
|
Soybeans |
|
Soybean, South American |
Agriculture |
|
Soybeans |
|
Soybeans / No. 1 Yellow |
Agriculture |
|
Soybeans |
|
Soybeans Mini-Sized |
Agriculture |
|
Sugar |
|
Sugar #11/World Raw |
Agriculture |
|
Sugar |
|
Sugar #14/Domestic Raw |
Agriculture |
|
Urea |
|
Urea |
Agriculture |
|
Urea Ammonium Nitrate |
|
Ammonium Nitrate |
Agriculture |
|
Wheat |
|
Wheat / No. 2 Hard Winter |
Agriculture |
|
Wheat |
|
Wheat / No. 2 Soft Red |
Agriculture |
|
Wheat |
|
Wheat / Spring 14% Protein |
Agriculture |
|
Wheat |
|
Wheat Mini-Sized |
Agriculture |
|
Wheat |
|
Wheat, Hard Red Winter |
Energy |
|
Coal |
|
Coal, Central Appalachian |
Energy |
|
Coal |
|
Coal, Richards Bay |
Energy |
|
Coal |
|
Coal, Rotterdam |
Energy |
|
Crude Oil |
|
Crude Oil (E) |
Energy |
|
Crude Oil |
|
Crude Oil E-mini |
Energy |
|
Crude Oil |
|
Crude Oil, Brent |
Energy |
|
Crude Oil |
|
Crude Oil, Brent / Global Spot |
Energy |
|
Crude Oil |
|
Crude Oil, Brent emiNY |
Energy |
|
Crude Oil |
|
Crude Oil, Sour / Midland, TX |
Energy |
|
Crude Oil |
|
Crude Oil, WTI / Global Spot |
Energy |
|
Crude Oil |
|
Crude Oil, WTI Light Sweet |
Energy |
|
Ethanol |
|
Ethanol |
Energy |
|
Ethanol |
|
Ethanol |
Energy |
|
Gas Oil |
|
Gas Oil |
Energy |
|
Gas Oil |
|
Gas-Oil-Petroleum |
Energy |
|
Gasoline |
|
Gasoline Unleaded, E-MinNY |
Energy |
|
Gasoline |
|
Gasoline, Blendstock |
Energy |
|
Gasoline |
|
Gasoline, Blendstock RBOB (E) |
Energy |
|
Gasoline |
|
Gasoline, Unleaded / Regular Non-Ox |
Energy |
|
Gasoline |
|
Gasoline, Unleaded Blendstock (RBOB |
Energy |
|
Heating Oil |
|
Heating Oil |
Energy |
|
Heating Oil |
|
Heating Oil #2 / Fuel Oil |
Energy |
|
Heating Oil |
|
Heating Oil (ED) |
Energy |
|
Heating Oil |
|
Heating Oil / E-MinNY |
Energy |
|
Natural Gas |
|
Natural Gas E-mini |
Energy |
|
Natural Gas |
|
Natural Gas (E) Last Day |
Energy |
|
Natural Gas |
|
Natural Gas (E) Penultimate |
Energy |
|
Natural Gas |
|
Natural Gas, Henry Hub |
Energy |
|
Propane |
|
Propane |
Livestock |
|
Broilers |
|
Broilers / Dressed A, 1-3/4 to 3- |
|
|
|
|
|
40
|
|
|
|
|
Sector |
|
Commodity |
|
Description |
|
|
|
|
|
Livestock |
|
Feeder Cattle |
|
Cattle, Feeder / Average |
Livestock |
|
Hogs |
|
Hogs, Lean / Average Iowa/S Minn |
Livestock |
|
Hogs |
|
Hogs, Live, Old |
Livestock |
|
Live Cattle |
|
Cattle, Live / Choice Average |
Livestock |
|
Pork Bellies |
|
Pork Bellies, Frozen, 12-14 lbs. |
Metals |
|
Aluminum |
|
Aluminum / Pig Ingots |
Metals |
|
Copper |
|
Copper / Electrolytic Cathodes |
Metals |
|
Copper |
|
Copper High Grade / Scrap No. 2 Wir |
Metals |
|
Gold |
|
Gold |
Metals |
|
Gold |
|
Gold, 100 oz |
Metals |
|
Gold |
|
Gold, N.Y. Mini-sized |
Metals |
|
Palladium |
|
Palladium |
Metals |
|
Platinum |
|
Platinum |
Metals |
|
Silver |
|
Silver |
Metals |
|
Silver |
|
Silver, 5000 oz |
Metals |
|
Silver |
|
Silver, N.Y. Mini-sized |
The following chart provides the composition of the
Index as of July 31, 2012.
41
MORNINGSTAR® LONG/SHORT COMMODITY INDEXSM
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Commodity |
|
Signal |
|
Index Weight |
|
||
|
|
|
|
|
|
||
Agricultural |
|
|
|
|
|
|
|
Coffee C/Colombian |
|
|
Short |
|
|
4.77 |
% |
Corn/No. 2 Yellow |
|
|
Long |
|
|
2.21 |
% |
Cotton/1-1/16 |
|
|
Short |
|
|
4.64 |
% |
Soybean Meal/48% Protein |
|
|
Long |
|
|
4.59 |
% |
Soybean Oil/Crude |
|
|
Short |
|
|
3.18 |
% |
Soybeans/No. 2 Yellow |
|
|
Long |
|
|
5.91 |
% |
Sugar #11/World Raw |
|
|
Short |
|
|
4.06 |
% |
Wheat/No. 2 Hard Winter |
|
|
Long |
|
|
2.09 |
% |
Wheat/No. 2 Soft Red |
|
|
Long |
|
|
2.01 |
% |
|
|
|
|
|
|
|
|
Total Long |
|
|
|
|
|
16.80 |
% |
Total Short |
|
|
|
|
|
16.64 |
% |
Total Flat |
|
|
|
|
|
0 |
% |
Total Agricultural |
|
|
|
|
|
33.44 |
% |
|
|
|
|
|
|
|
|
Energy |
|
|
|
|
|
|
|
Crude Oil WTI/Global Spot |
|
|
Flat |
|
|
10.45 |
% |
Crude Oil Brent/Global Spot |
|
|
Flat |
|
|
8.14 |
% |
Gas-Oil-Petroleum |
|
|
Flat |
|
|
6.23 |
% |
Natural Gas Henry Hub |
|
|
Flat |
|
|
5.71 |
% |
Heating Oil #2/Fuel Oil |
|
|
Flat |
|
|
5.31 |
% |
Gasoline Blendstock |
|
|
Flat |
|
|
4.89 |
% |
|
|
|
|
|
|
|
|
Total Long |
|
|
|
|
|
0.00 |
% |
Total Flat |
|
|
|
|
|
40.73 |
% |
Total Energy |
|
|
|
|
|
40.73 |
% |
|
|
|
|
|
|
|
|
Livestock |
|
|
|
|
|
|
|
Cattle Live/Choice Average |
|
|
Short |
|
|
4.56 |
% |
Hogs Lean/Average Iowa/S Minn |
|
|
Short |
|
|
4.25 |
% |
|
|
|
|
|
|
|
|
Total Long |
|
|
|
|
|
0 |
% |
Total Short |
|
|
|
|
|
8.81 |
% |
Total Flat |
|
|
|
|
|
0 |
% |
Total Livestock |
|
|
|
|
|
8.81 |
% |
|
|
|
|
|
|
|
|
Metals |
|
|
|
|
|
|
|
Copper High Grade/Scrap No. 2 Wire |
|
|
Short |
|
|
4.18 |
% |
Gold |
|
|
Short |
|
|
7.86 |
% |
Silver |
|
|
Short |
|
|
4.98 |
% |
|
|
|
|
|
|
|
|
Total Long |
|
|
|
|
|
0 |
% |
Total Short |
|
|
|
|
|
17.02 |
% |
Total Flat |
|
|
|
|
|
0 |
% |
Total Metals |
|
|
|
|
|
17.02 |
% |
|
|
The following table reflects the returns of the Index based on the selection criteria and methodology described above since the base date of December 21, 1979. Some of the Index Commodity Contracts currently comprising the Index, however, may not have been continuously included in the Index, either because such Index Commodity Contracts had not yet been introduced or because the futures contracts available for trading did not satisfy the selection criteria. Conversely, some commodity futures contracts previously included in the Index may no longer meet the selection criteria and have been deleted. The |
|
42
inception date of the Index was August 1, 2007. The Indexs closing
levels from December 21, 1979 July 31, 2007 are hypothetical.
|
|
|
|
|
|
|
|
|
|
|
Morningstar Long/Short Commodity Index |
|
|||||||||
|
|
|||||||||
Date |
|
Closing Level |
|
Annual Index Changes |
|
Index Changes Since Inception |
|
|||
|
|
|
|
|
|
|
|
|||
12/21/1979 |
|
|
100.00 |
|
|
|
|
|
|
|
12/31/1979 |
|
|
103.00 |
|
|
3.00 |
% |
|
3.00 |
% |
12/31/1980 |
|
|
112.99 |
|
|
9.70 |
% |
|
12.99 |
% |
12/31/1981 |
|
|
189.16 |
|
|
67.41 |
% |
|
89.16 |
% |
12/31/1982 |
|
|
239.11 |
|
|
26.41 |
% |
|
139.11 |
% |
12/31/1983 |
|
|
247.41 |
|
|
3.47 |
% |
|
147.41 |
% |
12/31/1984 |
|
|
307.98 |
|
|
24.48 |
% |
|
207.98 |
% |
12/31/1985 |
|
|
348.91 |
|
|
13.29 |
% |
|
248.91 |
% |
12/31/1986 |
|
|
372.12 |
|
|
6.65 |
% |
|
272.12 |
% |
12/31/1987 |
|
|
418.40 |
|
|
12.44 |
% |
|
318.40 |
% |
12/31/1988 |
|
|
494.76 |
|
|
18.25 |
% |
|
394.76 |
% |
12/31/1989 |
|
|
600.49 |
|
|
21.37 |
% |
|
500.49 |
% |
12/31/1990 |
|
|
708.47 |
|
|
17.98 |
% |
|
608.47 |
% |
12/31/1991 |
|
|
695.94 |
|
|
-1.77 |
% |
|
595.94 |
% |
12/31/1992 |
|
|
707.86 |
|
|
1.71 |
% |
|
607.86 |
% |
12/31/1993 |
|
|
685.66 |
|
|
-3.14 |
% |
|
585.66 |
% |
12/31/1994 |
|
|
747.13 |
|
|
8.97 |
% |
|
647.13 |
% |
12/31/1995 |
|
|
836.01 |
|
|
11.90 |
% |
|
736.01 |
% |
12/31/1996 |
|
|
1074.75 |
|
|
28.56 |
% |
|
974.75 |
% |
12/31/1997 |
|
|
1079.60 |
|
|
0.45 |
% |
|
979.60 |
% |
12/31/1998 |
|
|
1246.77 |
|
|
15.48 |
% |
|
1146.77 |
% |
12/31/1999 |
|
|
1577.96 |
|
|
26.56 |
% |
|
1477.96 |
% |
12/31/2000 |
|
|
2232.92 |
|
|
41.51 |
% |
|
2132.92 |
% |
12/31/2001 |
|
|
2311.61 |
|
|
3.52 |
% |
|
2211.61 |
% |
12/31/2002 |
|
|
2547.79 |
|
|
10.22 |
% |
|
2447.79 |
% |
12/31/2003 |
|
|
2739.73 |
|
|
7.53 |
% |
|
2639.73 |
% |
12/31/2004 |
|
|
3229.89 |
|
|
17.89 |
% |
|
3129.89 |
% |
12/31/2005 |
|
|
3554.09 |
|
|
10.04 |
% |
|
3454.09 |
% |
12/31/2006 |
|
|
3431.16 |
|
|
-3.46 |
% |
|
3331.16 |
% |
12/31/2007 |
|
|
4159.28 |
|
|
21.22 |
% |
|
4059.28 |
% |
12/31/2008 |
|
|
4629.60 |
|
|
11.31 |
% |
|
4529.60 |
% |
12/31/2009 |
|
|
4531.52 |
|
|
-2.12 |
% |
|
4431.52 |
% |
12/31/2010 |
|
|
5049.29 |
|
|
11.43 |
% |
|
4949.29 |
% |
12/31/2011 |
|
|
5127.52 |
|
|
1.55 |
% |
|
5027.52 |
% |
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR INDEX LEVELS AND
CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUNDS
FUTURE PERFORMANCE.
43
|
|
BECAUSE THE INDEX WAS ESTABLISHED ON AUGUST 1, 2007, CERTAIN INFORMATION RELATING TO THE INDEX CLOSING LEVELS MAY BE CONSIDERED TO BE HYPOTHETICAL. HYPOTHETICAL INFORMATION MAY HAVE CERTAIN INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT THE INDEX WILL OR IS LIKELY TO ACHIEVE ANNUAL OR CUMULATIVE CLOSING LEVELS CONSISTENT WITH OR SIMILAR TO THOSE SET FORTH HEREIN. SIMILARLY, NO REPRESENTATION IS BEING MADE THAT THE FUND WILL GENERATE PROFITS OR LOSSES SIMILAR TO THE FUNDS PAST PERFORMANCE, WHEN AVAILABLE, OR THE HISTORICAL ANNUAL OR CUMULATIVE CHANGES IN INDEX CLOSING LEVELS. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY INVESTMENT METHODOLOGIES, WHETHER ACTIVE OR PASSIVE. |
|
ONE OF THE LIMITATIONS OF HYPOTHETICAL INFORMATION IS THAT IT IS GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. TO THE EXTENT THAT INFORMATION PRESENTED HEREIN RELATES TO THE PERIOD DECEMBER 1979 THROUGH JULY 2007, THE INDEX CLOSING LEVELS REFLECT THE APPLICATION OF THE INDEX METHODOLOGY, AND SELECTION OF INDEX COMMODITIES, IN HINDSIGHT. |
|
NO HYPOTHETICAL RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THERE ARE NUMEROUS FACTORS, INCLUDING THOSE DESCRIBED UNDER THE SECTION THE RISKS YOU FACE HEREIN, RELATED TO THE COMMODITIES MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF THE FUNDS EFFORTS TO TRACK THE INDEX OVER TIME WHICH CANNOT BE, AND HAVE NOT BEEN, ACCOUNTED FOR IN THE PREPARATION OF THE INDEX INFORMATION SET FORTH HEREIN, ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL PERFORMANCE RESULTS FOR THE FUND. FURTHERMORE, THE INDEX INFORMATION DOES NOT INVOLVE FINANCIAL RISK. |
|
THE PRECEDING TABLE DOES NOT REFLECT THE DEDUCTION OF FEES OR EXPENSES, SUCH AS BROKERAGE AND TRADING COMMISSIONS AND MANAGEMENT FEES, OR TAXES. |
|
THE MANAGING OWNER HAS HAD NO EXPERIENCE IN TRADING ACTUAL SIMILAR ACCOUNTS FOR ITSELF OR FOR CLIENTS. BECAUSE THERE ARE NO ACTUAL TRADING RESULTS TO COMPARE TO THE INDEX CLOSING LEVELS SET FORTH HEREIN, PROSPECTIVE INVESTORS SHOULD BE PARTICULARLY WARY OF PLACING UNDUE RELIANCE ON THE ANNUAL OR CUMULATIVE INDEX RESULTS. |
|
LICENSING AGREEMENT AND DISCLAIMER
The Managing Owner has entered into a licensing agreement with the Index Provider to use the Index. The Fund is entitled to use the Index pursuant to a sub-licensing arrangement with the Managing Owner.
The Fund is not sponsored, endorsed, sold or promoted by Morningstar. Morningstar makes no representation or warranty, express or implied, to the shareholders of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund in particular or the ability of the Index to track general stock market performance. Morningstars only relationship to the Managing Owner is the licensing of certain service marks and service names of Morningstar and of the Index, which is determined, composed and calculated by Morningstar without regard to the Managing Owner or the Fund. Morningstar has no obligation to take the needs of the Managing Owner or the
44
shareholders of the Fund into consideration in determining, composing or calculating the Index. Morningstar is not responsible for and has not participated in the determination of the prices and amount of the Index or the timing of the issuance or sale of the Index or in the determination or calculation of the equation by which the Index is converted into cash. Morningstar has no obligation or liability in connection with the administration, marketing or trading of the Index.
MORNINGSTAR DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN AND MORNINGSTAR SHALL HAVE NOT LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. MORNINGSTAR MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE MANAGING OWNER, SHAREHOLDERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. MORNINGSTAR MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MORNINGSTAR HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
The Managing Owner may declare a split or a reverse split in the number of Shares outstanding and make a corresponding change in the number of Shares constituting a Basket. The Trust is not required to distribute any fraction of a Share in connection with a split or reverse split of the Shares. The Managing Owner may sell the aggregated fractions of Shares that would otherwise be distributed in a split or reverse split of the Shares or the amount of Fund property that would be represented by those Shares and distribute the net proceeds of those Shares or that Fund property to the Shareholders entitled to them.
|
|
|
|
Pursuant to the Services Agreement among the Trust, on behalf of the Fund, and the Administrator, the Administrator will perform certain administrative and valuation and computation services for the Fund, including the maintenance of certain books and records for the Fund, NAV calculations, accounting and other fund administrative services. |
|
The Services Agreement will continue in effect from the commencement of trading operations unless terminated on at least 90 days prior written notice by either party to the other party. Notwithstanding the foregoing, the Administrator may terminate the Services Agreement upon 30 days prior written notice if the Fund has materially failed to perform its obligations under the Services Agreement or upon the termination of the Custody Agreement. |
|
The Administrator is both exculpated and indemnified under the Services Agreement. |
|
The Administrator will not be liable for any costs, expenses, damages, liabilities or claims (including attorneys and accountants fees) incurred by or asserted against the Fund, except those costs, expenses, damages, liabilities or claims arising out of the Administrators own gross negligence or willful misconduct. In no event will the Administrator be liable to the Fund or any third party for special, indirect or consequential damages, or lost profits or loss of business, arising under or in connection with the Services Agreement. The Administrator will not be liable for any costs, expenses, damages, liabilities or |
|
45
claims (including attorneys and accountants fees), resulting from,
arising out of, or in connection with its performance under the Services
Agreement, including its actions or omissions, the incompleteness or inaccuracy
of any specifications or other information furnished by or on behalf of the
Fund, or for delays caused by circumstances beyond the Administrators
reasonable control, unless such cost, expense, damage, liability or claim
(including attorneys and accountants fees) arises out of the gross negligence
or willful misconduct of the Administrator.
The Fund will indemnify and hold harmless the Administrator from and against any and all costs, expenses, damages, liabilities and claims (including claims asserted by the Fund), and reasonable attorneys and accountants fees relating thereto, which are sustained or incurred or which may be asserted against the Administrator by reason of or as a result of any action taken or omitted to be taken by the Administrator in good faith under the Services Agreement or in reliance upon (i) any law, act, regulation or interpretation of the same, issued by a court or governmental agency, (ii) the registration statement or Prospectus, (iii) any instructions of an officer of the Managing Owner, or (iv) any opinion of legal counsel for the Fund or the Administrator, or arising out of transactions or other activities of the Fund which occurred prior to the commencement of the Services Agreement. The Fund will indemnify the Administrator against any loss, damage or expense, including counsel fees and other costs and expenses of a defense against any claim or liability, arising from any one or more of the following: (i) errors in records or instructions, explanations, information, specifications or documentation of any kind, as the case may be, supplied to the Administrator by any third party described above or by or on behalf of the Fund; (ii) action or inaction taken or omitted to be taken by the Administrator pursuant to any certificate, instructions or oral instructions without negligence or willful misconduct; (iii) any action taken or omitted to be taken by the Administrator in good faith after consultation with the Fund in accordance with the advice or opinion of counsel for the Fund or its own counsel; (iv) any improper use by the Fund or its agents, distributor or investment advisor of any valuations or computations supplied by the Administrator pursuant to the Services Agreement; (v) the method of valuation of the securities and the method of computing the Funds NAV; or (vi) any valuations of securities or NAV provided by the Fund.
The Bank of New York Mellon will serve as the Custodian. Pursuant to the Custody Agreement between the Trust, on behalf of the Fund, and the Custodian, the Custodian serves as custodian of all the Funds securities and cash at any time delivered to Custodian during the term of the Custody Agreement and the Fund has authorized the Custodian to hold its securities in registered form in its name or the name of its nominees. The Custodian has established and will maintain one or more securities accounts and cash accounts pursuant to the Custody Agreement. The Custodian will maintain books and records segregating the assets.
The Custodian is both exculpated and indemnified under the Custody Agreement.
Except as otherwise expressly provided in the Custody Agreement, the
Custodian will not be liable for any costs, expenses, damages, liabilities or
claims incurred by or asserted against the Fund, except those costs, expenses,
damages, liabilities or claims arising out of the negligence or willful
misconduct of the Custodian. The Custodian will have no liability whatsoever
for the action or inaction of any depository or issuer of securities. Subject
to the Custodians delegation of its duties to its affiliates, the Custodians
responsibility with respect to any securities or cash held by a subcustodian is
limited to the failure on the part of the Custodian to exercise reasonable care
in the selection or retention of such subcustodian in light of prevailing
settlement and securities handling practices, procedures and controls in the
relevant market. With respect to any costs, expenses, damages, liabilities or
claims incurred by the Fund as a result of the acts or the failure to act by
any subcustodian (other than an affiliate of the Custodian), the Custodian will
take appropriate action to recover such costs, expenses, damages, liabilities
or claims from such
46
subcustodian; and the Custodians sole responsibility and liability to
the Fund will be limited to amounts so received from such subcustodian
(exclusive of costs and expenses incurred by the Custodian). In no event will
the Custodian be liable to the Fund or any third party for special, indirect or
consequential damages, or lost profits or loss of business, arising in
connection with the Custody Agreement.
The Fund will indemnify the Custodian and hold the Custodian harmless from and against any and all costs, expenses, damages, liabilities or claims sustained or incurred by or asserted against the Custodian by reason of or as a result of any action or inaction, or arising out of the Custodians performance under the Custody Agreement, including reasonable fees and expenses of counsel; provided however, that the Fund will not indemnify the Custodian for those costs, expenses, damages, liabilities or claims arising out of the Custodians negligence or willful misconduct.
Either party may terminate the Custody Agreement by giving to the other party a notice in writing specifying the date of such termination, which will be not less than 90 days after the date of such notice. Upon termination thereof, the Fund will pay to the Custodian such compensation as may be due to the Custodian, and will likewise reimburse the Custodian for other amounts payable or reimbursable to the Custodian thereunder. The Custodian will follow such reasonable oral or written instructions concerning the transfer of custody of records, securities and other items as the Fund gives; provided, that (a) the Custodian will have no liability for shipping and insurance costs associated therewith, and (b) full payment will have been made to the Custodian of its compensation, costs, expenses and other amounts to which it is entitled thereunder. If any securities or cash remain in any account, the Custodian may deliver to the Fund such securities and cash.
Transfer Agency and Service Agreement
The Bank of New York Mellon will serve as the Trusts Transfer Agent. Pursuant to the Transfer Agency and Service Agreement between the Trust, on behalf of the Fund, and the Transfer Agent, the Transfer Agent will serve as the Trusts transfer agent, distribution disbursing agent, and agent in connection with certain other activities as provided under the Transfer Agency and Service Agreement.
The term of the Transfer Agency and Service Agreement is one year from the effective date and will automatically renew for additional one year terms unless either party provides written notice of termination at least 90 days prior to the end of any one year term or unless earlier terminated. The Fund may terminate the Transfer Agency and Service Agreement at any time upon 90 days prior written notice. Either party may terminate in the event the other party breaches any material provision of the Transfer Agency and Service Agreement.
The Transfer Agent will have no responsibility and will not be liable for any and all losses, damages, costs, charges, counsel fees (including, without limitation, those incurred by the Transfer Agent in a successful defense of any claims by the Fund), payments, expenses or liability, except that the Transfer Agent will be liable to the Fund for direct money damages caused by its own negligence or willful misconduct or that of its employees or agents, or its breach of any of its representations. In no event will the Transfer Agent be liable for special, indirect or consequential damages.
The Transfer Agent will not be responsible for, and the Fund will
indemnify and hold the Transfer Agent harmless from and against, any and all
losses, damages, costs, charges, counsel fees (including, without limitation,
those incurred by the Transfer Agent in a successful defense of any claims by
the Fund), payments, expenses and liability which may sustain or incur or which
may be asserted against the Transfer Agent in connection with or relating to
the Transfer Agency and Service Agreement or the Transfer Agents actions or
omissions with respect to the Transfer Agency and Service Agreement,
47
except that the Transfer Agent will be liable for direct money damages
caused by its own negligence or willful misconduct or that of its employees or
agents, or its breach of any of its representations.
BNY Mellon Clearing, LLC will serve as the Commodity Broker and as such arranges for the execution and clearing of the Funds futures transactions pursuant to a Futures Customer Agreement between the Trust, on behalf of the Fund, and the Commodity Broker.
The Commodity Broker is both exculpated and indemnified under the Futures Customer Agreement.
Under the Futures Customer Agreement, the Commodity Broker shall have no responsibility or liability to the Fund: (i) in connection with the performance or non-performance by any exchange or market, clearinghouse, clearing firm or other third party (including floor brokers and banks) to the Commodity Broker in respect of any Contract or other property of the Fund; (ii) as a result of the Commodity Brokers reliance on and acting upon any instruction, notice or communication that it reasonably believes to be that of an individual authorized to act on behalf of the Fund; (iii) as a result of any delay in the performance or non-performance of any of the Commodity Brokers obligations directly or indirectly caused by the occurrence of any contingency beyond its control; (iv) as a result of any action taken by the Commodity Broker or its agents to comply with applicable law or regulations; (v) as a result of any actions taken by the Commodity in connection with the exercise of the available remedies under the Futures Customer Agreement arising from an Event of Default; (vi) for any loss, claim, damage, expense, liabilities, penalties, taxes, judgments, fines, fees, costs, proceedings, claims, actions, investigations, damages, whether the dispute or proceeding involves the Commodity Broker or not (including reasonable attorneys fees and expenses, reasonable accountants fees and expenses (collectively, Loss) resulting from nationalization, government restrictions, exchange, regulatory or market rulings, suspension of trading, expropriation or other governmental actions, regulation of the banking, futures, commodities or securities industry, currency controls or restrictions, suspension of redemptions, market rulings, devaluations or fluctuations, or market conditions which prevent the orderly execution of securities transactions or affect the value of the Funds trades executed or cleared by the Commodity Broker; (vii) for any Loss or injury due to forces beyond the control of the Commodity, including without limitation strikes, failure of transmission or communication facilities, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear or natural catastrophes or acts of God, military actions, interruptions, or the insolvency of any issuer or third party.
Under the Futures Customer Agreement, the Fund agrees to indemnify and
hold harmless the Commodity Broker, its officers, directors, employees, agents
and affiliated persons for any Loss when and as incurred by, or asserted
against, the Commodity Broker and such persons arising out of or in connection
with, directly or indirectly, (i) the Futures Customer Agreement, (ii) the
Funds acts or omissions, (iii) any material breach by the Fund of its
obligations hereunder, (iv) the exercise or pursuit by the Commodity Broker and
its affiliates of its rights or remedies hereunder, (v) the performance by the
Commodity Broker of its duties under the Futures Customer Agreement; (v) any
Event of Default (as defined in the Futures Customer Agreement), or (vi) any
futures contracts, options on futures contracts, or over-the-counter derivative
products cleared through any derivatives clearing organization or other
organized clearing house contemplated under the Futures Customer Agreement; or
(vii) pursuant to authorized instructions received by the Commodity Broker from
the Fund or its agent, and to fully reimburse the Commodity Broker and such
persons for any reasonable legal or other fees and expenses, including the cost
of any investigation and preparation, when and as incurred by them in
connection with any claim, action, proceeding or activities of the Commodity
Broker and such persons in connection with the Futures Customer Agreement or
Contracts contemplated thereunder, except where such Loss arises from the
48
Commodity Brokers gross negligence or willful misconduct after such is
finally adjudicated in court and the time for appeal has expired.
The Futures Account Agreement may be terminated at any time by the Fund or the Commodity Broker by written notice to the other party.
The Marketing Agent will provide certain marketing services to the Fund. Pursuant to the Marketing Agent Agreement among the Trust, on behalf of the Fund, the Managing Owner and the Marketing Agent, the Marketing Agent will assist the Managing Owner with certain functions and duties relating to marketing, including reviewing and approving marketing materials.
The Marketing Agent Agreement will continue in effect for an initial term of [●] year[s] from the effective date and thereafter will continue automatically for successive [●] year periods.
Upon and after completion of its initial term, the Marketing Agent Agreement is terminable by any party at any time without penalty on [●] days prior written notice to the other parties. Notwithstanding the foregoing, the Marketing Agent Agreement may be terminated by any party upon written notice to the other parties if [(a) the Trust is terminated, (b) any other party becomes insolvent or bankrupt or files a voluntary petition, or is subject to an involuntary petition, in bankruptcy or attempts to or makes an assignment for the benefit of its creditors or consents to the appointment of a trustee or receiver or (c) any other party willfully and materially breaches its obligations under the Marketing Agent Agreement and such breach has not been cured to the reasonable satisfaction of the non-breaching party prior to the expiration of [●] days after written notice by the nonbreaching party to the breach party of such breach].
The Fund will indemnify, defend and hold harmless the Marketing Agent
and its partners, stockholders, members, directors, officers and employees of
the foregoing, and the successors and assigns of all the foregoing, from and
against any loss, damage, expense, liability or claim (including the reasonable
cost of investigation) which the Marketing Agent or any such person may incur
under the Securities Act, the Exchange Act, the common law or otherwise,
insofar as such loss, damage, expense, liability or claim arises out of or is
based upon: (i) any untrue statement of a material fact contained in the
registration statement (or in the registration statement as amended or supplemented)
or in the prospectus (or in the prospectus as amended or supplemented), or
arises out of or is based upon any omission or alleged omission to state a
material fact required to be stated in either such registration statement or
such prospectus or necessary to make the statements made therein not
misleading, except for any statements provided in writing, directly or
indirectly by the Marketing Agent to the Fund or the Managing Owner for
inclusion in such registration statement or such prospectus or any material
omissions therefrom; (ii) any untrue statement of a material fact or breach by
the Trust or the Managing Owner of any representation or warranty contained in
the Marketing Agent Agreement; (iii) the failure by the Trust or the Managing
Owner to perform when and as required any agreement or covenant contained
herein; (iv) any untrue statement of any material fact contained in any audio
or visual materials provided by the Trust or the Managing Owner or based upon
written information furnished by or on behalf of the Trust or the Managing
Owner including, without limitation, slides, videos, films or tape recordings
used in connection with the marketing of the Trust; or (v) the Marketing
Agents performance of its duties under the Marketing Agent Agreement except in
the case of this bullet point, for any loss, damage, expense, liability or
claim resulting from the gross negligence or willful misconduct of the
Marketing Agent. In no case is the indemnity of the Trust in favor of the
Marketing Agent deemed to protect the Marketing Agent against any liability to
the Trust or the Managing Owner to which the Marketing Agent would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under the Marketing Agent Agreement.
49
FUND MANAGEMENT AND OTHER THIRD PARTIES
Van Eck Absolute Return Advisers Corp., 335 Madison Avenue, New York, New York 10017, is the Managing Owner of the Fund. Van Eck Absolute Return Advisers Corp. and its affiliates (collectively, Van Eck Global) advise a family of exchange-traded funds, mutual funds, insurance portfolios, separate accounts and alternative investments. Van Eck Global has been an investment manager since 1955 and also acts as manager or sub-manager to other mutual funds, exchange-traded funds, other pooled investment vehicles and separate accounts.
50
The Fund has agreed to indemnify the Managing Owner for certain liabilities, including [certain liabilities arising under the federal securities laws, unless such loss or liability results from willful misfeasance, bad faith or gross negligence or reckless disregard of its obligations and duties to the Fund].
The Managing Owner serves as the commodity pool operator and commodity trading advisor of the Fund. Specifically, the Managing Owner:
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will select the Trustee, Administrator, Transfer Agent, Custodian, Marketing Agent and auditor of the Fund; |
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will negotiate various agreements and fees for the Fund; |
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will perform such other services as the Managing Owner believes that the Fund may require; |
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will select the commodity brokers for the Funds; and |
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will monitor the performance results of the Funds portfolio and reallocate assets within the portfolio with a view to causing the performance of the Funds portfolio to track that of the Index, over time. |
Messrs. Charles T. Cameron, Joseph M. Foster, Shawn Reynolds, Bruce J. Smith, John C. van Eck and Jan F. van Eck serve as principals of the Managing Owner. Van Eck Associates Corporation is also a principal of the Managing Owner.
Messrs. Charles T. Cameron, Joseph M. Foster and Shawn Reynolds will serve as the trading principals of the Managing Owner.
Charles T. Cameron joined the Managing Owner in 1995 and oversees all trade execution for Van Eck Global and specializes in constructing macro analysis with respect to commodity markets. He is also investment team member of funds managed by VEAC. Mr. Cameron received an MBA, Finance from New York University, Leonard N. Stern School of Business in 1993 and a BS in Finance from Boston College in 1982.
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Mr. van Eck is President, a Director and an owner of VEAC, a respected leader in actively managed hard assets, emerging markets investment and in exchange-traded funds. Mr. van Eck has managed the firm since 1998. Mr. van Eck joined the firm in 1992 and has been involved in starting several of its business lines. |
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From 1994 to 1998, he worked on international business development and spearheaded a fund management joint venture between VEAC and Shenyin Wanguo Securities, one of the largest securities firms in China. He then focused on originating and distributing several alternative investment strategies. |
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In 2006, he founded the firms ETF business which operates under the Market Vectors brand. Market Vectors has become one of the worlds ten largest ETF sponsors, currently offering over 35 ETFs in international equities, hard asset equities, and international and domestic fixed income. He serves as President, Chief Executive Officer and a Trustee of Market Vectors ETF Trust. |
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He has a J.D. from Stanford University and was graduated Phi Beta Kappa from Williams College with a major in Economics. Mr. van Eck is a Director of the National Committee on US-China Relations. He has registrations with NFA and the Financial Industry Regulatory Authority. He has appeared on CNBC and Bloomberg Television. |
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Mr. Smith joined Van Eck in 1983. He is Senior Vice President and Chief Financial Officer of Van Eck Associates Corporation, Van Eck Securities Corporation, and Van Eck Absolute Return Advisers Corporation and also has responsibility for the Operations and Portfolio Accounting/Administration departments. Prior to joining Van Eck, he was employed by McGladrey & Pullen, CPAs. Mr. Smith, who is a CPA, received his BS in Accounting from Fordham University. He is Series 7, 27 and 63 registered. |
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Mr. McBrien joined Van Eck in 2005 as Senior Vice President/General Counsel. His previous experience includes roles such as Managing Director at Chatsworth Securities from 2001-2005, Executive Vice President and General Counsel of MainStay Management from 1999-2000 and Vice President and Department Head of Legal Fund Administration at State Street Bank from 1997-1999 and Senior Vice President and General Counsel of Evergreen Asset Management Corp. from 1986-1996. Mr. McBrien has a JD from Georgetown University Law Center, a Masters of International Affairs from Columbia University and a BA degree from Syracuse University. |
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Fiduciary and Regulatory Duties of the Managing Owner; Limitation of Liability and Indemnification
A Shareholder should be aware that the Managing Owner has a fiduciary responsibility to the Shareholders to exercise good faith and fairness in all dealings affecting the Fund.
Managing Owners Beneficial Interest in the Fund
The Managing Owner has made and expects to maintain an aggregate investment of $[] in the Fund.
53
are to satisfy the requirements of the Delaware Statutory Trust Act that a Delaware statutory trust have at least one trustee with its principal place of business in Delaware.
Because the Trustee has no management authority with respect to the Fund, it is not registered in any capacity with the CFTC.
The Administrator will retain certain financial books and records, including: Basket creation and redemption books and records, Fund accounting records, ledgers with respect to assets, liabilities, capital, income and expenses, the registrar, transfer journals and related details and trading and related documents received from futures commission merchants, c/o [], [], telephone number ([]) []-[].
The Administrator and any of its affiliates may purchase or sell Shares for their own account, as agent for their customers and for accounts over which they exercise investment discretion.
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The Marketing Agent will not open or maintain customer accounts or solicit, receive, execute, clear, settle or otherwise handle any orders to purchase or redeem Shares.
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Name |
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Position(s) Held with |
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Length of Time Served |
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Principal Occupation(s) |
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Charles T. |
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None |
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Not Applicable |
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Director of Trading and Portfolio Manager for VEAC; Officer of other investment companies advised by VEAC; Trading principal of VEAC. |
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Joseph M.
Foster |
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Vice President |
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Since May 1997 |
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Portfolio Manager for the Managing Owner and VEAC; Trading principal of VEAC. |
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Shawn
Reynolds |
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None |
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Not Applicable |
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Senior Energy Analyst and Portfolio Manager for the Managing Owner and VEAC; Trading principal of VEAC. |
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Bruce J.
Smith |
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Senior Vice
President, |
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Since May 1997 |
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Senior Vice President, Chief Financial Officer, Treasurer and Controller of the Managing Owner, VEAC and Van Eck Securities Corporation (VESC); Director of the Managing Owner, VEAC and VESC, October 2010 to present; Officer of other investment companies advised by VEAC. |
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John C. van
Eck |
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None |
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Not Applicable |
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Chairman of the Board of Directors of VEAC. |
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Jan F. van
Eck |
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Director and President |
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Since May 1997 |
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Director, President and Owner of VEAC; Director and President, VESC; Director and President of the Managing Owner; Officer of other investment companies advised by VEAC. |
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Name |
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Position(s) Held with |
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Length of Time Served |
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Principal Occupation(s) |
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Thomas K. |
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Vice
President and |
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Since December 2006 |
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Chief Compliance Officer of the Managing Owner and VEAC; Chief Compliance Officer of VESC, August 2008 to present; Officer of other investment companies advised by VEAC. |
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Joseph J. |
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Senior Vice
President, |
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Since December 2005 |
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Senior Vice President, General Counsel and Secretary of the Managing Owner, VEAC and VESC; Director of VESC and the Managing Owner, October 2010 to present; Officer of other investment companies advised by VEAC. |
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Jonathan R. |
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Vice
President and |
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Since August 2006 |
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Vice President, Associate General Counsel and Assistant Secretary of the Managing Owner, VEAC and VESC; Officer of other investment companies advised by VEAC. |
As of the date of this Registration Statement, no person owned of record or beneficially 5% or more of the outstanding Shares of the Fund because the Fund had not yet commenced operations.
SECURITY OWNERSHIP OF MANAGEMENT
As of the date of this Registration Statement, the Trustee and the executive officers of the Registrant, as a group, did not own any of the Shares of the Fund because the Fund had not yet commenced operations.
During the last two fiscal years, the executive officers of the Fund did not receive any compensation from the Fund.
During the last fiscal year, the executive officers did not have any unexercised options, stock that had not vested, or equity inventive plan awards from the Fund.
During the last fiscal year, the Trustee of the Fund did not receive any compensation from the Fund.
Business Development of the Fund
The Fund was formed as a series of a Delaware statutory trust on February 1, 2012.
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The Fund will issue common units of beneficial interest, or Shares, which represent units of fractional undivided beneficial interest in and ownership of the Fund. The Shares of the Fund are expected to be listed for trading, subject to notice of issuance, on NYSE Arca under the symbol []. The Funds Shares may be bought and sold on NYSE Arca like any other exchange-listed security.
If the Managing Owner determines that there is more cash being held in the Fund than is reasonably expected to be needed to pay the Funds expenses in the near future, the Managing Owner at its discretion can either distribute the extra cash to the Shareholders or use it to acquire additional Index Commodity Contracts, Other Instruments or Cash Instruments. The Fund has no obligation to make periodic distributions to Shareholders.
If the Trust receives any proceeds in respect of its property other than those it is permitted to hold, the Trustee, at the direction of the Managing Owner, will distribute that property to the Shareholders by any means lawful, equitable and feasible. If the Trustee cannot distribute the property proportionately among the Shareholders, the Trustee, at the direction of the Managing Owner, will adopt any other method that it deems to be lawful, equitable and feasible, including public or private sale.
Registered holders of Shares will receive these distributions in proportion to the number of Shares owned. Before making a distribution, the Trustee will deduct any applicable withholding taxes and any fees and expenses of the Trust that have not been paid. It will distribute only whole U.S. dollars and cents and will round fractional cents down to the nearest whole cent. Neither the Managing Owner nor the Trustee will be responsible if the Managing Owner determines that it is unlawful or impractical to make a distribution available to registered holders.
The Trust is organized in separate series as a statutory trust under the Delaware Statutory Trust Act. As of the date of this Prospectus, the Trust consists of one series. The Trust and the Fund are managed by the Managing Owner, whose office is located at 335 Madison Avenue, New York, New York 10017, telephone: (212) 293-2000.
The books and records of the Fund will be maintained as follows:
all marketing materials will be maintained at the offices of the Marketing Agent,
Van Eck Securities Corporation, 335 Madison Avenue, New York, New York 10017;
telephone number (212)
293-2000;
Basket creation and redemption books and records, certain financial books and
records (including Fund accounting records, ledgers with respect to assets, liabilities,
capital, income and expenses, the registrar, transfer journals and related details)
and trading and related documents received from futures commission merchants
will be maintained at the offices of [], [Address]; telephone number ([])
[]-[].
All other books and records of the Fund (including minute books and other
general corporate records, trading records and related reports and other items
received from the Funds Commodity Brokers) will be maintained at the Funds principal office,
c/o Van Eck Absolute Return Advisers Corp., 335 Madison Avenue, New York, New York 10017,
telephone: (212) 293-2000.
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The Funds fiscal year ends on December 31 of each year.
The Trust is formed and is operated in a manner such that the Fund is liable only for obligations attributable to the Fund and Shareholders of the Fund are not subject to the losses or liabilities of any other series of the Trust that may be created in the future. If any creditor or Shareholder in a series asserted against the series valid claim with respect to its indebtedness or Shares, the creditor or Shareholder would only be able to recover money from that particular series and its assets. Accordingly, the debts, liabilities, obligations and expenses (collectively, Claims), incurred, contracted for or otherwise existing solely with respect to a particular series are enforceable only against the assets of that series, and not against any other series or the Trust generally or any of their respective assets. The assets of the Fund include only those funds and other assets that are paid to, held by or distributed to the Fund, including, without limitation, funds delivered to the Trust for the purchase of Shares in a Fund. This limitation on liability is referred to as the Inter-Series Limitation on Liability. The Inter-Series Limitation on Liability is expressly provided for under the Delaware Statutory Trust Act, which provides that if certain conditions (as set forth in Section 3804(a) of that Act) are met, then the Claims of any particular series are enforceable only against the assets of such series and not against the assets of any other Fund or the Trust generally.
In furtherance of the Inter-Series Limitation on Liability, every party providing services to the Trust, the Fund or the Managing Owner on behalf of the Trust or the Fund, has acknowledged and consented in writing to:
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the Inter-Series Limitation on Liability with respect to such partys Claims; |
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voluntarily reduce the priority of its Claims against the Funds or their respective assets, such that its Claims are junior in right of repayment to all other parties Claims against the Funds or their respective assets, except that Claims against the Trust where recourse for the payment of such Claims was, by agreement, limited to the assets of a particular Fund, will not be junior in right of repayment, but will receive repayment from the assets of such particular Fund (but not from the assets of any other Fund or the Trust generally) equal to the treatment received by all other creditors and Shareholders that dealt with the Fund; and |
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a waiver of certain rights that such party may have under the U.S. Bankruptcy Code, if such party held collateral for its Claims, in the event that the Trust is a debtor in a chapter 11 case under the U.S. Bankruptcy Code, to have any deficiency Claim (i.e., the difference, if any, between the amount of the Claim and the value of the collateral) treated as an unsecured Claim against the Trust generally or any Fund. |
No special custody arrangements are applicable to a Fund, and the existence of a trustee should not be taken as an indication of any additional level of management or supervision over a Fund.
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The value of Cleared Swaps is determined based on the value of the Index Commodity Contract in connection with each specific Cleared Swap.
NAV per Share is the NAV of the Fund divided by the number of its outstanding Shares.
CREATION AND REDEMPTION OF SHARES
Determination of Required Payment
The total payment required to create each Basket is the NAV of [] Shares of the Fund as of the closing time of NYSE Arca or the last to close of the exchanges on which Index Commodity Contracts are traded, whichever is latest, on the purchase order date. Baskets are issued as of [] [].m., Eastern time, on the business day immediately following the purchase order date at the applicable NAV as of the closing time of NYSE Arca or the last to close of the exchanges on which the corresponding Index Commodity Contracts are traded, whichever is latest, on the purchase order date, but only if the required payment has been timely received.
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Because orders to purchase Baskets must be placed by [] [].m., but the total payment required to create a Basket will not be determined until [] [].m., Eastern time, on the date the purchase order is received, Authorized Participants will not know the total amount of the payment required to create a Basket at the time they submit an irrevocable purchase order for the Basket. Valid orders to purchase Baskets received after [] [].m. are considered received on the following day. The NAV of the Fund and the total amount of the payment required to create a Basket could rise or fall substantially between the time an irrevocable purchase order is submitted and the time the amount of the purchase price in respect thereof is determined.
The Managing Owner may, in its discretion, suspend the right to purchase, or postpone the purchase settlement date: (i) for any period during which any of NYSE Arca, a Futures Exchange or other exchange material to the valuation or operation of the Fund is closed other than for customary holidays or weekend closings or when trading is suspended or restricted on such exchanges in any of the Index Commodity Contracts; (ii) for any period during which an emergency exists as a result of which the fulfillment of a purchase order is not reasonably practicable; or (iii) for such other period as the Managing Owner determines to be necessary for the protection of the Shareholders. The Managing Owner will not be liable to any person or in any way for any loss or damages that may result from any such suspension or postponement.
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Determination of Redemption Proceeds
Delivery of Redemption Proceeds
Suspension or Rejection of Redemption Orders
Creation and Redemption Transaction Fee
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On [], the Initial Purchaser, subject to certain terms and conditions, agreed to purchase and take delivery of [] Shares of the Fund, which comprise the Initial Baskets of the Fund, at a purchase price of $[] per Share ($[] per Basket), pursuant to an Initial Purchaser Agreement. The Initial Purchaser proposes to offer to the public these [] Shares of the Fund at a per-Share offering price that will vary depending upon, among other factors, the market price of the Shares on NYSE Arca, the Funds NAV and the supply of and demand for the Shares at the time of the offer. Shares of the Fund offered by the Initial Purchaser at different times may have different offering prices.
[The Managing Owner has agreed to indemnify the Initial Purchaser against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the Securities Act), and to contribute to payments that the Initial Purchaser may be required to make in respect thereof.]
The Initial Purchaser will only act in such a capacity with respect to the initial Baskets of the Fund. The Initial Purchaser will create Shares of the initial Baskets at a price of $[] per Share. The price of $[] per Share has been arbitrarily determined inasmuch as the Shares have no inherent value at the Funds inception. In contrast, Authorized Participants will create Shares of each Basket at the NAV per Share. The Initial Purchasers activities in connection with its role as the Initial Purchaser will cease after it has fully transacted with respect to the initial Baskets of the Fund. No Authorized Participants (except with respect to the Initial Purchaser, which is an Authorized Participant) will be involved with the purchase and sale of the initial Baskets of the Fund. Therefore, the Initial Purchasers activities will be distinct from those of an Authorized Participant.
Most Shareholders buy and sell Shares in secondary market transactions through brokers. Shares of the Fund will trade, subject to notice of issuance, on the NYSE Arca under the ticker symbol listed in this Prospectus. Shares are bought and sold throughout the trading day like other publicly traded securities. When buying or selling Shares through a broker, most Shareholders incur customary brokerage commissions and charges.
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The Fund will issue Shares in Baskets to Authorized Participants continuously as of [] Eastern time on the business day immediately following the date on which a valid order to create a Basket is accepted by the Fund, at the NAV of [] Shares as of the closing time of NYSE Arca or the last to close of the exchanges on which the Index Commodity Contracts are traded, whichever is later, on the date that a valid order to create a Basket is accepted by the Fund.
Authorized Participants may offer to the public, from time to time, Shares of the Fund from any Baskets they create. Shares of the Fund offered to the public by Authorized Participants will be offered at a per Share offering price that will vary depending on, among other factors, the market price of the Shares of the Fund on NYSE Arca, the Funds NAV and the supply of and demand for the Shares at the time of the offer. Shares initially comprising the same Basket but offered by Authorized Participants to the public at different times may have different offering prices.
The Initial Purchaser and, during the continuous offering period, Authorized Participants will not receive from the Fund, the Managing Owner or any of their affiliates, any fee or other compensation in connection with their sale of Shares to the public, although Shareholders are expected to be charged a customary commission by their brokers in connection with purchases of Shares that will vary from Shareholder to Shareholder. Shareholders are encouraged to review the terms of their brokerage accounts for applicable charges. The excess, if any, of the price at which an Authorized Participant sells a Share over the price paid by such Authorized Participant in connection with the creation of such Share in a Basket will be deemed to be underwriting compensation by the FINRA Corporate Financing Department.
Likelihood of Becoming a Statutory Underwriter
The Fund will issue the initial Baskets to the Initial Purchaser and will issue Shares in Baskets to Authorized Participants from time to time in exchange for cash. Because new Shares can be created and issued on an ongoing basis at any point during the life of the Fund, a distribution, as such term is used in the Securities Act, will be occurring. An Authorized Participant, other broker-dealer firm or its client will be deemed a statutory underwriter, and thus will be subject to the prospectus delivery and liability provisions of the Securities Act, if it purchases a Basket from the Fund, breaks the Basket down into the constituent Shares and sells the Shares to its customers; or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for the Shares. Similarly, the Initial Purchaser will be deemed a statutory underwriter. A determination of whether one is an underwriter must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that would lead to categorization as an underwriter. Authorized Participants, other broker-dealers and other persons are cautioned that some of their activities will result in their being deemed participants in a distribution in a manner which would render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act.
Dealers who are neither Authorized Participants nor underwriters but are participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that are part of an unsold allotment within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the Securities Act.
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Summary of Items of Value Pursuant to FINRA Rule 2310
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Nature of Payment |
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Recipient |
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Payor |
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Amount of Payment |
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Services Provided |
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Selling Commission |
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Initial Purchaser |
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Shareholders |
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[TBD] |
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Brokering purchases and sales of the Shares and creating and redeeming Shares of Initial Baskets. |
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Selling Commission |
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Authorized |
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Shareholders |
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No greater than 1.00% of the gross offering proceeds. |
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Brokering purchases and sales of the Shares and creating and redeeming Baskets. |
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Marketing Fee |
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Van Eck
Securities |
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[TBD] |
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[TBD] |
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Assisting the Managing Owner and the Administrator with certain functions and duties relating to distribution and marketing, including reviewing and approving marketing materials, consulting with FINRA and ensuring compliance with FINRA marketing rules and maintaining certain books and records pertaining to the Fund. |
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Prospective Shareholders may purchase and sell Shares through traditional brokerage accounts. Shareholders who purchase Shares through a commission/fee-based brokerage account may pay commissions/fees charged by the brokerage account. Prospective Shareholders are encouraged to review the terms of their brokerage accounts for applicable charges.
Prospective Shareholders intending to create or redeem Baskets through Authorized Participants in transactions not involving a broker-dealer registered in such Shareholders state of domicile or residence should consult their legal advisor regarding applicable broker-dealer or securities regulatory requirements under the state securities laws prior to such creation or redemption.
The offering of Baskets is being made in compliance with FINRA Rule 2310. Accordingly, neither the Initial Purchaser nor the Authorized Participants will make any sales to any account over which they have discretionary authority without the prior written approval of a purchaser of Shares. The maximum amount of items of value to be paid to FINRA members in connection with the offering of the Shares by the Fund will not exceed 10% of the gross offering proceeds of such Shares.
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The Initial Purchaser will not charge a selling commission of greater than 1% of the price per Share in offering and selling the Shares comprising the Initial Baskets.
Pursuant to the Marketing Agent Agreement, the Marketing Agent will be paid in an amount of approximately $[] per annum, plus any fees or disbursements incurred by the Marketing Agent in connection with the performance by the Marketing Agent of its duties on behalf of the Fund.
The Funds Shares are expected to be listed for trading, subject to notice of issuance, on NYSE Arca, under the symbol [].
A substantial amount of proceeds of the offering of the Shares of the Fund will be used by the Fund to engage in the trading of Index Commodity Contracts with a view to tracking the changes, whether positive or negative, in the level of the Index over time, less the expenses of the operations of the Fund. The Funds portfolio will also hold Cash Instruments.
To the extent that the Fund trades in futures on U.S. exchanges, the assets deposited by the Fund with the Commodity Broker as margin must be segregated pursuant to the regulations of the CFTC. Such segregated funds may be invested only in a limited range of instruments.
To the extent, if any, that the Fund trades in futures on markets other than regulated U.S. exchanges, funds deposited to margin positions held on such exchanges will be invested in bank deposits or in instruments of a credit standing generally comparable to those authorized by the CFTC for investment of customer segregated funds, although applicable CFTC rules prohibit funds employed in trading on foreign exchanges from being deposited in customer segregated fund accounts.
Although the percentages set forth below may vary substantially over time, as of the date of this Prospectus, the Fund estimates:
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up to approximately []% of the NAV of the Fund is placed in segregated accounts in the name of the Fund with the Commodity Broker (or another eligible financial institution, as applicable) in the form of cash or U.S. Treasury bills on margin positions of all commodities combined. Such funds are segregated pursuant to CFTC rules; |
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approximately []% of the NAV of the Fund is maintained in segregated accounts in the name of the Fund in bank deposits or U.S. Treasury and U.S. Government agencies issues; and |
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approximately []% of the NAV of the Fund will be invested in U.S. Treasury bills to track flat positions represented by the Index. |
The Managing Owner, a registered commodity pool operator and commodity trading advisor, is responsible for the cash management activities of the Fund, including investing in Cash Instruments. In addition, assets of the Fund not required to margin positions may be maintained in U.S. bank accounts opened in the name of the Fund and may be held in Cash Instruments.
The percentage that the Funds Cash Instruments will bear to the total net assets will vary from period to period as the market values of the futures contracts change.
The Fund receives all of the interest earned on Cash Instruments on deposit with the Commodity Broker or the Custodian.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following discussion describes the material U.S. federal (and certain state and local) income tax considerations associated with the purchase, ownership and disposition of Shares as of the date hereof by U.S. Shareholders (as defined below) and non-U.S. Shareholders (as defined below). Except where noted, this discussion deals only with Shares held as capital assets by Shareholders who acquired Shares by purchase and does not address special situations, such as those of:
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dealers in securities, commodities or currencies; |
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financial institutions; |
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regulated investment companies, other than the status of the Fund as a qualified publicly traded partnership (qualified PTP) within the meaning of the Code; |
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real estate investment trusts; |
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tax-exempt organizations; |
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insurance companies; |
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persons holding Shares as a part of a hedging, integrated or conversion transaction or a straddle; |
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traders in securities or commodities that elect to use a mark-to-market method of accounting for their securities or commodities holdings; or |
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persons liable for alternative minimum tax. |
Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the Code), the Treasury Regulations promulgated thereunder (the Regulations), and administrative and judicial interpretations thereof, all as of the date hereof, and such authorities may be repealed, revoked, modified or subject to differing interpretations, possibly on a retroactive basis, so as to result in U.S. federal income tax consequences different from those described below.
A U.S. Shareholder means a beneficial owner of Shares that is for U.S. federal income tax purposes:
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an individual citizen or resident of the United States; |
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a corporation (or other entity taxable as a corporation) 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 if it (1) is subject to the primary supervision of a court within the United States and one or more U.S. persons have the authority to control all substantial decisions of such trust or (2) has a valid election in effect under applicable Regulations to be treated as a U.S. person. |
A non-U.S. Shareholder means a beneficial owner of Shares that is not a U.S. Shareholder.
If a partnership or other entity or arrangement treated as a partnership for U.S. federal income tax purposes holds Shares, the tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. If you are a partner in a partnership holding Shares, we urge you to consult your own tax adviser.
No statutory, administrative or judicial authority directly addresses the treatment of Shares or instruments similar to Shares for U.S. federal income tax purposes. As a result, we cannot assure you that the United States Internal Revenue Service (the IRS) or the courts will agree with the tax consequences described herein. A different treatment from that described below could adversely affect the amount, timing and character of income, gain, loss or deduction in respect of an investment in the Shares. If you are considering the purchase of Shares, we urge you to consult your own tax adviser concerning the particular U.S. federal income tax consequences to you of the purchase, ownership and disposition of Shares, as well as any consequences to you arising under the laws of any other taxing jurisdiction.
Generally, a partnership is not a taxable entity and incurs no U.S. federal income tax liability. Section 7704 of the Code provides that publicly traded partnerships will, as a general rule, be taxed as corporations. However, an exception exists with respect to publicly traded partnerships of which 90% or more of the gross income during each taxable year consists of qualifying income within the meaning of Section 7704(d) of the Code (the qualifying income exception). Qualifying income includes dividends, interest, capital gains from the sale or other disposition of stocks and debt instruments and, in the case of a partnership (such as the Fund) a principal activity of which is the buying and selling of commodities or futures contracts with respect to commodities, income and gains derived from commodities or futures contracts with respect to commodities. The Fund anticipates that at least 90% of its gross income for each taxable year will constitute qualifying income within the meaning of Section 7704(d) of the Code.
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operations and the facts existing at the time of future determinations. However, the Funds Managing Owner will use its reasonable efforts to cause the Fund to operate in such manner as is necessary for the Fund to meet the qualifying income exception.
If the Fund were taxable as a corporation in any taxable year, either as a result of a failure to meet the qualifying income exception described above or otherwise, the Funds items of income, gain, loss and deduction would be reflected only on its tax return rather than being passed through to the Shareholders in the Fund, and the Funds net income would be taxed to it at the income tax rates applicable to domestic corporations. In addition, if the Fund were taxable as a corporation, any distribution made by the Fund to a Shareholder would be treated as taxable dividend income, to the extent of the Funds current or accumulated earnings and profits, or, in the absence of current and accumulated earnings and profits, as a nontaxable return of capital to the extent of the Shareholders tax basis in its Shares of the Fund, or as taxable capital gain, after the Shareholders tax basis in its Shares is reduced to zero. Taxation of the Fund as a corporation could result in a material reduction in a Shareholders cash flow and after-tax return and thus could result in a substantial reduction of the value of the Shares in the Fund.
The discussion below is based on Dechert LLPs opinion that the Fund will be classified as a partnership for U.S. federal income tax purposes that is not subject to corporate income tax for U.S. federal income tax purposes.
A partnership does not incur U.S. federal income tax liability. Instead, each partner of a partnership is required to take into account its share of items of income, gain, loss, deduction and other items of the partnership. Accordingly, each Shareholder in the Fund will be required to include in income its allocable share of the Funds income, gain, loss, deduction and other items for the Funds taxable year ending with or within its taxable year. In computing a partners U.S. federal income tax liability, the items must be included, regardless of whether cash distributions are made by the partnership. Thus, Shareholders in the Fund may be required to take into account taxable income without a corresponding current receipt of cash if the Fund generates taxable income but does not make cash distributions in an amount equal to the taxable income, or if the Shareholder is not able to deduct, in whole or in part, the Shareholders allocable share of the Funds expenses or capital losses. The Funds taxable year will end on December 31 unless otherwise required by law. The Fund will use the accrual method of accounting.
Shareholders in the Fund will take into account their share of ordinary income realized by the Fund from accruals of interest on Cash Instruments held in the Funds portfolio. The Fund may hold Cash Instruments with acquisition discount or original issue discount, in which case Shareholders in the Fund will be required to include accrued amounts in taxable income on a current basis even though receipt of those amounts may occur in a subsequent year. The Fund may also acquire Cash Instruments with market discount. Upon disposition of market discount Cash Instruments, gain will generally be required to be treated as interest income to the extent of the market discount and Shareholders in the Fund will be required to include as ordinary income their share of the market discount that accrued during the period the obligations were held by the Fund.
It is expected that a substantial portion of the futures on the commodities underlying the Index will constitute Section 1256 Contracts (as defined below). The Code generally applies a mark-to-market system of taxing unrealized gains and losses on and otherwise provides for special rules of taxation with respect to futures and other contracts that are Section 1256 Contracts. A Section 1256 Contract includes certain regulated futures contracts. With the exception of futures traded on certain exchanges, including
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the LME, discussed below, it is expected that the futures on the Index commodities held by the Fund will constitute Section 1256 Contracts. Section 1256 Contracts held by the Fund at the end of a taxable year of the Fund will be treated for U.S. federal income tax purposes as if they were sold by the Fund at their fair market value on the last business day of the taxable year. The net gain or loss, if any, resulting from these deemed sales (known as marking-to-market), together with any gain or loss resulting from any actual sales of Section 1256 Contracts (or other termination of the Funds obligations under such contracts), must be taken into account by the Fund in computing its taxable income for the year. If a Section 1256 Contract held by the Fund at the end of a taxable year is sold in the following year, the amount of any gain or loss realized on the sale will be adjusted to reflect the gain or loss previously taken into account under the mark-to-market rules.
Capital gains and losses from Section 1256 Contracts generally are currently characterized as short-term capital gains or losses to the extent of 40% of the gains or losses and as long-term capital gains or losses to the extent of 60% of the gains or losses. Thus, Shareholders in the Fund will generally take into account their pro rata share of the long-term capital gains and losses and short-term capital gains and losses from Section 1256 Contracts held by the Fund and taken into account by the Fund in computing its taxable income. If a non-corporate taxpayer incurs a net capital loss for a year, the portion of the loss, if any, which consists of a net loss on Section 1256 Contracts may, at the election of the taxpayer, be carried back three years. A loss carried back to a year by a non-corporate taxpayer may be deducted only to the extent (1) the loss does not exceed the net gain on Section 1256 Contracts for the year and (2) the allowance of the carry back does not increase or produce a net operating loss for the year. It should be noted that legislation has been introduced in the United States Senate, which, if enacted, would treat gains from Section 1256 Contracts as short-term capital gains.
Any futures on Index commodities held by the Fund which are not classified as Section 1256 Contracts (e.g., futures on aluminum and nickel which trade on the LME) will not be subject to the special tax rules discussed above. Since such futures are not subject to the year end mark-to-market rules of Section 1256 described above, long-term or short-term capital gains and losses with respect to such futures will only be recognized by the Fund when such futures positions are assigned or closed (by offset or otherwise). The applicable holding period for qualification for long-term capital gain or loss treatment for the commodity futures held by the Fund which are not Section 1256 Contracts is more than six months (rather than the more than one year holding period applicable to other capital assets).
In addition to the futures on the Index commodities, the Fund may also invest in other futures contracts, forward agreements, swaps, options or OTC derivatives. The Funds investment in these other futures contracts, forward agreements, swaps, options or OTC derivatives may have various tax consequences, requiring Shareholders in the Fund to recognize ordinary income or loss or capital gain or loss. In addition, the proper tax treatment of certain investments may not be entirely free from doubt. Potential Shareholders should consult their tax advisors regarding an investment in the Fund.
Allocation of the Funds Profits and Losses
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As described in more detail below, the U.S. federal income tax rules that apply to partnerships are complex and their application is not always clear. Additionally, the rules generally were not written for, and in some respects are difficult to apply to, publicly traded partnerships. The Fund will apply certain assumptions and conventions intended to comply with the intent of the rules and to report income, gain, deduction, loss and credit to Shareholders in the Fund in a manner that reflects the economic gains and losses, but these assumptions and conventions may not comply with all aspects of the applicable Regulations. It is possible therefore that the IRS will successfully assert that assumptions made and/or conventions used do not satisfy the technical requirements of the Code or the Regulations and will require that tax items be adjusted or reallocated in a manner that could adversely impact Shareholders in the Fund.
Monthly Allocation and Revaluation Conventions
In general, the Funds taxable income and losses will be determined monthly and will be apportioned among the Shareholders in the Fund in proportion to the number of Shares owned by each of them as of the close of the last trading day of the preceding month. By investing in Shares, a U.S. Shareholder agrees that, in the absence of an administrative determination or judicial ruling to the contrary, it will report income and loss under the monthly allocation and revaluation conventions described below.
Under the monthly allocation convention, whomever is treated for U.S. federal income tax purposes as holding Shares as of the close of the last trading day of the preceding month will be treated as continuing to hold the Shares until immediately before the close of the last trading day of the following month. As a result, a Shareholder who has disposed of Shares prior to the close of the last trading day of a month may be allocated income, gain, loss and deduction realized after the date of transfer.
The Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to the Funds monthly convention for allocating income and deductions. If this were to occur, the Funds allocation method might be deemed to violate that requirement.
In addition, for any month in which a creation or redemption of Shares in the Fund takes place, the Fund generally will credit or debit, respectively, the book capital accounts of the existing Shareholders in the Fund with any unrealized gain or loss in the Funds assets. This will result in the allocation of items of the Funds income, gain, loss, deduction and credit to existing Shareholders in the Fund to account for the difference between the tax basis and fair market value of property owned by the Fund at the time new Shares are issued or old Shares are redeemed (reverse section 704(c) allocations). The intended effect of these allocations is to allocate any built-in gain or loss in the Funds assets at the time of a creation or redemption of Shares to the Shareholders that economically have earned such gain or loss.
As with the other allocations described above, the Fund generally will use a monthly convention for purposes of the reverse section 704(c) allocations. More specifically, the Fund generally will credit or debit, respectively, the book capital accounts of the existing Shareholders with any unrealized gain or loss in the Funds assets based on a calculation utilizing the average price of the Funds Shares during the month in which the creation or redemption transaction takes place, rather than the fair market value of its assets at the time of such creation or redemption (the revaluation convention). As a result, it is possible that, for U.S. federal income tax purposes, (i) a purchaser of newly issued Shares will be allocated some or all of the unrealized gain in the Funds assets at the time it acquires the Shares or (ii) an existing
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Shareholder will not be allocated its entire share in the unrealized loss in the Funds assets at the time of such acquisition. Furthermore, the applicable Regulations generally require that the book capital accounts be adjusted based on the fair market value of partnership property on the date of adjustment and do not explicitly allow the adoption of a monthly revaluation convention.
The Code and applicable Regulations generally require that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis, and that adjustments to book capital accounts be made based on the fair market value of partnership property on the date of adjustment. The Code and Regulations do not contemplate monthly allocation or revaluation conventions. If the IRS does not accept the Funds monthly allocation or revaluation convention, the IRS may contend that taxable income or losses of the Fund must be reallocated among the Shareholders in the Fund. If such a contention were sustained, the Shareholders respective tax liabilities would be adjusted to the possible detriment of certain Shareholders in the Fund. The Managing Owner of the Fund is authorized to revise the Funds allocation and revaluation methods in order to comply with applicable law or to allocate items of partnership income and deductions in a manner that reflects more accurately the Shareholders interests in the Fund.
The Fund intends to make the election permitted by Section 754 of the Code. Such an election, once made, is irrevocable without the consent of the IRS. The making of the Section 754 election by the Fund will generally have the effect of requiring a purchaser of Shares in the Fund to adjust its proportionate share of the basis in the Funds assets, or the inside basis, pursuant to Section 743(b) of the Code to fair market value (as reflected in the purchase price for the purchasers Shares), as if it had acquired a direct interest in the Funds assets. The Section 743(b) adjustment is attributed solely to a purchaser of Shares and is not added to the bases of the Funds assets associated with all of the other Shareholders in the Fund. Depending on the relationship between a Shareholders purchase price for Shares and its unadjusted share of the Funds inside basis at the time of the purchase, the Section 754 election may be either advantageous or disadvantageous to the Shareholder as compared to the amount of gain or loss a Shareholder would be allocated absent the Section 754 election.
The calculations under Section 754 of the Code are complex, and there is little legal authority concerning the mechanics of the calculations, particularly in the context of publicly traded partnerships. Therefore, assuming the Fund makes the election under Section 754 of the Code, it is expected that the Fund will apply certain conventions in determining and allocating the Section 743 basis adjustments to help reduce the complexity of those calculations and the resulting administrative costs. It is possible that the IRS will successfully assert that some or all of such conventions utilized by the Fund do not satisfy the technical requirements of the Code or the Regulations and, thus, will require different basis adjustments to be made.
In order to make the basis adjustments permitted by Section 754, the Fund will be required to obtain information regarding each Shareholders secondary market transactions in Shares as well as creations and redemptions of Shares. The Fund will seek the requested information from the record Shareholders, and, by purchasing Shares, each beneficial owner of Shares will be deemed to have consented to the provision of the information by the record owner of such beneficial owners Shares. Notwithstanding the foregoing, however, there can be no guarantee that the Fund will be able to obtain such information from record owners or other sources, or that the basis adjustments that the Fund makes based on the information it is able to obtain will be effective in eliminating disparity between a Shareholders outside basis in its Shares.
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The Fund will experience a constructive termination for tax purposes if there is a sale or exchange of 50 percent or more of the total Shares in the Fund within a 12-month period. A constructive termination results in the closing of the Funds taxable year for all Shareholders in the Fund. In the case of a Shareholder reporting on a taxable year other than the taxable year used by the Fund (which is a fiscal year ending December 31), the early closing of the Funds taxable year may result in more than 12 months of its taxable income or loss being includable in the Shareholders taxable income for the year of termination. The Fund would be required to make new tax elections after a termination, including a new election under Section 754. A termination could also result in penalties if the Fund were unable to determine that the termination had occurred.
Distributions of cash by a partnership are generally not taxable to the distributee to the extent the amount of cash does not exceed the distributees tax basis in its partnership interest. Thus, any cash distributions made by the Fund will be taxable to a Shareholder in the Fund only to the extent the distributions exceed the Shareholders tax basis in the Shares it is treated as owning (see Tax Basis in Fund Shares below). Any cash distributions in excess of a Shareholders tax basis generally will be considered to be gain from the sale or exchange of the Shares (see Disposition of Shares below).
Creation and Redemption of Baskets
Shareholders, other than Authorized Participants (or holders for which an Authorized Participant is acting), generally will not recognize gain or loss as a result of an Authorized Participants creation or redemption of a Basket. If the Fund disposes of assets in connection with the redemption of a Basket, however, the disposition may give rise to gain or loss that will be allocated in part to Shareholders in the Fund. An Authorized Participants creation or redemption of a Basket also may affect a Shareholders share of the Funds tax basis in its assets, which could affect the amount of gain or loss allocated to the Shareholder on the sale or disposition of portfolio assets by the Fund.
If a U.S. Shareholder transfers Shares of the Fund and the transfer is a sale or other taxable disposition, the U.S. Shareholder will generally be required to recognize gain or loss measured by the difference between the amount realized on the sale and the U.S. Shareholders adjusted tax basis in the Shares sold. The amount realized will include an amount equal to the U.S. Shareholders share of the Funds liabilities, as well as any proceeds from the sale. The gain or loss recognized will generally be taxable as capital gain or loss. Capital gain of non-corporate U.S. Shareholders is eligible to be taxed at reduced rates where the Shares sold are considered held for more than one year. Capital gain of corporate U.S. Shareholders is taxed at the same rate as ordinary income. Any capital loss recognized by a U.S. Shareholder on a sale of Shares will generally be deductible only against capital gains, except that a non-corporate U.S. Shareholder may also offset up to $3,000 per year of ordinary income with capital losses.
A U.S. Shareholders initial tax basis in its Shares will equal the sum of (a) the amount of cash paid by the U.S. Shareholder for its Shares and (b) the U.S. Shareholders share of the Funds liabilities. A U.S. Shareholders tax basis in its Shares will be increased by (a) the U.S. Shareholders share of the Funds taxable income, including capital gain, (b) the U.S. Shareholders share of the Funds income, if any, that is exempt from tax and (c) any increase in the U.S. Shareholders share of the Funds liabilities. A U.S.
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Shareholders tax basis in its Shares will be decreased (but not below zero) by (a) the amount of any cash distributed (or deemed distributed) to the U.S. Shareholder, (b) the U.S. Shareholders share of the Funds losses and deductions, (c) the U.S. Shareholders share of the Funds expenditures that are neither deductible nor properly chargeable to its capital account and (d) any decrease in the U.S. Shareholders share of the Funds liabilities.
Limitations on Interest Deductions
The deductibility of a non-corporate U.S. Shareholders investment interest expense is generally limited to the amount of the Shareholders net investment income. Investment interest expense will generally include interest expense incurred by the Fund, if any, and investment interest expense incurred by the U.S. Shareholder on any margin account borrowing or other loan incurred to purchase or carry Shares. Net investment income includes gross income from property held for investment and amounts treated as portfolio income, such as dividends and interest, less deductible expenses, other than interest, directly connected with the production of investment income. For this purpose, any long-term capital gain or qualifying dividend income that is taxable at long-term capital gains rates is excluded from net investment income unless the U.S. Shareholder elects to pay tax on such capital gain or dividend income at ordinary income rates.
Organization, Syndication and Other Expenses
In general, expenses incurred that are considered miscellaneous itemized deductions may be deducted by a U.S. Shareholder that is an individual, estate or trust only to the extent that they exceed 2% of the adjusted gross income of the U.S. Shareholder. The Code imposes additional limitations on the amount of certain itemized deductions allowable to individuals.
In addition, certain expenses are also not deductible in determining the alternative minimum tax liability of a U.S. Shareholder. The Fund will report its expenses on a pro rata basis to the Shareholders, and each U.S. Shareholder will determine separately to what extent they are deductible on the U.S. Shareholders tax return. A U.S. Shareholders inability to deduct all or a portion of the expenses could result in an amount of taxable income to such U.S. Shareholder with respect to the Fund that exceeds the amount of cash actually distributed to the U.S. Shareholder for the year. It is anticipated that Management Fees the Fund will pay will constitute miscellaneous itemized deductions.
Under Section 709(b) of the Code, amounts paid or incurred to organize a partnership may, at the election of the partnership, be treated as deferred expenses, which are allowed as a deduction ratably over a period of 180 months. The Fund intends to make a 709(b) election. A non-corporate U.S. Shareholders allocable share of the organizational expenses will constitute miscellaneous itemized deductions. Expenditures in connection with the issuance and marketing of Shares (so called syndication fees) are not eligible for the 180-month amortization provision and are not deductible.
Passive Activity Income and Loss
Individuals are subject to certain passive activity loss rules under Section 469 of the Code. Under these rules, losses from a passive activity generally may not be used to offset income derived from any source other than passive activities. Losses that cannot be currently used under this rule may generally be carried forward. Upon an individuals disposition of an interest in the passive activity, the individuals unused passive losses may generally be used to offset other (i.e., non-passive) income. Under current Regulations, income or loss from the Funds investments generally will not constitute income or losses from a passive activity. Therefore, income or loss realized by Shareholders in the Fund will not be available to offset a U.S. Shareholders passive losses or passive income from other sources.
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Transferor/Transferee Allocations
In general, the Funds taxable income and losses will be determined monthly and will be apportioned among the Funds Shareholders in proportion to the number of Shares owned by each of them as of the close of the last trading day of the preceding month. With respect to any Shares that were not treated as outstanding as of the close of the last trading day of the preceding month, the first person that is treated as holding such Shares (other than an underwriter or other person holding in a similar capacity) for U.S. federal income tax purposes will be treated as holding such Shares for this purpose as of the close of the last trading day of the preceding month. As a result, a Shareholder transferring its Shares may be allocated income, gain, loss and deduction realized after the date of transfer.
Section 706 of the Code generally requires that items of partnership income and deductions be allocated between transferors and transferees of partnership interests on a daily basis. It is possible that transfers of Shares could be considered to occur for U.S. federal income tax purposes when the transfer is completed without regard to the Funds convention for allocating income and deductions. In that event, the Funds allocation method might be considered a monthly convention that does not literally comply with that requirement.
If the IRS treats transfers of Shares as occurring throughout each month and a monthly convention is not allowed by the Regulations (or only applies to transfers of less than all of a Shareholders Shares) or if the IRS otherwise does not accept the Funds convention, the IRS may contend that taxable income or losses of the Fund must be reallocated among the Shareholders in the Fund. If such a contention were sustained, the Shareholders respective tax liabilities would be adjusted to the possible detriment of certain Shareholders. The Funds Managing Owner is authorized to revise the Funds methods of allocation between transferors and transferees (as well as among Shareholders whose interests otherwise vary during a taxable period).
Reporting by the Fund to its Shareholders
Each Shareholder, by its acquisition of Shares of the Fund, will be deemed to agree to allow brokers and nominees to provide to the Fund its name and address and the other information and forms as may be reasonably requested by the Fund for purposes of complying with its tax reporting and withholding obligations (and to waive any confidentiality rights with respect to the information and forms for this purpose) and to provide information or forms upon request.
Given the lack of authority addressing structures similar to that of the Fund, it is not certain that the IRS will agree with the manner in which tax reporting by the Fund will be undertaken. Therefore, Shareholders should be aware that future IRS interpretations or revisions to Regulations could alter the manner in which tax reporting by the Fund and any nominee will be undertaken.
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Audits and Adjustments to Tax Liability
Any challenge by the IRS to the tax treatment by a partnership of any item must be conducted at the partnership, rather than at the partner, level. A partnership ordinarily designates a tax matters partner (as defined under Section 6231 of the Code) as the person to receive notices and to act on its behalf in the conduct of such a challenge or audit by the IRS.
A U.S. federal income tax audit of the Funds partnership tax return may result in an audit of the returns of the U.S. Shareholders, which, in turn, could result in adjustments of items of a Shareholder that are unrelated to the Fund as well as to the Funds related items. In particular, there can be no assurance that the IRS, upon an audit of a partnership tax return of the Fund or of an income tax return of a U.S. Shareholder, might not take a position that differs from the treatment thereof by the Fund. A U.S. Shareholder would be liable for interest on any deficiencies that resulted from any adjustments.
Prospective U.S. Shareholders should also recognize that they might be forced to incur substantial legal and accounting costs in resisting any challenge by the IRS to items in their individual returns, even if the challenge by the IRS should prove unsuccessful.
The Fund will conduct its activities in a manner that a non-U.S. Shareholder who is not otherwise carrying on a trade or business in the United States will not be considered to be engaged in a trade or business in the United States as a result of an investment in the Shares of the Fund. A non-U.S. Shareholders share of the interest income realized by the Fund on its holdings of U.S. Treasury bills will be exempt from U.S. withholding tax provided the non-U.S. Shareholder certifies on IRS Form W-8BEN (or other applicable form) that the Shareholder is not a U.S. person, provides name and address information and otherwise satisfies applicable documentation requirements.
Non-U.S. Shareholders will not be subject to U.S. federal income tax on gains realized on the sale of Shares of the Fund or on the Shareholders share of the Funds gains. However, in the case of an individual non-U.S. Shareholder, the Shareholder will be subject to U.S. federal income tax on gains on the sale of Shares or the Shareholders distributive share of gains if the Shareholder is present in the United States for 183 days or more during a taxable year and certain other conditions are met.
Non-U.S. Shareholders that are individuals will be subject to U.S. federal estate tax on the value of U.S. situs property owned at the time of their death (unless a statutory exemption or tax treaty exemption applies). It is unclear whether partnership interests (such as the Shares of the Fund) will be considered U.S. situs property. Accordingly, non-U.S. Shareholders may be subject to U.S. federal estate tax on all or part of the value of the Shares owned at the time of their death.
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Non-U.S. Shareholders are advised to consult their own tax advisers with respect to the particular tax consequences to them of an investment in the Shares of the Fund.
An organization that is otherwise exempt from U.S. federal income tax is nonetheless subject to taxation with respect to its unrelated business taxable income (UBTI). Except as noted below with respect to certain categories of exempt income, UBTI generally includes income or gain derived (either directly or through a partnership) from a trade or business, the conduct of which is substantially unrelated to the exercise or performance of the organizations exempt purpose or function.
UBTI generally does not include passive investment income, such as dividends, interest and capital gains, whether realized by the organization directly or indirectly through a partnership (such as the Fund) in which it is a partner. This type of income is exempt, subject to the discussion of unrelated debt-financed income below, even if it is realized from securities trading activity that constitutes a trade or business.
UBTI includes not only trade or business income or gain as described above, but also unrelated debt-financed income. This latter type of income generally consists of (1) income derived by an exempt organization (directly or through a partnership) from income producing property with respect to which there is acquisition indebtedness at any time during the taxable year and (2) gains derived by an exempt organization (directly or through a partnership) from the disposition of property with respect to which there is acquisition indebtedness at any time during the twelve-month period ending with the date of the disposition.
All of the income realized by the Fund is expected to be short-term or long-term capital gain income, interest income or other passive investment income of the type specifically exempt from UBTI as discussed above. The Fund will not borrow funds for the purpose of acquiring or holding any investments or otherwise incur acquisition indebtedness with respect to such investments. Therefore, a tax-exempt entity purchasing Shares of the Fund will not incur any UBTI by reason of its investment in the Shares or upon sale of such Shares provided that such tax-exempt entity does not borrow funds for the purpose of investing in the Shares.
Regulated Investment Companies
The treatment of a regulated investment companys (RIC) investment in the Fund will depend, in part, on whether the Fund is classified as a qualified publicly trade partnership, or qualified PTP, for purposes of the RIC rules. A RIC may invest up to 25% of its assets in qualified PTPs and net income derived from such investments is qualifying income under the income source test applicable to entities seeking to qualify for the special tax treatment available to RICs under the Code. In addition, interests in a qualified PTP are treated as issued by such PTP and a RIC is not required to look through to the underlying partnership assets when testing compliance with the asset diversification tests applicable to RICs under the Code.
The Fund anticipates that it will qualify as a qualified PTP for any taxable year in which the Fund realizes sufficient gross income from its commodities futures transactions. However, qualification of the Fund as a qualified PTP depends on performance of the Fund for the particular tax year and there is no assurance that it will qualify in a given year or that future results of the Fund will conform to prior experience. Additionally, there is, to date, no regulatory guidance on the application of these rules, and it is possible that future guidance may adversely affect qualification of the Fund as a qualified PTP.
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Other recently enacted legislation will impose a 3.8% tax on the net investment income (as defined in the Code) of certain individuals, trusts and estates, for taxable years beginning after December 31, 2013. U.S. Shareholders are encouraged to consult with their own advisors regarding the possible implications of this legislation on an investment in the Fund.
Certain State and Local Taxation Matters
Prospective Shareholders should consider, in addition to the U.S. federal income tax consequences described, potential state and local tax considerations in investing in the Shares.
State and local laws often differ from U.S. federal income tax laws with respect to the treatment of specific items of income, gain, loss, deduction and credit. A Shareholders distributive share of the taxable income or loss of the Fund generally will be required to be included in determining its reportable income for state and local tax purposes in the jurisdiction in which the Shareholder is a resident. The Fund may have income in one or more jurisdictions that will subject a Shareholder to tax (and require a Shareholder to file an income tax return with the jurisdiction in respect to the Shareholders share of the income derived from that business). A prospective Shareholder should consult its tax adviser with respect to the availability of a credit for such tax in the jurisdiction in which the Shareholder is resident.
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Taxation and Finance or the New York City Department of Finance has been, or will be, requested regarding such matters.
The Fund is required in certain circumstances to backup withhold on certain payments paid to non-corporate Shareholders that 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 a Shareholder may be refunded or credited against the Shareholders U.S. federal income tax liability, if any, provided that the required information is furnished to the IRS in a timely manner.
Shareholders should be aware that certain aspects of the U.S. federal, state and local income tax treatment regarding the purchase, ownership and disposition of Shares are not clear under existing law. Thus, Shareholders are urged to consult their own tax advisers to determine the tax consequences of ownership of the Shares in their particular circumstances, including the application of U.S. federal, state, local and foreign tax laws.
PROSPECTIVE SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX ADVISERS BEFORE DECIDING WHETHER TO INVEST IN THE SHARES OF THE FUND.
The Fund will make distributions at the discretion of the Managing
Owner. To the extent that the Funds actual and projected interest income from
its Cash Instruments exceeds the actual and projected fees and expenses of the
Fund, the Managing Owner expects periodically to make distributions of the
amount of such excess. The Fund currently does not expect to make distributions
with respect to capital gains. Depending on the Funds performance for the
taxable year and your own tax situation for such year, your income tax
liability for the taxable year for your allocable share of the Funds net
ordinary income or loss and capital gain or loss may exceed any distributions you
receive with respect to such year.
PURCHASES BY EMPLOYEE BENEFIT PLANS
Although there can be no assurance that an investment in the Fund, or any other managed futures product, will achieve the investment objectives of an employee benefit plan in making such investment, futures investments have certain features which may be of interest to such a plan. For example, the futures markets are one of the few investment fields in which employee benefit plans can participate in leveraged strategies without being required to pay tax on unrelated business taxable income. See Material U.S. Federal Income Tax ConsiderationsTax-Exempt Organizations on page []. In addition, because they are not taxpaying entities, employee benefit plans are not subject to paying annual tax on profits (if any) of the Fund.
The following section sets forth certain consequences under the Employee Retirement Income Security Act of 1974, as amended (ERISA), and the Code, which a fiduciary of an employee benefit plan as defined in, and subject to the fiduciary responsibility provisions of, ERISA or of a plan as defined in and subject to Section 4975 of the Code who has investment discretion should consider before deciding to invest the plans assets in the Fund (such employee benefit plans and plans being referred to herein as
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Plans, and such fiduciaries with investment discretion being referred to herein as Plan Fiduciaries). The following summary is not intended to be complete, but only to address certain questions under ERISA and the Code which are likely to be raised by the Plan Fiduciarys own counsel.
In general, the terms employee benefit plan as defined in ERISA and plan as defined in Section 4975 of the Code together refer to any plan or account of various types which provide retirement benefits or welfare benefits to an individual or to an employers employees and their beneficiaries. Such plans and accounts include, but are not limited to, corporate pension and profit sharing plans, simplified employee pension plans, Keogh plans for self-employed individuals (including partners), individual retirement accounts described in Section 408 of the Code and medical benefit plans.
Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in the Fund, including the role that such an investment in the Fund would play in the Plans overall investment portfolio. Each Plan Fiduciary, before deciding to invest in the Fund, must be satisfied that such investment in the Fund is a prudent investment for the Plan, that the investments of the Plan, including the investment in the Fund, are diversified so as to minimize the risk of large losses and that an investment in the Fund complies with the documents of the Plan and related trust.
EACH PLAN FIDUCIARY CONSIDERING ACQUIRING SHARES MUST CONSULT WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO. AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THE FUND IS NOT INTENDED AS A COMPLETE INVESTMENT PROGRAM.
ERISA and a regulation issued thereunder (the Plan Asset Rules) contain rules for determining when an investment by a Plan in an entity will result in the underlying assets of such entity being assets of the Plan for purposes of ERISA and Section 4975 of the Code (i.e., plan assets). Those rules provide that assets of an entity will not be plan assets of a Plan which purchases an interest therein if certain exceptions apply, including (i) an exception applicable if the equity interest purchased is a publicly-offered security (the Publicly-Offered Security Exception) and (ii) an exception applicable if the investment by all benefit plan investors is not significant or certain other exceptions apply (the Insignificant Participation Exception).
The Publicly-Offered Security Exception applies if the equity interest is a security that is (1) freely transferable, (2) part of a class of securities that is widely held and (3) either (a) part of a class of securities registered under Section 12(b) or 12(g) of the Exchange Act, or (b) sold to the Plan as part of a public offering pursuant to an effective Registration Statement under the Securities Act and the class of which such security is a part is registered under the Exchange Act within 120 days (or such later time as may be allowed by the SEC) after the end of the fiscal year of the issuer in which the offering of such security occurred. The Plan Asset Rules state that the determination of whether a security is freely transferable is to be made based on all relevant facts and circumstances. Under the Plan Asset Rules, a class of securities is widely held only if it is of a class of securities owned by 100 or more investors independent of the issuer and of each other.
The Shares of the Fund should be considered to be publicly-offered securities. First, the Shares will be sold as part of a public offering pursuant to an effective Registration Statement under the Securities Act, and the Shares will be timely registered under the Securities Exchange Act. Second, it appears that the Shares will be freely transferable because the Shares of the Fund will be freely tradable on NYSE Arca like any other exchange-listed security. Finally, it is anticipated that the Shares will be owned by at least
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100 investors independent of the Fund. Therefore, the underlying assets of the Fund should not be considered to constitute assets of any Plan which purchases Shares.
Except as otherwise set forth, the foregoing statements regarding the consequences under ERISA and the Code of an investment in the Fund are based on the provisions of the Code and ERISA as currently in effect, and the existing administrative and judicial interpretations thereunder. No assurance can be given that administrative, judicial or legislative changes will not occur that will not make the foregoing statements incorrect or incomplete.
THE PERSON WITH INVESTMENT DISCRETION SHOULD CONSULT WITH HIS OR HER ATTORNEY AND FINANCIAL ADVISERS AS TO THE PROPRIETY OF AN INVESTMENT IN SHARES IN LIGHT OF THE CIRCUMSTANCES OF THE PARTICULAR PLAN AND CURRENT TAX LAW.
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PERFORMANCE, FINANCIALS AND OTHER INFORMATION
The Fund has not yet commenced operations and therefore does not have a performance history. Once available, the Funds performance information will be accessible on the Funds website at vaneck.com/etf.
Managements Discussion and Analysis of Financial Condition and Results of Operations
Preparation of the financial statements and related disclosures in accordance with U.S. generally accepted accounting principles requires the application of appropriate accounting rules and guidance, as well as the use of estimates. The Funds application of these policies involves judgments and the use of estimates. Actual results may differ from the estimates used and such differences could be material. The Fund Portfolio will hold a significant portion of its assets in futures contracts and Cash Instruments, each of which, as applicable, will be held at fair value. The Fund may also invest in Cleared Swaps and/or Other Commodity Instruments.
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The Fund will calculate its NAV as described under the section Net Asset Value for more details. |
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If the Fund invests in one or more Cleared Swaps, the value of the Cleared Swaps will be based on the value of the contract underlying the applicable Index commodity in connection with such Cleared Swap, except that a fair value may be determined if the Managing Owner believes that the Fund is subject to significant credit risk relating to the counterparty to such Cleared Swap.
If the Fund invests in Other Commodity Instruments traded OTC, they would be recorded on a trade date basis and at fair value in the financial statements, with changes in fair value reported in the Statements of Operations.
The fair value of a financial instrument is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). In determining fair value, the Fund maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the financial instrument based on market data obtained from independent sources. Unobservable inputs reflect the Managing Owners assumptions that market participants would use in pricing the financial instrument developed based on the best information available in the circumstances. Greater use of management judgment is required in determining fair value when inputs are less observable or unobservable in the marketplace.
At the inception of trading, the Managing Owner expects that the majority of the Funds investments will be exchange-traded futures contracts, which will be valued daily at settlement prices published by the exchanges. U.S. Treasury bills are measured based on quoted market prices. Thus, the Managing Owner expects that a substantial portion of the Funds assets will be valued on a daily basis at fair value using objective measures.
Liquidity and Capital Resources
As of the date of this Prospectus, the Fund has not begun trading activities. Once the Fund begins trading activities, it is anticipated that all of its total net assets will be allocated to Index Commodity Contracts
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If the Fund invests in Cleared Swaps or Other Commodity Instruments, a portion of its proceeds of the offering may be used to collateralize the Cleared Swaps or Other Commodity Instruments, as applicable, in accordance with normal market practices.
A
significant portion of the NAV is likely to be held in Cash Instruments.
Although the following percentages may vary substantially over time, as of the
date of this Prospectus, the Fund estimates that up to approximately []% of
its NAV will be placed in segregated accounts (pursuant to the rules of the
CFTC) in the name of the Fund with the Commodity Broker (or another eligible
financial institution, as applicable) in the form of Cash Instruments to margin
positions of all futures contracts combined. The Fund maintains approximately
[]% of its NAV in Cash Instruments over and above that which is needed to post
as collateral for trading. The percentage that the Funds Cash Instruments will
bear to the total net assets will vary from period to period as the market
values of commodity interests change. The balance of the net assets will be
held in the Funds segregated and custodial account with the Custodian or
Commodity Broker. Interest earned on the Funds interest-bearing funds will be
paid to the Fund.
The amount of margin that is required to establish and maintain a Cleared Swap is determined by the exchange which clears the applicable Cleared Swap. Additionally, the requirements and the logistics related to margin with respect to Cleared Swaps is substantially similar to futures contracts.
The Funds commodity futures contracts may be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, commodity exchanges limit fluctuations in certain commodity futures contract prices during a single day by regulations referred to as daily limits. During a single day, no trades may be executed at prices beyond the daily limit. Once the price of a futures contract for a particular commodity has increased or decreased by an amount equal to the daily limit, positions in the commodity futures contracts can neither be taken nor liquidated unless the traders are willing to effect trades at or within the limit. Commodity futures prices have occasionally moved the daily limit for several consecutive days with little or no trading. Such market conditions could prevent the Fund from promptly liquidating its commodity futures positions.
The Funds Cleared Swaps and Other Commodity Instruments, if any, may also be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. For example, certain Other Commodity Instruments are not traded on an exchange, do not have uniform terms and conditions, and in general are not transferable without the consent of the counterparty. Entry into certain
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Other Commodity Instruments (if any) may further impact liquidity because these contractual agreements are executed off-exchange between private parties and, therefore, the time required to offset or unwind these positions may be greater than that for exchange-traded instruments. This potential delay could be exacerbated to the extent a counterparty is not a U.S. person.
Because the Fund will trade futures contracts, its capital will be at risk due to changes in the market price of these contracts. The Funds capital would also be at risk in connection with its Cleared Swaps due to changes in the value of these Cleared Swaps. Additionally, if the Fund invested in Other Commodity Instruments traded OTC, its capital would be at risk due to changes in the value of these Other Commodity Instruments (market risk) or the inability of counterparties to perform under the terms of the Other Commodity Instruments (credit risk).
Trading in futures contracts, such as Index Commodity Contracts and Other Commodity Contracts will involve the Fund entering into contractual commitments to purchase or sell a particular commodity at a specified date and price. The market risk associated with the Funds commitments to purchase commodities will be limited to the gross or face amount of the futures contracts held. The Funds capital would also be at risk in connection with its Cleared Swaps or Other Commodity Interests due to changes in the value of these Cleared Swaps or Other Commodity Interests, respectively.
The Funds exposure to market risk will be influenced by a number of factors including the volatility of interest rates and foreign currency exchange rates, the liquidity of the markets associated with the contracts and the relationships among the contracts held. The inherent uncertainty of the Funds trading as well as the development of drastic market occurrences could ultimately lead to a loss of all or substantially all of Shareholders capital.
When the Fund enters into OTC Other Commodity Instruments (if any), the Fund will be exposed to credit risk that the counterparty to the contract will not meet its obligations. Futures contracts traded on U.S. and on most foreign futures exchanges will settle through the clearing house associated with the particular exchange. In general, clearing houses are backed by their corporate members who may be required to share in the financial burden resulting from the nonperformance by one of their members and, as such, should significantly reduce the risk that a given futures contract will not be performed. In cases where the clearing house is not backed by the clearing members (i.e., some foreign exchanges), it may be backed by a consortium of banks or other financial institutions.
When the Fund enters into Cleared Swaps, the Fund will be exposed to credit risk that the clearing house for the Cleared Swaps will not meet its obligations. However, the Fund will not be subject to individual dealer counterparty risk that exists in OTC swaps that are not cleared through a clearing house.
OTC Other Commodity Instruments (if any) will be subject to the risks as described under the sections Certain Operations of the Fund, Including the Creation of Baskets, May Be Restricted By Regulatory and Exchange Position Limits and Other Position Limitation Rules and Could Result in Tracking Error Between Changes in the NAV Per Share and Changes in the Level of the Index, Or Could Result in the Market Price of the Shares Trading at a Premium or Discount to the NAV Per Share.; Failure of the Clearing House to Meet Its Obligations with respect to Index Commodity Contracts or Cleared Swaps May Adversely Impact the NAV of the Fund, and the Value of Your Shares.; Other Commodity Instruments that Trade OTC (If Any), Such As Forward Agreements and Swaps, Are Subject to the Risk
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of Counterparty Non-Performance Resulting in the Fund Not Realizing a Trading Gain.; and Future Regulation of OTC Derivatives Markets May Have a Detrimental Effect On the Value of Your Shares.
Swap agreements do not generally involve the delivery of the underlying assets either at the outset of a transaction or upon settlement. Accordingly, if the counterparty to a swap agreement defaults, the Funds risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any. Swap counterparty risk is generally limited to the amount of any unrealized gains, although in the event of a counterparty bankruptcy, there could be delays and costs associated with recovery of collateral posted in segregated tri-party accounts at the Funds custodian bank.
Forward agreements do not involve the delivery of the underlying assets at the onset of a transaction, but may be settled physically in the underlying asset if such contracts are held to expiration. Thus, prior to settlement, if the counterparty to a forward contract defaults, the Funds risk of loss consists of the net amount of payments that the Fund is contractually entitled to receive, if any. However, if physically settled forwards are held until expiration, at the time of settlement, the Fund may be at risk for the full notional value of the forward contracts depending on the type of settlement procedures used.
There can be no assurance that any counterparty, clearing member or clearing house will meet its obligations to the Fund.
The Managing Owner will attempt to minimize these market and credit risks by requiring the Fund to abide by various trading limitations and policies, which will include limiting margin accounts and trading only in liquid markets. The Managing Owner will implement procedures which will include, but will not be limited to:
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executing and clearing trades with creditworthy counterparties; |
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limiting the amount of margin or premium required for any one futures contract or all futures contracts combined; and |
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generally limiting transactions to futures contracts which will be traded in sufficient volume to permit the taking and liquidating of positions. |
The Commodity Broker, when acting as the Funds futures commission merchant in accepting orders for the purchase or sale of domestic futures contracts, will be required by CFTC regulations to separately account for and segregate as belonging to the Fund all assets of the Fund held at the Commodity Broker relating to domestic futures trading and the Commodity Broker will not be allowed to commingle such assets with the Commodity Brokers assets. In addition, CFTC regulations will also require the Commodity Broker to hold in a secure account assets of the Fund related to foreign futures trading.
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Off-Balance Sheet Arrangements and Contractual Obligations
As of the date of this Prospectus, the Fund has not utilized, nor does it expect to utilize in the future, special purpose entities to facilitate off-balance sheet financing arrangements and have no loan guarantee arrangements or off-balance sheet arrangements of any kind other than agreements entered into in the normal course of business, which may include indemnification provisions related to certain risks service providers undertake in performing services which are in the best interests of the Fund. While the Funds exposure under such indemnification provisions cannot be estimated, these general business indemnifications are not expected to have a material impact on the Funds financial position.
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Dechert LLP has advised the Managing Owner in connection with the Shares being offered hereby. Dechert LLP also advised the Managing Owner with respect to its responsibilities as Managing Owner of the Fund and with respect to matters relating to the Fund. Dechert LLP has prepared the sections U.S. Federal Income Tax Considerations with respect to U.S. federal income tax matters and Purchases By Employee Benefit Plans with respect to ERISA. Richards, Layton & Finger, P.A., special Delaware counsel to the Trust, has advised the Trust in connection with the legality of the Shares being offered hereby. Dechert LLP has not represented, nor will it represent the Fund or the Shareholders in matters relating to the Fund and no other counsel has been engaged to act on their behalf. Certain opinions of counsel have been filed with the SEC as exhibits to the Registration Statement of which this Prospectus is a part.
The financial statements of the Fund as of [], 2012 that will be included in this Prospectus will be audited by [], an independent registered public accounting firm, as stated in its report appearing herein, and will be so included in reliance upon such report given upon the authority of that firm as an expert in auditing and accounting.
This Prospectus constitutes part of the Registration Statement filed by the Fund with the SEC in Washington, D.C. This Prospectus does not contain all of the information set forth in the Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC, including, without limitation, certain exhibits thereto (for example, the forms of the Participant Agreement). The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries; the exhibits themselves may be inspected without charge at the public reference facilities maintained by the SEC in Washington, D.C., and copies of all or part thereof may be obtained from the SEC upon payment of the prescribed fees. The SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address is http://www.sec.gov.
Recent Financial Information and Annual Reports
The Managing Owner will furnish you with an annual report of the Fund in which you invested within 90 calendar days after the end of the Funds fiscal year as required by the rules and regulations of the SEC as well as with those reports required by the CFTC and NFA, including, but not limited to, an annual audited financial statement certified by independent registered public accountants and any other reports required by any other governmental authority that has jurisdiction over the activities of the Fund. You also will be provided with appropriate information to permit you to file your U.S. federal and state income tax returns (on a timely basis) with respect to your Shares. Monthly account statements conforming to CFTC and NFA requirements will be posted on the Managing Owners website at http://www.vaneck.com. The Fund will file periodic, quarterly and annual reports with the SEC. Shareholders can read and copy these reports at the SEC public reference facilities in Washington D.C. The filings will also be posted at http://www.sec.gov. Additional reports may be posted on the Managing Owners website in the discretion of the Managing Owner or as required by regulatory authorities.
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[Privacy Policy of the Managing Owner
The Managing Owner collects non-public information about you from the following sources: (i) information received from you on applications or other forms; and (ii) information about your transactions with the Managing Owner and others. The Managing Owner does not disclose any non-public personal information about you to anyone, other than as set forth below, as permitted by applicable law and regulation. The Managing Owner may disclose non-public personal information about you to the funds in which you invest. The Managing Owner may disclose non-public personal information about you to non-affiliated companies that work with the Managing Owner to service your account(s), or to provide services or process transactions that you have requested. The Managing Owner may disclose non-public personal information about you to parties representing you, such as your investment representative, your accountant, your tax adviser, or to other third parties at your direction/consent. If you are a former shareholder, the Managing Owner will adhere to the privacy policies and practices as described in this notice. The Managing Owner restricts access to your personal and account information to those employees who need to know that information to provide products and services to you. The Managing Owner maintains appropriate physical, electronic and procedural safeguards to guard your non-public personal information.]
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Report of Independent Public Accounting Firm Dated []* |
Statement of Financial Condition Dated []* |
Notes to Statement of Financial Condition Dated []* |
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To be filed by amendment |
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To be furnished by amendment. |
THE FUND HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO ASSETS OR LIABILITIES. |
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THE FUND HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY. |
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To be furnished by amendment |
THE FUND HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO ASSETS OR LIABILITIES. |
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THE FUND HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY. |
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To be furnished by amendment. |
THE FUND HAS NOT COMMENCED OPERATIONS AND, CONSEQUENTLY, HAS NO ASSETS OR LIABILITIES. |
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THE FUND HAS NOT COMMENCED TRADING AND DOES NOT HAVE ANY PERFORMANCE HISTORY. |
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PART TWO |
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STATEMENT OF ADDITIONAL INFORMATION |
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Market Vectors Morningstar Long/Short Commodity ETF |
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Shares of Beneficial Interest |
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This is a speculative investment which involves the risk of loss. |
Past performance is not necessarily indicative of future results. |
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See the section The Risks You Face beginning at page [] in Part One. |
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THIS PROSPECTUS IS IN TWO PARTS: |
A DISCLOSURE DOCUMENT AND A STATEMENT OF ADDITIONAL INFORMATION. |
THESE PARTS ARE BOUND TOGETHER, AND BOTH CONTAIN |
IMPORTANT INFORMATION. YOU MUST READ THE |
STATEMENT OF ADDITIONAL INFORMATION |
IN CONJUNCTION WITH THE |
DISCLOSURE DOCUMENT. |
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[], 2012 |
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Van Eck Absolute Return Advisers Corp. |
Managing Owner |
PART TWO
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
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The Commodity Exchange Act provides for the federal regulation of all commodity interest transactions, markets and intermediaries. Regulatory oversight encompasses all commodity futures trading activities and requires all commodity futures and commodity options to be traded on organized exchanges. The CFTC was created in 1974 as a result of the Commodity Exchange Act, pursuant to which NFA was also created in 1982. NFA is an independent self-regulatory organization and oversees participants in the commodities and futures industry in the United States. NFAs oversight is conducted with the goal of, among other things, protecting investors from fraudulent commodities and futures activities. Pursuant to authority in the Commodity Exchange Act, NFA has been formed and registered with the CFTC as a registered futures association. At the present time, NFA is the only non-exchange self-regulatory organization for commodities professionals. NFA members are subject to NFA standards relating to fair trade practices, financial condition, and consumer protection. As the self-regulatory body of the commodities industry, NFA promulgates rules governing the conduct of commodity professionals and disciplines those professionals who do not comply with such standards. The CFTC has delegated to NFA responsibility for the registration of commodity trading advisors, commodity pool operators, futures commission merchants, introducing brokers, retail foreign exchange dealers, and their respective associated persons and floor brokers. The Commodity Broker and the Managing Owner are members of NFA, but neither the Trust nor the Fund is required to become a member of NFA.
In December 2000, the Commodity Exchange Act was amended by the Commodity Futures Modernization Act of 2000 (CFMA) which substantially revised the regulatory framework governing certain commodity interest transactions and the markets on which they trade. The Commodity Exchange Act, as amended by the CFMA, now provides for varying degrees of regulation of commodity interest transactions depending upon the variables of the transaction. In general, these variables include (i) the type of instrument being traded (e.g., contracts for future delivery or options contracts), (ii) the type of commodity underlying the instrument (distinguishing between instruments based upon real assets that are the focus of the Fund and include energy, agriculture, metalsincluding precious metalsand livestock commodities, and those instruments based upon financial assets such as stocks, bonds, currencies and interest rates), (iii) the nature of the parties to the transaction (retail, eligible contract participant or eligible commercial entity), (iv) whether the transaction is entered into on a principal-to-principal or intermediated basis, (v) the type of market on which the transaction occurs and (vi) whether the transaction is subject to clearing through a clearing organization. Information regarding commodity interest transactions, markets and intermediaries, and their associated regulatory environment, is provided below.
Futures contracts are standardized contracts trading on U.S. or foreign exchanges that call for the future delivery of specified quantities of certain types of commodities at a specified time and place. The contractual obligations, depending upon whether one is a buyer or a seller, may be satisfied either by taking or making, as the case may be, physical delivery of an approved grade of commodity or by making an offsetting sale or purchase of an equivalent but opposite futures contract on the same, or mutually off-setting, exchange prior to the designated date of delivery. As an example of an offsetting transaction where the physical commodity is not delivered, the contractual obligation arising from the sale of one contract of January 2012 wheat on a commodity exchange may be fulfilled at any time before delivery of the commodity is required by the purchase of one contract of January 2012 wheat on the same exchange. The difference between the price at which the futures contract is sold or purchased and the price paid for the offsetting purchase or sale, after allowance for brokerage commissions, constitutes the profit or loss to
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the trader. Certain futures contracts, such as those for stock or other financial or economic indices approved by the CFTC or Eurodollar contracts, settle in cash (irrespective of whether any attempt is made to offset such contracts) rather than delivery.
In market terminology, a trader who purchases a futures contract is long in the market and a trader who sells a futures contract is short in the market. Before a trader closes out the traders long or short position by an offsetting sale or purchase, his outstanding contracts are known as open trades or open positions. The aggregate amount of open positions held by traders in a particular contract is referred to as the open interest in such contract.
Options on commodity futures contracts are standardized contracts traded on an exchange. An option on a futures contract gives the buyer of the option the right, but not the obligation, to take a position at a specified price (the exercise price) in the underlying futures contract on or before a specified date. The buyer of a call option acquires the right, but not the obligation, to purchase or take a long position in the underlying futures contract, and the buyer of a put option acquires the right, but not the obligation, to sell or take a short position in the underlying futures contract.
The seller of an option is obligated to take a position in the underlying contract at a specified price on or before a specified date opposite to the option buyer if the option is exercised. Thus, the seller of a call option must stand ready to take a short position in the underlying contract at the exercise price if the buyer should exercise the option. The seller of a put option, on the other hand, must stand ready to take a long position in the underlying contract at the exercise price.
A call option is said to be in-the-money if the exercise price is below current market levels, out-of-the-money if the exercise price is above current market levels and at-the-money if the exercise price is at current market levels. Conversely, a put option is said to be in-the-money if the exercise price is above the current market levels and out-of-the-money if the exercise price is below current market levels.
Options have limited life spans, usually tied to the delivery or settlement date of the underlying contract. The purchase price of an option is referred to as its premium, which consists of its intrinsic value plus its time value. As an option nears its expiration date, the time value shrinks and the market and intrinsic values move into parity. An option that is out-of-the-money at the time it expires becomes worthless. On certain exchanges, in-the-money options are automatically exercised on their expiration date, but on others, unexercised options simply become worthless after their expiration date.
Regardless of how much the market swings, the most an option buyer can lose is the option premium. The option buyer deposits his premium with his broker, and the money goes to the option seller. Option sellers, on the other hand, face risks similar to participants in the futures markets. For example, since the seller of a call option on futures is assigned a short futures position if the option is exercised, his risk is the same as someone who initially sold a futures contract. Because no one can predict exactly how the market will move, the option seller posts margin to demonstrate his ability to meet any potential contractual obligations.
Commodity prices fluctuate based on the supply and demand of any commodity. If there is excess supply, then inventories build up until there is downward pressure on prices and producers reduce supplies in response to that price signal. Conversely, in the case of excess demand, inventories will be
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drawn down until the shortage causes prices to rise and equilibrium is restored. However, it can take a significant time period for inventories to be regulated through price changes due to production and storage situations, leading to sustained trends in commodity spot prices. These trends in commodity spot prices are reflected in futures prices.
Large fluctuations in spot prices can lead to the risk of operating losses for both commercial commodity producers (e.g., wheat farmers) and consumers (e.g., cereal manufacturers), so they both have incentives to hedge against the risk of future price fluctuations. The commodity futures markets provide one of the most common and effective ways of hedging price risk. When there are more producers than consumers who need to hedge, speculators (including investors pursuing commodity futures strategies) enter the market and provide insurance against falling spot prices by taking the long side. Speculators receive a premium for this insurance in the form of a futures price that is less than the expected future spot price. Hence, they expect the futures price to trend upward as it approaches the actual future spot price over the life of the contract. Conversely, net hedging pressure can be greater on the long side. That is, when there are more consumer hedgers than producer hedgers, speculators provide insurance against rising futures prices by taking the short side, leading to a futures price that is higher than the expected future spot price. Hence, they expect the futures price to trend downward as it approaches the spot price over the life of the contract.
Producers of stable commodities use inventories to fill gaps between production and sales. Similarly, consumers use inventories to fill gaps between consumption and purchases. This creates a market for storage. Storage is costly, however, besides the direct cost of physical storage, there is also an opportunity cost because the money tied up in the commodity could be earning interest. On the margin then, an extra unit is only worth storing if the benefits of storage are at least equal to the costs (including the opportunity to earn interest). If this benefit is high enough (so that it makes sense to store the commodity for later use or sale rather than using or selling it now), the futures price will be lower than the spot price, causing time to expiration and the futures price to be inversely related so that the further out the futures contract, the lower the price, thus compensating for the cost of storage. If this is the case, we say that there is backwardation in the futures market. In a backwardated market, owners of a commodity in storage are being more than compensated for the costs of storage, but the compensation is not in monetary payments. Rather, it is in less-tangible benefits such as securing a supply of fuel as insurance against an energy crunch. However, investors who are taking long positions in futures contracts can realize this compensation monetarily by replacing the contracts that they are holding with longer-term ones, thus locking in profits. As shown below, Chart A illustrates the relationship between the price and the term of a futures contract when the market is in backwardation. The price curve slopes downward from left to right and the buy transaction of a longer term contract is at a lower price. Roll yields are positive. The market condition in which this takes place is called backwardation.
Likewise, when the marginal benefits of storage are low, the relationship between time to expiration and the futures price is positive, a market condition known as contango. In contangoed markets, roll yields are negative because replacing contracts results in locking in a loss. The benefit of storage tends to be high when inventories are low. For example, when a commodity is scarce, having it in storage will improve commercial consumers readiness to meet their needs in the near future, leading to backwardation and positive roll yields. Conversely, the benefits of storage are low when inventories are plentiful, leading to contango. Chart B illustrates the futures price curve in a contango market. The price curve slopes upward from left to right and the buy transaction of a longer term contract is at a higher price. Roll yields are negative. Since inventory conditions in some commodities are slow to adjust due to the
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time it takes to increase their production, backwardation or contango could persist for a period of time, causing investors to consistently experience positive or negative roll yield over the period. The persistence of backwardated markets over time does not necessarily imply that contract rolls will consistently be positive or profitable. This is because both the slope and the relative position of the futures price curve could change or move up or down. Similarly, the persistence of contango markets over time does not necessarily imply that contract rolls will be negative or unprofitable. The slope and position of the futures price curves are dynamic and reflect a broad range of global economic and supply and demand factors which affect the prices of the specific commodities underlying the futures contracts.
Source: Morningstar, Inc.
The two broad classes of persons who trade commodity futures contracts are hedgers and speculators. Commercial interests, including farmers, that market or process commodities, and financial institutions that market or deal in commodities, including interest rate sensitive instruments, foreign currencies and stocks, and which are exposed to currency, interest rate and stock market risks, may use the futures markets for hedging. Hedging is a protective procedure designed to minimize losses that may occur because of price fluctuations occurring, for example, between the time a processor makes a contract to buy or sell a raw or processed commodity at a certain price and the time he must perform the contract. The futures markets enable the hedger to shift the risk of price fluctuations to the speculator. The speculator risks his capital with the hope of making profits from price fluctuations in futures interests contracts. Speculators rarely take delivery of commodities, but rather close out their positions by entering into offsetting purchases or sales of futures interests contracts. Since the speculator may take either a long or short position in the futures markets, it is possible for him to make profits or incur losses regardless of whether prices go up or down.
Futures exchanges provide centralized market facilities for trading futures contracts and options (but not forward contracts). Members of, and trades executed on, a particular exchange are subject to the rules of that exchange. Among the principal exchanges in the U.S. are the Chicago Board of Trade, the Chicago Mercantile Exchange, the New York Mercantile Exchange, and ICE Futures U.S.
Each futures exchange in the U.S. has an associated clearing house. Once trades between members of an exchange have been confirmed, the clearing house becomes substituted for each buyer and each seller of contracts traded on the exchange and, in effect, becomes the other party to each traders
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open position in the market. Thereafter, each party to a trade looks only to the clearing house for performance. The clearing house generally establishes some sort of security or guarantee fund to which all clearing members of the exchange must contribute; this fund acts as an emergency buffer that enables the clearing house, at least to a large degree, to meet its obligations with regard to the other side of an insolvent clearing members contracts. Furthermore, clearing houses require margin deposits and continuously mark positions to market to provide some assurance that their members will be able to fulfill their contractual obligations. Thus, a central function of the clearing houses is to ensure the integrity of trades, and members effecting futures transactions on an organized exchange need not be concerned with the solvency of each party on the opposite side of each trade; their concerns are the respective solvencies of their commodity broker and the clearing house. The clearing house guarantee of performance on open positions does not run to customers. If a member firm goes bankrupt, customers could lose money.
Futures exchanges in the U.S. are subject to designation and regulation by the CFTC as a designated contract market. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) authorized the CFTC to designate swap transaction facilities for the centralized trading and processing of swaps if they comply with core principles similar to those required for designation as a contract market. An electronic trading facility is a form of an exchange operated by electronic means that is not subject to regulation under the Commodity Exchange Act.
A designated contract market is a highly regulated exchange. Designated contract markets may offer products to retail customers on an unrestricted basis. To be designated as a contract market, the exchange must demonstrate that it satisfies specified general criteria for designation, such as having the ability to prevent market manipulation, rules and procedures to ensure fair and equitable trading, position limits, dispute resolution procedures, minimization of conflicts of interest and protection of market participants. Among the principal designated contract markets in the U.S. are the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), the Intercontinental Exchange (ICE), the New York Mercantile Exchange (NYMEX), the New York Commodities Exchange (COMEX), and the Kansas City Board of Trade (KBOT). Each of the designated contract markets in the U.S. must provide for the clearance and settlement of transactions with a CFTC-registered derivatives clearing organization.
Title VII of the Dodd-Frank Act established a new regulatory regime for the trading and clearing of swap contracts that is broad and far-reaching. Among other things, it provides the CFTC with jurisdiction and regulatory authority over a wide variety of swap contracts and a comprehensive regulatory structure affecting the clearing and trading of swaps, swap dealers and major swap participants, including the establishment of swap execution facilities and derivatives clearing organizations for the centralized trading and clearing of swaps. The CFTC has proposed various rules mandated by the Dodd-Frank Act to implement this new regulatory regime, the final assessment of which must await the adoption of the proposed regulations.
An electronic trading facility is a form of exchange that operates by means of an electronic or telecommunications network and maintains an automated audit trail of bids, offers, and the matching of orders or the execution of transactions on the electronic trading facility. The Commodity Exchange Act does not apply to, and the CFTC has no jurisdiction over, transactions on an electronic trading facility in certain excluded commodities that are entered into between principals that qualify as eligible contract participants, subject only to CFTC anti-fraud and anti-manipulation authority. In general, excluded commodities include interest rates, currencies, securities, securities indices or other financial, economic or commercial indices or measures.
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Foreign futures exchanges differ in certain respects from their U.S. counterparts. In contrast to U.S. exchanges, certain foreign exchanges are principals markets, where trades remain the liability of the traders involved, and the exchange clearing house does not become substituted for any party. See the section The Risks You Face Trading on Commodity Exchanges Outside the United States is Not Subject to U.S. Regulation, and May Be Less Reliable than U.S. Exchanges.
The CFTC and U.S. futures exchanges have established limits, referred to as speculative position limits or position limits, on the maximum net long or net short speculative position that any person or group of persons (other than a hedger) may hold, own or control in certain futures interests contracts. Among the purposes of speculative position limits is the desire to prevent a corner on a market or undue influence on prices by any single trader or group of traders. The CFTC has jurisdiction to establish position limits with respect to all commodities and has established position limits for all agricultural commodities. In addition, the CFTC requires each U.S. exchange to submit position limits for all commodities traded on such exchange for approval by the CFTC. Position limits do not apply to forward contract trading or generally to trading on foreign exchanges. See the section The Risks You Face Certain Operations of the Fund, Including the Creation of Baskets, May Be Restricted By Regulatory and Exchange Position Limits and Other Position Limitation Rules and Could Result in Tracking Error Between Changes in the NAV Per Share and Changes in the Level of the Index, Or Could Result in the Market Price of the Shares Trading at a Premium or Discount to the NAV Per Shares.
Most U.S. futures exchanges (but generally not foreign exchanges or banks or dealers in the case of forward contracts) limit the amount of fluctuation in futures interests contract prices during a single trading day by regulation. These regulations specify what are referred to as daily price fluctuation limits or more commonly daily limits. The daily limits establish the maximum amount that the price of a futures interests contract may vary either up or down from the previous days settlement price. Once the daily limit has been reached in a particular futures interest, no trades may be made at a price beyond the limit. See the section The Risks You Face Potentially Illiquid Markets, Disruption of Market Trading, and Daily Price Fluctuation Limits, Among Other Events, May Exacerbate Losses of the Fund and, In Turn, the Value of Your Shares.
Commodity prices are volatile and, although ultimately determined by the interaction of supply and demand, are subject to many other influences, including the psychology of the marketplace and speculative assessments of future world and economic events. Political climate, interest rates, treaties, balance of payments, exchange controls and other governmental interventions as well as numerous other variables affect the commodity markets, and even with comparatively complete information it is impossible for any trader to reliably predict commodity prices.
Futures exchanges in the U.S. are subject to regulation under the Commodity Exchange Act, by the CFTC, the governmental agency having responsibility for regulation of futures exchanges and trading on those exchanges. The CFTC does not regulate OTC foreign exchange markets and has no authority to regulate trading on foreign commodity exchanges and markets.
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The Commodity Exchange Act and the CFTC also regulate the activities of commodity trading advisors and commodity pool operators and the CFTC has adopted regulations with respect to certain of such persons activities. Pursuant to its authority, the CFTC requires a commodity pool operator (such as the Managing Owner) to keep accurate, current and orderly records with respect to each pool it operates. The CFTC may suspend the registration of a commodity pool operator if the CFTC finds that the operator has violated the Commodity Exchange Act or regulations thereunder and in certain other circumstances. Suspension, restriction or termination of the Managing Owners registration as a commodity pool operator would prevent it, until such time (if any) as such registration were to be reinstated, from managing, and might result in the termination of, the Trust. Neither the Trust nor the Fund is required to be registered with the CFTC in any capacity.
The Commodity Exchange Act requires all futures commission merchants, such as the Commodity Broker, to meet and maintain specified fitness and financial requirements, segregate customer funds from proprietary funds and account separately for all customers funds and positions, and to maintain specified book and records open to inspection by the staff of the CFTC.
The Commodity Exchange Act also gives the states certain powers to enforce its provisions and the regulations of the CFTC.
Shareholders are afforded certain rights for reparations under the Commodity Exchange Act. Shareholders may also be able to maintain a private right of action for certain violations of the Commodity Exchange Act. The CFTC has adopted rules implementing the reparation provisions of the Commodity Exchange Act which provide that any person may file a complaint for a reparations award with the CFTC for violation of the Commodity Exchange Act against a floor broker, futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, and their respective associated persons.
Initial or original margin is the minimum amount of funds that must be deposited by futures traders with their commodity brokers in order to initiate futures trading or to maintain an open position in futures contracts. Maintenance margin is the amount (generally less than initial margin) to which a traders account may decline before the trader must deliver additional margin. A margin deposit is like a cash performance bond. It helps assure the futures traders performance of the futures interests which contracts the trader purchases or sells. Futures interests are customarily bought and sold on margins that represent a very small percentage (ranging upward from less than 2%) of the purchase price of the underlying commodity being traded. Because of such low margins, price fluctuations occurring in the futures markets may create profits and losses that are greater, in relation to the amount invested, than are customary in other forms of investments. The minimum amount of margin required in connection with a particular futures interests contract is set from time-to-time by the exchange on which such contract is traded, and may be modified from time-to-time by the exchange during the term of the contract.
Brokerage firms carrying accounts for traders in futures interests contracts may not accept lower, and generally require higher, amounts of margin as a matter of policy in order to afford further protection for themselves.
Margin requirements are computed each day by a commodity broker. When the market value of a particular open futures interests contract position changes to a point where the margin on deposit does not satisfy maintenance margin requirements, a margin call is made by the commodity broker. If the margin call is not met within a reasonable time, the broker may close out the Trusts position. With respect to the
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Managing Owners trading, for its own account, if any, only the Managing Owner, and not the Trust or the Funds Shareholders personally, will be subject to margin calls.
8
PART
II
INFORMATION NOT REQUIRED IN PROSPECTUS
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Item 13. |
Other Expenses of Issuance and Distribution. |
The following expenses reflect the estimated amounts required to prepare and file this Registration Statement and complete the offering of the Shares (other than selling commissions).
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Approximate Amount |
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SEC Registration Fee |
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114.60 |
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NYSE Arca Listing Fee |
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Financial Industry Regulatory Authority Filing Fee |
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Printing Expenses |
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Fees of Certified Public Accountants |
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* |
Fees of Counsel |
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Miscellaneous Expenses |
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Total |
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To be provided by amendment. |
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Item 14. |
Indemnification of Directors and Officers. |
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Item 15. |
Recent Sales of Unregistered Securities. |
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None. |
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Item 16. |
Exhibits and Financial Statement Schedules. |
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(a) |
Exhibits |
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(4)(i) |
Amended and Restated Trust Agreement* |
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(4)(ii) |
Form of Participant Agreement* |
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(5) |
Opinion and Consent of Richards, Layton & Finger, P.A. Regarding Legality of Shares* |
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(8) |
Opinion and Consent of Dechert LLP Regarding Tax Matters* |
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(10)(i)
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Form of Services Agreement*
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(10)(ii) |
Form of Custody Agreement* |
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(10)(iii) |
Form of Transfer Agency and Service Agreement* |
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(10)(iv)
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Form of Futures Customer Agreement**
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(10)(v) |
Form of Marketing Agent Agreement* |
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(10)(vi)
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Index Product License Agreement**
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(23)(i) |
Consent of Independent Registered Public Accounting Firm* |
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(23)(ii) |
Consent of Richards, Layton & Finger, P.A. (included in Exhibit 5)* |
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(23)(iii) |
Consent of Dechert LLP (included in Exhibit 8)* |
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(24) |
Powers of Attorney*** |
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To be filed by amendment. |
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Filed herewith. |
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Previously filed as an exhibit to Form S-1 filed on February 8, 2012 and incorporated herein by reference. |
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The following financial statements are included in the Prospectus: [To come.].
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Item 17. |
Undertakings |
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The undersigned Registrant hereby undertakes: |
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To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: |
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To include any prospectus required by section 10(a)(3) of the Securities Act of 1933, as amended (Securities Act); |
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To reflect in the prospectus any facts or events arising after the effective date of the Registration Statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the Registration Statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of Prospectus filed with the SEC pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective Registration Statement. |
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iii. |
To include any material information with respect to the plan of distribution not previously disclosed in the Registration Statement or any material change to such information in the Registration Statement; |
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Provided however, that: |
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A. |
Paragraphs (a)(1)(i) and (a)(1)(ii) of this section do not apply if the Registration Statement is on Form S-8, and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the SEC by the Registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934, as amended (Exchange Act), that are incorporated by reference in the Registration Statement; and |
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Paragraphs (a)(1)(i), (a)(1)(ii) and (a)(1)(iii) of this section do not apply if the Registration Statement is on Form S-3 or Form F-3 and the information required to be included in a post-effective amendment by those paragraphs is contained in reports filed with or furnished to the SEC by the Registrant pursuant to section 13 or section 15(d) of the Exchange Act that are incorporated by reference in the Registration Statement, or is contained in a form of Prospectus filed pursuant to Rule 424(b) that is part of the Registration Statement. |
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That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
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To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
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That, for the purpose of determining liability under the Securities Act to any purchaser: |
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If the Registrant is relying on Rule 430B under the Securities Act (230.430B of this chapter): |
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A. |
Each Prospectus filed by the Registrant pursuant to Rule 424(b)(3)shall be deemed to be part of the Registration Statement as of the date the filed Prospectus was deemed part of and included in the Registration Statement; and |
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B. |
Each Prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a Registration Statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act shall be deemed to be part of and included in the Registration Statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the Registration Statement relating to the securities in the Registration Statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a Registration Statement or Prospectus that is part of the Registration Statement or made in a document incorporated or deemed incorporated by reference into the Registration Statement or prospectus that is part of the Registration Statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the Registration Statement or prospectus that was part of the Registration Statement or made in any such document immediately prior to such effective date; or |
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ii. |
If the Registrant is subject to Rule 430C, each prospectus filed pursuant to Rule 424(b) as part of a Registration Statement relating to an offering, other than Registration Statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the Registration Statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a Registration Statement or Prospectus that is part of the Registration Statement or made in a document incorporated or deemed incorporated by reference into the Registration Statement or prospectus that is part of the Registration Statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the Registration Statement or Prospectus that was part of the Registration Statement or made in any such document immediately prior to such date of first use. |
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5. |
That, for the purpose of determining liability of the Registrant under the Securities Act to any purchaser in the initial distribution of the securities: The undersigned Registrant undertakes that in a primary offering of securities of the undersigned Registrant pursuant to this Registration Statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned Registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser: |
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Any preliminary prospectus or prospectus of the undersigned Registrant relating to the offering required to be filed pursuant to Rule 424; |
II-3
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ii. |
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned Registrant or used or referred to by the undersigned Registrant; |
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iii. |
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned Registrant or its securities provided by or on behalf of the undersigned Registrant; and |
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iv. |
Any other communication that is an offer in the offering made by the undersigned Registrant to the purchaser. |
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b. |
The undersigned Registrant hereby undertakes that: |
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1. |
For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. |
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2. |
For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new Registration Statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
II-4
SIGNATURES
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MARKET VECTORS COMMODITY TRUST |
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By: |
VAN ECK
ABSOLUTE RETURN |
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/s/ Jan F. van Eck |
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Name: |
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Jan F. van Eck |
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Title: |
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President |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
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Signature |
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/s/ Jan F. van Eck |
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Jan F. van Eck |
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President and Director |
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August 24, 2012 |
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/s/ Bruce J. Smith |
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Senior Vice President, Chief Financial Officer, |
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Treasurer, Controller and Director |
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August 24, 2012 |
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Bruce J. Smith |
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/s/ Joseph J. McBrien* |
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Senior Vice President, Chief Legal Officer, |
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General Counsel, Secretary and Director |
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August 24, 2012 |
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Joseph J. McBrien |
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*By: /s/ Jonathan R. Simon |
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Jonathan R. Simon |
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Attorney-in-Fact |
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II-5
EXHIBIT INDEX
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(10)(iv) |
Form of Futures Customer Agreement |
(10)(vi) |
Index Product License Agreement |
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II-6
Exhibit 10.4
Futures Customer Agreement
This Futures Customer Agreement (Agreement) between BNY Mellon Clearing, LLC (BNYM Clearing) and the customer named below (Customer) shall govern the purchase and sale of futures contracts, options on futures contracts, or over-the-counter derivative products cleared through any derivatives clearing organization or other organized clearing house (the above instruments referred to collectively as Contracts) for the account and risk of Customer through one or more accounts carried by BNYM Clearing or its affiliates on behalf and in the name of Customer (collectively, the Account).
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Applicable Law. |
The Account and all transactions and agreements in respect of the Account shall be subject to all applicable governmental, exchange, clearinghouse, and self-regulatory agency statutes, rules, regulations and interpretations and custom and usage of the trade. All such statutes, rules, regulations, interpretations, custom and usage are hereinafter collectively referred to as Applicable Law. Provisions contained in and remedies provided by this Agreement which are in addition to or more expansive than any provisions contained in or remedies provided by any other agreement with Customer (including, without limitation, provisions or remedies that cover the same subject matter) shall not be deemed to be in conflict with each other, and all such provisions and remedies shall be applicable and available. Neither BNYM Clearing nor any of its officers, directors, employees or agents shall be liable as a result of any act taken or failed to be taken by BNYM Clearing or its agents, reasonably and in good faith, to comply with Applicable Law.
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2. |
Customers Representations and Warranties. |
Customer represents, warrants and covenants that (a) (i) Customer has full right, power and authority to enter into this Agreement and transactions in Contracts, and the person executing this Agreement on behalf of Customer is authorized to do so; (ii) this Agreement and such Contracts are binding on Customer and enforceable against Customer in accordance with their terms; (iii) Customer may lawfully establish and open the Account for the purpose of effecting purchases and sales of Contracts through BNYM Clearing; (iv) Customer has determined that trading in futures contracts is appropriate for Customer, and transactions entered into pursuant to this Agreement will not violate Applicable Law (or any other law or regulation) to which Customer is subject or any agreement to which Customer is subject or a party; (v) all information provided by Customer in or in connection with the Account Application preceding this Agreement (which Application and information is hereby incorporated into this Agreement) is true and correct and Customer shall promptly (and in no event later than within one business day) notify BNYM Clearing of any material change in such information; (vi) Customer understands that, except as otherwise specifically agreed, BNYM Clearing acts as agent, and not as principal, in the execution of futures contracts; (vii) except as disclosed in writing to BNYM Clearing, Customer is acting solely as principal and not as agent for any other party and no other person has any interest in Customers Account; (viii) Customer is in compliance with Applicable Law in relation to the transactions contemplated by this Agreement including, to the extent applicable, all laws and regulations applicable to pension plans, investment companies, commodity pools or other forms of collective investment vehicles; and (ix) Customer is an eligible contract participant as such term is defined in Section 1a(12) of the Commodity Exchange Act, as amended.
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3. |
Payment Obligations of Customer. |
Customer will immediately upon demand pay BNYM Clearing (a) all brokerage charges, give-up fees, commissions and service fees as BNYM Clearing may from time to time charge; (b) all contract market, clearinghouse, NFA or clearing member fees or charges or any other regulatory fees and service charges incurred with respect to each transaction; (c) any tax imposed on such transactions by any competent taxing authority; (d) the amount of any trading losses in the Account; (e) any debit balance or
deficiency in the Account; (f) any obligation of Customer to BNYM Clearing incurred in respect of a trade executed in connection herewith; (g) interest on any debit balances or deficiencies in the Account, at the overnight rate customarily charged by BNYM Clearing, together with costs and reasonable attorneys fees incurred in collecting any such debit balance or deficiency; and (h) any other amounts owed by Customer to BNYM Clearing with respect to the Account or any transactions therein.
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4. |
Events of Default; BNYM Clearings Remedies. |
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(a) |
Events of Default. As used herein, each of the following shall be an Event of Default: (i) Customer shall be dissolved or in any other way terminated; (ii) Customer shall fail timely to deposit or maintain initial or original margin or make timely payment of additional or variation margin or fail to pay for shares of stock, other securities or commodities arising from Customer taking delivery on Contracts; (iii) Customer shall fail to pay the premium on any option purchased by Customer; (iv) the commencement of a case or other proceeding with respect to a Customer under any Federal or state bankruptcy, insolvency, or reorganization law (or, if Customer is a trust, its trustee or sponsor); the continuation of any such case or proceeding, or such case or proceeding remaining pending; the filing of a petition or similar request for the appointment of a receiver, a trustee, a conservator or any other or similar administrator or official by or against Customer (or, if Customer is a trust, its trustee or sponsor); the appointment of any receiver, trustee, conservator, administrator or other similar official (including the Federal Deposit Insurance Corporation) with regard to any Customer or any of its assets; the continuation or any such receivership, trusteeship, conservatorship or other similar proceeding, or any such receivership, trusteeship, conservatorship or other similar proceeding remaining pending; an assignment made by Customer for the benefit of creditors; an admission in writing by Customer that it is insolvent or unable to pay its debts when due, or the failure to pay debts when due; the dissolution or termination of Customer (or, if Customer is a trust, its trustee or sponsor); the commencement of dissolution proceedings with respect to Customer; the suspension by Customer of its usual business or any material portion of such usual business; (any of which, a Bankruptcy) or any material adverse change in Customers financial condition or net asset value; (v) the filing by Customer with any governmental body of a notice of intent to dissolve or terminate; the receipt of a notice of intent to terminate Customer from a governmental agency or body; or (if the Customer is an employee benefit plan) the inability of Customer to pay benefits under the relevant plan when due; (v) BNYM Clearing shall determine, in its sole and absolute discretion, that the risk in the Customer Account must be reduced for the protection of BNYM Clearing; (vi) Customers Account shall incur a deficit balance; (vii) BNYM Clearing shall determine that any material representation or warranty made by Customer to BNYM Clearing is untrue or inaccurate; (viii) if Customer is an investment company, commodity pool or other form of collective investment vehicle, proceedings for the revocation or suspension of any registration of any public offering of interests in Customer or of any person or entity required to be registered in connection with Customers activities have been instituted or are pending or threatened by any governmental agency or self-regulatory organization. |
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(b) |
Remedies. Upon the occurrence of an Event of Default, BNYM Clearing may liquidate Customers open positions in whole or in part; by any reasonable method, including without limitation exchange for physical, basis trade, exchange for swap or other similar transaction and/or, sell or otherwise dispose of, realize, set off or apply any or all of the property represented by an entry on or standing to the credit of Customers Account or held |
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by, to the order or under the direction or control of BNYM Clearing or any exchange or clearing organization through which transactions on Customers behalf are executed or cleared, buy any property for Customers Account, and/or cancel any outstanding orders and commitments made by BNYM Clearing on Customers behalf and/or reduce the risk posed by the positions in Customers Account by establishing long or short positions in any other product in any other market. Without prejudice to the foregoing, BNYM Clearing shall have (to the greatest extent permitted by applicable law) all of the rights of a secured party with respect to the property referred to above, and any rights, powers and remedies provided herein shall operate as a variation and extension of any statutory power of sale, application or realization available to BNYM Clearing as a secured party. All purchases or sales pursuant to this Section 4 may be effected in public or private transactions in whatever manner and with whichever party BNYM Clearing deems appropriate and at such price(s) as BNYM Clearing may deem satisfactory. In the event BNYM Clearings position would not be jeopardized thereby, BNYM Clearing will make reasonable efforts under the circumstances to notify Customer prior to taking any such action, except that Customer agrees that, if BNYM Clearing reasonably determines that its position will be jeopardized by such notice or demand, BNYM Clearing shall have the right to take any and all action pursuant to this Section 4 without any notice of default, demand for Margin (as defined in paragraph 7 herein), notice to Customer of sale or purchase, or other notice or advertisement and BNYM Clearing shall not be deemed to have breached this Agreement thereby. It is understood that a prior demand or Margin call of any kind from BNYM Clearing or prior notice from BNYM Clearing or the failure to previously enforce any provision of this Agreement shall not be considered a waiver of BNYM Clearings right to take any action as described herein without notice or demand and that Customer shall be liable for the payment of any deficiency remaining in each Account after any such action is taken, together with interest thereon and all costs relating to liquidation and collection (including reasonable attorneys fees and expenses). |
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(c) |
Set Off Rights. If an Event of Default has occurred and is continuing, in addition to and not in limitation of any other right or remedy under this or any other agreement or applicable law, rule or regulation, BNYM Clearing will at its option have the right, at any time and from time to time, without prior notice to the Customer, to set-off any sum or obligation (whether or not arising under this Agreement) owed by the Customer to BNYM Clearing or any affiliate of BNYM Clearing against any sum or obligation (whether or not arising under this Agreement) owed by BNYM Clearing or any affiliate of BNYM Clearing (the Original Obligation) to the Customer and, for this purpose, may convert one currency into another at the rate of exchange determined by BNYM Clearing in good faith and in a commercially reasonable manner for the purchase of such other currency from time to time. Any such set-off will automatically satisfy and discharge the Original Obligation to the Customer and, if the Original Obligation exceeds the sum or obligation to be set-off against, the Original Obligation will be novated and replaced by an obligation to pay the Customer only the excess of the Original Obligation over such sum or obligation. |
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5. |
Indemnification. |
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Customer hereby releases and shall indemnify and hold harmless BNYM Clearing, its officers, directors, employees, agents and affiliated persons for any loss, claim, damage, expense, liabilities, penalties, taxes, judgments, fines, fees, costs, proceedings, claims, actions, investigations, damages, whether the dispute or proceeding involve BNYM Clearing or not (including reasonable attorneys fees and expenses, reasonable accountants fees and expenses (collectively Loss) when and as incurred by, or asserted against, BNYM Clearing and such persons arising out of or in connection with, directly or indirectly, (i) this Agreement, (ii) Customers acts or omissions, (iii) any material breach by Customer of its obligations hereunder, (iv) the exercise or pursuit by BNYM Clearing and its affiliates of its rights or remedies hereunder, (v) the performance by BNYM Clearing of its duties hereunder; (v) any Event of Default, or (vi) any Contracts contemplated hereunder, or (vii) pursuant to authorized instructions received by BNYM Clearing from Customer or its agent, and to fully reimburse BNYM Clearing and such persons for any reasonable legal or other fees and expenses, including the cost of any investigation and preparation, when and as incurred by them in connection with any claim, action, proceeding or activities of BNYM Clearing and such persons in connection with this Agreement or Contracts contemplated hereunder, except where such Loss arises from BNYM Clearings gross negligence or willful misconduct after such is finally adjudicated in court and the time for appeal has expired. The rights of BNYM and its affiliates provided above shall be in addition to any other right or remedy available to BNYM and its affiliates at law, by statute or in equity or under any Applicable Laws, including without limitation the right of set off. |
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Limitation of Liability. |
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BNYM Clearing shall have no responsibility or liability to Customer hereunder (i) in connection with the performance or non-performance by any exchange or market, clearinghouse, clearing firm or other third party (including floor brokers and banks) to BNYM Clearing of its obligations in respect of any Contract or other property of the Customer, in particular BNYM Clearing shall not be liable to Customer if any such third party makes an error in filling orders or fails to fill an order for Customer; (ii) as a result of any prediction, recommendation or advice made or given by a representative of BNYM Clearing whether or not made or given at the request of Customer; (iii) as a result of BNYM Clearings reliance on and acting upon any instruction, notice or communication that it reasonably believes to be that of an individual authorized to act on behalf of Customer; (iv) as a result of any delay in the performance or non-performance of any of BNYM Clearings obligations hereunder directly or indirectly caused by the occurrence of any contingency beyond the control of BNYM Clearing including, but not limited to, the unscheduled closure of an exchange or market or delays in the transmission of orders due to breakdowns or failures of transmission or communication facilities, execution, and/or trading facilities, other systems, or any other electronic trading systems, facilities or services), it being understood that BNYM Clearing shall be excused from performance of its obligations hereunder for such period of time as is reasonably necessary after such occurrence to remedy the effects therefrom; (v) as a result of any action taken by BNYM Clearing or its floor brokers to comply with Applicable Law; (vi) as a result of any actions taken by BNYM Clearing in connection with the exercise of the available remedies pursuant to Section 4; (vii) for any acts or omissions of those neither employed nor supervised by BNYM Clearing; (viii) for investment decisions made by Customer; (ix) for any Loss resulting from nationalization, government restrictions, exchange, regulatory or market rulings, suspension of trading, expropriation or other governmental actions, regulation of the banking, futures, commodities or securities industry, currency controls or restrictions, suspension of redemptions, market rulings, devaluations or fluctuations, or market conditions which prevent the orderly execution of securities transactions or affect the value of Property, including without limitation extreme market volatility or trading volume, (x) for any Loss or injury due to forces beyond the control of BNYM Clearing, including without limitation strikes, failure of transmission or communication facilities, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear or natural catastrophes or acts of God, military actions, interruptions, or the insolvency of any issuer or third party, or (vii) any action taken by BNYM Clearing, or any other third party, to comply with Applicable Laws. Except as provided in Section 5, in no event will BNYM Clearing or Customer be liable to the other for consequential, incidental, indirect, punitive or special damages. |
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General Agreements. |
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The parties agree that: |
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(a) |
BNYM Clearings Responsibility. BNYM Clearing is not acting as a fiduciary, commodity pool operator, commodity trading advisor, or investment adviser in respect of any Account opened by Customer. BNYM Clearing shall have no responsibility hereunder for compliance with any law or regulation governing the conduct of fiduciaries, commodity pool operators, commodity trading advisors, or investment advisers for Customers compliance with any law or regulations governing or affecting Customers trading hereunder. |
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(b) |
Advice. All advice or market information communicated by BNYM Clearing with respect to any Account opened by Customer hereunder is incidental to the conduct of BNYM Clearings business as a futures commission merchant and such advice or information does not constitute an offer to buy or sell or the solicitation of an offer to buy or sell any Contract and will not serve as the primary basis for any decision by or on behalf of Customer. BNYM Clearing makes no representation as to the reliability, accuracy or completeness of such advice or any information on which it is based. BNYM Clearing shall have no discretionary authority, power or control over any decisions made by or on behalf of Customer in respect of the Account, regardless of whether Customer relies on the advice of BNYM Clearing in making any such decision. Customer acknowledges that BNYM Clearing and its managing directors, officers, employees and affiliates may take or hold positions in, or advise other customers concerning, contracts that are the subject of advice from BNYM Clearing to Customer. The positions and advice of BNYM Clearing and its managing directors, officers, employees and affiliates may be inconsistent with or contrary to positions of, and the advice given by, BNYM Clearing to Customer. |
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(c) |
Clearing Broker. BNYM Clearing, as agent, is responsible solely for the execution, clearing and/or carrying of Contracts in each Account in accordance with the terms of this Agreement. Customer and Customers advisor (Advisor), if any, are solely responsible for all investment and trading decisions for the Account. All transactions for or on Customers behalf in any Account maintained for Customer shall be deemed to be included in a single Account, whether or not such transactions appear on BNYM Clearings records in separate Accounts, either severally or jointly with others. |
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(d) |
Customer Trades. BNYM Clearing, for and on behalf of Customer, is authorized in its sole discretion to select floor brokers and, on exchanges where BNYM Clearing is not a clearing member, unaffiliated clearing brokers, which will act as brokers and agents in connection with transactions in Contracts for the Accounts. Absent a separate written agreement with Customer with respect to give-up transactions, BNYM Clearing may, in its sole discretion, but shall not be obligated to, accept from other brokers Contracts executed by such brokers that are to be given up to BNYM Clearing for clearance or carrying in any Account. |
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(e) |
Introducing Broker. |
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(i) |
If Customers Account has been introduced to BNYM Clearing by another broker, that broker is acting as Customers agent and that broker in this relationship is not an agent of or affiliated with BNYM Clearing simply by virtue of such introduction. Customer agrees that Customers broker and its employees are third-party beneficiaries of this Agreement. Unless BNYM Clearing receives from Customer prior written notice to the contrary, BNYM Clearing may accept from such other broker, without any inquiry or investigation: (a) orders for the purchase or sale of Contracts, on margin or otherwise; and (b) any other instructions concerning your Account or the Collateral (as defined below) therein. |
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(ii) |
Customer understands and agrees that by agreement with Customers broker, BNYM Clearing may pay a substantial portion of the brokerage commissions charged to Customers Account to Customers broker in consideration of introducing and servicing Customers Account. |
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(iii) |
Customer further understands and agrees that BNYM Clearing generally will not inquire into the circumstances surrounding any transaction for Customers Account. BNYM Clearing is not responsible for any acts or omissions of any independent introducing broker, including, but not limited to, sales practices, trading practices, or recommendations. Customer agrees to look solely to Customers independent introducing broker for redress of any loss or damage arising out of circumstances other than BNYM Clearings own gross negligence or willful misconduct in the execution, clearance, or bookkeeping of transactions for Customers Account. |
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(f) |
Foreign Markets. If Customer has been approved by BNYM Clearing for the transmission of orders directly to affiliates of BNYM Clearing located outside the United States, for execution and clearance on non-U.S. exchanges, Customer acknowledges and agrees that (i) it will transmit orders directly to such affiliates identified by BNYM Clearing only in accordance with any conditions or instructions furnished by BNYM Clearing and solely for Customers own Account, (ii) any orders transmitted by Customer to an affiliate of BNYM Clearing will be executed and cleared through omnibus Accounts maintained by the appropriate affiliate in the name of BNYM Clearing and not for an Account of Customer with the affiliate, and (iii) notwithstanding its transmission of orders to an affiliate, Customer will continue to be a customer of BNYM Clearing and will not be a customer of the affiliate. |
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(g) |
Reliance on Instructions. BNYM Clearing shall be entitled to rely on any instruction, notice or communication that it reasonably believes to have originated from Customer or Customers duly authorized agent (including Customers Advisor, if any) and Customer shall be bound thereby. Customer hereby waives any defense that any such instruction, notice or communication was not in writing as may be required by the Statute of Frauds or any other law, rule or regulation. |
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(h) |
Recording. BNYM Clearing and Customer each agree that either party may record, on tape or otherwise, any telephone conversation between BNYM Clearing and Customer and their respective officers, agents and employees. BNYM Clearing and Customer each consent to the use of such recordings as evidence by either party in any action or proceeding arising out of this Agreement. |
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(i) |
Acceptance of Orders; Position Limits. |
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BNYM Clearing shall have the right, whenever in its reasonable discretion it deems such action necessary or desirable and upon reasonable notice to Customer, to limit the size of open positions (net or gross) of Customer with respect to the Account and to refuse to accept any orders to establish new positions, whether such refusal, reduction or limitation is required by, or based on position limits imposed under, Applicable Law. BNYM Clearing shall promptly notify Customer if it has limited or has refused to accept any order. Unless specified by Customer, BNYM Clearing may designate the exchange or other market on which it will attempt to execute orders, and |
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(ii) |
Customer shall comply with all position limit rules and shall file or cause to be filed all applications or reports required under Applicable Law with the CFTC or the relevant |
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exchange or market or clearing house, and shall promptly provide BNYM Clearing with a copy of such applications or reports and such other information as BNYM Clearing may reasonably request in connection therewith. |
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(j) |
Original and Variation Margin; Premiums; Other Contract Obligations. Customer shall make, or cause to be made, all applicable original margin, variation margin, intra-day margin, additional margin and premium payments (Margin), and perform all other obligations attendant to transactions or positions in Contracts, as may be required by Applicable Law or BNYM Clearing, upon written notice and in BNYM Clearings sole reasonable discretion. Customer acknowledges that BNYM Clearing has no obligation to establish uniform margin requirements. Requests for Margin deposits and/or premium payments may, at BNYM Clearings election, be communicated to Customer orally, telephonically, or in writing. Customer Margin deposits and/or premium payments shall be made by wire transfer to BNYM Clearings customer segregated Account and shall be in U.S. dollars unless BNYM Clearing specifically agrees otherwise |
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(k) |
Security Interest and Rights Respecting Collateral. Except to the extent proscribed by Applicable Law not subject to waiver, all Contracts, cash, securities, and/or any other property of Customer (either individually or jointly held with others) whatsoever (collectively, with all proceeds thereof, the Collateral) at any time held by BNYM Clearing or its affiliates, or carried by others for the Account, hereby are pledged to BNYM Clearing and shall be subject to a general lien and security interest in BNYM Clearings favor to secure any indebtedness or other amounts, obligations and/or liabilities at any time owing from Customer to BNYM Clearing (collectively, the Customers Liabilities). To the extent permitted by the Commodity Exchange Act and CFTC regulations regarding segregation, investment and pledging of Customer assets, Customer hereby grants BNYM Clearing the right to borrow, pledge, repledge, hypothecate, rehypothecate, loan or invest any of the Collateral, including utilizing the Collateral to purchase United States Government Treasury obligations pursuant to repurchase agreements or reverse repurchase agreements with any party, in each case without notice to Customer, and without any obligation to pay or to Account to Customer for any interest, income or benefit that may be derived therefrom. BNYM Clearing shall be under no obligation to deliver the same property deposited with BNYM Clearing or received by BNYM Clearing for the Account of Customer, but may deliver other property of like or equivalent kind or amount. |
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(l) |
Reports and Objections. All oral and written reports relating to the Account, including but not limited to confirmations, purchase and sale notices, correction notices and Account statements (collectively, Statements) shall be submitted to Customer and shall be conclusive and binding on Customer unless Customer notifies BNYM Clearing of any objection thereto (i) in the case of any oral communication, within one hour of the time such report is given to Customer or its representative, and (ii) prior to the opening of trading on the exchange or market on which such transaction occurred on the business day following the day on which Customer receives such Statement; provided, that with respect to monthly Statements, Customer may notify BNYM Clearing of any objection thereto within five (5) business days after receipt of such monthly Statement, provided the objection could not have been raised at the time any prior Statement or oral communication was received by Customer as provided for above. Any such notice of objection, if given orally to BNYM Clearing, |
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shall immediately (and not later than within one business day) be confirmed in writing by Customer. |
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(m) |
Delivery and Option Exercise Instructions and Procedures. |
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(i) |
BNYM Clearing shall liquidate any Contract for which an offsetting order is entered by Customer, unless Customer instructs BNYM Clearing not to liquidate such Contract and to maintain the offsetting Contracts as open positions, provided, that BNYM Clearing shall not be obligated to comply with any such instructions given by Customer if Customer fails to provide BNYM Clearing with any representations, documentation or information reasonably requested by BNYM Clearing or if, in BNYM Clearings reasonable judgment, failure to offset such Contracts against each other would result in a violation of Applicable Laws. |
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(ii) |
Unless Customer shall have delivered to BNYM Clearing sufficient funds and/or the necessary documents to make or take delivery, Customer shall, with respect to open positions in futures contracts, give BNYM Clearing liquidating instructions at least five (5) business days prior to the first notice day, in the case of long positions, and at least five (5) business days prior to the last trading day, in the case of short positions. |
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(iii) |
With respect to long option positions, Customer shall give BNYM Clearing instructions to exercise, and shall deposit sufficient funds and/or the necessary documents for such exercise, on the day Customer intends to exercise; provided, however, that, with respect to options on futures contracts, such instructions must be given prior to the close of the market in the underlying futures contract and in no event less than one business day before the last trading day in any option. |
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(iv) |
Customer acknowledges that certain option contracts sold by Customer are subject to exercise at any time and that rules of the relevant exchange or clearinghouse may provide for the automatic exercise of options that are in-the-money at the time of expiration. Exercise notices received by BNYM Clearing from the applicable exchange or clearinghouse with respect to any option contract sold by BNYM Clearings customers will be allocated among such customers (including Customer) pursuant to a nonpreferential allocation procedure and Customer shall be bound by any allocation made to it pursuant to such procedure. Such notices may be allocated to Customer after the close of trading on the day on which such notices have been allocated to BNYM Clearing by the applicable exchange or clearinghouse. BNYM Clearing shall use reasonable efforts to contact Customer promptly upon its allocation of an exercise notice to Customer. |
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(v) |
Subject to the foregoing, BNYM Clearing shall have no responsibility for any action that it takes or fails to take with respect to any option contract (including, without limitation, any responsibility to exercise any option contract purchased by Customer unless and until BNYM Clearing receives acceptable and timely instructions from Customer indicating the action to be taken). If Customer does not either give instructions or deliver the required funds and/or documents to BNYM Clearing as required herein, BNYM Clearing may, after using reasonable efforts to provide notice to Customer, either exercise, |
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abandon or liquidate Customers positions or take or make delivery on behalf of Customer in any commercially reasonable manner. |
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(n) |
Financial and Other Information. Customer shall provide to BNYM Clearing such financial information regarding Customer as BNYM Clearing may from time to time reasonably request to determine Customers financial condition and Customers ability to perform its obligations under this Agreement or in connection with any Contracts executed by BNYM Clearing on Customers behalf. Customer shall notify BNYM Clearing promptly if the financial condition of Customer changes materially and adversely from that shown in the most recent financial information theretofore provided to BNYM Clearing. Customer authorizes BNYM Clearing to contact such banks, financial institutions and credit agencies as BNYM Clearing shall deem appropriate from time to time to verify information regarding Customer that may be provided by Customer from time to time. Customer further authorizes BNYM Clearing to conduct, or cause to be conducted, an investigation into Customers background, including but not limited to, credit, regulatory and legal matters, and authorizes BNYM Clearing to retain a consumer reporting agency for such purpose. |
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(o) |
Currency Exchange Risk. In the event that Customer directs BNYM Clearing to enter into any Contract or transaction in a foreign currency or BNYM Clearing permits Customer to deposit foreign currency in satisfaction of any of Customers margin, settlement or premium obligations in respect of any Contract, any profit or loss arising as a result of a fluctuation in the exchange rate affecting such currency will be entirely for the Account and risk of Customer. Absent specific written instruction from Customer, BNYM Clearing shall, when such Contract or transaction is terminated, credit the Account of Customer in such foreign currency or in U.S. dollars at a rate of exchange based upon then prevailing money markets rates of exchange for such foreign currency. |
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(p) |
Cross Trade Consent. The undersigned Customer hereby agrees that BNYM Clearing, its managing directors, officers, employees, affiliates, agents and, floor brokers, where acting on BNYM Clearings behalf, in any transaction for the undersigned Account may take the other side of the transaction, subject to the transaction being executed in accordance with the regulations of the applicable exchange and regulations of the CFTC. |
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(q) |
Communications. BNYM Clearing may communicate with Customer by email from time to time. By executing this Agreement, Customer agrees to receive Statements and other communications containing customer information by e-mail. If Customer does not wish to receive Statements and other communications by email, Customer must notify BNYM Clearing in writing. Customer acknowledges that e-mail messages are not secure and may contain computer viruses or other defects, may not be accurately replicated on other systems, or may be intercepted, interfered with, or deleted without the knowledge of the sender or the intended recipient. BNYM Clearing makes no warranties in relation to these matters. BNYM Clearing reserves the right to intercept, monitor and retain e-mail messages to and from its systems as permitted by Applicable Law. |
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(r) |
Electronic Services. Customer acknowledges that it may access BNYM Clearing by any means, including, but not limited to, use of the Internet, computer-to-computer interface, or otherwise (collectively Electronic Services). Customers use of Electronic Services shall be governed by the Electronic Services Access Terms in the accompanying Risk Disclosure |
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package. In addition to all other provisions of the provisions of this Agreement and the attached Electronic Services Access Terms Customer acknowledges that access to Electronic Services may be limited or unavailable during periods of peak demand, market volatility, system upgrades, maintenance or for other reasons. If Electronic Services are unavailable for any reason, Customer will use alternative means to contact BNYM Clearing. BNYM Clearing will have no liability whatever for any disruption or delay in Electronic Services (as further described in Section 6); and Customer shall be responsible for administration of its use of Electronic Services including, but not limited to, record keeping, data file backups and maintenance of software and equipment. |
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8. |
CFTC Regulations. |
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I. Customer acknowledges that CFTC Regulation 1.35(a-2)(2) requires Customer to create, retain and produce upon the request of the CFTC, the United States Department of Justice and the applicable Transaction Facility, documentation of cash transactions underlying EFP, EFS, EFR or EFO transactions and, if Customer effects any such exchange of futures, Customer will comply with Regulation 1.35(a-2)(2). |
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9. |
Termination. |
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This Agreement may be terminated at any time by Customer or BNYM Clearing by written notice to the other. Termination shall not affect any transaction entered into prior to receipt of such notice and shall not relieve either party of any obligations in connection with any debt or credit balance or other liability or obligation incurred prior to such receipt. In the event of such notice, Customer shall either close out open positions in the Account or arrange for such open positions to be transferred to another futures commission merchant within five (5) business days after delivery of such notice to Customer. Upon satisfaction by Customer of all of Customers liabilities, BNYM Clearing shall transfer to another futures commission merchant all Contracts, if any, then held for the Account, and shall transfer to Customer or to another futures commission merchant, as Customer may instruct, all cash, securities and other property held in the Account, whereupon this Agreement shall terminate. |
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10. |
Miscellaneous. |
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(a) |
Severability. If any provision of this Agreement is, or at any time becomes, inconsistent with any present or future law, rule or regulation of any exchange or other market, sovereign government or regulatory body thereof, and if any of these authorities have jurisdiction over the subject matter of this Agreement, the inconsistent provision shall be deemed superseded or modified to conform with such law, rule or regulation but in all other respects, this Agreement shall continue and remain in full force and effect. |
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(b) |
Successors and Assigns. This Agreement shall be binding upon the parties and their successors and permitted assigns. Neither party hereto may assign its rights or obligations hereunder without the prior written consent of the other party; provided, however, that BNYM Clearing may assign its rights and obligations hereunder to any of its affiliates. Any such assignment in violation of this paragraph shall be void. |
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(c) |
Entire Agreement. This Agreement contains the entire agreement between the parties and supersedes any prior agreements between the parties as to the subject matter hereof. No provision of this Agreement shall in any respect be waived, altered, modified, or amended unless such waiver, alteration, modification or amendment is in writing and signed by Customer and a duly authorized officer of BNYM Clearing. In executing this Agreement, Customer has not relied on any statements or representations that are not expressly contained herein. |
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(d) |
Currency Denomination. Unless another currency is designated in the confirmations reporting transactions entered into by Customer, all Margin deposits in connection with such transactions, and a debit or credit in the Account, shall be stated in United States dollars. |
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(e) |
Instructions, Notices or Communications. Except as specifically otherwise provided in this Agreement, all instructions, notices or other communications may be oral or written. All oral instructions, unless custom and usage of trade dictate otherwise, shall be promptly confirmed in writing. All written instructions, notices or other communications shall be addressed as follows: |
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(i) |
if to BNYM Clearing: |
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BNY MELLON CLEARING, LLC |
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Attention: Sanjay Kannambadi |
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One Wall Street |
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New York, New York |
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(ii) |
if to Customer: at the address as indicated on the Futures Account Application. |
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(f) |
No Waiver. No failure on the part of BNYM Clearing or Customer to exercise, and no delay in exercising, any of their respective contractual rights will operate as a waiver thereof, nor will any single or partial exercise by BNYM Clearing or Customer of any such right preclude any other or future exercise thereof or the exercise of any other partial right. |
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(g) |
Governing Law. THE INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT AND THE RIGHTS, OBLIGATIONS AND REMEDIES OF THE PARTIES SHALL BE EXCLUSIVELY GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, EXCLUDING ANY CONFLICTS OR CHOICE OF LAW, RULE OR PRINCIPLE THAT MIGHT OTHERWISE REFER CONSTRUCTION OR INTERPRETAITON OF THESE PROVISIONS TO THE SUBSTANTIVE LAW OF ANOTHER JURISDICTION. |
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(h) |
Consent to Jurisdiction. ANY LEGAL ACTION, SUIT OR PROCEEDING BETWEEN BNYM CLEARING AND CUSTOMER RELATING TO THIS AGREEMENT OR TRANSACTIONS HEREUNDER SHALL TAKE PLACE IN THE COURTS OF THE STATE OF NEW YORK LOCATED IN THE BOROUGH OF MANHATTAN OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. CUSTOMER CONSENTS TO THE SERVICE OF PROCESS BY THE MAILING TO CUSTOMER OF COPIES OF SUCH COURT FILING BY CERTIFIED MAIL TO THE ADDRESS OF CUSTOMER AS IT APPEARS ON THE BOOKS AND RECORDS OF BNYM CLEARING, SUCH SERVICE TO BE EFFECTIVE TEN DAYS AFTER MAILING. CUSTOMER AGREES THAT ANY LEGAL ACTION, SUIT OR PROCEEDING ARISING OUT OF, OR RELATING TO, THIS AGREEMENT MAY BE BROUGHT IN SUCH COURTS; AND WAIVES, AND AGREES NOT TO ASSERT, AS A DEFENSE IN ANY SUCH ACTION, SUIT OR PROCEEDING (I) THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURTS, (II) THAT SUCH ACTION, SUIT OR PROCEEDING MAY NOT BE BROUGHT OR IS NOT MAINTAINABLE IN SUCH COURTS, (III) THAT THIS AGREEMENT MAY NOT BE ENFORCED IN OR BY SUCH COURTS, OR (IV) THAT THE VENUE OF ANY SUCH ACTION, SUIT OR PROCEEDING IS INCONVENIENT OR IMPROPER. FINAL JUDGMENT AGAINST CUSTOMER IN ANY ACTION, SUIT OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN ANY OTHER JURISDICTION BY SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH SHALL BE CONCLUSIVE EVIDENCE OF THE FACT AND AMOUNT OF INDEBTEDNESS ARISING FROM SUCH JUDGMENT. CUSTOMER HEREBY WAIVES IRREVOCABLY ANY IMMUNITY TO WHICH IT MIGHT OTHERWISE BE ENTITLED IN ANY ACTION AT LAW, SUIT IN EQUITY OR ANY OTHER PROCEEDING ARISING OUT OF OR BASED ON THIS AGREEMENT OR ANY TRANSACTION IN CONNECTION HEREWITH. |
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(i) |
Waiver of Jury Trial and Punitive Damages. Customer hereby waives a trial by jury in any action arising out of or relating to this Agreement or any transaction in connection therewith. Furthermore, no party to this Agreement will attempt to obtain an award of punitive damages against the other. |
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(j) |
Use of Name. Customer agrees not to use BNYM Clearings name for any purpose without BNYM Clearings prior written consent, including, but not limited to, in any advertisement, publication or offering material; provided, however, that BNYM Clearing consents to Customers stating in its offering documents that BNYM Clearing is its FCM so long as such statement is factually accurate at the time the statement is made. Customer acknowledges that BNYM Clearing has no responsibility for the preparation and accuracy of such offering documents. |
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(k) |
Customer Acknowledgments. |
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(i) |
CUSTOMER HEREBY ACKNOWLEDGES THAT IT HAS RECEIVED AND UNDERSTANDS THE FOLLOWING DISCLOSURE STATEMENTS PRESCRIBED BY THE CFTC/NFA AND FURNISHED HEREWITH |
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_____ |
Risk Disclosure Statement (CFTC Rule 1.55 & Rule 190.10(c) & NFA |
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(Please initial) |
Compliance Rule 2-30) |
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(ii) |
If Customer has indicated on the Futures Account Application that orders placed for the Account represent bona fide hedging transactions, please complete the following. CFTC Regulation 190.06 permits you to specify whether, in the unlikely event of BNYM Clearings bankruptcy, you prefer the bankruptcy trustee to liquidate or transfer to another futures commission merchant all positions in the Account. Accordingly, Customer hereby elects as follows: (check one) |
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o |
Liquidation |
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o |
Transfer to another futures commission merchant |
If neither alternative is checked, Customer will be deemed to have elected to have all positions liquidated. This election may be changed at any time by written notice.
IN WITNESS WHEREOF, Customer has executed this Agreement on the date indicated below.
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(Name of Customer Please Print) |
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(Signature) |
(Date) |
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(Name & Title Please Print) |
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Exhibit 10.6
INDEX PRODUCT LICENSE AGREEMENT
This Product License Agreement (PLA), entered into pursuant to Section 1.2 of that certain August 23, 2010 Morningstar Master License Agreement (Master Agreement) by and between Morningstar, Inc. (Licensor) and Van Eck Associates Corporation(Licensee), the terms of which Master Agreement are incorporated herein in their entirety by reference to form the agreement (Agreement) between Licensor and Licensee with respect to the below-defined Products, is executed and effective as of this 16th day of April 2012 (PLA Effective Date). In the event the Master Agreement expires or terminates for any reason, this Agreement shall automatically terminate and, except as provided herein or in the Master Agreement, all rights and obligations of the parties hereunder shall simultaneously terminate.
Licensor and Licensee agree, as follows:
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1. |
Limited License. Licensor hereby grants to Licensee a nontransferable limited U.S.-only license to use: (a) the Morningstar® Long/Flat Commodity IndexSM and (b) the Morningstar® Long/Short Commodity IndexSM (each, a Product and together, the Products) as designated on Attachment A, a copy of which is attached hereto and incorporated by reference, and created in accordance with versions of the Rule Book listed in Section 7 below and such future versions of the Rule Book as Licensor may subsequently implement from time to time at its discretion; (b) those Licensor marks set forth in Section 8 (collectively, the Morningstar Marks); and (c) the Licensor documentation, research and materials in the field of Licensors index business that Licensor may furnish to Licensee from time to time, including, without limitation, those materials set forth in Section 7 (all such documentation, research and materials, collectively, the Intellectual Property) all solely for the specific purpose of Licensee using the Products to create a single Exchange Traded Fund for each Product (each, an ETF and together, the ETFs). For purposes of this PLA, an ETF is a pooled investment vehicle, fund, trust, investment company or other similar product (i) that issues, sells, and redeems blocks of shares, units, or similar interests and (ii) whose shares, units or similar interests trade on national securities exchanges (such as the New York Stock Exchange) or other secondary market facilities. Licensee intends to use the Products in ETFs sponsored or advised by Licensee or an affiliate of Licensee (each such ETF, hereafter, a Licensee Product and together, the Licensee Products). Notwithstanding the foregoing and for the avoidance of doubt, the parties acknowledge and agree that the ETFs may be marketed and sold worldwide but that Licensor makes no warranty of non-infringement with respect to the Products or the Intellectual Property other than with respect to any U.S.-based intellectual property rights. |
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2. |
Licensees Product Commitments. If it has not already done so, Licensee shall submit a registration statement for at least one of the Licensee Products to one or more U.S. regulatory authorities (e.g., the U.S. Securities and Exchange Commission) (each, a Regulatory Authority) within sixty (60) days of the PLA |
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Effective Date and will make at least one of the Licensee Products available for sale to investors in the U.S. within one hundred twenty (120) days of effectiveness of such registration statement. Except as provided in this Agreement, Licensee will have no obligation hereunder to create or maintain the Licensee Products, nor will Licensee have an obligation to maintain any particular level of assets in the Licensee Products. Licensee, in its sole discretion, may determine to liquidate, dissolve, or otherwise discontinue the Licensee Products; provided that Licensees obligations under this Agreement including, without limitation, the obligation to pay the License Fees for the Term (as defined below), will remain in full force and effect. |
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For purposes of this PLA, the Launch Date shall be deemed to be the earlier of: (i) the date that is one hundred eighty (180) days after the PLA Effective Date; or (ii) the date on which the securities of the first Licensee Product are first made available for sale to investors in the United States (the date referred to in this clause (ii), the Product Launch Date). The first Licensee Product sponsored or advised by Licensee or its affiliate as contemplated by this PLA that is made available for sale to investors in the United States is referred to herein as the first Licensee Product and the second Licensee Product sponsored or advised by Licensee or its affiliate as contemplated by this PLA made available for sale to investors in the United States following the first Licensee Product is referred to herein as the second Licensee Product. |
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3. |
Term. The initial term of this Agreement (Initial Term) is three (3) years from the PLA Effective Date. After the Initial Term, this Agreement will automatically renew for successive periods of one (1) year each, unless either party provides the other party with written notice of its intent not to renew no less than ninety (90) days prior to the end of the term for which termination is sought. |
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Notwithstanding anything to the contrary herein, if, on or after the twelve-month anniversary of the PLA Effective Date, Licensee determines that, due to legal or regulatory reasons (including, without limitation, a prolongation in the time required for a registration statement in respect of a Licensee Product to become effective), it is not practicable to launch a Licensee Product, Licensee shall have the right to terminate this Agreement upon at least 30 days prior written notice to Licensor. |
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4. |
License Fees |
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The License Fees payable by Licensee hereunder with respect to its use of the Products shall begin to accrue as of the Launch Date. License Fees shall be paid quarterly in arrears. |
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(a) |
During each year of the Initial Term or any extension thereof (collectively, the Term), commencing on the Launch Date and ending on the date on which the securities of the second Licensee Product are first made available for sale to investors in the United States (at which point, for the |
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avoidance of doubt, the License Fees payable by Licensee shall be calculated as set forth in Section 4(b) below), Licensee will be obligated to pay Licensor the greater of (i) hundred and fifty thousand dollars ($150,000) and (ii) the following variable fees, based on the total number of assets held in the Licensee Products: |
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i) |
Asset-Breakpoint 1: Licensee shall pay an annual fee equal to twenty percent (20%) of its management fee as disclosed in the prospectus for the first Licensee Product (the First Management Fee) on the average daily net assets of the first Licensee Product during such quarter up to 1 billion USD; |
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ii) |
Asset-Breakpoint 2: Licensee shall pay an annual fee equal to seventeen-and-a-half percent (17.5%) of the First Management Fee on the average daily net assets of the first Licensee Product during such quarter of more than 1 billion USD up to a maximum of 2 billion; |
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iii) |
Asset Breakpoint 3: Licensee shall pay an annual fee equal to fifteen percent (15%) of the First Management Fee on the average daily net assets of the first Licensee Product during such quarter of more than 2 billion USD up to a maximum of 3 billion USD; |
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iv) |
Asset Breakpoint 4: Licensee shall pay an annual fee equal to twelve-and-a-half percent (12.5%) of the First Management Fee on the average daily net assets of the first Licensee Product during such quarter of more than 3 billion USD up to a maximum of 4 billion USD; and |
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v) |
Asset Breakpoint 5: Licensee shall pay an annual fee equal to ten percent (10%) of the First Management Fee on the average daily net assets of the first Licensee Product during such quarter in excess of 4 billion USD. |
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(b) |
During the Term, commencing on the date on which the securities of the second Licensee Product are first made available for sale to investors in the United States, Licensee will be obligated to pay Licensor the greater of (i) two hundred thousand dollars ($200,000) or (ii) the following variable fees: |
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i) |
Asset-Breakpoint 1: Licensee shall pay an annual fee equal to the sum of (x) twenty percent (20%) of the First Management Fee on the average daily net assets of the first Licensee Product during such quarter (the First Product Net Asset Calculation) and (y) twenty percent (20%) of its management fee as disclosed in the prospectus for the second Licensee Product (the Second Management Fee) on the average daily net assets of the second Licensee Product during such quarter (the Second Product Net Asset Calculation); provided, that the sum of the assets of the First Licensee Product and the assets of the Second Licensee Product is equal to or less than 1 billion USD; |
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ii) |
Asset-Breakpoint 2: Licensee shall pay an annual fee equal to the sum of (x) seventeen-and-a-half percent (17.5%) of the First Management Fee on the First Product Net Asset Calculation and (y) seventeen-and-a-half percent (17.5%) of the Second Management Fee on the Second Product Net Asset Calculation; provided, that the sum of the assets of the First Licensee Product and the assets of the Second Licensee Product is greater than 1 billion USD but less than 2 billion USD; |
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iii) |
Asset Breakpoint 3: Licensee shall pay an annual fee equal to the sum of (x) fifteen percent (15%) of the Management Fee on the First Product Net Asset Calculation and (y) fifteen percent (15%) of the Second Management Fee on the Second Product Net Asset Calculation; provided, that the assets of the First Licensee Product and the assets of the Second Licensee Product is greater than 2 billion USD but less than 3 billion USD; |
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iv) |
Asset Breakpoint 4: Licensee shall pay an annual fee equal to the sum of (x) twelve-and-a-half percent (12.5%) of the First Management Fee on the First Product Net Asset Calculation and (y) twelve-and-a-half percent (12.5%) of the Second Management Fee on the Second Product Net Asset Calculation; provided, that the sum of the assets of the First Licensee Product and the assets of the Second Licensee Product is greater than 3 billion USD but less than 4 billion USD; and |
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v) |
Asset Breakpoint 5: Licensee shall pay an annual fee equal to the sum of ten percent (10%) of the First Management Fee on the First Product Net Asset Calculation and (y) ten percent (10%) of the Second Management Fee on the Second Product Net Asset Calculation; provided, that the sum of the assets of the First Licensee Product and the assets of the Second Licensee Product is greater than 4 billion USD. |
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(c) |
Notwithstanding anything to the contrary herein, Licensor shall reimburse Licensee 25% of the fee minimum set forth in this Section 4 in the event that the first Licensee Product is not launched within 180 days of the PLA Effective Date through no fault of Licensee or its agents as long as the first Licensee Product is launched within 12 months of the PLA Effective Date. |
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5. |
Exclusivity Period |
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Subject to the terms and conditions contained in this PLA and the Agreement, Licensee will have exclusive rights to use the Products and the Intellectual Property in the United States in connection with the operation of the Licensee Products beginning on the PLA Effective Date and continuing for a period of one (1) year after the Launch Date of the relevant Licensee Product (the Initial Exclusivity Period). During the Initial Exclusivity Period, Licensor will not license the Products or a non-material derivation of the Products in the United |
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States to any other party (other than Licensors affiliated companies) that intends to list ETFs based upon the Products. |
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The Initial Exclusivity Period may be extended for up to two (2) additional years time if the total gross asset under management associated with the Licensee Products meet the following hurdles on the following dates: |
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a) |
500 million USD on the first anniversary of the Product Launch Date of the first Licensee Product; and |
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b) |
1 billion USD on the second anniversary of the Product Launch Date of the first Licensee Product. |
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If (i) Licensee fails to launch the first Licensee Product within 12 months of the PLA Effective Date and/or (ii) Licensee fails to meet any of these AUM hurdles as of the dates set forth above, Licensor will have the right at any time thereafter to terminate Licensees exclusivity with respect to the Products and Intellectual Property on at least thirty (30) days written notice to Licensee and to continue to license the Products and Intellectual Property to Licensee on a non-exclusive basis for the remainder of the Term. |
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If Licensee launches the first Licensee Product in a timely manner as contemplated by this PLA but fails to launch the second Licensee Product within 12 months of the PLA Effective Date, Licensor will have the right to terminate Licensees exclusivity with respect to the second Licensee Product on at least thirty (30) days written notice to Licensee and Licensor shall continue to license such Product and Intellectual Property to Licensee on a non-exclusive basis for the remainder of the Term. |
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6. |
Right of First Refusal |
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In the event that a third party approaches Licensor after the PLA Effective Date through the six-month period following the Launch Date of the first Licensee Product and such third party has a bona fide interest in licensing the Product for use in creating an investment vehicle for the European market, Licensor agrees to provide Licensee with a right of first refusal to separately license the Product to develop and market Licensee Products for the European market. The licensing terms for this separate arrangement will not be governed by this Agreement but will instead be negotiated separately pursuant to a separate product license agreement under the Master License. In the event of such bona fide third party interest within the above-referenced six-month time period, Licensor will promptly notify Licensee and Licensee will then have 14 days to respond to Licensors notice. In case Licensee decides to exercise its right of first refusal hereunder, Licensor will provide Licensee with an exclusive license to use the Product to develop and market one or more Licensee Products for the European market for a time period of at least 180 days from its launch of the first Licensee Product in any European market; provided that Licensee follows the same registration application and Licensee Product launch deadlines applicable to its |
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creation and distribution of the first Licensee Product in the U.S; and provided further, that any grant of exclusive license may, at Licensors discretion, except out those third parties to whom Licensor had already been in discussions at the time Licensee provided Licensor with notice of Licensees intent to exercise its right of first refusal. |
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7. |
Exchange & Specialist |
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To the extent the Licensee Products are listed for trading on an exchange, Licensee has the authority to decide the specialists and listing venues in the U.S.A for the Licensee Products and will not require any further license from Licensor to affect such listing. Licensor agrees to grant the exchanges designated by Licensee no-fee licenses for the purpose of allowing such exchanges in the U.S.A to list and facilitate trading in the Licensee Products. In the event that Licensee desires to list one or more Licensee Products for trading on an exchange outside of the United States, Licensee may request in writing that Licensor allow such a listing. Licensor reserves the right in its sole discretion to deny such request or to impose additional conditions on Licensee in exchange for Licensors approval. |
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8. |
Data Requirements |
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Licensor will provide Licensee with the Products related data points (Product Data) set forth in Attachment A on the time frames set forth therein. Licensee may use these Product Data solely in connection with the operation, distribution and marketing of the Licensee Products. |
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Licensor will provide its real time pricing of the Products to external vendors and Licensee as needed to price Licensee Products on an intra day basis and to calculate an NAV on the Licensee Products. Licensor will share index statistics and fundamental data (e.g. prices of underlying assets) with Licensee for use in marketing of the Licensee Products, including for posting on Licensees website. |
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9. |
Multiple Exchange Listings |
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If additional exchanges wish to trade the Licensee Products on a UTP (Unlisted Trading Privilege) basis, Licensor will grant any necessary or applicable license(s) and the parties will share any fees related to such licensing equally. |
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10. |
Marketing Support |
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The parties will work together in good faith to determine the amount and extent of any marketing efforts to be performed by them. |
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11. |
Intellectual Property |
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Licensee may use and, subject to Licensors prior review and approval as more fully set forth in the Master Agreement, distribute the following Intellectual Property in conjunction with the Licensee Products: |
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Morningstar Methodology Rule Book 3.2 for Morningstar Commodity Indexes |
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Any research, marketing or other related materials provided hereunder. |
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12. |
Morningstar Marks |
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Subject to Licensors prior review and approval, as more fully set forth in the Master Agreement, Licensee may use the following Morningstar Marks in conjunction with its marketing of the Licensee Products: |
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Morningstar® Long/Flat Commodity IndexSM |
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Morningstar® Long/Short Commodity IndexSM |
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13. |
Calculation Obligations |
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Licensor or its agent(s) shall calculate and publicly disseminate to market data vendors the value of each Product in a manner and as frequently as may be required by rules and regulations of any applicable securities exchange (as such rules and regulations may be amended from time to time) including, without limitation, Rule 5.2 of NYSE Area Equity Rules. |
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The Licensee Products will be named such that the Licensee name will precede that of the Licensor. Licensee will not include any trademark designators (e.g., ) within the name of the Licensee Products. |
The parties have caused their authorized representatives to execute this PLA as of the PLA Effective Date.
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Licensor: |
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Licensee: |
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Morningstar, Inc. |
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Van Eck Associates Corporation |
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By: |
/s/ SANJAY ARYA |
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by: |
/s/ Wu-Kwan kit |
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SANJAY ARYA |
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Wu-Kwan kit |
Title: |
Senior Vice President |
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Title: |
Assistant Vice President |
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ATTACHMENT A
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1) |
The Products for which Licensee is receiving a License hereunder is as follows: |
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Morningstar® Long/Flat Commodity IndexSM |
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Morningstar® Long/Short Commodity IndexSM |
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2) |
The Product Data that will be provided to Licensee as part of this License are, as follows: |
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A) |
One time delivery: daily history of end-of- day Product values from the date of inception of the Products |
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B) |
On a daily basis: |
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i. |
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A list of Components for each of the Products; |
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ii. |
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End of day price of each Component; |
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iii. |
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Divisor of the Product |
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iv. |
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End of Day Product Values |
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Licensor will provide the Product Data to Licensee via FTP. |
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3) |
Licensor will advise Licensee of: |
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1. |
Changes in Components; |
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2. |
Changes to the weightings of the Components |
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3. |
Changes to the divisor of the Product |
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