LGBTQ + ESG100 ETF
Shares will be listed on Nasdaq, Inc.
*Shares
are not currently available*
Ticker: LGBT
Dated
January 14, 2020
Beginning on January 1, 2021, as permitted by regulations adopted
by the Securities and Exchange Commission, paper copies of the
Fund’s shareholder reports will no longer be sent by mail,
unless you specifically request paper copies of the reports from
the Fund or from your financial intermediary, such as a
broker-dealer or bank. Instead, the reports will be available on a
website, and you will be notified by mail each time a report is
posted and provided with a website link to access the
report.
You may elect to receive all future annual and semi-annual
shareholder reports in paper free of charge. To elect to continue
to receive paper copies of shareholder reports through the mail or
to otherwise change your delivery method, contact your financial
intermediary or follow the instructions included with this
disclosure. Your election to receive shareholder reports in paper
will apply to all funds that you hold through the financial
intermediary. If you already elected to receive shareholder reports
electronically, you will not be affected by this change and you
need not take any action.
The
Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the adequacy of this prospectus.
Any representation to the contrary is a criminal
offense.
Not FDIC Insured | May Lose Value | No Bank Guarantee
The LGBTQ + ESG100 ETF (the “Fund”) is an
exchange-traded fund (“ETF”). This means that shares of
the Fund will be listed on a national stock exchange, the Nasdaq,
Inc., and trade at market prices. The market price for the
Fund’s shares may be different from their net asset value per
share (“NAV”).
TABLE OF CONTENTS
SUMMARY INFORMATION
|
3
|
OVERVIEW
|
11
|
DESCRIPTION OF THE PRINCIPAL STRATEGIES OF THE FUND
|
12
|
ADDITIONAL INVESTMENT STRATEGIES
|
14
|
DESCRIPTION OF PRINCIPAL RISKS OF THE FUND
|
14
|
DISCUSSION OF ADDITIONAL RISKS
|
21
|
CONTINUOUS OFFERING
|
22
|
CREATION AND REDEMPTION OF CREATION UNITS
|
23
|
BUYING AND SELLING SHARES IN THE SECONDARY MARKET
|
24
|
MANAGEMENT
|
24
|
OTHER SERVICE PROVIDERS
|
26
|
FREQUENT TRADING
|
27
|
DISTRIBUTION AND SERVICE PLAN
|
27
|
DETERMINATION OF NET ASSET VALUE (NAV)
|
28
|
PREMIUM/DISCOUNT INFORMATION
|
28
|
DIVIDENDS, DISTRIBUTIONS, AND TAXES
|
29
|
CODES OF ETHICS
|
32
|
PORTFOLIO HOLDINGS INFORMATION
|
32
|
HOUSEHOLDING
|
33
|
FINANCIAL HIGHLIGHTS
|
33
|
PRIVACY POLICY
|
33
|
SUMMARY INFORMATION
LGBTQ + ESG100
ETF
Investment Objective
The LGBTQ + ESG100 ETF (the “Fund”) seeks to track the investment results
(before fees and expenses) of the LGBTQ100 ESG Index (the
“Underlying
Index”).
Fees and Expenses
The following table describes the fees and expenses you may pay if
you buy and hold shares of the Fund (“Shares”). Most investors also will incur brokerage
commissions when buying or selling Shares, which are not reflected
in the table or the Example.
Annual Fund Operating Expenses (expenses that you pay each year as a percentage
of the value of your investment):
Management
Fee
|
0.75%
|
Distribution and/or
Service (12b-1) Fees (1)
|
0.00%
|
Other Expenses
(2)
|
0.00%
|
Total
Annual Fund Operating Expenses
|
0.75%
|
(1)
Pursuant to a Rule
12b-1 Distribution and Service Plan (the “Plan”), the Fund may bear a Rule
12b-1 fee not to exceed 0.25% per year of the Fund’s average
daily net assets. However, no such fee is currently paid by the
Fund or will be paid by the Fund in its first year of operation,
and the Board of Trustees has not currently approved the
commencement of any payments under the Plan.
(2)
“Other
Expenses” are based on estimated amounts for the current
fiscal year.
Example. This example is intended to
help you compare the cost of investing in the Fund with the cost of
investing in other funds. The example assumes that you invest
$10,000 in the Fund for the time periods indicated and then redeem
all of your Shares at the end of those periods. The example also
assumes that your investment has a return of 5% each year and that
the Fund’s operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions
your costs would be:
One
Year
|
Three
Years
|
$77
|
$240
|
Portfolio Turnover. The Fund
may pay transaction costs, including commissions, when it buys and
sells securities (or “turns over” its portfolio). A
higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Shares are held in a
taxable account. These costs, which are not reflected in the annual
fund operating expenses or in the example, affect the Fund’s
performance. Because the Fund had not yet commenced operations
prior to the end of its prior fiscal year, no portfolio turnover
rate is provided for this Fund.
Principal Investment Strategies
Under normal circumstances, the Fund seeks to achieve its
investment objective by investing at least 80% of its net assets
(plus borrowings for investment purposes, exclusive of collateral
held from securities lending) in components of the Underlying
Index. The
Underlying Index is comprised of securities screened to support
LGBTQ or ESG positions. The Fund also may invest up to 20%
of its assets in instruments other than the components of the
Underlying Index, including shares of other investment companies,
cash and cash equivalents, as well as in securities not included in
the Underlying Index, but which it believes will help the Fund
track the Underlying Index.
The Fund uses a passive management strategy designed to track the
performance of the Underlying Index. The Fund intends to replicate
the Underlying Index, meaning it intends to invest in substantially
all of the Underlying Index components in approximately the same
proportions as the Underlying Index. The Fund reserves the right to
use a representative sampling strategy to track the performance of
the Underlying Index, which involves investing in a representative
sample of securities that collectively have an investment profile
similar to that of the Underlying Index. The correlation between
the Fund’s performance, before fees and expenses, and that of
the Underlying Index is expected to be 95% or better over time. A
figure of 100% would indicate perfect correlation.
As further
discussed below, the Underlying Index represents the top 100 U.S.
companies that:
●
nurture and
promote equality in the workplace for employees of all gender and
sexual orientation;
●
have a history of
consistently strong financial performance; and
●
either (1) have a
strong track record of loyalty and brand awareness among the
US-based LGBTQ community or (2) observe high standards on
environmental, social and governance issues.
The Underlying Index represents the top 100 U.S. companies that
nurture and promote equality in the workplace for employees of all
gender and sexual orientation, have a strong track record of
loyalty and brand awareness among the US-based LGBTQ community, and
have a history of consistently strong financial performance. The
Underlying Index attempts to capture market outperformance of these
companies as compared to their competition.
Loyalty Preference Index Inc. (the “Index Provider”)
constructs the Underlying Index by starting with an investable
universe (the “Index Universe”) first drawn from those
Fortune 1000 companies earning a 100% rating according to an annual
self-reported survey conducted by a national LGBT advocacy
organization. The self-reporting survey seeks to score companies
based on three pillars: (1) non-discrimination policies across
business entities; (2) equitable benefits for LGBTQ workers and
their families; and (3) supporting an inclusive culture and
corporate social responsibility. In 2019, this step produced 572
public and private companies. These companies are then screened so
that only those that also are among the top 500 publicly-listed
U.S. corporations by market capitalization are included in the
Index Universe. In 2019, the Index Universe consisted of
approximately 170 public companies, which number is expected to
vary from year to year.
The Index Provider, in constructing the Underlying Index, first
screens the Index Universe to exclude companies based on their
FactSet Revere Business Industry Classification System
(“RBICS”) industry involvement in Guns, Tobacco,
Pornography, or Weapons of Mass Destruction or that generates over
two-thirds of its revenue from the RBICS Gaming industry. The
remaining companies are then screened for superior fundamentals,
low price volatility and high market liquidity (the
“Fundamentals and Liquidity Screening”) as
follows:
●
six
months minimum age of listing;
●
average
monthly turnover of traded shares for prior 12 months of at least
$1.5 billion;
●
liquidity
of at least 0.2% for nine of the last 12 months as measured by
median daily trading volume divided by free float adjusted issued
shares (i.e., shares readily available to the market and not held
by company insiders); and
●
12-month
average month end free-float market value at least $7.5
billion.
The companies remaining after the Fundamentals and Liquidity
Screening are then further screened for Underlying Index
eligibility based on satisfactory scoring for either environmental,
social and governance issues (the “ESG Group”) or LGBTQ
brand loyalty and support (the “LGBTQ Brand Loyalty &
Support Group”). In the case of companies in the RBICS Gaming
or Entertainment industries, such companies will only be eligible
if they belong to both the ESG Group and the LGBTQ Brand Loyalty
& Support Group.
To be eligible for the ESG Group, the constituent’s ESG
Rating score - as provided by Institutional Shareholder Services -
must be within the top three quartiles for the year. To be eligible
for the LGBTQ Brand Loyalty & Support Group, a company must
have a composite score, determined by the Underlying Index’s
maintenance agent, Fuzzy Logix LLC (“Fuzzy Logix”),
greater than the 25th percentile based on the results of a survey
conducted by The Harris Poll, a third party.
The Harris Poll surveys the U.S. LGBTQ community with respect of
companies that pass Fundamentals and Liquidity Screening for (1)
brand awareness, (2) brand image, (3) brand loyalty and (4) LGBTQ
community support. The Harris Poll annually surveys approximately
150,000 self-identified members of the approximately 11.5 million
member U.S. LGBTQ community. Harris Poll received 3,170 completed
survey responses in 2019 that were then used by Fuzzy Logix to
determine LGBTQ Brand Loyalty & Support Group eligibility.
First, it disregards a respondent’s survey results of a
company where no brand awareness is indicated and then ranks
companies based on composite scoring for The Harris Poll’s
survey results on brand image, brand loyalty and LGBTQ community
support. Fuzzy Logix’s methodology renders ineligible for the
Underlying Index any company that scores less than the 25th
percentile on a Harris Polls question about supporting LGBTQ
causes.
The number of Underlying Index components is fixed at 100. All
companies deemed eligible for the Underlying Index by ESG Group
and/or LGBTQ Brand Loyalty & Support Group membership, as the
case may be, are then ranked according to sales growth from highest
to lowest growth over the prior one year period. The top two
companies of each of the 11 RBICS sectors based on Fuzzy Logix
scoring of the LGBTQ Brand Loyalty & Support Group are
automatically included in the Underlying Index. The remaining 88
positions are filled by the remaining highest sales growth eligible
companies, without regard to RBICS sector, until 100 Underlying
Index components have been selected.
Underlying Index components are then weighted by a composite
weighting formula that measures inverse of volatility (30%), the
free float adjusted market capitalization (30%) and the price to
earnings ratio (40%) of each Underlying Index component. This
weighting methodology is further subject to the following rules: no
single RBICS sector is allowed to represent a combined weight of
more than 25% of the Underlying Index; and no individual Underlying
Index component is allowed to have a weight greater than 5% of the
Underlying Index.
The Underlying Index is reconstituted annually and rebalanced
quarterly. As of October 30, 2019, the Underlying Index consisted
of 100 securities, which had capitalizations ranging from $3.24
billion to $1,103.20 billion, an average market capitalization of
$115.15 billion and a median market capitalization of $55.44
billion. As of that date, the Underlying Index had significant
exposure to the technology sector (25 %), healthcare sector (17.4%)
and finance sector (12.4%). The components of the Underlying Index
and the percentages represented by various sectors in the
Underlying Index may change overtime. The Fund will concentrate its
investments in a particular industry or group of industries (i.e.,
hold more than 25% of its assets) to approximately the same extent
that the Underlying Index is concentrated.
Under normal
circumstances, the Fund will invest at least 80% of its total
assets, at all times, in LGBTQ Brand Loyalty & Support Group
securities and ESG Group securities.
Principal Investment Risks
An
investment in the Fund involves risk, including those described
below. There is no assurance that the Fund will achieve its
investment objective. An investor may lose money by investing in
the Fund. The Fund is not a complete investment program. Therefore,
investors should consider carefully the following risks before
investing in the Fund.
Management Risk. To the extent the Fund does not replicate the
Underlying Index, it is subject to management risk. This is the
risk that its security selection or trading process, which is
subject to a number of constraints, may not produce the intended
results. Alternatively, to the extent the Fund replicates the
Underlying Index, it is likely to experience higher portfolio
turnover and brokerage costs, which erode
performance.
Excluded Securities Risk. The
universe of acceptable investments for the Fund may be limited as
compared to other funds due to the Fund’s ESG investment
screening. Because the Fund does not invest in companies that do
not meet its ESG criteria, and the Fund may sell portfolio
companies that subsequently violate its screens, the Fund may be
riskier than other funds that invest in a broader array of
securities. Although the Adviser believes that the Fund can achieve
its investment objective within the parameters of ESG investing,
eliminating certain securities as investments may have an adverse
effect on the Fund’s performance.
Tracking Error Risk. Tracking
error is the divergence of a fund’s performance from that of
the applicable underlying index. Tracking error may occur because
of differences between the securities and other instruments held in the
Fund’s portfolio and those included in the applicable
underlying index, pricing differences (including, as applicable,
differences between a security’s price at the market close
and the Fund’s valuation of a security at the time of
calculation of the Fund’s NAV), differences in transaction
costs, the Fund’s holding of uninvested cash, differences in
timing of the accrual of or the valuation of dividends or interest,
tax gains or losses, changes to the Underlying Index or the costs
to the Fund of complying with various new or existing regulatory
requirements. This risk may be heightened during times of increased
market volatility or other unusual market conditions. Tracking
error also may result because the Fund incurs fees and expenses,
while the Underlying Index does not. To the extent that the Fund
employs a representative sampling strategy or calculates its NAV
based on fair value prices and the value of the Underlying Index is
based on securities’ closing prices, the Fund’s ability
to track the Underlying Index may be adversely
affected.
Preference Investing Risk. Investing based on consumer preferences is subject
to the risk that consumer preferences may change, potentially
unexpectedly and rapidly. It can also be difficult to accurately
assess or predict consumer preferences and surveys may not
accurately capture them.
Index-Related Risk. There is no guarantee that the Fund will achieve a
high degree of correlation to the Underlying Index and therefore
achieve its investment objective. Market disruptions and regulatory
restrictions could have an adverse effect on the Fund’s
ability to adjust its exposure to the required levels in order to
track the Underlying Index. Errors in index data, index
computations and/or the construction of the Underlying Index in
accordance with its methodology may occur from time to time and may
not be identified and corrected for a period of time or at all,
which may have an adverse impact on the Fund and its shareholders.
There is no guarantee that the Underlying Index will create the
desired exposure. The Underlying Index may not contain an
appropriate mix of securities, but the Fund’s investment
objective and principal investment strategies impose limits on the
Fund’s ability to invest in securities not included in the
Underlying Index.
Representative Sampling Risk. To the extent used by the Fund, a representative
sampling approach will result in it holding a smaller number of
securities than are in the Underlying Index. As a result, an
adverse development respecting an issuer of securities held by the
Fund could result in a greater decline in NAV than would be the
case if the Fund held all of the securities in the Underlying
Index. Conversely, a positive development relating to an issuer of
securities in the Underlying Index that is not held by the Fund
could cause the Fund to underperform the Underlying Index. To the
extent the assets in the Fund are smaller, these risks will be
greater.
New Fund Risk. The Fund is new with no operating history and
there can be no assurance that the Fund will grow to or maintain an
economically viable size, in which case the Board of Trustees may
determine to liquidate the Fund.
Technology Sector Risk. The
technology sector includes companies that offer software and
information technology services, manufacturers and distributors of
technology hardware and equipment such as communications equipment,
cellular phones, computers and peripherals, electronic equipment
and related instruments and semiconductors. Technology companies
face intense competition and potentially rapid product
obsolescence. They are also heavily dependent on intellectual
property rights and may be adversely affected by the loss or
impairment of those rights. The value of technology companies may
fluctuate widely due to competitive pressures, increased
sensitivity to short product cycles and aggressive pricing,
problems relating to bringing their products to market, very high
price/earnings ratios, and high personnel turnover due to severe
labor shortages for skilled technology professionals. The
products of technology companies may face obsolescence due to rapid
technological developments, frequent new product introduction,
unpredictable changes in growth rates and competition for the
services of qualified personnel. Companies in the technology sector
are heavily dependent on patent and other intellectual property
rights. A technology company’s loss or impairment of these
rights may adversely affect the company’s
profitability.
Healthcare Sector Risk. The
healthcare sector includes health care providers and services,
companies that manufacture and distribute healthcare equipment and
supplies, and healthcare technology companies. It also includes
companies involved in the research, development, production and
marketing of pharmaceuticals and biotechnology products. The Fund
is subject to the risk that the securities of such issuers will
underperform the market due to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting
the healthcare sector. The prices of the securities of companies
operating in the healthcare sector are closely tied to government
regulation and approval of their products and services, which can
have a significant effect on the price and availability of those
products and services.
Finance Sector Risk. The
finance sector includes companies involved in banking, thrifts and
mortgage finance, specialized finance, consumer finance, asset
management and custody banks, investment banking and brokerage and
insurance. It also includes financial exchanges, financial data
vendors, and mortgage REITs. The Fund is subject to the risk that
the securities of such issuers will underperform the entire market
due to legislative or regulatory changes, adverse market conditions
and/or increased competition affecting the finance sector.
Companies operating in the finance sector are subject to extensive
government regulation, which may limit their ability to leverage
their capital. Interest rates and banking fees are also regulated
by federal and state authorities. Profitability is largely
dependent on the availability and the cost of deposit funds and
reserve requirements required by statues and can fluctuate
significantly when interest rates change, or the sector faces
increased competition from less regulated competitors. The finance
sector is also affected by regulatory changes that require
significant ongoing technology investments in legacy system to meet
the regulatory reporting needs.
Asset Class Risk. Securities
and other assets in the Underlying Index or in the Fund’s
portfolio may underperform in comparison to the general financial
markets, a particular financial market or other asset
classes.
Concentration Risk. The Fund
may be susceptible to an increased risk of loss, including losses
due to adverse events that affect the Fund’s investments more
than the market as a whole, to the extent that the Fund’s
investments are concentrated in the securities of a particular
issuer or issuers, country, group of countries, region, market,
industry, group of industries, sector or asset class. Market
conditions, interest rates, and economic, regulatory, or financial
developments could significantly affect a single industry or a
group of related industries, and the securities of companies in
that industry or group of industries could react similarly to these
or other developments. From time to time, the Fund may invest a
significant percentage of its assets in issuers in a single
industry (or the same group of industries) or sector of the
economy.
Assets Under Management (AUM)
Risk.
From time to time, an Authorized Participant (as defined in the
“Creations and Redemptions” section of this prospectus
(this “Prospectus”)), a third-party investor, the
Fund’s adviser, subadviser or an affiliate thereof, or a fund
may invest in the Fund and hold its investment for a specific
period of time in order to facilitate commencement of the
Fund’s operations or for the Fund to achieve size or scale.
There can be no assurance that any such entity would not redeem its
investment or that the size of the Fund would be maintained at such
levels, which could negatively impact the Fund.
Cyber Security Risk. Failures
or breaches of the electronic systems of the Fund, the Fund’s
adviser, subadviser, distributor, index provider, index calculation
agent, and other service providers, market makers, Authorized
Participants or the issuers of securities in which the Fund invests
have the ability to cause disruptions and negatively impact their
business operations, potentially resulting in financial losses.
While the Fund has established business continuity plans and risk
management systems seeking to address system breaches or failures,
there are inherent limitations in such plans and systems.
Furthermore, the Fund cannot control the cyber security plans and
systems of the Fund’s service providers, index provider,
index calculation agent, market makers, Authorized Participants or
issuers of securities in which the Fund
invests.
Equity Securities Risk. Common
stocks are subject to changes in value, and their values may be
more volatile than those of other asset classes. The Underlying
Index is comprised of common stocks, which generally subject their
holders to more risks than holders of preferred stock and debt
securities because common stockholders’ claims are
subordinated to holders of preferred stock and debt securities upon
the bankruptcy of the issuer.
Issuer Risk. Fund performance
depends on the performance of individual securities to which the
Fund has exposure. Changes in the financial condition or credit
rating of an issuer of those securities may cause the value of the
securities to decline.
Liquidity Risk.
The Fund’s investments are subject to liquidity risk, which
exists when an investment is or becomes difficult to purchase or
sell at a reasonable time and price. If a transaction is
particularly large or if the relevant market is or becomes
illiquid, it may not be possible to initiate a transaction or
liquidate a position, which may cause the Fund to suffer
significant losses and difficulties in meeting redemptions. If a
number of securities held by the Fund stop trading, it may have a
cascading effect and cause the Fund to halt trading. Volatility in
market prices will increase the risk of the Fund being subject to a
trading halt.
Operational Risk. The Fund is
exposed to operational risks arising from a number of factors,
including, but not limited to, human error, processing and
communication errors, errors of the Fund’s service providers,
counterparties or other third-parties, failed or inadequate
processes and technology or systems failures. The Fund and its
service providers seek to reduce these operational risks through
controls and procedures. However, these measures do not address
every possible risk and may be inadequate to address these
risks.
New Adviser Risk. The Adviser is a newly organized investment
adviser and has no operating history. As a result, prospective
investors have no track record or history on which to base their
investment decisions.
Passive Investment Risk. The
Fund is not actively managed, and it generally does not attempt to
take defensive positions under any market conditions, including
declining markets.
Premium/Discount Risk. Disruptions to creations and redemptions, the
existence of extreme market volatility or potential lack of an
active trading market for Shares may result in Shares trading at a
significant premium or discount to NAV. A shareholder may purchase
Shares at a time when the market price is at a premium to the NAV
and sell Shares at a time when the market price is at a discount to
the NAV.
Valuation Risk. The sale price
the Fund could receive for a security or other asset may differ
from the Fund’s valuation of the security or other asset and
from the value used by the Underlying Index, particularly for
securities or other assets that trade in low volume or volatile
markets or that are valued using a fair value methodology. In
addition, the value of the securities or other assets in the
Fund’s portfolio may change on days or during time periods
when shareholders will not be able to purchase or sell the
Fund’s shares. Authorized Participants who purchase or redeem
fund shares on days when the Fund is holding fair-valued securities
may receive fewer or more shares or lower or higher redemption
proceeds than they would have received if the Fund has not
fair-valued securities or had used a different valuation
methodology. The Fund’s ability to value investments may be
impacted by technological issues and/or errors by pricing services
or other third-party service providers.
Investment Risk. An investment
in the Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other
government agency. When you sell your Shares, they could be worth
less than what you paid for them.
Large-Capitalization Companies Risk. Large-capitalization
companies may trail the returns of the overall stock market.
Large-capitalization stocks tend to go through cycles of doing
better - or worse - than the stock market in general. These periods
have, in the past, lasted for as long as several
years.
Risk of Investing in the United States. The Fund has significant exposure to U.S.
issuers. Certain changes in the U.S. economy, such as when the U.S.
economy weakens or when its financial markets decline, may have an
adverse effect on the securities to which the Fund has
exposure.
Authorized Participant Concentration Risk. Only an Authorized Participant may engage in
creation or redemption transactions directly with the Fund. The
Fund has a limited number of financial institutions that may act as
Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the
extent that these Authorized Participants exit the business or are
unable to proceed with creation and/or redemption orders with
respect to the Fund and no other Authorized Participant is able to
step forward to create or redeem Creation Units (as defined in the
“Purchase and Sale of Fund Shares” section of this
Prospectus), the Fund shares may trade at a premium or discount to
NAV and possibly face trading halts and/or delisting. Authorized Participant concentration
risk may be heightened for exchange-traded funds
(“ETFs”), such as the Fund, which invest in non-U.S.
securities or other securities or instruments that are less widely
traded.
Market Risk. The Fund could
lose money over short periods due to short-term market movements
and over longer periods during more prolonged market downturns. For
example, there is the risk that sharp price declines in securities
owned by the Fund, known as flash crash risk, may trigger trading
halts, which may result in the Fund’s shares trading in the
market at an increasingly large discount to NAV during part (or
all) of a trading day.
Market Trading Risk. The Fund
faces numerous market trading risks, including the potential lack
of an active market for Fund shares, losses from trading in
secondary markets, periods of high volatility and disruptions in
the creation/redemption process. Any of these factors, among
others, may lead to the Fund’s Shares trading at a premium or
discount to NAV.
Shares are Not Individually Redeemable. Shares are only redeemable by the
Fund at NAV if they are tendered in large blocks known as
“Creation Units”
which are expected to be worth in excess of $1 million each. Only
Authorized Participants (as defined below) may engage in such
creation and redemption transactions directly with the Fund.
Individual Shares may be sold on a stock exchange at their current
market prices, which may be less, more, or equal to their
NAV.
Performance Information
Performance
information will be available in the Prospectus after the Fund has
been in operation for one full calendar year. When provided, the
information will provide some indication of the risks of investing
in the Fund by showing how the Fund’s average annual returns
compare with a broad measure of market performance. Past
performance does not necessarily indicate how the Fund will perform
in the future. Updated performance information will be available at
www.PALETFs.com.
Management
Investment Adviser. ProcureAM, LLC will serve as the investment
adviser of the Fund and has selected Penserra Capital Management
LLC (“Penserra”) as the subadviser for the Fund.
Penserra will perform all the required adviser services needed by
the Fund under the supervision of ProcureAM,
LLC.
Portfolio Manager. Dustin
Lewellyn, Ernesto Tong and Anand Desai of Penserra have been
appointed as the Fund’s portfolio managers. They have been
portfolio managers of the Fund since its
inception.
Purchase and Sale of Fund Shares
The Fund is an ETF. Individual shares of the Fund are listed on a
national securities exchange. Most investors will buy and sell
shares of the Fund through a broker-dealer. The price of Fund
shares is based on market price, and because ETF shares trade at
market prices rather than at NAV, shares may trade at a price
greater than NAV (a premium) or less than NAV (a discount). The
Fund will only issue or redeem shares that have been aggregated
into blocks of 25,000 shares or multiples thereof
(“Creation
Units”) to Authorized
Participants who have entered into agreements with the Fund’s
distributor and accepted by the Fund’s transfer agent. The
Fund generally will issue or redeem Creation Units in return for a
designated portfolio of securities (and an amount of cash) that the
Fund specifies each day.
Tax Information
The
Fund’s distributions are taxable and will generally be taxed
as ordinary income or capital gains, unless you are investing
through a tax-deferred arrangement, such as a 401(k) plan or
individual retirement account. Withdrawals from such tax-deferred
arrangements may be subject to tax at a later date.
Payments to Broker-Dealers and other Financial
Intermediaries
If you purchase shares of the Fund through a broker-dealer or other
financial intermediary (such as a bank), the Fund’s
investment adviser, subadviser, sponsor or other related companies
may pay the intermediary for marketing activities and
presentations, educational training programs, conferences, the
development of technology platforms and reporting systems or other
services related to the sale or promotion of the Fund. These
payments may create a conflict of interest by influencing the
broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or
visit your financial intermediary’s website for more
information.
LGBTQ + ESG100 ETF (the “Fund”) is a series of the
Procure ETF Trust I, a Delaware statutory trust registered as an
investment company under the Investment Company Act of 1940, as
amended (“1940 Act”). The Fund will operate as an
exchange-traded fund (“ETF”). ETFs are funds that trade
like other publicly-traded securities. The Fund is designed to
track an index. Similar to shares of an index mutual fund, each
share of the Fund represents an ownership interest in an underlying
portfolio of securities and other instruments intended to track an
index. Unlike shares of a mutual fund, which can be bought and
redeemed from the issuing fund by all shareholders at a price based
on net asset value (“NAV”), shares of the Fund may be
purchased or redeemed directly from the Fund at NAV solely by
Authorized Participants (“APs”). Also unlike shares of
a mutual fund, shares of the Fund are listed on a national
securities exchange and trade in the secondary market at market
prices that change throughout the day.
An index is a financial calculation, based on a grouping of
financial instruments. An index is not an investment product, while
the Fund is an actual investment portfolio. The performance of the
Fund and the LGBTQ100 ESG Index (the “Underlying
Index”) may vary for a number of reasons, including
transaction costs, asset valuations, corporate actions (such as
mergers and spin-offs), timing variances and differences between
the Fund’s portfolio and the Underlying Index resulting from
the Fund’s use of representative sampling or from legal
restrictions (such as diversification requirements) that apply to
the Fund but not to the Underlying Index. “Tracking
error” is the divergence of the performance (return) of the
Fund’s portfolio from that of the Underlying Index. It is
expected that, over time, the Fund’s tracking error will not
exceed 5%.
Shares of the Fund (the “Shares”), upon commencement of
operations, will be listed and traded on the Nasdaq, Inc. (the
“Nasdaq” or the “Exchange”), where the
market prices for the Shares may be different from the intra-day
value of the Shares disseminated by the Exchange from its net asset
value (“NAV”). Unlike conventional mutual funds, Shares
are not individually redeemable directly with the Fund. Rather,
each Fund issues and redeems Shares on a continuous basis at NAV
only in large blocks of Shares called “Creation Units.”
A Creation Unit consists of 25,000 Shares. Creation Units of the
Fund are issued and redeemed in cash and/or in-kind for securities
included in the Underlying Index. As a result, retail investors
generally will not be able to purchase or redeem Shares directly
from, or with, the Fund. Most retail investors will purchase or
sell Shares in the secondary market through a broker.
In order to provide additional information regarding the value of
Shares of the Fund, ICE Data Services will disseminate the
Indicative Intra-Day Value (“IIV”) for the Fund. The
Fund’s IIV is expected to be disseminated every 15 seconds
during the regular trading hours of the Exchange. The IIV is based
on the current market value of the securities and cash required to
be deposited in exchange for a Creation Unit. The IIV does not
necessarily reflect the precise composition of the current
portfolio holdings of the Fund as of a particular point in time, or
an accurate valuation of the current portfolio. The quotations of
certain Fund holdings may not be updated during U.S. trading hours
if such holdings do not trade in the U.S. The Fund is not involved
in, nor responsible for, the calculation or dissemination of the
IIV and makes no representations or warranty as to its
accuracy.
This Prospectus provides the information you need to make an
informed decision about investing in the Fund. It contains
important facts about the Trust and the Fund.
There is no assurance that the Fund will achieve its investment
objective and an investment in the Fund could lose money. The Fund
is not a complete investment program.
Changes in Investment Objective. The Fund’s investment objective and 80%
policy are not fundamental policies and may be changed by the
Fund’s Board of Trustees without shareholder
approval.
DESCRIPTION OF THE PRINCIPAL STRATEGIES OF THE FUND
The Fund seeks to track the investment results (before fees and
expenses) of the Underlying Index. Under normal circumstances, the
Fund seeks to achieve its investment objective by investing at
least 80% of its net assets (plus borrowings for investment
purposes, exclusive of collateral held from securities lending) in
securities included in the Underlying Index. The Underlying Index
is comprised of securities screened to support LGBTQ or ESG
positions.
The Fund will generally hold all of the securities that comprise
the Underlying Index in approximate proportion to their respective
weightings in the Underlying Index. However, under various
circumstances, it may not be possible or practicable to purchase
all of those securities in those weightings. In these
circumstances, the Fund may purchase a representative sample of
securities in the Underlying Index. There also may be instances in
which the Fund may choose to underweight or overweight a security
in the Underlying Index, purchase securities not in the Underlying
Index that it believes are appropriate to substitute for certain
securities in the Underlying Index or utilize various combinations
of other available investment techniques. The Fund may sell
securities that are represented in the Underlying Index in
anticipation of their removal from the Underlying Index or purchase
securities not represented in the Underlying Index in anticipation
of their addition to the Underlying Index. The Fund may also, in
order to comply with the tax diversification requirements of the
Internal Revenue Code of 1986, as amended (the “Code”),
temporarily invest in securities not included in the Underlying
Index.
Given the Fund’s investment objective of attempting to track
its Underlying Index, the Fund does not follow traditional methods
of active investment management, which may involve buying and
selling securities based upon analysis of economic and market
factors. Also, unlike many investment companies, the Fund does not
attempt to outperform the Underlying Index and does not seek
temporary defensive positions when markets decline or appear
overvalued.
As further
discussed below, the Underlying Index represents the top 100 U.S.
companies that:
●
nuture and promote
equality in the workplace for employees of all gender and sexual
orientation;
●
have a history of
consistently strong financial performance; and
●
either (1) have a
strong track record of loyalty and brand awareness among the
US-based LGBTQ community or (2) observe high standards on
enviornmental, social and governance issues.
The Underlying Index represents the top 100 U.S. companies that
nurture and promote equality in the workplace for employees of all
gender and sexual orientation, have a strong track record of
loyalty and brand awareness among the US-based LGBTQ community, and
have a history of consistently strong financial performance. The
Underlying Index attempts to capture market outperformance of these
companies as compared to their competition.
Loyalty Preference Index Inc. (the “Index Provider”)
constructs the Underlying Index by starting with an investable
universe (the “Index Universe”) first drawn from those
Fortune 1000 companies earning a 100% rating according to an annual
self-reported survey conducted by a national LGBT advocacy
organization. The self-reporting survey seeks to score companies
based on three pillars: (1) non-discrimination policies across
business entities; (2) equitable benefits for LGBTQ workers and
their families; and (3) supporting an inclusive culture and
corporate social responsibility. In 2019, this step produced 572
public and private companies. These companies are then screened so
that only those that also are among the top 500 publicly-listed
U.S. corporations by market capitalization are included in the
Index Universe. In 2019, the Index Universe consisted of
approximately 170 public companies, which number is expected to
vary from year to year.
The Index Provider, in constructing the Underlying Index, first
screens the Index Universe to exclude companies based on their
FactSet Revere Business Industry Classification System
(“RBICS”) industry involvement in Guns, Tobacco,
Pornography, or Weapons of Mass Destruction or that generates over
two-thirds of its revenue from the RBICS Gaming industry. The
remaining companies are then screened for superior fundamentals,
low price volatility and high market liquidity (the
“Fundamentals and Liquidity Screening”) as
follows:
●
six
months minimum age of listing;
●
average
monthly turnover of traded shares for prior 12 months of at least
$1.5 billion;
●
liquidity
of at least 0.2% for nine of the last 12 months as measured by
median daily trading volume divided by free float adjusted issued
shares (i.e., shares readily available to the market and not held
by company insiders); and
●
12-month
average month end free-float market value at least $7.5
billion.
The companies remaining after the Fundamentals and Liquidity
Screening are then further screened for Underlying Index
eligibility based on satisfactory scoring for either environmental,
social and governance issues (the “ESG Group”) or LGBTQ
brand loyalty and support (the “LGBTQ Brand Loyalty &
Support Group”). In the case of companies in the RBICS Gaming
or Entertainment industries, such companies will only be eligible
if they belong to both the ESG Group and the LGBTQ Brand Loyalty
& Support Group.
To be eligible for the ESG Group, the constituent’s ESG
Rating score - as provided by Institutional Shareholder Services -
must be within the top three quartiles for the year. To be eligible
for the LGBTQ Brand Loyalty & Support Group, a company must
have a composite score, determined by the Underlying Index’s
administrator, Fuzzy Logix LLC (“Fuzzy Logix”), greater
than the 25th percentile based on the results of a survey conducted
by The Harris Poll, a third party.
The Harris Poll surveys the U.S. LGBTQ community with respect of
companies that pass Fundamentals and Liquidity Screening for (1)
brand awareness, (2) brand image, (3) brand loyalty and (4) LGBTQ
community support. The Harris Poll annually surveys approximately
150,000 self-identified members of the approximately 11.5 million
member U.S. LGBTQ community. Harris Poll received 3,170 completed
survey responses in 2019 that were then used by Fuzzy Logix to
determine LGBTQ Brand Loyalty & Support Group eligibility.
First, it disregards a respondent’s survey results of a
company where no brand awareness is indicated and then ranks
companies based on composite scoring for The Harris Poll’s
survey results on brand image, brand loyalty and LGBTQ community
support. Fuzzy Logix’s methodology renders ineligible for the
Underlying Index any company that scores less than the 25th
percentile on a Harris Polls question about supporting LGBTQ
causes.
The number of Underlying Index components is fixed at 100. All
companies deemed eligible for the Underlying Index by ESG Group
and/or LGBTQ Brand Loyalty & Support Group membership, as the
case may be, are then ranked according to sales growth from highest
to lowest growth over the prior one year period. The top two
companies of each of the 11 RBICS sectors based on Fuzzy Logix
scoring of the LGBTQ Brand Loyalty & Support Group are
automatically included in the Underlying Index. The remaining 88
positions are filled by the remaining highest sales growth eligible
companies, without regard to RBICS sector, until 100 Underlying
Index components have been selected.
Underlying Index components are then weighted by a composite
weighting formula that measures inverse of volatility (30%), the
free float adjusted market capitalization (30%) and the price to
earnings ratio (40%) of each Underlying Index component. This
weighting methodology is further subject to the following rules: no
single RBICS sector is allowed to represent a combined weight of
more than 25% of the Underlying Index; and no individual Underlying
Index component is allowed to have a weight greater than 5% of the
Underlying Index.
The Underlying Index is reconstituted annually and rebalanced
quarterly. As of October 30, 2019, the Underlying Index consisted
of 100 securities, which had capitalizations ranging from $3.24
billion to $1,103.20 billion, an average market capitalization of
$115.15 billion and a median market capitalization of $55.44
billion. As of that date, the Underlying Index had significant
exposure to the technology sector (25 %), healthcare sector (17.4%)
and finance sector (12.4%). The components of the Underlying Index
and the percentages represented by various sectors in the
Underlying Index may change overtime. The Fund will concentrate its
investments in a particular industry or group of industries (i.e.,
hold more than 25% of its assets) to approximately the same extent
that the Underlying Index is concentrated.
Under normal
circumstances, the Fund will invest at least 80% of its total
assets, at all times, in LGBTQ Brand Loyalty & Support Group
securities and ESG Group securities.
Loyalty Preference Index, Inc. is the provider of the Underlying
Index. ProcureAM, LLC (“Adviser”), the Fund’s
investment advisers, licenses the Underlying Index from the Index
Provider and sublicenses it to the Fund.
ADDITIONAL INVESTMENT STRATEGIES
The additional investment strategies outlined below do not
represent and are distinct from the principal investment strategies
of the Fund.
The Fund may invest in one or more financial instruments, including
but not limited to futures contracts, swap agreements and forward
contracts, reverse repurchase agreements, and options on
securities, indices, and futures contracts.
The Fund may invest up to 20% of its assets in securities and other
instruments including derivatives (such as forwards, futures,
options and swap contracts), cash and cash equivalents, as well as
in securities not included in the Underlying Index, but which the
Fund believes will help it track the Underlying Index.
Each of the policies described herein, including the investment
objective of the Fund, constitutes a non-fundamental policy that
may be changed by the Board of Trustees of the Trust (the
“Board”) without shareholder approval. Certain
fundamental policies of the Fund are set forth in the
Fund’s’ Statement of Additional Information
(“SAI”) under “Investment
Restrictions.”
Securities Lending
The Fund may lend its portfolio securities in compliance with
applicable law.
Borrowing Money
The Fund may borrow money from a bank as permitted by the 1940 Act
or other governing statute, by the rules thereunder, or by the U.S.
Securities and Exchange Commission or other regulatory agency with
authority over the Fund, but only for temporary or emergency
purposes.
DESCRIPTION OF PRINCIPAL RISKS OF THE FUND
The Fund is subject to various risks, including the principal risks
noted below, any of which may adversely affect the Fund’s
NAV, trading price, yield, total return and ability to meet its
investment objective. You could lose all or part of your investment
in the Fund, and the Fund could underperform other
investments.
Management Risk. To the extent
the Fund does not replicate the Underlying Index, it is subject to
management risk. This is the risk that its security selection or
trading process, which is subject to a number of constraints, may
not produce the intended results. Alternatively, to the extent the
Fund replicates the Underlying Index, it is likely to experience
higher portfolio turnover and brokerage costs, which erode
performance.
Excluded Securities Risk. The
universe of acceptable investments for the Fund may be limited as
compared to other funds due to the Fund’s ESG investment
screening. Because the Fund does not invest in companies that do
not meet its ESG criteria, and the Fund may sell portfolio
companies that subsequently violate its screens, the Fund may be
riskier than other funds that invest in a broader array of
securities. Although the Adviser believes that the Fund can achieve
its investment objective within the parameters of ESG investing,
eliminating certain securities as investments may have an adverse
effect on the Fund’s performance.
Tracking Error Risk. Tracking
error is the divergence of a fund’s performance from that of
the applicable underlying index. Tracking error may occur because
of differences between the securities and other instruments held in
the Fund’s portfolio and those included in the Underlying
Index, pricing differences (including, as applicable, differences
between a security’s price at the local market close and the
Fund’s valuation of a security at the time of calculation of
the Fund’s NAV), differences in transaction costs, the
Fund’s holding of uninvested cash, differences in timing of
the accrual of or the valuation of dividends or interest, tax gains
or losses, changes to the Underlying Index or the costs to the Fund
of complying with various new or existing regulatory requirements.
This risk may be heightened during times of increased market
volatility or other unusual market conditions. Tracking error also
may result because the Fund incurs fees and expenses, while the
Underlying Index does not. To the extent that the Fund employs a
representative sampling strategy or calculates its NAV based on
fair value prices and the value of the Underlying Index is based on
securities’ closing prices, the Fund’s ability to track
the Underlying Index may be adversely affected.
Preference Investing Risk. Investing based on consumer preferences is subject
to the risk that consumer preferences may change, potentially
unexpectedly and rapidly. It can also be difficult to accurately
assess or predict consumer preferences and surveys may not
accurately capture them.
Index-Related Risk. The Fund
seeks to achieve a return that corresponds generally to the price
and yield performance, before fees and expenses, of the Underlying
Index. There is no assurance that the Underlying Index will be
determined, composed or calculated accurately. While the Fund has
received a description of what the Underlying Index is designed to
achieve, the Index Provider and its agents do not provide any
warranty or accept any liability in relation to the quality,
accuracy or completeness of the Underlying Index or its related
data, and they do not guarantee that the Underlying Index will be
in line with the index methodology. The Fund’s investment
adviser and subadviser also do not provide any warranty or
guarantee against errors in the Underlying Index. Errors in respect
of the quality, accuracy and completeness of the data used to
compile the Underlying Index may occur from time to time and may
not be identified and corrected for a period of time or at all.
Therefore, gains, losses or costs associated with errors of the
Underlying Index will generally be borne by the Fund and its
shareholders. For example, during a period where the Underlying
Index contains incorrect constituents, the Fund would have market
exposure to such constituents and would be underexposed to the
Underlying Index’s other constituents. Such errors may
negatively or positively impact the Fund and its
shareholders.
Apart from scheduled rebalances, ad hoc adjustments or rebalances
to the Underlying Index may occur, in order, for example, to
correct an error in the selection of index constituents. When the
Underlying Index is rebalanced and the Fund in turn rebalances its
portfolio to attempt to increase the correlation between the
Fund’s portfolio and the Underlying Index, any transaction
costs and market exposure arising from such portfolio rebalancing
will be borne directly by the Fund and its shareholders.
Unscheduled rebalances to the Underlying Index may expose the Fund
to additional tracking error risk, which is the risk that the
Fund’s returns may not track those of the Underlying Index.
Therefore, errors and additional ad hoc rebalances may increase the
costs to and the tracking error risk of the Fund.
Representative Sampling Risk. If, under certain circumstances, the Fund elects
to use a representative sampling approach, this will result in it
holding a smaller number of securities than are in the Underlying
Index. As a result, an adverse development respecting an issuer of
securities held by the Fund could result in a greater decline in
NAV than would be the case if the Fund held all of the securities
in the Underlying Index. Conversely, a positive development
relating to an issuer of securities in the Underlying Index that is
not held by the Fund could cause the Fund to underperform the
Underlying Index. To the extent the assets in the Fund are smaller,
these risks will be greater.
New Fund Risk. The Fund is new with no operating history and
there can be no assurance that the Fund will grow to or maintain an
economically viable size, in which case the Board of Trustees may
determine to liquidate the Fund.
Technology Sector Risk. The technology sector includes companies that
offer software and information technology services, manufacturers
and distributors of technology hardware and equipment such as
communications equipment, cellular phones, computers and
peripherals, electronic equipment and related instruments and
semiconductors. Technology companies face intense competition and
potentially rapid product obsolescence. They are also heavily
dependent on intellectual property rights and may be adversely
affected by the loss or impairment of those rights. The value of
technology companies may fluctuate widely due to competitive
pressures, increased sensitivity to short product cycles and
aggressive pricing, problems relating to bringing their products to
market, very high price/earnings ratios, and high personnel
turnover due to severe labor shortages for skilled technology
professionals. The products of technology companies may face
obsolescence due to rapid technological developments, frequent new
product introduction, unpredictable changes in growth rates and
competition for the services of qualified personnel. Companies in
the technology sector are heavily dependent on patent and other
intellectual property rights. A technology company’s loss or
impairment of these rights may adversely affect the company’s
profitability.
Healthcare Sector Risk. The healthcare sector includes health care
providers and services, companies that manufacture and distribute
healthcare equipment and supplies, and healthcare technology
companies. It also includes companies involved in the research,
development, production and marketing of pharmaceuticals and
biotechnology products. The Fund is subject to the risk that the
securities of such issuers will underperform the market due to
legislative or regulatory changes, adverse market conditions and/or
increased competition affecting the healthcare sector. The prices
of the securities of companies operating in the healthcare sector
are closely tied to government regulation and approval of their
products and services, which can have a significant effect on the
price and availability of those products and
services.
Finance Sector Risk. The finance sector includes companies involved in
banking, thrifts and mortgage finance, specialized finance,
consumer finance, asset management and custody banks, investment
banking and brokerage and insurance. It also includes financial
exchanges, financial data vendors, and mortgage REITs. The Fund is
subject to the risk that the securities of such issuers will
underperform the entire market due to legislative or regulatory
changes, adverse market conditions and/or increased competition
affecting the finance sector. Companies operating in the finance
sector are subject to extensive government regulation, which may
limit their ability to leverage their capital. Interest rates and
banking fees are also regulated by federal and state authorities.
Profitability is largely dependent on the availability and the cost
of deposit funds and reserve requirements required by statues and
can fluctuate significantly when interest rates change, or the
sector faces increased competition from less regulated competitors.
The finance sector is also affected by regulatory changes that
require significant ongoing technology investments in legacy system
to meet the regulatory reporting needs.
Asset Class Risk. The
securities and other assets in the Underlying Index or in the
Fund’s portfolio may underperform in comparison to other
securities or indexes that track other countries, groups of
countries, regions, industries, groups of industries, markets,
asset classes or sectors. Various types of securities, currencies
and indexes may experience cycles of outperformance and
underperformance in comparison to the general financial markets
depending upon a number of factors including, among other things,
inflation, interest rates, productivity, global demand for local
products or resources, and regulation and governmental controls.
This may cause the Fund to underperform other investment vehicles
that invest in different asset classes.
Concentration Risk. The Fund
may be susceptible to an increased risk of loss, including losses
due to adverse events that affect the Fund’s investments more
than the market as a whole, to the extent that the Fund’s
investments are concentrated in the securities of a particular
issuer or issuers, country, group of countries, region, market,
industry, group of industries, sector or asset class. Market
conditions, interest rates, and economic, regulatory, or financial
developments could significantly affect a single industry or a
group of related industries, and the securities of companies in
that industry or group of industries could react similarly to these
or other developments. From time to time, the Fund may invest a
significant percentage of its assets in issuers in a single
industry (or the same group of industries) or sector of the
economy. The Fund may be more adversely affected by the
underperformance of those securities, may experience increased
price volatility and may be more susceptible to adverse economic,
market, political or regulatory occurrences affecting those
securities than a fund that does not concentrate its
investments.
Assets Under Management (AUM) Risk. From time to time, an Authorized Participant, a
third-party investor, the Fund’s adviser or subadviser or an
affiliate thereof, or a fund may invest in the Fund and hold its
investment for a specific period of time in order to facilitate
commencement of the Fund’s operations or for the Fund to
achieve size or scale. There can be no assurance that any such
entity would not redeem its investment or that the size of the Fund
would be maintained at such levels, which could negatively impact
the Fund.
Cyber Security Risk. With the
increased use of technologies such as the internet to conduct
business, the Fund, Authorized Participants, service providers,
index provider, index calculation agent and the relevant listing
exchange are susceptible to operational, information security and
related “cyber” risks both directly and through their
service providers. Similar types of cyber security risks are also
present for issuers of securities in which the Fund invests, which
could result in material adverse consequences for such issuers and
may cause the Fund’s investment in such portfolio companies
to lose value. Unlike many other types of risks faced by the Fund,
these risks typically are not covered by insurance. In general,
cyber incidents can result from deliberate attacks or unintentional
events. Cyber incidents include, but are not limited to, gaining
unauthorized access to digital systems (e.g., through “hacking” or malicious
software coding) for purposes of misappropriating assets or
sensitive information, corrupting data, or causing operational
disruption. Cyber attacks may also be carried out in a manner that
does not require gaining unauthorized access, such as causing
denial-of-service attacks on websites (i.e., efforts to make network services unavailable to
intended users). Cyber security failures by or breaches of the
systems of the Fund’s adviser, distributor and other service
providers (including, but not limited to, index providers, index
calculation agents, fund accountants, custodians, transfer agents
and administrators), market makers, Authorized Participants or the
issuers of securities in which the Fund invests, have the ability
to cause disruptions and impact business operations, potentially
resulting in: financial losses, interference with the Fund’s
ability to calculate its NAV, disclosure of confidential trading
information, impediments to trading, submission of erroneous trades
or erroneous creation or redemption orders, the inability of the
Fund or its service providers to transact business, violations of
applicable privacy and other laws, regulatory fines, penalties,
reputational damage, reimbursement or other compensation costs, or
additional compliance costs. In addition, cyber attacks may render
records of Fund assets and transactions, shareholder ownership of
Fund shares, and other data integral to the functioning of the Fund
inaccessible or inaccurate or incomplete. Substantial costs may be
incurred by the Fund in order to resolve or prevent cyber incidents
in the future. While the Fund has established business continuity
plans in the event of, and risk management systems to prevent, such
cyber attacks, there are inherent limitations in such plans and
systems, including the possibility that certain risks have not been
identified and that prevention and remediation efforts will not be
successful. Furthermore, the Fund cannot control the cyber security
plans and systems put in place by service providers to the Fund,
issuers in which the Fund invests, the index provider, index
calculation agent, market makers or Authorized Participants. The
Fund and its shareholders could be negatively impacted as a
result.
Equity Securities Risk. The
Fund invests in equity securities, which are subject to changes in
value that may be attributable to market perception of a particular
issuer or to general stock market fluctuations that affect all
issuers. Investments in equity securities may be more volatile than
investments in other asset classes. The Underlying Index is
comprised of common stocks, which generally subject their holders
to more risks than holders of preferred stock and debt securities
because common stockholders’ claims are subordinated to
holders of preferred stock and debt securities upon the bankruptcy
of the issuer.
Issuer Risk. The performance of
the Fund depends on the performance of individual securities to
which the Fund has exposure. Any issuer of these securities may
perform poorly, causing the value of its securities to decline.
Poor performance may be caused by poor management decisions,
competitive pressures, changes in technology, expiration of patent
protection, disruptions in supply, labor problems or shortages,
corporate restructurings, fraudulent disclosures, credit
deterioration of the issuer or other factors. Issuers may, in times
of distress or at their own discretion, decide to reduce or
eliminate dividends, which may also cause their stock prices to
decline.
Liquidity Risk. The
Fund’s investments are subject to liquidity risk, which
exists when an investment is or becomes difficult to purchase or
sell at a reasonable price. If a transaction is particularly large
or if the relevant market is or becomes illiquid, it may reduce the
returns of the Fund because it may be unable to sell the illiquid
securities at an advantageous time or price, which may cause the
Fund to suffer significant losses and difficulties in meeting
redemptions. This is especially true given the limited number of
market participants in certain markets in which the Fund may
invest. Market developments may cause the Fund’s investments
to become less liquid and subject to erratic price movements, and
may also cause the Fund to encounter difficulties in timely
honoring redemptions, especially if market events cause an
increased incidence of shareholder redemptions. If a number of
securities held by the Fund halt trading or become illiquid, such
as due to an exchange’s limit up, limit down rules, it may
have a cascading effect and cause the Fund to halt trading.
Volatility in market prices will increase the risk of the Fund
being subject to a trading halt.
Operational Risk. The Fund is
exposed to operational risks arising from a number of factors,
including, but not limited to, human error, processing and
communication errors, errors of the Fund’s service providers,
counterparties or other third-parties, failed or inadequate
processes and technology or systems failures. The Fund and its
service providers seek to reduce these operational risks through
controls and procedures. However, these measures do not address
every possible risk and may be inadequate to address these
risks.
New Adviser Risk. The Adviser
is a newly organized investment adviser and has no operating
history. As a result, prospective investors have no track record or
history on which to base their investment
decisions.
Passive Investment Risk. The
Fund is not actively managed and may be affected by a general
decline in market segments related to the Underlying Index. The
Fund invests in securities included in, or representative of, the
Underlying Index, regardless of their investment merits. The Fund
generally does not attempt to take defensive positions under any
market conditions, including declining markets.
Premium/Discount Risk. Disruptions to creations and redemptions, the
existence of extreme market volatility or potential lack of an
active trading market for Shares may result in Shares trading at a
significant premium or discount to NAV. If a shareholder purchases
Shares at a time when the market price is at a premium to the NAV
or sells Shares at a time when the market price is at a discount to
the NAV, the shareholder may sustain losses.
Valuation Risk. The sale price
the Fund could receive for a security or other asset may differ
from the Fund’s valuation of the security or other asset and
from the value used by the Underlying Index, particularly for
securities or other assets that trade in low volume or volatile
markets, or that are valued using a fair value methodology.
Authorized Participants who purchase or redeem fund shares on days
when the Fund is holding fair-valued securities may receive fewer
or more shares or lower or higher redemption proceeds than they
would have received if the Fund has not fair-valued securities or
had used a different valuation methodology. The Fund’s
ability to value investments may be impacted by technological
issues and/or errors by pricing services or other third party
service providers.
Derivatives Risk. A derivative
is a financial contract, the value of which depends on, or is
derived from, the value of an underlying asset such as a security
or an index. The Fund may invest in certain types of derivatives
contracts, including futures, options, and swaps. Derivatives are
subject to a number of risks based on the structure of the
underlying instrument and the counterparty to the derivatives
transaction. These risks include leveraging risk, liquidity risk,
interest rate risk, market risk, credit/default risk, counterparty
risk, and management risk.
Forward and Futures Contract Risk. The primary risks associated with the use of
forward and futures contracts are (a) the imperfect correlation
between the change in market value of the instruments held by the
Fund and the price of the forward or futures contract; (b) the
possible lack of a liquid secondary market for a forward or futures
contract and the resulting inability to close a forward or futures
contract when desired; (c) the possibility that the counterparty
will default in the performance of its obligations; and (d) the
possibility that, if the Fund has insufficient cash, the Fund may
have to sell securities from its portfolio to meet daily variation
margin requirements, and the Fund may have to sell securities at a
time when it may be disadvantageous to do so.
Investment Risk. An
investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any
other government agency. When you sell your Shares, they could be
worth less than what you paid for them.
Large-Capitalization Companies Risk. Large-capitalization companies may be less able
than smaller capitalization companies to adapt to changing market
conditions. Large-capitalization companies may be more mature and
subject to more limited growth potential compared with smaller
capitalization companies. During different market cycles, the
performance of large-capitalization companies has trailed the
overall performance of the broader securities
markets.
Risk of Investing in the United States. The Fund has significant exposure to U.S.
issuers. A decrease in imports or exports, changes in trade
regulations and/or an economic recession in the United States may
have a material adverse effect on the U.S. economy and the
securities listed on U.S. exchanges. Proposed and adopted policy
and legislative changes in the United States are changing many
aspects of financial and other regulation and may have a
significant effect on the U.S. markets generally, as well as the
value of certain securities. In addition, a continued rise in the
U.S. public debt level or U.S. austerity measures may adversely
affect U.S. economic growth and the securities to which the Fund
has exposure.
Authorized Participant Concentration Risk. Only an Authorized Participant may engage in
creation or redemption transactions directly with the Fund. The
Fund has a limited number of institutions that may act as
Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the
extent that Authorized Participants exit the business or are unable
to proceed with creation and/or redemption orders with respect to
the Fund and no other Authorized Participant is able to step
forward to create or redeem Creation Units, Fund shares may be more
likely to trade at a premium or discount to NAV and possibly face
trading halts and/or delisting. Authorized Participant
concentration risk may be heightened because ETFs, such as the
Fund, that invest in non-U.S. securities or other securities or
instruments that are less widely traded often involve greater
settlement and operational issues and capital costs for Authorized
Participants, which may limit the availability of Authorized
Participants.
Market Risk. The Fund could
lose money over short periods due to short-term market movements
and over longer periods during more prolonged market downturns.
Securities or other assets may decline in value due to factors
affecting financial markets generally or particular asset classes
or industries represented in the markets. The value of a security
or other asset may also decline due to general market conditions,
economic trends or events that are not specifically related to the
issuer of the security or other asset, or due to factors that
affect a particular issuer or issuers, country, group of countries,
region, market, industry, group of industries, sector or asset
class. During a general market downturn, multiple asset classes may
be negatively affected. Changes in market conditions and interest
rates will not have the same impact on all types of
securities.
Market Trading Risk
Absence of Active Market.
Although shares of the Fund are listed for trading on one or more
stock exchanges, there can be no assurance that an active trading
market for such shares will develop or be maintained by market
makers or Authorized Participants.
Risk of Secondary Listings. The Fund’s shares may be listed or traded on
U.S. and non-U.S. stock exchanges other than the U.S. stock
exchange where the Fund’s primary listing is maintained and
may otherwise be made available to non-U.S. investors through funds
or structured investment vehicles similar to depositary receipts.
There can be no assurance that the Fund’s shares will
continue to trade on any such stock exchange or in any market or
that the Fund’s shares will continue to meet the requirements
for listing or trading on any exchange or in any market. The
Fund’s shares may be less actively traded in certain markets
than in others, and investors are subject to the execution and
settlement risks and market standards of the market where they or
their broker direct their trades for execution. Certain information
available to investors who trade Fund shares on a U.S. stock
exchange during regular U.S. market hours may not be available to
investors who trade in other markets, which may result in secondary
market prices in such markets being less
efficient.
Secondary Market Trading Risk.
Shares of the Fund may trade in the secondary market at times when
the Fund does not accept orders to purchase or redeem shares. At
such times, shares may trade in the secondary market with more
significant premiums or discounts than might be experienced at
times when the Fund accepts purchase and redemption
orders.
Secondary market trading in Fund shares may be halted by a stock
exchange because of market conditions or for other reasons. In
addition, trading in Fund shares on a stock exchange or in any
market may be subject to trading halts caused by extraordinary
market volatility pursuant to “circuit breaker” rules
on the stock exchange or market.
Shares of the Fund, similar to shares of other issuers listed on a
stock exchange, may be sold short and are therefore subject to the
risk of increased volatility and price decreases associated with
being sold short.
Shares of the Fund May Trade at Prices Other Than
NAV. Shares of the Fund trade
on stock exchanges at prices at, above or below the Fund’s
most recent NAV. The NAV of the Fund is calculated at the end of
each business day and fluctuates with changes in the market value
of the Fund’s holdings. The trading price of the Fund’s
shares fluctuates continuously throughout trading hours based on
both market supply of and demand for Fund shares and the underlying
value of the Fund’s portfolio holdings or NAV. As a result,
the trading prices of the Fund’s shares may deviate
significantly from NAV during periods of market volatility. ANY OF
THESE FACTORS, AMONG OTHERS, MAY LEAD TO THE FUND'S SHARES TRADING
AT A PREMIUM OR DISCOUNT TO NAV. However, because shares can be
created and redeemed in Creation Units at NAV, the Fund believes
that large discounts or premiums to the NAV of the Fund are not
likely to be sustained over the long term (unlike shares of many
closed-end funds, which frequently trade at appreciable discounts
from, and sometimes at premiums to, their NAVs). While the
creation/redemption feature is designed to make it more likely that
the Fund’s shares normally will trade on stock exchanges at
prices close to the Fund’s next calculated NAV, exchange
prices are not expected to correlate exactly with the Fund’s
NAV due to timing reasons, supply and demand imbalances and other
factors. In addition, disruptions to creations and redemptions,
including disruptions at market makers, Authorized Participants, or
other market participants, and during periods of significant market
volatility, may result in trading prices for shares of the Fund
that differ significantly from its NAV. Authorized Participants may
be less willing to create or redeem Fund shares if there is a lack
of an active market for such shares or its underlying investments,
which may contribute to the Fund’s shares trading at a
premium or discount to NAV.
Costs of Buying or Selling Fund Shares. Buying or selling Fund shares on an exchange
involves two types of costs that apply to all securities
transactions. When buying or selling shares of the Fund through a
broker, you will likely incur a brokerage commission and other
charges. In addition, you may incur the cost of the
“spread”; that is, the difference between what
investors are willing to pay for Fund shares (the “bid”
price) and the price at which they are willing to sell Fund shares
(the “ask” price). The spread, which varies over time
for shares of the Fund based on trading volume and market
liquidity, is generally narrower if the Fund has more trading
volume and market liquidity and wider if the Fund has less trading
volume and market liquidity. In addition, increased market
volatility may cause wider spreads. There may also be regulatory
and other charges that are incurred as a result of trading
activity. Because of the costs inherent in buying or selling Fund
shares, frequent trading may detract significantly from investment
results and an investment in Fund shares may not be advisable for
investors who anticipate regularly making small investments through
a brokerage account.
Shares are Not Individually Redeemable. Shares are only
redeemable by the Fund at NAV if they are tendered in large blocks
known as “Creation Units,” which are expected to be
worth in excess of $.5 million each. Only Authorized Participants
may engage in such creation and redemption transactions directly
with the Fund. Individual Shares may be sold on a stock exchange at
their current market prices, which may be less, more, or equal to
their NAV.
DISCUSSION OF ADDITIONAL RISKS
The Fund may also be subject to certain other risks associated with
its investments and investment strategies.
Calculation Methodology Risk. The Underlying Index’s index
methodology relies on various sources of information to assess the
criteria of issuers included in the Underlying Index, including
information that may be based on assumptions and estimates. No
assurance can be provided that the calculation methodology or
sources of information will provide an accurate assessment of
included issuers.
Costs of Buying or Selling Shares. Investors buying or selling the Shares in the
Secondary Market will pay brokerage commissions or other charges
imposed by brokers as determined by that broker. Brokerage
commissions are often a fixed amount and may be a significant
proportional cost for investors seeking to buy or sell relatively
small amounts of Shares. In addition, secondary market investors
will also incur the cost of the difference between the price that
an investor is willing to pay for Shares (the “bid”
price) and the price at which an investor is willing to sell Shares
(the “ask” price). This difference in bid and ask
prices is often referred to as the “spread” or
“bid/ask spread”. The bid/ask spread varies over time
for Shares based on trading volume and market liquidity. In
addition, increased market volatility may cause increased bid/ask
spreads.
Counterparty Risk. Many of the
protections afforded to participants on some organized exchanges,
such as the performance guarantee of an exchange clearing house,
are not available in connection with OTC derivatives transactions.
In those instances, the Fund will be subject to the risk that its
direct counterparty will not perform its obligations under the
transactions and that the Fund will sustain
losses.
Leverage Risk. Leverage,
including borrowing, may cause the Fund to be more volatile by
magnifying the Fund’s gains or losses than if the Fund had
not been leveraged. The use of leverage may cause the Fund to
liquidate portfolio positions when it may not be advantageous to do
so to satisfy its obligations or to meet segregation
requirements.
Securities Lending Risk. The
Fund may engage in securities lending. Securities lending involves
the risk that the Fund may lose money because the borrower of the
loaned securities fails to return the securities in a timely manner
or at all. The Fund could also lose money in the event of a decline
in the value of collateral provided for loaned securities or a
decline in the value of any investments made with cash collateral.
These events could also trigger adverse tax consequences for the
Fund.
Tax Risk. The tax treatment of
derivatives is unclear for purposes of determining the Fund’s
tax status. In addition, the Fund’s transactions in
derivatives may result in the Fund realizing more short-term
capital gains and ordinary income that are subject to higher
ordinary income tax rates than if the Fund did not engage in such
transactions.
Trading Issues. Trading in
Shares on the Nasdaq may be halted due to market conditions or for
reasons that, in the view of the Nasdaq, make trading in Shares
inadvisable. In addition, trading in Shares on the Nasdaq is
subject to trading halts caused by extraordinary market volatility
pursuant to the Nasdaq “circuit breaker” rules. There
can be no assurance that the requirements of the Nasdaq necessary
to maintain the listing of the Fund will continue to be met or will
remain unchanged.
Please refer to the SAI for a more complete discussion of the risks
of investing in the Fund.
The method by which Creation Units are purchased and traded may
raise certain issues under applicable securities laws. Because new
Creation Units are issued and sold by the Fund on an ongoing basis,
at any point a “distribution,” as such term is used in
the Securities Act of 1934 (the “Securities Act”), may
occur. Broker-dealers and other persons are cautioned that some
activities on their part may, depending on the circumstances,
result in their being deemed participants in a distribution in a
manner which could render them statutory underwriters and subject
them to the prospectus delivery and liability provisions of the
Securities Act. For example, a broker-dealer firm or its client may
be deemed a statutory underwriter if it takes Creation Units after
placing an order with the Distributor (defined below), breaks them
down into individual Shares, and sells such Shares directly to
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 Shares. A determination of whether one
is an underwriter for purposes of the Securities Act must take into
account all the facts and circumstances pertaining to the
activities of the broker-dealer or its client in the particular
case, and the examples mentioned above should not be considered a
complete description of all the activities that could lead to
categorization as an underwriter.
Broker-dealer firms should also note that dealers who are not
“underwriters” but are effecting transactions in
Shares, whether or not participating in the distribution of Shares,
are generally required to deliver a prospectus. This is because the
prospectus delivery exemption in Section 4(3) of the Securities Act
is not available with respect to such transactions as a result of
Section 24(d) of the 1940 Act. As a result, broker-dealer firms
should note that dealers who are not underwriters but are
participating in a distribution (as contrasted with ordinary
Secondary Market transactions) and thus dealing with Shares that
are part of an over-allotment within the meaning of Section 4(3)(a)
of the Securities Act would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(3) of the
Securities Act. Firms that incur a prospectus delivery obligation
with respect to Shares of the Fund are reminded that under Rule 153
of the Securities Act, a prospectus delivery obligation under
Section 5(b)(2) of the Securities Act owed to an exchange member in
connection with a sale on the Nasdaq is satisfied by the fact that
such Fund’s prospectus is available at the Nasdaq upon
request. The prospectus delivery mechanism provided in Rule 153 is
only available with respect to transactions on an
exchange.
CREATION AND REDEMPTION OF CREATION UNITS
The Fund issues and redeems Shares only in bundles of a specified
number of Shares. These bundles are known as “Creation
Units”. For the Fund, a Creation Unit is comprised of 25,000
Shares. The number of Shares in a Creation Unit may change in the
event of a share split, reverse split, or similar revaluation. The
Fund may not issue fractional Creation Units. To purchase or redeem
a Creation Unit, you must be an Authorized Participant or you must
do so through a broker, dealer, bank, or other entity that is an
Authorized Participant. An Authorized Participant is either (1) a
“Participating Party”, i.e., a broker-dealer or other participant in the
clearing process of the Continuous Net Settlement System of the
NSCC (“Clearing
Process”), or (2) a
participant of DTC (a “DTC
Participant”), and, in
each case, must have executed an agreement with the Distributor,
and accepted by the Transfer Agent, with respect to creations and
redemptions of Creation Units (each a “Participation
Agreement”). Because
Creation Units are likely to cost over one million dollars each, it
is expected that only large institutional investors will purchase
and redeem Shares directly from the Fund in the form of Creation
Units. In turn, it is expected that institutional investors who
purchase Creation Units will break up their Creation Units and
offer and sell individual Shares in the Secondary Market. Although
it is anticipated that most creation and redemption transactions
for the Fund will be made on an “in-kind” basis, from
time to time they may be made partially or wholly in
cash. In determining whether the Fund will sell or
redeem Creation Units entirely on a cash or in-kind basis (whether
for a given day or a given order) the key consideration will be the
benefit that would accrue to the Fund and its investors. Under
certain circumstances, tax considerations may warrant in-kind,
rather than cash, redemptions.
Retail
investors may acquire Shares in the Secondary Market (not from the
Fund) through a broker or dealer. Shares are listed on the Nasdaq
and are publicly-traded. For information about acquiring Shares in
the Secondary Market, please contact your broker or dealer. If you
want to sell Shares in the Secondary Market, you must do so through
your broker or dealer.
When
you buy or sell Shares in the Secondary Market, your broker or
dealer may charge you a commission, market premium or discount, or
other transaction charge, and you may pay some or all of the spread
between the bid and the offered price for each purchase or sale
transaction. Unless imposed by your broker or dealer, there is no
minimum dollar amount you must invest and no minimum number of
Shares you must buy in the Secondary Market. In addition, because
transactions in the Secondary Market occur at market prices, you
may pay more than NAV when you buy Shares and receive less than NAV
when you sell those Shares.
The
creation and redemption processes discussed above are summarized,
and such summary only applies to Shareholders who purchase or
redeem Creation Units (that is, they do not relate to Shareholders
who purchase or sell Shares in the Secondary Market). Authorized
Participants should refer to their Participant Agreements for the
precise instructions that must be followed in order to create or
redeem Creation Units.
BUYING AND SELLING SHARES IN THE SECONDARY MARKET
Most
investors will buy and sell Shares of the Fund in Secondary Market
transactions through brokers. Shares of the Fund will be listed for
trading on the Secondary Market on the Nasdaq. Shares can be bought
and sold throughout the trading day like other publicly-traded
shares. There is no minimum investment. Although Shares are
generally purchased and sold in “round lots” of 100
Shares, brokerage firms typically permit investors to purchase or
sell Shares in smaller “odd lots”. When buying or
selling Shares through a broker, you will incur customary brokerage
commissions and charges, and you may pay some or all of the spread
between the bid and the offered price in the Secondary Market on
each leg of a round trip (purchase and sale)
transaction.
Share
prices are reported in dollars and cents per Share. For information
about buying and selling Shares in the Secondary Market, please
contact your broker or dealer.
Book Entry
Shares
of the Fund are held in book-entry form and no stock certificates
are issued. The Depository Trust Company (“DTC”), through its nominee Cede
& Co., is the record owner of all outstanding
Shares.
Investors
owning Shares are beneficial owners as shown on the records of DTC
or its participants. DTC serves as the securities depository for
all Shares. Participants in DTC include securities brokers and
dealers, banks, trust companies, clearing corporations, and other
institutions that directly or indirectly maintain a custodial
relationship with DTC. As a beneficial owner of Shares, you are not
entitled to receive physical delivery of stock certificates or to
have Shares registered in your name, and you are not considered a
registered owner of Shares. Therefore, to exercise any right as an
owner of Shares, you must rely upon the procedures of DTC and its
participants.
These
procedures are the same as those that apply to any securities that
you hold in book-entry or “street name” form for any
publicly-traded company. Specifically, in the case of a Shareholder
meeting of the Fund, DTC assigns applicable Cede & Co. voting
rights to its participants that have Shares credited to their
accounts on the record date, issues an omnibus proxy, and forwards
the omnibus proxy to the Fund. The omnibus proxy transfers the
voting authority from Cede & Co. to the DTC participant. This
gives the DTC participant through whom you own Shares (namely, your
broker, dealer, bank, trust company, or other nominee) authority to
vote the Shares, and, in turn, the DTC participant is obligated to
follow the voting instructions you provide.
Adviser. ProcureAM, LLC (“Adviser”) is the
Fund’s investment adviser. The Adviser is registered as
an investment adviser with the SEC. The Adviser’s principal
office is located at 16 Firebush Road, Levittown, PA
19056.
The
Adviser has overall responsibility for the general management and
administration of the Trust. The Adviser provides an investment
program for the Fund. The Adviser has arranged for custody, fund
administration, transfer agency and all other non-distribution
related services necessary for the Fund to operate.
As
compensation for its services and its assumption of certain
expenses, the Fund pays the Adviser a management fee equal to an
annual rate of 0.75% of the Fund’s average daily net assets
that is calculated daily and paid monthly.
The
Adviser serves as adviser to the Fund pursuant to an Investment
Advisory Agreement (the “Advisory Agreement”). As of
the date of this Prospectus, the Adviser has only one other account
under management. Penserra Capital Management LLC, the Fund’s
subadviser (“Subadviser” or “Penserra”),
serves as subadviser to the Fund pursuant to an Investment
Sub-Advisory Agreement (the "Sub-Advisory Agreement"). The Adviser
has ultimate responsibility, subject to oversight by the
Fund’s Board of Trustees, for overseeing the Subadviser and
recommending their hiring, termination and replacement. The Adviser
reserves the right to directly manage the Fund in the future
without obtaining shareholder approval so long as the Fund’s
management fee does not increase. The basis for the Fund’s
Board of Trustees’ approval of the Advisory Agreement and
Sub-Advisory Agreement will be available in the Trust’s
semi-annual report for the fiscal period ended April 30,
2020.
Under
the Advisory Agreement, the Adviser agrees to pay all expenses of
the Trust, except brokerage and other transaction expenses
including taxes; acquired fund fees and expenses; extraordinary
legal fees or expenses, such as those for litigation or
arbitration; other extraordinary expenses; distribution fees and
expenses paid by the Trust under any distribution plan adopted
pursuant to Rule 12b-1 under the 1940 Act; and the advisory fee
payable to the Adviser hereunder.
The
Adviser and its affiliates deal, trade and invest for their own
accounts in the types of securities in which the Fund also may
invest. The Adviser does not use inside information in making
investment decisions on behalf of the Fund.
Subadviser. Pursuant to the Sub-Advisory Agreement,
the Subadviser, a New York limited liability company with its
principal office located at 4 Orinda Way, 100-A, Orinda, California
94563 is responsible for the day-to-day management of the Fund. The
Subadviser provides investment advisory services to other
exchange-traded funds. The Subadviser is responsible for, among
other things, trading portfolio securities on behalf of the Fund,
including selecting broker-dealers to execute purchase and sale
transactions as instructed by the Adviser or in connection with any
rebalancing or reconstitution of the Underlying Index, subject to
the supervision of the Adviser and the Board. Under the
Sub-Advisory Agreement, the Adviser pays the Sub-Adviser a fee for
its services. As of September 20, 2019, the Subadviser managed
approximately $1.6 billion in assets.
The
Subadviser has been registered as an investment adviser since
2014.
The
Subadviser is responsible for managing the investment portfolio of
the Fund and will direct the purchase and sale of the Fund’s
investment securities. The Subadviser utilizes a team of investment
professionals acting together to manage the assets of the Fund. The
team meets regularly to review portfolio holdings and to discuss
purchase and sale activity. The team adjusts holdings in the
portfolio as they deem appropriate in the pursuit of the
Fund’s investment objective.
Portfolio Managers. The Fund’s day-to-day
activities will be managed by a team of portfolio managers at the
Subadviser.
Dustin
Lewellyn, Ernesto Tong, and Anand Desai are the Fund’s
portfolio managers and are jointly responsible for the day-to-day
management of the Fund. The portfolio managers are responsible for
various functions related to portfolio management, including, but
not limited to, investing cash inflows, implementing investment
strategy, researching and reviewing investment strategy, and
overseeing members of their portfolio management team with more
limited responsibilities.
Mr.
Lewellyn has been Chief Investment Officer with Penserra since
2012. He was President and Founder of Golden Gate Investment
Consulting LLC from 2011 through 2015. Prior to that, Mr. Lewellyn
was a managing director at Charles Schwab Investment Management,
Inc. (“CSIM”), which he joined in 2009, and head of
portfolio management for Schwab ETFs. Prior to joining CSIM, he
worked for two years as director of ETF product management and
development at a major financial institution focused on asset and
wealth management. Prior to that, he was a portfolio manager for
institutional clients at a financial services firm for three years.
In addition, he held roles in portfolio operations and portfolio
management at a large asset management firm for more than 6
years.
Mr.
Tong has been a Managing Director with Penserra since 2015. Prior
to that, Mr. Tong spent seven years as vice president at BlackRock,
where he was a portfolio manager for a number of the iShares ETFs,
and prior to that, he spent two years in the firm’s index
research group.
Mr.
Desai has been a Vice President with Penserra since 2015. Prior to
that, Mr. Desai was a portfolio fund accountant at State Street for
five years.
For
more information about the portfolio managers’ compensation,
other accounts managed by the portfolio managers and the portfolio
managers’ ownership of securities in the Fund, see the
SAI.
Loyalty
Preference Index, Inc. (“Index Provider”), located at
2435 Dixie Hwy, Wilton Manors, FL 33305 is the provider of the
Underlying Index.
THE
INDEX PROVIDER DOES NOT GUARANTEE THE ACCURACY AND/OR THE
COMPLETENESS OF THE UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN
AND HAS NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS
THEREIN. THE INDEX PROVIDER MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY THE UNDERLYING INDEX, OWNERS OF THE
FUND OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE UNDERLYING
INDEX OR ANY DATA INCLUDED THEREIN. THE INDEX PROVIDER 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 UNDERLYING INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
THE INDEX PROVIDER HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN
IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
U.S.
Bank, N.A. (“USBNA”), located at 615 East Michigan
Street. Milwaukee, WI 53202, serves as the Fund’s Custodian,
and U.S. Bancorp Fund Services (“USBFS”) serves as the
Fund’s Administrator, Fund Accountant, and Transfer Agent.
USBFS is an operating subsidiary of USBNA.
Quasar
Distributors LLC (“Quasar” or
“Distributor”), a wholly owned subsidiary of U.S.
Bancorp, serves as the Distributor of Creation Units for the Fund
on an agency basis. The Distributor does not maintain a Secondary
Market in Shares. ProcureAM, LLC has entered into a Distribution
Agreement with Quasar to distribute the Fund.
Cipperman
Compliance Services, LLC (“Cipperman”) will manage the
compliance programs of the Trust and the Fund. Stacey Gillespie of
Cipperman will act as Chief Compliance Officer (the
“CCO”) of the Trust and the Fund and perform the
functions of the chief compliance officer as described in Rule
38a-1 under the Investment Company Act of 1940. The CCO shall have
primary responsibility for administering the Trust’s
compliance policies and procedures adopted pursuant to Rule 38a-1
(the “Compliance Program”) and reviewing the Compliance
Program, in the manner specified in Rule 38a-1, at least annually,
or as may be required by Rule 38a-1, as may be amended from time to
time. The CCO reports directly to the Board of Trustees regarding
the Compliance Program.
Cohen
& Company Ltd., located at 1350 Euclid Ave., Suite 800,
Cleveland, Ohio 44115, serves as the independent registered public
accounting firm for the Trust.
K&L
Gates LLP, 599 Lexington Avenue, New York, New York 10022, serves
as counsel to the Trust and the Fund.
The
Trust’s Board of Trustees has not adopted policies and
procedures with respect to frequent purchases and redemptions of
Shares by shareholders (“market timing”). In
determining not to adopt market timing policies and procedures, the
Board noted that the Fund is expected to be attractive to active
institutional and retail investors interested in buying and selling
Shares on a short-term basis. In addition, the Board considered
that, unlike traditional mutual funds, the Shares can only be
purchased and redeemed directly from the Fund in Creation Units by
Authorized Participants, and that the vast majority of trading in
the Shares occurs on the secondary market. Because secondary market
trades do not involve the Fund directly, it is unlikely those
trades would cause many of the harmful effects of market timing,
including dilution, disruption of portfolio management, increases
in the Fund’s trading costs and the realization of capital
gains. With respect to trades directly with the Fund, to the extent
effected in-kind (namely, for securities), those trades do not
cause any of the harmful effects that may result from frequent cash
trades. To the extent trades are effected in whole or in part in
cash, the Board noted that those trades could result in dilution to
the Fund and increased transaction costs (the Fund may impose
higher transaction fees to offset these increased costs), which
could negatively impact the Fund’s ability to achieve its
investment objective. However, the Board noted that direct trading
on a short-term basis by Authorized Participants is critical to
ensuring that the Fund’s Shares trade at or close to NAV.
Given this structure, the Board determined that it is not necessary
to adopt market timing policies and procedures. The Fund reserves
the right to reject any purchase order at any time and reserves the
right to impose restrictions on disruptive or excessive trading in
Creation Units.
The
Board of Trustees has instructed the officers of the Trust to
review reports of purchases and redemptions of Creation Units on a
regular basis to determine if there is any unusual trading in the
Fund. The officers of the Trust will report to the Board any such
unusual trading in Creation Units that is disruptive to the Fund.
In such event, the Board may reconsider its decision not to adopt
market timing policies and procedures.
DISTRIBUTION AND SERVICE PLAN
The Board of Trustees of the Trust has adopted a Distribution and
Service Plan pursuant to Rule 12b-1 under the 1940 Act. In
accordance with its Rule 12b-1 plan, the Fund is authorized to pay
an amount up to 0.25% of its average daily net assets each year to
finance activities primarily intended to result in the sale of
Creation Units of the Fund or the provision of investor services.
No Rule 12b-1 fees are currently paid by the Fund and there are no
plans to impose these fees. However, in the event Rule 12b-1 fees
are charged in the future, they will be paid out of the
Fund’s assets, and over time these fees will increase the
cost of your investment and they may cost you more than certain
other types of sales charges.
The Adviser and its affiliates may, out of their own resources, pay
amounts (“Payments”) to third parties for distribution
or marketing services on behalf of the Fund. The making of these
payments could create a conflict of interest for a financial
intermediary receiving such payments. The Adviser may make Payments
for such third parties to organize or participate in activities
that are designed to make registered representatives, other
professionals and individual investors more knowledgeable about
ETFs, including ETFs advised by the Adviser, or for other
activities, such as participation in marketing activities and
presentations, educational training programs, conferences, the
development of technology platforms and reporting systems
(“Education Costs”). The Adviser also may make Payments
to third parties to help defray costs typically covered by a
trading commission, such as certain printing, publishing and
mailing costs or materials relating to the marketing of services
related to exchange-traded products (such as commission-free
trading platforms) or exchange-traded products in general
(“Administrative Costs”).
DETERMINATION OF NET ASSET VALUE (NAV)
The NAV of the Shares is equal to the Fund’s total assets
minus the Fund’s total liabilities divided by the total
number of Shares outstanding. Interest and investment income on the
Trust’s assets accrue daily and are included in the
Fund’s total assets. Expenses and fees (including investment
advisory, management, administration and distribution fees, if any)
accrue daily and are included in the Fund’s total
liabilities. The NAV that is published is rounded to the nearest
cent; however, for purposes of determining the price of Creation
Units, the NAV is calculated to five decimal places. The NAV is
calculated by the Administrator and Custodian and determined each
Business Day as of the close of regular trading on the New York
Stock Exchange (“NYSE”) (ordinarily 4:00 p.m. New York
time). “Business Day” means any day that Nasdaq
is open for trading. Nasdaq is scheduled to be open for
trading Monday through Friday except for the following holidays:
New Year’s Day, Martin Luther King, Jr. Day,
Presidents’ Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
In calculating NAV, the Fund’s investments are valued using
market quotations when available. Equity securities are generally
valued at the closing price of the security on the security’s
primary exchange. With respect to any portion of the Fund’s
assets invested in one or more underlying mutual funds, the
Fund’s NAV is calculated based upon the NAVs of those
underlying mutual funds.
When market quotations are not readily available or are deemed
unreliable or not representative of an investment’s fair
value, investments are valued using fair value pricing as
determined in good faith by the Adviser under procedures
established by and under the general supervision and responsibility
of the Trust’s Board of Trustees. Investments that may be
valued using fair value pricing include, but are not limited to:
(1) securities that are not actively traded, including
“restricted” securities and securities received in
private placements for which there is no public market; (2)
securities of an issuer that becomes bankrupt or enters into a
restructuring; and (3) securities whose trading has been halted or
suspended.
The frequency with which the Fund’s investments are valued
using fair value pricing is primarily a function of the types of
securities and other assets in which the Fund invests pursuant to
its investment objective, strategies and limitations. If the Fund
invests in other open-end management investment companies
registered under the 1940 Act, it may rely on the net asset values
of those companies to value the shares they hold of them. Those
companies may also use fair value pricing under some
circumstances.
Valuing the Fund’s investments using fair value pricing
results in using prices for those investments that may differ from
current market valuations. Accordingly, fair value pricing could
result in a difference between the prices used to calculate NAV and
the prices used to determine the Fund’s Indicative Intra-Day
Value (“IIV”), which could result in the market prices
for Shares deviating from NAV.
PREMIUM/DISCOUNT INFORMATION
As of
the date of this Prospectus, the Fund has not commenced operations
and therefore has not accumulated information to report regarding
the extent and frequency with which market prices of Shares have
tracked the Fund’s NAV. Information regarding the extent and
frequency with which market prices of Shares have tracked the
Fund’s NAV for the most recently completed calendar year and
the quarters since that year will be available without charge on
the Fund’s website at www.PALETFs.com.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
Net Investment Income and Capital Gains
As a
Shareholder, you are entitled to your share of the Fund’s
distributions of net investment income and net realized capital
gains on its investments. The Fund pays out substantially all of
its net earnings to its Shareholders as
‘distributions’.
The
Fund typically earns income dividends from stocks. These amounts,
net of expenses, are typically passed along to Shareholders as
dividends from net investment income. The Fund realizes capital
gains or losses whenever it sells securities. Net capital gains are
distributed to Shareholders as “capital gain
distributions”.
Capital
gains of the Fund are normally declared and paid annually.
Dividends from net investment income are normally declared and paid
quarterly. The amount of distributions may vary and there can be no
guarantee that the Fund will pay dividends of investment income in
any given quarter. Dividends also may be declared and paid more
frequently to comply with the distribution requirements of the
Code. In addition, the Fund may determine to distribute at least
annually amounts representing the full dividend yield net of
expenses on securities held by the Fund, as if the Fund owned the
securities for the entire dividend period, in which case some
portion of each distribution may result in a return of capital. You
will be notified regarding the portion of the distribution that
represents a return of capital. A return of capital is not taxable,
but reduces a shareholder’s tax basis in its shares, thus
reducing any loss or increasing any gain on a subsequent taxable
disposition by the shareholder of its shares.
Distributions
in cash may be reinvested automatically in additional Shares of the
Fund only if the broker through which you purchased Shares makes
such option available.
Federal Income Taxes
The
following is a summary of the material U.S. federal income tax
considerations applicable to an investment in Shares of the Fund.
The summary is based on the laws in effect on the date of this
Prospectus and existing judicial and administrative interpretations
thereof, all of which are subject to change, possibly with
retroactive effect. In addition, this summary assumes that a
Shareholder holds Shares as capital assets within the meaning of
the Code and does not hold Shares in connection with a trade or
business. This summary does not address all potential U.S. federal
income tax considerations possibly applicable to an investment in
Shares of the Fund to Shareholders holding Shares through a
partnership (or other pass-through entity) or to Shareholders
subject to special tax rules. Prospective shareholders are urged to
consult their own tax advisors with respect to the specific
federal, state, local, and foreign tax consequences of investing in
Shares based on their particular circumstances.
The
Fund has not requested and will not request an advance ruling from
the Internal Revenue Service (the “IRS”) as to the
federal income tax matters described below. The IRS could adopt
positions contrary to those discussed below and such positions
could be sustained. Prospective investors should consult their own
tax advisors with regard to the federal tax consequences of the
purchase, ownership, or disposition of Shares, as well as the tax
consequences arising under the laws of any state, foreign country,
or other taxing jurisdiction.
Tax Treatment of the Fund
The
Fund intends to qualify and elect to be treated as a
“regulated investment company” under the Code. To
qualify and maintain its tax status as a regulated investment
company, the Fund must annually meet certain income and asset
diversification requirements and must distribute annually at least
the sum of 90% of its “investment company taxable
income” (which includes dividends, interest, and net
short-term capital gains) and 90% of its net exempt interest
income.
As a
regulated investment company, the Fund generally will not have to
pay corporate-level federal income taxes on any ordinary income or
capital gains that it distributes to its Shareholders. If the Fund
fails to qualify as a regulated investment company for any year
(subject to certain curative measures allowed by the Code) the Fund
will be subject to regular corporate-level income tax in that year
on all of its taxable income, regardless of whether the Fund makes
any distributions to its Shareholders. In addition, distributions
will be taxable to Shareholders generally as ordinary dividends to
the extent of the Fund’s current and accumulated earnings and
profits.
The
Fund may be required to recognize taxable income in advance of
receiving the related cash payment. For example, if the Fund
invests in original issue discount obligations (such as zero coupon
debt instruments or debt instruments with payment-in-kind
interest), the Fund will be required to include in income each year
a portion of the original issue discount that accrues over the term
of the obligation, even if the related cash payment is not received
by the Fund until a later year. Under the “wash sale”
rules, the Fund may not be able to deduct a loss on a disposition
of a portfolio security. As a result, the Fund may be required to
make an annual income distribution greater than the total cash
actually received during the year. Such distribution may be made
from the cash assets of the Fund or by selling portfolio
securities. The Fund may realize gains or losses from such sales,
in which event its Shareholders may receive a larger capital gain
distribution than they would in the absence of such
transactions.
The
Fund will be subject to a 4% excise tax on certain undistributed
income if the Fund does not distribute to its Shareholders in each
calendar year at least 98% of its ordinary income for the calendar
year plus 98.2% of its capital gain net income for the twelve
months ended October 31 of such year, as well as 100% of any
previously undistributed income from prior years. The Fund intends
to make distributions necessary to avoid the 4% excise
tax.
Tax Treatment of the Shareholders
Fund Distributions. In general, Fund distributions
are subject to federal income tax when paid, regardless of whether
they consist of cash or property or are re-invested in Shares.
However, any Fund distribution declared in October, November, or
December of any calendar year and payable to Shareholders of record
on a specified date during such month will be deemed to have been
received by each Shareholder on December 31 of such calendar year,
provided such dividend is actually paid during January of the
following calendar year.
Distributions
of the Fund’s net investment income (except, as discussed
below, qualifying dividend income) and net short-term capital gains
are taxable as ordinary income to the extent of the Fund’s
current or accumulated earnings and profits. Distributions of the
Fund’s net long-term capital gains in excess of net
short-term capital losses are taxable as long-term capital gain to
the extent of the Fund’s current or accumulated earnings and
profits, regardless of a Shareholder’s holding period in the
Shares. Distributions of qualifying dividend income are taxable as
long-term capital gain to the extent of the Fund’s current or
accumulated earnings and profits, provided that the Shareholder
meets certain holding period and other requirements with respect to
its Shares and the Fund meets certain holding period and other
requirements with respect to its dividend-paying
stocks.
The
Fund intends to distribute its long-term capital gains at least
annually. However, by providing written notice to its Shareholders
no later than 60 days after its year-end, the Fund may elect to
retain some or all of its long-term capital gains and designate the
retained amount as a “deemed distribution”. In that
event, the Fund pays income tax on the retained long-term capital
gain, and each Shareholder recognizes a proportionate share of the
Fund’s undistributed long-term capital gain. In addition,
each Shareholder can claim a refundable tax credit for the
Shareholder’s proportionate share of the Fund’s income
taxes paid on the undistributed long-term capital gain and increase
the tax basis of the Shares by an amount equal to the
Shareholder’s proportionate share of the Fund’s
undistributed long-term capital gains, reduced by the amount of the
Shareholder’s tax credit.
Long-term
capital gains of non-corporate Shareholders (i.e., individuals, trusts, and estates)
are taxed at a maximum rate of 20%.
In
addition, high-income individuals (and certain other trusts and
estates) are subject to a 3.8% Medicare contribution tax on net
investment income (which generally includes all Fund distributions
and gains from the sale of Shares) in addition to otherwise
applicable federal income tax. Please consult your tax advisor
regarding this tax.
Investors
considering buying Shares just prior to a distribution should be
aware that, although the price of the Shares purchased at such time
may reflect the forthcoming distribution, such distribution
nevertheless may be taxable (as opposed to a non-taxable return of
capital).
Sales of Shares. Any capital gain or loss realized
upon a sale of Shares is treated generally as a long-term gain or
loss if the Shares have been held for more than one year. Any
capital gain or loss realized upon a sale of Shares
held for one year or less is generally treated as a short-term gain
or loss, except that any capital loss on the sale of Shares held
for six months or less is treated as long-term capital loss to the
extent that capital gain dividends were paid with respect to the
Shares.
Creation Unit Issues and Redemptions. On an issue of Shares
of the Fund as part of a Creation Unit where the creation is
conducted in-kind, an Authorized Participant recognizes capital
gain or loss equal to the difference between (1) the fair market
value (at issue) of the issued Shares (plus any cash received by
the Authorized Participant as part of the issue) and (2) the
Authorized Participant’s aggregate basis in the exchanged
securities (plus any cash paid by the Authorized Participant as
part of the issue). On a redemption of Shares as part of a Creation
Unit where the redemption is conducted in-kind, an Authorized
Participant recognizes capital gain or loss equal to the difference
between (1) the fair market value (at redemption) of the securities
received (plus any cash received by the Authorized Participant as
part of the redemption) and (2) the Authorized Participant’s
basis in the redeemed Shares (plus any cash paid by the Authorized
Participant as part of the redemption). However, the IRS may
assert, under the “wash sale” rules or on the basis
that there has been no significant change in the Authorized
Participant’s economic position, that any loss on creation or
redemption of Creation Units cannot be deducted
currently.
In
general, any capital gain or loss recognized upon the issue or
redemption of Shares (as components of a Creation Unit) is treated
either as long-term capital gain or loss if the deposited
securities (in the case of an issue) or the Shares (in the case of
a redemption) have been held for more than one year, or otherwise
as short-term capital gain or loss. However, any capital loss on a
redemption of Shares held for six months or less is treated as
long-term capital loss to the extent that capital gain dividends
were paid with respect to such Shares.
Back-Up Withholding. The Fund may be required to report
certain information on a Shareholder to the IRS and withhold
federal income tax (“backup withholding”) at a 24% rate
from all taxable distributions and redemption proceeds payable to
the Shareholder if the Shareholder fails to provide the Fund with a
correct taxpayer identification number (in the case of a U.S.
individual, a social security number) or a completed exemption
certificate (e.g., an IRS
Form W-8BEN or W-8BEN-E, as applicable, in the case of a foreign
Shareholder) or if the IRS notifies the Fund that the Shareholder
is otherwise subject to backup withholding. Backup withholding is
not an additional tax and any amount withheld may be credited
against a Shareholder’s federal income tax
liability.
Special Issues for Foreign Shareholders. If a Shareholder is not a U.S.
citizen or resident or if a Shareholder is a foreign entity, the
Fund’s ordinary income dividends (including distributions of
amounts that would not be subject to U.S. withholding tax if paid
directly to foreign Shareholders) will be subject, in general, to
withholding tax at a rate of 30% (or at a lower rate established
under an applicable tax treaty). However, interest-related
dividends and short-term capital gain dividends generally will not
be subject to withholding tax; provided that the foreign
Shareholder furnishes the Fund with a completed IRS Form W-8BEN or
W-8BEN-E, as applicable, (or acceptable substitute documentation)
establishing the Shareholder’s status as foreign and the Fund
does not have actual knowledge or reason to know that the foreign
Shareholder would be subject to withholding tax if the foreign
Shareholder were to receive the related amounts directly rather
than as dividends from the Fund. There can be no assurance that
these rules, which have expired, will be extended.
The
Foreign Account Tax Compliance Act (FATCA) subjects foreign
Shareholders to U.S. withholding tax of 30% on all U.S. source
income (including all dividends from the Fund), and, beginning in
2019, on the gross proceeds from the sale of U.S. stocks and
securities (including the sale of Shares), unless they comply with
certain reporting requirements. Complying with such requirements
will require the Shareholder to provide and certify certain
information about itself and (where applicable) its beneficial
owners, and foreign financial institutions generally will be
required to enter in an agreement with the U.S. Internal Revenue
Service or a tax authority in the institution’s own country
to provide certain information regarding such Shareholder’s
account holders. Please consult your tax advisor regarding this
tax.
To
claim a credit or refund for any Fund-level taxes on any
undistributed long-term capital gains (as discussed above) or any
taxes collected through back-up withholding, a foreign Shareholder
must obtain a U.S. taxpayer identification number and file a
federal income tax return even if the foreign Shareholder would not
otherwise be required to obtain a U.S. taxpayer identification
number or file a U.S. income tax return.
For a
more detailed tax discussion regarding an investment in the Fund,
please see the section of the SAI entitled
“Taxation.”
The Trust, the Adviser and Subadviser each have adopted a code of
ethics under Rule 17j-1 of the 1940 Act that is designed to prevent
affiliated persons of the Trust, the Adviser and Subadviser from
engaging in deceptive, manipulative, or fraudulent activities in
connection with securities held or to be acquired by the Fund
(which may also be held by persons subject to a code). There can be
no assurance that the codes will be effective in preventing such
activities. The codes permit personnel subject to them to invest in
securities, including securities that may be held or purchased by
the Fund. The codes are on file with the SEC and are available to
the public.
PORTFOLIO HOLDINGS INFORMATION
A description of the Trust’s policies and procedures with
respect to the disclosure of the Fund’s portfolio securities
is available in the Fund’s Statement of Additional
Information (“SAI”).
It is
the policy of the Fund to mail only one copy of the prospectus,
annual report, semi-annual report and proxy statements to all
shareholders who share the same mailing address and share the same
last name. You are deemed to consent to this policy unless you
specifically revoke this policy and request that separate copies of
such documents be mailed to you. In such case, you will begin to
receive your own copies within 30 days after our receipt of the
revocation. You may request that separate copies of these
disclosure documents be mailed to you by writing to us at: Procure
ETF Trust I, c/o ProcureAM, LLC, 16 Firebush Road, Levittown, PA
19056.
Investors who hold their shares through an intermediary are subject
to the intermediary policies. Contact your financial intermediary
for any questions you may have.
The Fund has not yet commenced operations as of the date of this
Prospectus; therefore, no financial information is available for
the Fund.
Procure ETF Trust I is committed to respecting the privacy of
personal information you entrust to us in the course of doing
business with us.
The Trust may collect non-public personal information from various
sources. The Trust uses such information provided by you or your
representative to process transactions, to respond to inquiries
from you, to deliver reports, products, and services, and to
fulfill legal and regulatory requirements.
We do not disclose any non-public personal information about our
customers to anyone unless permitted by law or approved by the
customer. We may share this information within the Trust’s
family of companies in the course of providing services and
products to best meet your investing needs. We may share
information with certain third parties who are not affiliated with
the Trust to perform marketing services, to process or service a
transaction at your request or as permitted by law. For example,
sharing information with companies that maintain or service
customer accounts for the Trust is essential. We may also share
information with companies that perform administrative or marketing
services for the Trust, including research firms. When we enter
into such a relationship, we restrict the companies’ use of
our customers’ information and prohibit them from sharing it
or using it for any purposes other than those for which they were
hired.
We maintain physical, electronic, and procedural safeguards to
protect your personal information. Within the Trust, we restrict
access to personal information to those employees who require
access to that information in order to provide products or services
to our customers, such as handling inquiries. Our employment
policies restrict the use of customer information and require that
it be held in strict confidence.
We will adhere to the policies and practices described in this
notice for both current and former customers of the
Trust.
In the event that you hold Shares of the Fund through a financial
intermediary, including, but not limited to, a broker-dealer, bank,
or trust company, the privacy policy of your financial intermediary
would govern how your non-public personal information would be
shared by those entities with unaffiliated third
parties.
FOR MORE INFORMATION
If you
would like more information about the Trust, the Fund, and the
Shares, the following documents are available free upon
request:
Statement of Additional Information
The SAI
provides additional details about the investments and techniques of
the Fund and certain other additional information. A current SAI is
on file with the SEC and is incorporated into this Prospectus by
reference. This means that the SAI is legally considered a part of
this Prospectus even though it is not physically within this
Prospectus.
Annual and Semi-Annual Reports
Additional
information about the Fund will be in its annual and semi-annual
reports to shareholders, when available. The annual report will
explain the market conditions and investment strategies affecting
the Fund’s performance during the preceding fiscal
year.
The SAI
and Shareholder Reports, when available, will be available free of
charge on the Fund’s website at www.PALETFs.com.
You can
obtain a free copy of the SAI and Shareholder Reports, when
available, request other information, or make general inquiries
about the Fund by calling the Fund (toll-free) at 1-866-690-3837 or
by writing to:
Procure
ETF Trust I
c/o
ProcureAM, LLC
16
Firebush Road
Levittown,
PA 19056
You may
review and copy information about the Fund, including the SAI and
Shareholder Reports, when available, at the Public Reference Room
of the SEC in Washington, D.C. You can obtain information on the
operation of the Public Reference Room by calling (202) 551-8090.
Reports and other information about the Fund are also
available:
●
Free of charge from
the SEC’s EDGAR database on the SEC’s website at
http://www.sec.gov;
●
For a fee, by
writing to the Public Reference Section of the SEC, Washington,
D.C. 20549-1520; or
●
For a fee, by
electronic request at the following e-mail address:
publicinfo@sec.gov
No
person is authorized to give any information or to make any
representations about the Fund and Shares not contained in this
Prospectus and you should not rely on any other information. This
Prospectus does not constitute an offering by the Fund in any
jurisdiction where such an offering is not lawful. Read and keep
the Prospectus for future reference.
The
Trust may enter into contractual arrangements with various parties,
including among others, the Fund's investment adviser, subadviser,
distributor, custodian, and transfer agent who provide services to
the Fund. Shareholders are not parties to any such contractual
arrangements or intended beneficiaries of those contractual
arrangements, and those contractual arrangements are not intended
to create in any shareholder any right to enforce them against the
service providers or to seek any remedy under them against the
service providers, either directly or on behalf of the
Trust.
This
Prospectus provides information concerning the Fund that you should
consider in determining whether to purchase Shares. Neither this
Prospectus nor the SAI is intended, or should be read, to be or
give rise to an agreement or contract between the Trust or the Fund
and any investor, or to give rise to any rights in any shareholder
or other person other than any rights under federal or state law
that may not be waived.
Dealers
effecting transactions in the Shares, whether or not participating
in this distribution, may be generally required to deliver a
Prospectus. This is in addition to any obligation dealers have to
deliver a Prospectus when acting as underwriters.
The
Fund’s investment company registration number is
811-23320.
Filed pursuant to Rule 497(c)
File Nos. 333-222120 and 811-23320
Procure ETF Trust I
Statement
of Additional Information
LGBTQ + ESG100 ETF
Shares will be listed on Nasdaq, Inc.
*Shares are not currently
available*
Ticker:
LGBT
Dated
January 14, 2020
This
Statement of Additional Information (“SAI”) is not a prospectus. It
should be read in conjunction with the current prospectus dated
January 14, 2020 (“Prospectus”) for the LGBTQ +
ESG100 ETF (the “Fund”), a series of Procure ETF
Trust I (the “Trust”), as revised from time to
time. The Fund’s Prospectus is incorporated by reference into
this SAI.
Capitalized
terms used herein that are not defined have the same meaning as in
the Prospectus, unless otherwise noted. The Financial Statements
and Notes contained in the applicable Annual Report and Semi-Annual
Report of the Trust for the Fund will be incorporated by reference
into and deemed to be part of this SAI. A copy of the Fund’s
Prospectus, Annual Report and Semi-Annual Report may be obtained
without charge by writing to the Trust’s distributor, Quasar
Distributors, LLC (the “Distributor”), at 777 E Wisconsin
Avenue, Milwaukee, WI 53202, calling 1-866-690-3837 or visiting
www.PALETFs.com.
TABLE OF CONTENTS
Page
General Description of the Trust and the Fund
|
1
|
Exchange Listing and Trading
|
1
|
Investment Strategies and Risks
|
2
|
Investment Policies and Limitations
|
19
|
Management
|
21
|
Proxy Voting Policy and Procedures
|
27
|
Control Persons and Principal Holders of Securities
|
27
|
Investment Advisory and Subadvisory Services
|
27
|
Other Service Providers
|
30
|
Brokerage Transactions
|
32
|
Portfolio Holdings Information
|
34
|
Indicative Intra-Day Value
|
35
|
Additional Information Concerning the Trust
|
36
|
Creation and Redemption of Creation Units
|
38
|
Continuous Offering
|
46
|
Determination of Net Asset Value
|
47
|
Taxation
|
50
|
Miscellaneous Information
|
55
|
Financial Statement
|
57
|
Appendix A - Proxy Voting Policy and Proxy Voting
Guidelines
|
A-1
|
General Description of the Trust and the
Fund
The
Trust was organized as a Delaware statutory trust in August 2017
and is authorized to have multiple series or portfolios. The Trust
is an open-end management investment company registered with the
Securities and Exchange Commission (“SEC”) under the Investment Company
Act of 1940, as amended (the “1940 Act”). The offering of the
Trust’s shares is registered under the Securities Act of
1933, as amended (the “1933
Act”). This SAI relates to the LGBTQ + ESG100 ETF (the
“Fund”), a
diversified series of the Trust. The shares of the Fund are
referred to herein as “Shares.”
ProcureAM,
LLC (the “Adviser”) is the investment adviser for the
Fund and Penserra Capital Management LLC (the
“Subadviser” or “Penserra”) serves as the
investment subadviser for the Fund. The Fund seeks to track the
investment results (before fees and expenses) of the LGBTQ 100 ESG
Index (the “Underlying
Index”).
The
Shares of the Fund will trade on Nasdaq, Inc. (the
“Exchange”).
Shares will trade on the Exchange at market prices that may be
below, at, or above the net asset value (“NAV”) of the Shares.
The
Fund offers and issues Shares at NAV only in aggregations of a
specified number of Shares (each, a “Creation Unit” or a
“Creation Unit
Aggregation”), generally in exchange for a basket of
“in-kind” securities (“Deposit Securities”), together
with the deposit of a specified cash payment (“Cash Component”). Shares are
redeemable only in Creation Unit Aggregations and, generally, in
exchange for Deposit Securities and a Cash Component. Creation
Units are aggregations of 25,000 Shares. The Fund may adjust the
number of Shares in a Creation Unit.
The
Fund presently creates and redeems Shares “in-kind.”
The Trust reserves the right to offer a “cash” option
for creations and redemptions of Shares. When cash purchases of
Creation Unit Aggregations of Shares are available or specified for
the Fund, such purchases shall be effected in essentially the same
manner as in-kind purchases thereof. In the case of a cash
purchase, the Authorized Participant (as defined below) must pay
the cash equivalent of the Deposit Securities it would otherwise be
required to provide through an in-kind purchase, plus the same Cash
Component required to be paid by an in-kind purchaser. In addition,
to offset brokerage and other costs associated with using cash to
purchase the requisite Deposit Securities, the Authorized
Participant must pay additional Transaction Fees required by the
Fund, as applicable. Shares may be issued in advance of the receipt
of Deposit Securities subject to various conditions, including a
requirement to maintain on deposit with the Trust cash at least
equal to 115% of the market value of the missing Deposit
Securities. In all cases, such fees will be limited in accordance
with the requirements of the Securities and Exchange Commission
(“SEC”) applicable to management investment companies
offering redeemable securities.
Exchange
Listing and Trading
There
can be no assurance that the requirements of the Exchange necessary
for the Fund to maintain the listing of its Shares will continue to
be met. The Exchange will consider the suspension of trading and
de-listing of the Shares of the Fund from listing if (i) following
the initial 12-month period beginning at the commencement of
trading of the Fund, there are fewer than 50 beneficial owners of
the Shares of the Fund; (ii) the value of the Underlying Index is
no longer calculated or available; (iii) the Fund’s
Underlying Index no longer meets various liquidity and other
metrics required by the Exchange’s continued listing
standards; or (iv) such other event shall occur or condition exist
that, in the opinion of the Exchange, makes further trading on the
Exchange inadvisable. The Exchange will remove the Shares of the
Fund from listing and trading upon termination of the
Fund.
The
Fund’s continued listing on the Exchange or another stock
exchange or market system is a condition of the exemptive relief
the Fund obtained from the SEC to operate as an exchange-traded
fund (“ETF”).
The Fund’s failure to be so listed would result in the
liquidation and closure of the Fund.
As in
the case of other publicly listed securities, when Shares of the
Fund are bought and sold through a broker, an investor may incur a
brokerage commission determined by that broker, as well as other
charges and a bid-ask spread.
The
Trust reserves the right to adjust the number of outstanding shares
in order to impact the market price rang of the Shares to maintain
convenient trading ranges for investors. Any adjustments would be
accomplished through stock splits or reverse stock splits, which
would have no effect on the net assets of the Fund or an
investor’s equity interest in the Fund.
Investment
Strategies and Risks
A
discussion of the risks associated with an investment in the Fund
is contained in the Fund’s Prospectus under the headings
“Principal Investment Risks,” “Description of
Principal Risks of the Fund” and “Discussion of
Additional Risks.” The discussion below supplements, and
should be read in conjunction with, such sections of the
Fund’s Prospectus.
An
investment in the Fund should be made with an understanding that
the value of the Fund’s portfolio securities may fluctuate in
accordance with changes in the financial condition of the issuers
of the portfolio securities, the value of preferred or common
stocks in general, and other factors that affect the
market.
General
The
Fund seeks to achieve its objective by investing primarily in
securities issued by issuers that comprise its relevant Underlying
Index and through transactions that provide substantially similar
exposure to securities in the Underlying Index. The Fund operates
as an index fund and is not actively managed. Adverse performance
of a security in the Fund’s portfolio will ordinarily not
result in the elimination of the security from the Fund’s
portfolio.
The
Fund intends to fully replicate the Underlying Index. At times, the
Fund may gain exposure to only a representative sample of the
securities in the Index that have aggregate characteristics similar
to those of the Underlying Index. “Representative
sampling” is an indexing strategy that involves investing in
a representative sample of securities that collectively has an
investment profile similar to that of an applicable underlying
index. The securities selected are expected to have, in the
aggregate, investment characteristics (based on factors such as
market capitalization and industry weightings), fundamental
characteristics (such as return variability, duration, maturity,
credit ratings and yield) and liquidity measures similar to those
of an applicable underlying index. The Fund may or may not hold all
of the securities in the Underlying Index.
Future Developments. The Board of Trustees of the Trust (the
“Board”) may, in
the future, authorize the Fund to invest in securities contracts
and investments, other than those listed in this SAI and in the
applicable Prospectus, provided they are consistent with the
Fund’s investment objective and do not violate any of its
investment restrictions or policies.
Borrowing. The Fund is
authorized to borrow money from time to time for temporary,
extraordinary or emergency purposes or for clearance of
transactions, and not for the purpose of leveraging its
investments, in amounts not to exceed at any time 33 1/3% of the
value of its total assets at the time of such borrowings, as
allowed under the 1940 Act. Under normal market conditions,
any borrowing by the Fund will not exceed 10% of the Fund’s
net assets; however, the Fund generally does not intend to borrow
money.
The
purchase of securities while borrowings are outstanding may have
the effect of leveraging the Fund. The incurrence of leverage
increases the Fund’s exposure to risk, and borrowed funds are
subject to interest costs that will reduce net income. Purchasing
securities while borrowings are outstanding creates special risks,
such as the potential for greater volatility in the net asset value
of Fund shares and in the yield on the Fund’s portfolio. In
addition, the interest expenses from borrowings may exceed the
income generated by the Fund’s portfolio and, therefore, the
amount available (if any) for distribution to shareholders as
dividends may be reduced. The Adviser may determine to maintain
outstanding borrowings if it expects that the benefits to the
Fund’s shareholders will outweigh the current reduced return.
Borrowing may cause the Fund to liquidate positions when it may not
be advantageous to do so to satisfy its obligations.
Certain
types of borrowings by the Fund must be made from a bank or may
result in the Fund being subject to covenants in credit agreements
relating to asset coverage, portfolio composition requirements and
other matters. It is not anticipated that observance of such
covenants would impede the management of the Fund’s portfolio
in accordance with the Fund’s investment objectives and
policies. However, a breach of any such covenants not cured within
the specified cure period may result in acceleration of outstanding
indebtedness and require the Fund to dispose of portfolio
investments at a time when it may be disadvantageous to do
so.
Cash Transactions Risk. The
Fund currently intends to effect creation and redemptions
“in-kind,” although the Trust reserves the right to
require creations and redemption be effected in whole or in part
for cash. To the extent creations and redemptions are effected in
cash, the Fund may be less tax-efficient than an investment in an
ETF that does not elect to effect all creations and redemptions
principally for cash. ETFs generally are able to make in-kind
redemptions and generally are not taxed on any gains on holdings
that are distributed as part of an in-kind
redemption.
Custody Risk. Custody risk refers to the risks inherent in
the process of clearing and settling trades and to the holding of
securities, cash and other assets by local banks, agents and
depositories. Low trading volumes and volatile prices in less
developed markets make trades harder to complete and settle, and
governments or trade groups may compel local agents to hold
securities in designated depositories that may not be subject to
independent evaluation. Local agents are held only to the standards
of care of their local markets, and thus may be subject to limited
or no government oversight. Communications between the United
States and emerging market countries may be unreliable, increasing
the risk of delayed settlements or losses of security certificates.
In general, the less developed a country’s securities market
is, the greater the likelihood of custody problems. Practices in
relation to the settlement of securities transactions in emerging
markets involve higher risks than those in developed markets, in
part because of the use of brokers and counterparties that are
often less well capitalized, and custody and registration of assets
in some countries may be unreliable. The possibility of fraud,
negligence or undue influence being exerted by the issuer or
refusal to recognize ownership exists in some emerging markets,
and, along with other factors, could result in ownership
registration being lost. In addition, the laws of certain countries
may put limits on the Fund’s ability to recover its assets if
a foreign bank or depository or issuer of a security or an agent of
any of the foregoing goes bankrupt. The Fund would absorb any loss
resulting from such custody problems and may have no successful
claim for compensation.
Cyber Security Risk. With the increased use of technologies
such as the Internet to conduct business, the Fund is susceptible
to operational, information security and related risks. In general,
cyber incidents can result from deliberate attacks or unintentional
events. Cyber attacks include, but are not limited to, gaining
unauthorized access to digital systems (e.g., through
“hacking” or malicious software coding) for purposes of
misappropriating assets or sensitive information, corrupting data,
or causing operational disruption. Cyber attacks may also be
carried out in a manner that does not require gaining unauthorized
access, such as causing denial-of-service attacks on websites
(i.e., efforts to make network services unavailable to intended
users). Cyber security failures or breaches suffered by the
Adviser, Subadviser, distributor, and other service providers
(including, but not limited to, Fund accountants, custodians,
transfer agents, and administrators), market makers, Authorized
Participants and the issuers of securities in which the Fund
invests have the ability to cause disruptions and impact business
operations potentially resulting in financial losses, interference
with the Fund’s ability to calculate its NAV, impediments to
trading, the inability of the shareholders to transact business,
violations of applicable privacy and other laws, regulatory fines,
penalties, reputational damage, reimbursement or other compensation
costs, or additional compliance costs. In addition, substantial
costs may be incurred in order to prevent any cyber incidents in
the future. Every business continuity plan is subject to inherent
limitations in such plans and systems, including the possibility
that certain risks have not been identified. The Fund cannot
control the cyber security plans and systems put in place by
service providers to the Fund and issuers in which the Fund
invests, market makers, or Authorized Participants. The Fund and
its shareholders could be negatively impacted as a result of any
cyber incidents impacting such parties.
Derivatives. A derivative is a financial contract, the value
of which depends on, or is derived from, the value of an underlying
asset, such as a security, a currency or an index (a measure of
value or rates, such as the S&P 500® or the prime
lending rate). The Fund may invest in stock index futures
contracts, securities options, contracts for difference (CFDs) and
other derivatives. Compared to conventional securities, derivatives
can be more sensitive to changes in interest rates or to sudden
fluctuations in market prices and thus the Fund’s losses may
be greater if it invests in derivatives than if it invests only in
conventional securities. Derivatives are also subject to
counterparty risk, which is the risk that the other party in the
transaction will not fulfill its contractual obligations.
Derivatives generally involve the incurrence of leverage. To
address such leverage and to prevent the Fund from being deemed to
have issued senior securities as a result of an investment in
derivatives, such Fund will segregate liquid assets equal to its
obligations under the derivatives throughout the life of the
investment.
When a
derivative is used as a hedge against a position that the Fund
holds or is committed to purchase, any loss generated by the
derivative generally should be substantially offset by gains on the
hedged investment, and vice versa. While hedging can reduce or
eliminate losses, it can also reduce or eliminate gains, and in
some cases, hedging can cause losses that are not offset by gains,
and the Fund will recognize losses on both the investment and the
hedge. Hedges are sometimes subject to imperfect matching between
the derivative and the underlying security, and there can be no
assurance that the Fund’s hedging transactions, which entail
additional transaction costs, will be effective.
Diversification Status
The
Fund is considered a diversified investment company.
A fund
classified as “diversified” under the 1940 Act may not
purchase securities of an issuer (other than (i) obligations issued
or guaranteed by the U.S. government, its agencies or
instrumentalities and (ii) securities of other investment
companies) if, with respect to 75% of its total assets, (a) more
than 5% of the fund’s total assets would be invested in
securities of that issuer or (b) the fund would hold more than 10%
of the outstanding voting securities of that issuer. With respect
to the remaining 25% of its total assets, the fund can invest more
than 5% of its assets in one issuer. Under the 1940 Act, a fund
cannot change its classification from diversified to
non-diversified without shareholder approval.
A
“non-diversified” fund is a fund that is not limited by
the 1940 Act with regard to the percentage of its assets that may
be invested in the securities of a single issuer. The securities of
a particular issuer (or securities of issuers in particular
industries) may constitute a significant percentage of the
underlying index of such a fund and, consequently, the fund’s
investment portfolio. This may adversely affect a fund’s
performance or subject the fund’s shares to greater price
volatility than that experienced by more diversified investment
companies.
The
Fund intends to maintain the required level of diversification and
otherwise conduct its operations so as to qualify as a regulated
investment company (“RIC”) for purposes of the U.S.
Internal Revenue Code of 1986, as amended (the “Code”), and to relieve the Fund of
any liability for U.S. federal income tax to the extent that its
earnings are distributed to shareholders, provided that the Fund
satisfies a minimum distribution requirement. Compliance with the
diversification requirements of the Internal Revenue Code may limit
the investment flexibility of the Fund and may make it less likely
that the Fund will meet its investment objective.
Dividend Risk. There is no guarantee that issuers of the
stocks held by the Fund will declare dividends in the future or
that, if declared, they will either remain at current levels or
increase over time.
Equity Securities. Common
stocks, preferred stocks, convertible securities, rights, warrants
and American Depositary Receipts (“ADRs”), and real estate investment trusts
(“REITs”) are examples of equity securities in
which the Fund may invest.
All investments in equity securities are subject to market risks
that may cause their prices to fluctuate over time. Historically,
the equity markets have moved in cycles and the value of the
securities in the Fund’s portfolio may fluctuate
substantially from day to day. Owning an equity security can also
subject the Fund to the risk that the issuer may discontinue paying
dividends. There is also the risk that sharp price declines in
securities owned by the Fund, known as flash crash risk, may
trigger trading halts, which may result in the Fund’s Shares
trading in the market at an increasingly large discount to NAV
during part (or all) of a trading day.
Common Stocks. A common stock
represents a proportionate share of the ownership of a company and
its value is based on the success of the company’s business,
any income paid to stockholders, the value of its assets, and
general market conditions. In addition to the general risks set
forth above, investments in common stocks are subject to the risk
that in the event a company in which the Fund invests is
liquidated, the holders of preferred stock and creditors of that
company will be paid in full before any payments are made to the
Fund as a holder of common stock. It is possible that all assets of
that company will be exhausted before any payments are made to the
Fund.
Preferred Stocks. Preferred
stocks are equity securities that often pay dividends at a specific
rate and have a preference over common stocks in dividend payments
and liquidation of assets. A preferred stock has a blend of the characteristics
of a bond and common stock. It can offer the higher yield of a bond
and has priority over common stock in equity ownership, but does
not have the seniority of a bond and, unlike common stock, its
participation in the issuer’s growth may be limited. Although
the dividend is set at a fixed annual rate, in some circumstances
it can be changed or omitted by the issuer. Also, non U.S.
preferred stock may have different rights or privileges than those
commonly associated with U.S. preferred stock. In addition to the
risks listed above, investors in non U.S. preferred stock may
experience difficulty or uncertainty in determining and enforcing
their rights related to preferred stock.
Convertible Securities. The
Fund may invest in convertible securities. Traditional convertible
securities include corporate bonds, notes, and preferred stocks
that may be converted into or exchanged for common stock, and other
securities that also provide an opportunity for equity
participation. These securities are convertible either at a stated
price or a stated rate (that is, for a specific number of shares of
common stock or other security). As with other debt securities, the
price of a convertible security generally varies inversely with
interest rates. While providing a debt stream, a convertible
security also affords the investor an opportunity, through its
conversion feature, to participate in the capital appreciation of
the common stock into which it is convertible. As the market price
of the underlying common stock declines, convertible securities
tend to trade increasingly on a yield basis and so may not
experience market value declines to the same extent as the
underlying common stock. When the market price of the underlying
common stock increases, the price of a convertible security tends
to rise as a reflection of higher yield or capital appreciation. In
such situations, the Fund may have to pay more for a convertible
security than the value of the underlying common
stock.
Rights and Warrants. The Fund
may invest in rights and warrants. A right is a privilege
granted to existing shareholders of a corporation to subscribe to
shares of a new issue of common stock and it is issued at a
predetermined price in proportion to the number of shares already
owned. Rights normally have a short life, usually two to four
weeks, are freely transferable and entitle the holder to buy the
new common stock at a lower price than the current market. Warrants
are options to purchase equity securities at a specific price for a
specific period of time. They do not represent ownership of the
securities, but only the right to buy them. Hence, warrants have no
voting rights, pay no dividends and have no rights with respect to
the assets of the corporation issuing them. The value of warrants
is derived solely from capital appreciation of the underlying
equity securities. Warrants differ from call options in that the
underlying corporation issues warrants, whereas call options may be
written by anyone.
An investment in rights and warrants may entail greater risks than
certain other types of investments. Generally, rights and warrants
do not carry the right to receive dividends or exercise voting
rights with respect to the underlying securities, and they do not
represent any rights in the assets of the issuer. In addition,
although their value is influenced by the value of the underlying
security, their value does not necessarily change with the value of
the underlying securities, and they cease to have value if they are
not exercised on or before their expiration date. Investing in
rights and warrants increases the potential profit or loss to be
realized from the investment as compared with investing the same
amount in the underlying securities.
Tracking Stocks. The Fund may
invest in tracking stocks. A tracking stock is a separate class of
common stock whose value is linked to a specific business unit or
operating division within a larger company and which is designed to
“track” the performance of such business unit or
division. The tracking stock may pay dividends to shareholders
independent of the parent company. The parent company, rather than
the business unit or division, generally is the issuer of tracking
stock. However, holders of the tracking stock may not have the same
rights as holders of the company’s common
stock.
Equity Options. The Fund may
write call options on stocks and stock indices if the calls are
“covered” throughout the life of the option. A call is
“covered” if the Fund owns the optioned securities. See
below for additional ways a call can be covered. When the Fund
writes a call, it receives a premium and give the purchaser the
right to buy the underlying security at any time during the call
period at a fixed exercise price regardless of market price changes
during the call period. If the call is exercised, the Fund will
forgo any gain from an increase in the market price of the
underlying security over the exercise price.
The Fund may purchase a call on securities to effect a
“closing purchase transaction,” which is the purchase
of a call covering the same underlying security and having the same
exercise price and expiration date as a call previously written by
the Fund on which it wishes to terminate its obligation. If the
Fund is unable to effect a closing purchase transaction, it will
not be able to sell the underlying security until the call
previously written by the Fund expires (or until the call is
exercised and the Fund delivers the underlying
security).
The Fund may also write and purchase put options
(“puts”). When the Fund writes a put, it receives
a premium and gives the purchaser of the put the right to sell the
underlying security to the Fund at the exercise price at any time
during the option period. When the Fund purchases a put, it pays a
premium in return for the right to sell the underlying security at
the exercise price at any time during the option period. If any put
is not exercised or sold, it will become worthless on its
expiration date.
Purchasing Put and Call Options. When the Fund purchases a put option, it buys
the right to sell the instrument underlying the option at a fixed
strike price. In return for this right, the Fund pays the current
market price for the option (known as the
“option
premium”). The Fund may
purchase put options to offset or hedge against a decline in the
market value of its securities (“protective
puts”) or to benefit from
a decline in the price of securities that it does not own. The Fund
would ordinarily realize a gain if, during the option period, the
value of the underlying securities decreased below the exercise
price sufficiently to cover the premium and transaction costs.
However, if the price of the underlying instrument does not fall
enough to offset the cost of purchasing the option, a put buyer
would lose the premium and related transaction
costs.
Call options are similar to put options, except that the Fund
obtains the right to purchase, rather than sell, the underlying
instrument at the option’s strike price. The Fund would
normally purchase call options in anticipation of an increase in
the market value of securities it owns or wants to buy. The Fund
would ordinarily realize a gain if, during the option period, the
value of the underlying instrument exceeded the exercise price plus
the premium paid and related transaction costs. Otherwise, the Fund
would realize either no gain or a loss on the purchase of the call
option.
The purchaser of an option may terminate its position
by:
●
Allowing
it to expire and losing its entire premium;
●
Exercising
the option and either selling (in the case of a put option) or
buying (in the case of a call option) the underlying instrument at
the strike price; or
●
Closing
it out in the secondary market at its current price.
Selling (Writing) Put and Call Options. When the Fund writes a call option it assumes an
obligation to sell specified securities to the holder of the option
at a specified price if the option is exercised at any time before
the expiration date. Similarly, when the Fund writes a put option
it assumes an obligation to purchase specified securities from the
option holder at a specified price if the option is exercised at
any time before the expiration date. The Fund may terminate its
position in an exchange-traded put option before exercise by buying
an option identical to the one it has written. Similarly, it may
cancel an over-the-counter option by entering into an offsetting
transaction with the counter-party to the
option.
The Fund may try to hedge against an increase in the value of
securities it would like to acquire by writing a put option on
those securities. If a security’s price rises, the Fund would
expect the put option to expire and the premium it received to
offset the increase in the security’s value. If a
security’s price remains the same over time, the Fund would
hope to profit by closing out the put option at a lower price. If a
security’s price falls, the Fund may lose an amount of money
equal to the difference between the value of the security and the
premium it received. Writing covered put options may deprive the
Fund of the opportunity to profit from a decrease in the market
prices of the securities it would like to acquire.
The characteristics of writing call options are similar to those of
writing put options, except that call writers expect to profit if
prices remain the same or fall. The Fund could try to hedge against
a decline in the value of securities it already owns by writing a
call option. If the price of that security falls as expected, the
Fund would expect the option expire and the premium it received to
offset the decline of the security’s value. However, the Fund
must be prepared to deliver the underlying instrument in return for
the strike price, which may deprive it of the opportunity to profit
from an increase in the market price of the securities it
holds.
The Fund is permitted only to write covered options. The Fund can
cover a call option by owning:
●
The
underlying security (or securities convertible into the underlying
security without additional consideration), index, interest rate,
foreign currency or futures contract;
●
A
call option on the same security or index with the same or lesser
exercise price;
●
A
call option on the same security or index with a greater exercise
price and segregating cash or liquid securities in an amount equal
to the difference between the exercise prices;
●
Cash
or liquid securities equal to at least the market value of the
optioned securities, interest rate, foreign currency, or futures
contract; or
●
In
the case of an index, securities whose price movements correlate to
the movements of the index.
The Fund can cover a put option by:
●
Purchasing
a put option on the same security, index, interest rate, foreign
currency or futures contract with the same or greater exercise
price;
●
Purchasing
a put option on the same security, index, interest rate, foreign
currency or futures contract with a lesser exercise price and
segregating cash or liquid securities in an amount equal to the
difference between the exercise prices; or
●
Maintaining
the entire exercise price in liquid securities.
Options on Securities Indices.
Options on securities indices are similar to options on securities,
except that the exercise of securities index options requires cash
settlement payments and does not involve the actual purchase or
sale of securities. In addition, securities index options are
designed to reflect price fluctuations in a group of securities or
segment of the securities market, rather than price fluctuations in
a single security.
Options on Futures. An option
on a futures contract provides the holder with the right to buy a
futures contract (in the case of a call option) or sell a futures
contract (in the case of a put option) at a fixed time and price.
Upon exercise of the option by the holder, the contract market
clearing house establishes a corresponding short position for the
writer of the option (in the case of a call option) or a
corresponding long position (in the case of a put option). If the
option is exercised, the parties will be subject to the futures
contracts. In addition, the writer of an option on a futures
contract is subject to initial and variation margin requirements on
the option position. Options on futures contracts are traded on the
same contract market as the underlying futures
contract.
The buyer or seller of an option on a futures contract may
terminate the option early by purchasing or selling an option of
the same series (i.e., the same exercise price and expiration date) as
the option previously purchased or sold. The difference between the
premiums paid and received represents the trader’s profit or
loss on the transaction.
The Fund may purchase put and call options on futures contracts
instead of selling or buying futures contracts. The Fund may buy a
put option on a futures contract for the same reason it would sell
a futures contract. It also may purchase such put options in order
to hedge a long position in the underlying futures contract. The
Fund may buy call options on futures contracts for the same purpose
as the actual purchase of the futures contracts, such as in
anticipation of favorable market conditions.
The Fund may write a call option on a futures contract to hedge
against a decline in the prices of the instrument underlying the
futures contracts. If the price of the futures contract at
expiration were below the exercise price, the Fund would retain the
option premium, which would offset, in part, any decline in the
value of its assets.
The writing of a put option on a futures contract is similar to the
purchase of the futures contracts, except that, if the market price
declines, the Fund would pay more than the market price for the
underlying instrument. The premium received on the sale of the put
option, less any transaction costs, would reduce the net cost to
the Fund.
Combined Positions. The Fund
may purchase and write options in combination with each other, or
in combination with futures or forward contracts, to adjust the
risk and return characteristics of the overall position. For
example, the Fund could construct a combined position whose risk
and return characteristics are similar to selling a futures
contract by purchasing a put option and writing a call option on
the same underlying instrument. Alternatively, the Fund could write
a call option at one strike price and buy a call option at a lower
price to reduce the risk of the written call option in the event of
a substantial price increase. Because combined options positions
involve multiple trades, they result in higher transaction costs
and may be more difficult to open and close
out.
Caps and Floors. The Fund may
enter cap and floor agreements. Caps and floors have an effect
similar to buying or writing options. In a typical cap or floor
agreement, one party agrees to make payments only under specified
circumstances, usually in return for payment of a fee by the other
party. For example, the buyer of an interest rate cap obtains the
right to receive payments to the extent that a specified interest
rate exceeds an agreed-upon level. The seller of an interest rate
floor is obligated to make payments to the extent that a specified
interest rate falls below an agreed-upon level. An interest rate
collar combines elements of buying a cap and selling a
floor.
Risks of Derivatives. While
transactions in derivatives may reduce certain risks, these
transactions themselves entail certain other risks. For example,
unanticipated changes in interest rates, securities prices or currency exchange rates may
result in poorer overall performance of the Fund than if it had not
entered into any derivatives transactions. Derivatives may magnify
the Fund’s gains or losses, causing it to make or lose
substantially more than it invested.
When used for hedging purposes, increases in the value of the
securities the Fund holds or intends to acquire should offset any
losses incurred with a derivative. Purchasing derivatives for
purposes other than hedging could expose the Fund to greater
risks.
Derivative Management Risk. The Fund may lose money by
investing in derivatives. For example, if the Fund were to write a
call option based on the expectation that the price of the
underlying security would fall, but the price was to rise instead,
the Fund could be required to sell the security upon exercise at a
price below the current market price.
Futures, Options on Futures and Securities Options. Futures
contracts, options on futures and securities options may be used by
the Fund to simulate investment in its Underlying Index, to
facilitate trading or to reduce transaction costs. The Fund may
enter into futures contracts and options on futures that are traded
on a U.S. or non-U.S. futures exchange. The Fund will not use
futures, options on futures or securities options for speculative
purposes.
Futures
contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific instrument or
index at a specified future time and at a specified price. Stock
index contracts are based on investments that reflect the market
value of common stock of the firms included in the investments. The
Fund may enter into futures contracts to purchase securities
indexes when it anticipates purchasing the underlying securities
and believes prices will rise before the purchase will be made.
Upon entering into a futures contract, the Fund will be required to
deposit with the broker an amount of cash or cash equivalents known
as “initial margin,” which is similar to a performance
bond or good faith deposit on the contract and is returned to the
Fund upon termination of the futures contract if all contractual
obligations have been satisfied. Subsequent payments, known as
“variation margin,” will be made to and from the broker
daily as the price of the instrument or index underlying the
futures contract fluctuates, making the long and short positions in
the futures contract more or less valuable, a process known as
“marking-to-market.” At any time prior to the
expiration of a futures contract, the Fund may elect to close the
position by taking an opposite position, which will operate to
terminate the Fund’s existing position in the contract. To
the extent required by law, the Fund will segregate liquid assets
in an amount equal to its delivery obligations under the futures
contracts. An option on a futures contract, as contrasted with a
direct investment in such a contract, gives the purchaser the
right, but no obligation, in return for the premium paid, to assume
a position in the underlying futures contract at a specified
exercise price at any time prior to the expiration date of the
option. Upon exercise of an option, the delivery of the futures
position by the writer of the option to the holder of the option
will be accompanied by delivery of the accumulated balance in the
writer’s futures margin account that represents the amount by
which the market price of the futures contract exceeds (in the case
of a call) or is less than (in the case of a put) the exercise
price of the option on the futures contract. The potential for loss
related to the purchase of an option on a futures contract is
limited to the premium paid for the option plus transaction costs.
Because the value of the option is fixed at the point of sale,
there are no daily cash payments by the purchaser to reflect
changes in the value of the underlying contract; however, the value
of the option changes daily and that change would be reflected in
the NAV of the Fund. The potential for loss related to writing call
options is unlimited. The potential for loss related to writing put
options is limited to the agreed-upon price per share, also known
as the “strike price,” less the premium received from
writing the put. The Fund may purchase and write put and call
options on futures contracts that are traded on an exchange as a
hedge against changes in value of their portfolio securities or in
anticipation of the purchase of securities, and may enter into
closing transactions with respect to such options to terminate
existing positions. There is no guarantee that such closing
transactions can be effected.
Securities
options may be used by the Fund to obtain access to securities in
its Underlying Index or to dispose of securities in its Underlying
Index at favorable prices, to invest cash in a securities index
that offers similar exposure to that provided by its Underlying
Index or otherwise to achieve the Fund’s objective of
tracking its Underlying Index. A call option gives a holder the
right to purchase a specific security at a specified price
(“exercise price”) within a specified period of time. A
put option gives a holder the right to sell a specific security at
an exercise price within a specified period of time. The initial
purchaser of a call option pays the “writer” a premium,
which is paid at the time of purchase and is retained by the writer
whether or not such option is exercised. The Fund may purchase put
options to hedge its portfolio against the risk of a decline in the
market value of securities held and may purchase call options to
hedge against an increase in the price of securities it is
committed to purchase. The Fund may write put and call options
along with a long position in options to increase its ability to
hedge against a change in the market value of the securities it
holds or is committed to purchase. The Fund may purchase or sell
securities options on a U.S. or non-U.S. securities exchange or in
the OTC market through a transaction with a dealer. Options on a
securities index are typically settled on a net basis based on the
appreciation or depreciation of the index level over the strike
price. Options on single name securities may be cash- or
physically-settled, depending upon the market in which they are
traded. Options may be structured so as to be exercisable only on
certain dates or on a daily basis. Options may also be structured
to have conditions to exercise (i.e., “Knock-in Events”) or
conditions that trigger termination (i.e., “Knock-out Events”).
Investments in futures contracts and other investments that contain
leverage may require each Fund to maintain liquid assets in an
amount equal to its delivery obligations under these contracts and
other investments. Generally, the Fund maintains an amount of
liquid assets equal to its obligations relative to the position
involved, adjusted daily on a marked-to-market basis. With respect
to futures contracts that are contractually required to
“cash-settle,” the Fund maintains liquid assets in an
amount at least equal to the Fund’s daily marked-to-market
obligation (i.e., each
Fund’s daily net liability, if any), rather than the
contracts’ notional value (i.e., the value of the underlying
asset). By maintaining assets equal to its net obligation under
cash-settled futures contracts, the Fund may employ leverage to a
greater extent than if the Fund were required to set aside assets
equal to the futures contracts’ full notional value. The Fund
bases its asset maintenance policies on methods permitted by the
SEC and its staff and may modify these policies in the future to
comply with any changes in the guidance articulated from time to
time by the SEC or its staff. Changes in SEC guidance regarding the
use of derivatives by registered investment companies may adversely
impact the Fund’s ability to invest in futures, options or
other derivatives or make investments in such instruments more
expensive.
Government Obligations. The
Fund may invest in U.S. Government obligations and other quasi
government related obligations. Such obligations include Treasury
bills, certificates of indebtedness, notes, and bonds, and issues
of such entities as the Government National Mortgage Association
(“GNMA”), Export-Import Bank of the United States,
Tennessee Valley Authority, Resolution Funding Corporation, Farmers
Home Administration, Federal Home Loan Banks, Federal Intermediate
Credit Banks, Federal Farm Credit Banks, Federal Land Banks,
Federal Housing Administration, Federal National Mortgage
Association (“FNMA”), Federal Home Loan Mortgage Corporation
(“FHLMC”), and the Student Loan Marketing
Association.
Some of these obligations, such as those of the GNMA, are supported
by the full faith and credit of the U.S. Treasury Department;
others, such as those of the Export-Import Bank of the United
States, are supported by the right of the issuer to borrow from the
U.S. Treasury; others, such as those of the FNMA, are supported by
the discretionary authority of the U.S. Government to purchase the
agency’s obligations; still others, such as those of the
Student Loan Marketing Association, are supported only by the
credit of the instrumentality. No assurance can be given that the
U.S. Government would provide financial support to U.S.
Government-sponsored instrumentalities if it is not obligated to do
so by law.
The
Fund may invest in sovereign, quasi-sovereign, supranational or
local authority debt obligations issued by non-U.S. governments. A
sovereign debtor’s willingness or ability to repay principal
and interest in a timely manner may be affected by a number of
factors, including its cash flow situation, the extent of its
foreign reserves, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of the debt service
burden to the economy as a whole, the sovereign debtor’s
policy toward principal international lenders, and the political
constraints to which it may be subject. Emerging market governments
could default on their sovereign debt. Such sovereign debtors also
may be dependent on expected disbursements from foreign
governments, multilateral agencies and other entities abroad to
reduce principal and interest arrearages on their debt. The
commitments on the part of these governments, agencies, and others
to make such disbursements may be conditioned on a sovereign
debtor’s implementation of economic reforms and/or economic
performance and the timely service of such debtor’s
obligations. Failure to meet such conditions could result in the
cancellation of such third parties’ commitments to lend funds
to the sovereign debtor, which may further impair such
debtor’s ability or willingness to service its debt in a
timely manner.
Illiquid Securities. The Fund may invest up to an aggregate
amount of 15% of its net assets in illiquid securities (calculated
at the time of investment). The Fund
will determine a security to be illiquid if it reasonably expects
the security cannot be sold or disposed of in current market
conditions in seven calendar days or less without the sale or
disposition significantly changing the market value of the
investment. Illiquid securities may include securities
subject to contractual or other restrictions on resale and other
instruments that lack readily available markets. The liquidity of a
security relates to the ability to readily dispose of the security
and the price to be obtained upon disposition of the security,
which may be lower than the price that would be obtained for a
comparable, more liquid security. Illiquid securities may trade at
a discount to comparable, more liquid securities and the Fund may
not be able to dispose of illiquid securities in a timely fashion
or at their expected prices.
Industry and Sector Risks. The Fund is susceptible to the
risks associated with the industries and sectors in which it
invests.
Risk of Investing in the Communication Services Sector.
Communication services companies are particularly vulnerable to the
potential obsolescence of products and services due to
technological advances and the innovation of competitors. Companies
in the communication services sector may also be affected by other
competitive pressures, such as pricing competition, as well as
research and development costs, substantial capital requirements
and government regulation. Additionally, fluctuating domestic and
international demand, shifting demographics and often unpredictable
changes in consumer demand can drastically affect a communication
services company’s profitability. Companies in the
communication services may encounter distressed cash flows due to
the need to commit substantial capital to meet increasing
competition, particularly in formulating new products and services
using new technology. While all companies may be susceptible to
network security breaches, certain companies in the communication
services sector may be particular targets of hacking and potential
theft of proprietary or consumer information or disruptions in
services, which would have a material adverse effect on their
businesses. The communications industry is also heavily regulated.
Certain companies in the U.S., for example, are subject to both
state and federal regulations affecting permitted rates of return
and the kinds of services that may be offered.
Risk of Investing in the Consumer Discretionary Sector. The
consumer discretionary sector includes companies that sell
nonessential goods and services, including the retail, leisure and
entertainment, media and automotive industries. The consumer
discretionary sector may be affected by changes in domestic and
international economies, commodity price volatility, imposition of
import controls, depletion of resources and labor relations,
exchange and interest rates, competition, consumers’
disposable income, consumer preferences, social trends and
marketing campaigns. In addition, companies in the consumer
discretionary sector depend heavily on disposable household income
and consumer spending, and may be strongly affected by social
trends and marketing campaigns. Consumer discretionary companies
may be adversely affected and lose value more quickly in periods of
economic downturns given that the products of these companies may
be viewed as luxury items during times of economic downturn.
Companies in the consumer discretionary sector may be subject to
severe competition, which may also have an adverse impact on their
profitability. Changes in demographics and consumer tastes can also
affect the demand for, and success of, consumer discretionary
products. The Fund’s performance may be affected by such
susceptibilities if the Fund invests in this sector.
Risk of Investing in the Consumer Goods Industry. The
consumer goods industry includes companies involved in the design,
production or distribution of goods for consumers, including food,
household, home, personal and office products, clothing and
textiles. The success of the consumer goods industry is tied
closely to the performance of the domestic and international
economy, interest rates, exchange rates, competition, consumer
confidence and consumer disposable income. The consumer goods
industry may be affected by trends, marketing campaigns and other
factors affecting consumer demand. Governmental regulation
affecting the use of various food additives may affect the
profitability of certain companies in the consumer goods industry.
Moreover, international events may affect food and beverage
companies that derive a substantial portion of their net income
from foreign countries. In addition, tobacco companies may be
adversely affected by new laws, regulations and litigation. Many
consumer goods may be marketed globally, and consumer goods
companies may be affected by the demand and market conditions in
other countries and regions. Companies in the consumer goods
industry may be subject to severe competition, which may also have
an adverse impact on their profitability. Changes in demographics
and consumer preferences may affect the success of consumer
products.
Risk of Investing in the Consumer Staples Sector. Companies
in the consumer staples sector may be affected by general economic
conditions, commodity production and pricing, consumer confidence
and spending, consumer preferences, interest rates, product cycles,
marketing, competition, and government regulation. In particular,
the success of food and soft drinks may be strongly affected by
fads, marketing campaigns and other factors affecting supply and
demand. Other risks include changes in global economic,
environmental and political events, and the depletion of resources.
Companies in the consumer staples sector may also be negatively
impacted by government regulations affecting their products. For
example, government regulations may affect the permissibility of
using various food additives and production methods of companies
that make food products, which could affect company profitability.
Tobacco companies, in particular, may be adversely affected by new
laws, regulations and litigation. Companies in the consumer staples
sector may also be subject to risks relating to the supply of,
demand for, and prices of raw materials. The prices of raw
materials fluctuate in response to a number of factors, including,
changes in exchange rates, import and export controls, changes in
international agricultural and trading policies, and seasonal and
weather conditions, among others. In addition, the success of food,
beverage, household and personal product companies, in particular,
may be strongly affected by unpredictable factors, such as,
demographics, consumer spending, and product trends.
Risks of Investing in the Energy Sector. The Fund's
investments are exposed to issuers conducting business in the
Energy Sector. The Energy Sector includes manufacturers and
distributors of capital goods such as aerospace and defense,
building projects, electrical equipment and machinery and companies
that offer construction and engineering services. The petroleum
industry, including oil companies, petroleum refiners, fuel
transport and end-user sales at gas stations. The gas industry,
including natural gas extraction, and coal gas manufacture, as well
as distribution and sales. The electrical power industry, including
electricity generation, electric power distribution and sales. The
coal and nuclear power industries are also components of this
sector. The renewable energy industry, comprising alternative
energy and sustainable energy companies, including those involved
in hydroelectric power, wind power, and solar power generation, and
the manufacture, distribution and sale of alternative fuels
traditional energy industry based on the collection and
distribution of firewood, the use of which, for cooking and
heating, is particularly common in poorer countries.
Risks of Investing in the Financials Sector. The Fund's
investments are exposed to issuers conducting business in the
Financial Sector. The Financial Sector includes companies involved
in banking, thrifts and mortgage finance, specialized finance,
consumer finance, asset management and custody banks, investment
banking and brokerage and insurance. It also includes Financial
Exchanges, Financial Data venders, and Mortgage REITs. The Fund is
subject to the risk that the securities of such issuers will
underperform the entire market due to legislative or regulatory
changes, adverse market conditions and/or increased competition
affecting the Financials Sector. Companies operating in the
Financial Sector are subject to extensive government regulation,
which may limit their ability to leverage their capital. Interest
rates and banking fees are also regulated by federal and state
authorities. Profitability is largely dependent on the availability
and the cost of deposit funds and reserve requirements required by
statues and can fluctuate significantly when interest rates change,
or the sector faces increased competition from less regulated
competitors. The financial sector is also affected by regulatory
changes that require significant ongoing technology investments in
legacy system to meet the regulatory reporting needs.
Risks of Investing in the Health Care Sector. The Fund's
investments are exposed to issuers conducting business in the
Health Care Sector. The Health Care Sector includes health care
providers and services, companies that manufacture and distribute
health care equipment and supplies, and health care technology
companies. It also includes companies involved in the research,
development, production and marketing of pharmaceuticals and
biotechnology products. The Fund is subject to the risk that the
securities of such issuers will underperform the market due to
legislative or regulatory changes, adverse market conditions and/or
increased competition affecting the Health Care Sector. The prices
of the securities of companies operating in the Health Care Sector
are closely tied to government regulation and approval of their
products and services, which can have a significant effect on the
price and availability of those products and services.
Risks of Investing in the Industrials Sector. The Fund's
investments are exposed to issuers conducting business in the
Industrials Sector. The Industrials Sector includes manufacturers
and distributors of capital goods such as aerospace and defense,
building projects, electrical equipment and machinery and companies
that offer construction and engineering services. It also includes
providers of commercial and professional services including
printing, environmental and facilities services, office services
and supplies, security and alarm services, human resource and
employment services, research and consulting services. It also
includes companies that provide transportation services. The Fund
is subject to the risk that the securities of such issuers will
underperform the whole market due to legislative or regulatory
changes, adverse market conditions and/or increased competition
affecting the Industrials Sector. The prices of the securities of
companies operating in the Industrials Sector may fluctuate due to
the level and volatility of commodity prices, the exchange value of
the dollar, import controls, worldwide competition, liability for
environmental damage, depletion of resources, and mandated
expenditures for safety and pollution control devices.
Risk of Investing in the Information Technology Sector. The
information technology sector includes companies that offer
software and information technology services, manufacturers and
distributors of technology hardware and equipment such as
communications equipment, cellular phones, computers and
peripherals, electronic equipment and related instruments and
semiconductors. Information technology companies face intense
competition and potentially rapid product obsolescence. They are
also heavily dependent on intellectual property rights and may be
adversely affected by the loss or impairment of those rights. The
value of technology companies may fluctuate widely due to
competitive pressures, increased sensitivity to short product
cycles and aggressive pricing, problems relating to bringing their
products to market, very high price/earnings ratios, and high
personnel turnover due to severe labor shortages for skilled
technology professionals. The products of technology companies
may face obsolescence due to rapid technological developments,
frequent new product introduction, unpredictable changes in growth
rates and competition for the services of qualified personnel.
Companies in the technology sector are heavily dependent on patent
and other intellectual property rights. A technology
company’s loss or impairment of these rights may adversely
affect the company’s profitability.
Risk of Investing in the Retail Industry. The retail
industry may be affected by changes in domestic and international
economies, consumer confidence, disposable household income and
spending, and consumer tastes and preferences. Companies in the
retail industry face intense competition, which may have an adverse
effect on their profitability. The success of companies in the
retail industry may be strongly affected by social trends,
marketing campaigns and public perceptions. Companies in the retail
industry may be dependent on outside financing, which may be
difficult to obtain. Many of these companies are dependent on third
party suppliers and distribution systems. Retail companies may be
unable to protect their intellectual property rights or may be
liable for infringing the intellectual property rights of
others.
Investment Companies. The Fund
may invest in shares of other registered investment companies,
including other ETFs, closed-end funds, money market mutual funds,
unit investment trusts, and business development companies in
pursuit of its investment objective, in accordance with the
limitations established under the 1940 Act or in reliance on
an exemption from these limitations. Investments in the securities
of other investment companies may involve duplication of advisory
fees and certain other expenses. By investing in another investment
company, the Fund becomes a shareholder of that investment company.
As a result, Fund shareholders indirectly will bear the
Fund’s proportionate share of the fees and expenses paid by
Fund shareholders of the other investment company, in addition to
the fees and expenses Fund shareholders directly bear in connection
with the Fund’s own operations.
ETPs. Some exchange-traded
products (ETPs) are ETFs which are open-end investment companies
whose shares are listed on a national securities exchange. An ETF
is similar to a traditional mutual fund, but trades at different
prices during the day on a securities exchange. Similar to
investments in other investment companies discussed above, the
Fund’s investments in ETPs will involve duplication of
advisory fees and other expenses because the Fund will be investing
in another investment company. In addition, the Fund’s
investment in ETPs is also subject to its limitations on
investments in investment companies, as well as any exemptions from
such limitations granted by the SEC, discussed above. To the extent
the Fund invests in ETPs which focus on a particular market segment
or industry, the Fund will also be subject to the risks associated
with investing in those sectors or industries. The shares of the
ETPs in which the Fund will invest will be listed on a national
securities exchange and the Fund will purchase or sell these shares
on the secondary market at its current market price, which may be
more or less than its NAV.
As a purchaser of ETP shares on the secondary market, the Fund will
be subject to the market risk associated with owning any security
whose value is based on market price. ETP shares historically have
tended to trade at or near their NAV, but there is no guarantee
that they will continue to do so. Unlike traditional mutual funds,
shares of an ETP may be purchased and redeemed directly from the
ETPs only in large blocks and only through participating
organizations that have entered into contractual agreements with
the ETP. The Fund does not expect to enter into such agreements and
therefore will not be able to purchase and redeem their ETP shares
directly from the ETP.
Large-Capitalization Companies. Large-capitalization
companies may be less able than smaller capitalization companies to
adapt to changing market conditions. Large-capitalization companies
may be more mature and subject to more limited growth potential
compared with smaller capitalization companies. Over certain
periods, the performance of large-capitalization companies has
trailed the performance of overall markets.
Lending Portfolio Securities. The Fund may lend its
portfolio securities in an amount not exceeding one-third of its
total assets to financial institutions such as banks and brokers if
the loan is collateralized in accordance with applicable
regulations. Under the present regulatory requirements which govern
loans of portfolio securities, the loan collateral must, on each
business day, at least equal the value of the loaned securities and
must consist of cash, letters of credit of domestic banks or
domestic branches of foreign banks, or securities of the U.S.
Government or its agencies. To be acceptable as collateral, letters
of credit must obligate a bank to pay amounts demanded by the Fund
if the demand meets the terms of the letter. Such terms and the
issuing bank would have to be satisfactory to the Fund. Any loan
might be secured by any one or more of the three types of
collateral. The terms of the Fund’s loans must meet certain
tests under the Code.
Securities
lending involves exposure to certain risks, such as operational,
counterparty, credit and market risk. Delays or restrictions upon
the Fund’s ability to recover loaned securities exposes the
Fund to operational issues surrounding the processing and
settlement of related trading and could create an inability to
dispose of the collateral for the loan(s). All investments made
with the collateral received are subject to market and other risks
associated with such investments. If such investments lose value,
the Fund will have to cover the loss when repaying the collateral
to the borrower, which could require the Fund to liquidate other
investments in order to return said collateral.
Delays
in recovery of loaned securities could result from the event of
default or insolvency by a borrower. In such instances, the Fund
would be exposed to the risk of a possible loss in the value of
loaned securities (e.g.,
the opportunity of disposition at favorable prices is lost due to a
delay in recover), the risk of a possible opportunity cost of
reinvestment (e.g., adverse
price movement occurs following a cash-in-lieu payment being made
where in-kind recovery of securities is not possible), and the risk
of a possible loss of rights in the collateral, among other
risks.
Operational Risk. The Fund and its service providers may
experience disruptions or operating errors such as processing
errors or human errors, inadequate or failed internal or external
processes, or systems or technology failures, that could negatively
impact the Fund. While service providers are required to have
appropriate operational risk management policies and procedures,
their methods of operational risk management may differ from the
Fund’s in the setting of priorities, the personnel and
resources available or the effectiveness of relevant controls. It
is not possible for the Fund and its service providers to identify
all of the operational risks that may affect the Fund or to develop
processes and controls to completely eliminate or mitigate their
occurrence or effects.
Percentage Limitations. Whenever an investment policy or
limitation states a maximum percentage of the Fund’s assets
that may be invested in any security or other asset, or sets forth
a policy regarding quality standards, such standard or percentage
limitation will be determined immediately after and as a result of
the Fund’s acquisition or sale of such security or other
asset. Accordingly, except with respect to borrowing, any
subsequent change in values, net assets, or other circumstances
will not be considered in determining whether an investment
complies with the Fund’s investment policies and limitations.
In addition, if a bankruptcy or other extraordinary event occurs
concerning a particular investment by the Fund, the Fund may
receive stock, real estate, or other investments that the Fund
would not or could not buy. If this happens, the Fund would sell
such investments as soon as practicable while trying to maximize
the return to its shareholders.
Recent Market Conditions. Decreasing imports or exports,
changes in trade regulations and/or an economic recession in the
United States may have a material adverse effect on the U.S.
economy and the securities listed on U.S. exchanges. Policy and
legislative changes in the United States are changing many aspects
of financial and other regulation and may have a significant effect
on the U.S. markets generally, as well as on the value of certain
securities. In addition, a continued rise in the U.S. public debt
level or U.S. austerity measures may adversely affect U.S. economic
growth and the securities to which the Fund have
exposure.
Regulation Regarding Derivatives. The CFTC subjects advisers
to registered investment companies to regulation by the CFTC if a
fund that is advised by the adviser either (i) invests, directly or
indirectly, more than a prescribed level of its liquidation value
in CFTC-regulated futures, options and swaps (“CFTC Derivatives”), or (ii)
markets itself as providing investment exposure to such
instruments. The CFTC also subjects advisers to registered
investment companies to regulation by the CFTC if the registered
investment company invests in one or more commodity pools. To the
extent the Fund uses CFTC Derivatives, it intends to do so below
such prescribed levels and intends not to market itself as a
“commodity pool” or a vehicle for trading such
instruments. The Fund is not permitted to invest in commodities or
commodity derivatives.
Derivative
contracts, including, without limitation, swaps, currency forwards,
and non-deliverable forwards, are subject to regulation under the
Dodd-Frank Wall Street Reform and Consumer Protection Act
(“Dodd-Frank
Act”) in the U.S. and under comparable regimes in
Europe, Asia and other non-U.S. jurisdictions. Swaps,
non-deliverable forwards and certain other derivatives traded in
the OTC market became subject to variation margin requirements on
March 1, 2017 and will be subject to phase-in requirements with
respect to initial margin, which phase-in period continues through
2020. Implementation of the margining and other provisions of the
Dodd-Frank Act regarding clearing, mandatory trading, reporting and
documentation of swaps and other derivatives have impacted and may
continue to impact the costs to the Fund of trading these
instruments and, as a result, may affect returns to investors in
the Fund.
As a
result of regulatory requirements under the 1940 Act, the Fund is
required to maintain an amount of liquid assets, accrued on a daily
basis, having an aggregate value at least equal to the value of the
Fund’s obligations under the applicable derivatives contract.
To the extent that derivatives contracts are settled on a physical
basis, the Fund will generally be required to maintain an amount of
liquid assets equal to the notional value of the contract. On the
other hand, in connection with derivatives contracts that are
performed on a net basis, the Fund will generally be required to
maintain liquid assets, accrued daily, equal only to the accrued
excess, if any, of the Fund’s obligations over those of its
counterparty under the contract. Accordingly, reliance by the Fund
on physically-settled derivatives contracts may adversely impact
investors by requiring the Fund to set aside a greater amount of
liquid assets than would generally be required if the Fund were
relying on cash-settled derivatives contracts.
Repurchase Agreements. A repurchase agreement is an
instrument under which the purchaser (i.e., the Fund) acquires the security
and the seller agrees, at the time of the sale, to repurchase the
security at a mutually agreed-upon time and price, thereby
determining the yield during the purchaser’s holding period.
Repurchase agreements may be construed to be collateralized loans
by the purchaser to the seller secured by the securities
transferred to the purchaser. If a repurchase agreement is
construed to be a collateralized loan, the underlying securities
will not be considered to be owned by the Fund but only to
constitute collateral for the seller’s obligation to pay the
repurchase price, and, in the event of a default by the seller, the
Fund may suffer time delays and incur costs or losses in connection
with the disposition of the collateral.
In any
repurchase transaction, the collateral for a repurchase agreement
may include: (i) cash items; (ii) obligations issued by the
U.S. government or its agencies or instrumentalities; or (iii)
obligations that, at the time the repurchase agreement is entered
into, are determined to (A) have exceptionally strong capacity to
meet their financial obligations and (B) are sufficiently liquid
such that they can be sold at approximately their carrying value in
the ordinary course of business within seven days.
Repurchase
agreements pose certain risks for the Fund that utilizes them. Such
risks are not unique to the Fund, but are inherent in repurchase
agreements. The Fund seeks to minimize such risks, but because of
the inherent legal uncertainties involved in repurchase agreements,
such risks cannot be eliminated. Lower quality collateral and
collateral with a longer maturity may be subject to greater price
fluctuations than higher quality collateral and collateral with a
shorter maturity. If the repurchase agreement counterparty were to
default, lower quality collateral may be more difficult to
liquidate than higher quality collateral. Should the counterparty
default and the amount of collateral not be sufficient to cover the
counterparty’s repurchase obligation, the Fund would likely
retain the status of an unsecured creditor of the counterparty
(i.e., the position the
Fund would normally be in if it were to hold, pursuant to its
investment policies, other unsecured debt securities of the
defaulting counterparty) with respect to the amount of the
shortfall. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and income involved in the
transaction.
Reverse Repurchase Agreements.
Reverse repurchase agreements involve the sale of securities with
an agreement to repurchase the securities at an agreed-upon price,
date and interest payment and have the characteristics of
borrowing. Generally, the effect of such transactions is that the
Fund can recover all or most of the cash invested in the portfolio
securities involved during the term of the reverse repurchase
agreement, while in many cases the Fund is able to keep some of the
interest income associated with those securities. Such transactions
are advantageous only if the Fund has an opportunity to earn a rate
of interest on the cash derived from these transactions that is
greater than the interest cost of obtaining the same amount of
cash. Opportunities to realize earnings from the use of the
proceeds equal to or greater than the interest required to be paid
may not always be available, and the Fund intends to use the
reverse repurchase technique only when it believes it will be
advantageous. The use of reverse repurchase agreements may
exaggerate any increase or decrease in the value of the
Fund’s assets. The Fund’s exposure to reverse
repurchase agreements will be covered by liquid assets having a
value equal to or greater than the Fund’s obligations under
such commitments. The use of reverse repurchase agreements is a
form of leverage, and the proceeds obtained by the Fund through
reverse repurchase agreements may be invested in additional
securities.
Short-Term Instruments and Temporary Investments. The Fund
may invest in short-term instruments, including money market
instruments, on an ongoing basis to provide liquidity or for other
reasons, such as temporary defensive positions in response to
adverse market, economic, or political conditions. Money market
instruments are generally short-term investments that may include,
but are not limited to: (i) shares of money market funds; (ii)
obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities (including government-sponsored
enterprises); (iii) negotiable certificates of deposit
(“CDs”),
bankers’ acceptances, fixed-time deposits and other
obligations of U.S. and non-U.S. banks (including non-U.S.
branches) and similar institutions; (iv) commercial paper rated, at
the date of purchase, “Prime-1” by Moody’s®
Investors Service, Inc., “F-1” by Fitch Ratings, Inc.,
or “A-1” by Standard & Poor’s® Financial
Services LLC, a subsidiary of S&P Global, Inc.
(“S&P Global
Ratings”), or if unrated, of comparable quality as
determined by the Adviser or Subadviser; (v) non-convertible
corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than 397
days and that satisfy the rating requirements set forth in Rule
2a-7 under the 1940 Act; (vi) repurchase agreements; and (vii)
short-term U.S. dollar-denominated obligations of non-U.S. banks
(including U.S. branches) that, in the opinion of the Adviser or
Subadviser, are of comparable quality to obligations of U.S. banks
that may be purchased by the Fund. Any of these instruments may be
purchased on a current or forward-settled basis. Time deposits are
non-negotiable deposits maintained in banking institutions for
specified periods of time at stated interest rates. Bankers’
acceptances are time drafts drawn on commercial banks by borrowers,
usually in connection with international transactions.
Swap Agreements. Swap agreements are contracts between
parties in which one party agrees to make periodic payments to the
other party based on the change in market value or level of a
specified rate, index or asset. In return, the other party agrees
to make periodic payments to the first party based on the return of
a different specified rate, index or asset. Swap agreements will
usually be performed on a net basis, with the Fund receiving or
paying only the net amount of the two payments. The net amount of
the excess, if any, of the Fund’s obligations over its
entitlements with respect to each swap is accrued on a daily basis,
and an amount of liquid assets having an aggregate value at least
equal to the accrued excess will be maintained by the
Fund.
The
Fund may enter into currency, interest rate or index swaps, or,
total return swaps (e.g.,
CFDs). The use of currency, interest rate and index swaps is a
highly specialized activity that involves investment techniques and
risks different from those associated with ordinary portfolio
security transactions. These transactions generally do not involve
the delivery of securities or other underlying assets.
The
risk of loss with respect to swaps is generally limited to the net
amount of payments that the Fund is contractually obligated to
make. Swap agreements are subject to the risk that the swap
counterparty will default on its obligations to pay the Fund and
the risk that the Fund will not be able to meet its obligations to
pay the other party to the agreement. If such a default occurs, the
parties will have contractual remedies pursuant to the agreements
related to the transaction. However, such remedies may be subject
to bankruptcy and insolvency laws, which could affect the
Fund’s rights as a creditor (e.g., the Fund may not receive
the net amount of payments that it is contractually entitled to
receive). Swap agreements may also involve the risk that there is
an imperfect correlation between the return on the Fund’s
obligation to its counterparty and the return on the referenced
asset. In addition, swap agreements are subject to market and
liquidity risk, leverage risk and hedging risk.
Regulations
are now in effect that require the Fund to post and collect
variation margin (comprised of specified liquid instruments and
subject to required haircuts) in connection with trading of OTC
swaps. Requirements for posting of initial margin in connection
with OTC swaps will be phased-in over the next several years. The
Fund expects that both of these requirements may increase the costs
of transacting in swaps. In addition, the prudential regulators
have indicated that they intend to adopt legislation requiring
certain regulated counterparties to include in swap agreements
terms that restrict the rights of counterparties, such as the Fund,
to terminate swaps and foreclose upon collateral in the event that
the counterparty and/or its affiliates are subject to certain types
of insolvency proceedings.
Tracking Stocks. A tracking stock is a separate class of
common stock whose value is linked to a specific business unit or
operating division within a larger company and is designed to
“track” the performance of such business unit or
division. The tracking stock may pay dividends to shareholders
independent of the parent company. The parent company, rather than
the business unit or division, generally is the issuer of tracking
stock. However, holders of the tracking stock may not have the same
rights as holders of the company’s common stock.
When-Issued Securities. The
Fund may purchase securities on a when-issued basis, for payment
and delivery at a later date, generally within one month. The price
and yield are generally fixed on the date of commitment to
purchase, and the value of the security is thereafter reflected in
the Fund’s NAV. During the period between purchase and
settlement, no payment is made by the Fund and no interest accrues
to the Fund. At the time of settlement, the market value of the
security may be more or less than the purchase price. When the Fund
purchases securities on a when-issued basis, it maintains liquid
assets in a segregated account with its custodian in an amount
equal to the purchase price as long as the obligation to purchase
continues.
Investment
Policies and Limitations
The
Fund has adopted its investment objective as a non-fundamental
investment policy. Therefore, the Fund may change its investment
objective and Underlying Index without shareholder
approval.
The
Board has adopted as fundamental policies the following numbered
investment restrictions, which cannot be changed without the
approval of the holders of a majority of the Fund’s
outstanding voting securities. A vote of a majority of the
outstanding voting securities is defined in the 1940 Act as the
lesser of (a) 67% or more of the voting securities present at a
fund meeting, if the holders of more than 50% of the outstanding
voting securities are present or represented by proxy and (b) more
than 50% of outstanding voting securities of the fund.
For
purposes of the following limitations, any limitation which
involves a maximum percentage shall not be considered violated
unless an excess over the percentage occurs immediately after, and
is caused by, an acquisition or encumbrances of securities or
assets of, or borrowings by, the Fund. With respect to the
Fund’s fundamental investment restriction on borrowing, asset
coverage of at least 300% (as defined in the 1940 Act), inclusive
of any amounts borrowed, must be maintained at all
times.
As a matter of fundamental policy, the Fund will not:
1.
Concentrate its
investments (i.e., hold 25%
or more of its total assets in the stocks of a particular industry
or group of industries), except that the Fund will concentrate to
approximately the same extent that its Underlying Index
concentrates in the securities of such particular industry or group
of industries. For purposes of this limitation, securities of the
U.S. government (including its agencies and instrumentalities),
repurchase agreements collateralized by U.S. government securities,
securities of state or municipal governments and their political
subdivisions and securities of investment companies are not
considered to be issued by members of any industry.
2.
Borrow money,
except as permitted under the 1940 Act, the rules, regulations and
interpretations thereunder, and any applicable exemptive relief,
including that (i) the Fund may borrow from banks for temporary or
emergency (not leveraging) purposes, including the meeting of
redemption requests which might otherwise require the untimely
disposition of securities, and (ii) the Fund may, to the extent
consistent with its investment policies, enter into repurchase
agreements, reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To
the extent that it engages in transactions described in (i) and
(ii), the Fund will be limited so that no more than 33 1/3% of the
value of its total assets (including the amount borrowed) is
derived from such transactions. Any borrowings which come to exceed
this amount will be reduced in accordance with applicable
law.
3.
Issue any senior
security, except as permitted under the 1940 Act, as amended, the
regulations and any exemptive relief thereunder and as interpreted,
modified or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
4.
Make loans, except
as permitted under the 1940 Act, the rules, regulations and
interpretations thereunder, and any exemptive relief.
5.
Purchase or sell
real estate unless acquired as a result of ownership of securities
or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate,
real estate investment trusts or securities of companies engaged in
the real estate business).
6.
Purchase or sell
physical commodities unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the
Fund from purchasing or selling options, futures contracts and
other financial instruments or from investing in issuers engaged in
the commodities business or securities or other instruments backed
by physical commodities).
7.
Engage in the
business of underwriting securities issued by other persons, except
to the extent that the Fund may technically be deemed to be an
underwriter under the 1933 Act in disposing of portfolio
securities.
The Fund has
adopted a non-fundamental investment policy in accordance with Rule
35d-1 under the 1940 Act that, under normal circumstances, the Fund
will invest at least 80% of its total assets, at all times, in the
securities of companies screened and satisfactorily scored for
either enviornmental, social and governance issues, and in
securities of companies screened and satisfactorily scored for
LGBTQ brand loyalty and support. The Fund has also adopted a policy
to provide its shareholders with at least 60 days' prior written
notice of any change in such policy.
Management
Board Responsibilities. The business of the Trust is managed under the
direction of the Board. The Board has considered and approved
contracts, as described herein, under which certain companies
provide essential management and administrative services to the
Trust. The day-to-day business of the Trust, including the
day-to-day management of risk, is performed by the service
providers of the Trust, such as the Adviser, Subadviser,
Distributor and Administrator. The Board is responsible for
overseeing the Trust’s service providers and, thus, has
oversight responsibility with respect to the risk management
performed by those service providers. Risk management seeks to
identify and eliminate or mitigate the potential effects of risks
such as events or circumstances that could have material adverse
effects on the business, operations, shareholder services,
investment performance or reputation of the Trust or the Fund. The
Board’s role in risk management oversight begins before the
inception of an investment portfolio, at which time the Adviser
presents the Board with information concerning the investment
objectives, strategies and risks of the investment portfolio.
Additionally, the Adviser provides the Board with an overview of,
among other things, the firm’s investment philosophy,
brokerage practices and compliance infrastructure. Thereafter, the
Board oversees the risk management of the investment
portfolio’s operations, in part, by requesting periodic
reports from and otherwise communicating with various personnel of
the service providers, including the Trust’s Chief Compliance
Officer and the independent registered public accounting firm of
the Trust. The Board and, with respect to identified risks that
relate to its scope of expertise, the Audit Committee of the Board,
oversee efforts by management and service providers to manage risks
to which the Fund may be exposed.
Under the overall supervision of the Board and the Audit Committee
(discussed in more detail below), the service providers to the
Trust employ a variety of processes, procedures and controls to
identify risks relevant to the operations of the Trust and the Fund
to lessen the probability of their occurrence and/or to mitigate
the effects of such events or circumstances if they do occur. Each
service provider is responsible for one or more discrete aspects of
the Trust’s business and, consequently, for managing the
risks associated with that activity.
The Board is responsible for overseeing the nature, extent and
quality of the services provided to the Fund by the Adviser and
receives information about those services at its regular meetings.
In addition, on at least an annual basis, in connection with its
consideration of whether to renew the Advisory Agreement with the
Adviser and the Sub-Advisory Agreement with the Subadviser, the
Board receives detailed information from the Adviser and
Subadviser. Among other things, the Board regularly considers the
Adviser’s and Sub-adviser’s adherence to the
Fund’s investment restrictions and compliance with various
policies and procedures of the Trust and with applicable securities
regulations. The Board also reviews information about the
Fund’s performance and investments.
The Trust’s Chief Compliance Officer meets regularly with the
Board to review and discuss compliance and other issues. At least
annually, the Trust’s Chief Compliance Officer provides the
Board with a report reviewing the adequacy and effectiveness of the
Trust’s policies and procedures and those of its service
providers, including the Adviser and the Subadviser. The report
addresses the operation of the policies and procedures of the Trust
and each service provider since the date of the last report,
material changes to the policies and procedures since the date of
the last report, any recommendations for material changes to the
policies and procedures, and material compliance matters since the
date of the last report.
The Board receives reports from the Trust’s service providers
regarding operational risks, portfolio valuation and other matters.
Annually, the independent registered public accounting firm reviews
with the Audit Committee its audit of the financial statements of
the Fund, focusing on major areas of risk encountered by the Trust
and noting any significant deficiencies or material weaknesses in
the Trust’s internal controls.
The Board recognizes that not all risks that may affect the Fund
can be identified, that it may not be practical or cost-effective
to eliminate or mitigate certain risks, that it may be necessary to
bear certain risks (such as investment-related risks) to achieve
the Fund’s goals, and that the processes, procedures and
controls employed to address certain risks may be limited in their
effectiveness. Moreover, despite the periodic reports the Board
receives and the Board’s discussions with the service
providers to the Trust, it may not be made aware of all of the
relevant information of a particular risk. Most of the
Trust’s investment management and business affairs are
carried out by or through the Adviser or the Subadviser and other
service providers, each of which has an independent interest in
risk management but whose policies and the methods by which one or
more risk management functions are carried out may differ from the
Trust’s and each other’s in the setting of priorities,
the resources available or the effectiveness of relevant controls.
As a result of the foregoing and other factors, the Board’s
risk management oversight is subject to substantial
limitations.
Members of the Board and Officers of the
Trust. Set forth below are
the names, years of birth, position with the Trust, term of office,
portfolios supervised and the principal occupations and other
directorships for a minimum of the last five years of each of the
persons currently serving as members of the Board and as Executive
Officers of the Trust. Also included below is the term of office
for each of the Executive Officers of the Trust. The members of the
Board serve as Trustees for the life of the Trust or until
retirement, removal, or their office is terminated pursuant to the
Trust’s Declaration of Trust.
The Chairman of the Board, Robert Tull, is an interested
person of the Trust as that term is defined under Section 2(a)(19)
of the 1940 Act (the “Interested Trustee”) because of
his affiliation with the Adviser. The other Trustees, and their
immediate family members have no affiliation or business connection
with the Adviser, Subadviser or the Fund’s principal
underwriter or any of their affiliated persons and do not own any
stock or other securities issued by the Adviser, Subadviser or the
Fund’s principal underwriter. These Trustees are not
Interested Persons of the Trust and are referred to herein as
“Independent Trustees.”
There is an Audit Committee and a Nominating and Governance
Committee of the Board, each of which is chaired by an Independent
Trustee and comprised solely of Independent Trustees. The Committee
chair for each is responsible for running the Committee meeting,
formulating agendas for those meetings, and coordinating with
management to serve as a liaison between the Independent Trustees
and management on matters within the scope of the responsibilities
of such Committee as set forth in its Board-approved
charter.
There is a Valuation Committee, which is comprised of the
Independent Trustees and representatives of the Adviser to take
action in connection with the valuation of portfolio securities
held by the Fund in accordance with the Board-approved Valuation
Procedures. The Board has determined that this leadership structure
is appropriate given the specific characteristics and circumstances
of the Fund. The Board made this determination in consideration of,
among other things, the fact that the Independent Trustees
constitute a majority of the Board, the assets under management of
the Fund, the number of portfolios overseen by the Board and the
total number of trustees on the Board.
Trustees and Officers
Independent Trustees:
Name and Year of Birth(1)
|
|
Position(s) Held with Trust
|
|
Term of Office and Length of Time Served(2)
|
|
Principal Occupation(s)
During Past 5 Years
|
|
Number of Portfolios in Fund Complex Overseen by
Trustee(3)
|
|
Other Directorships Held by Trustee During Past 5
Years
|
|
|
|
|
|
|
|
|
|
|
|
Lawrence Larkin
(1939)
|
|
Trustee
|
|
Term: Unlimited
Served
since
November 2019
|
|
Larkin Consulting, LLC (President, 2000 to Present)
|
|
1
|
|
None
|
Arlene Reyes (1964)
|
|
Trustee
|
|
Term: Unlimited
Served
since
November 2019
|
|
Varmer
Inc. (COO, 1998 to Present);
Coffee
and Chocolate Farming, Sabana Grande (President, 2014 to
Present)
|
|
1
|
|
None
|
James Brenner (1984)
|
|
Trustee
|
|
Term: Unlimited
Served
since
November 2019
|
|
Patria Investimentos (Investor Relations & Business
Development, 2016 to Present); PineBridge Investments (Vice
President- Institutional Sales, 2010-2016)
|
|
1
|
|
Trustee, Procure ETF Trust II (since 2018)
|
Interested Trustee:
Name and Year of
Birth(1)
|
|
Position(s) Held
with Trust
|
|
Term of Office
and Length of Time Served(2)
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
Number of
Portfolios in Fund Complex Overseen by
Trustee(3)
|
|
Other
Directorships Held by Trustee During Past 5
Years
|
|
|
|
|
|
|
|
|
|
|
|
Robert
Tull (4)
(1952)
|
|
Chairman
and Trustee
|
|
Term: Unlimited
Served
since
June 2019
|
|
Procure
Holdings LLC (President, 2018 to Present);
Robert
Tull & Co. (President, 2005 to Present)
|
|
1
|
|
Virtus
ETFs
|
Other Officers:
Name and Year of
Birth(1)
|
|
Position(s) Held
with Trust
|
|
Term of Office
and Length of Time Served(2)
|
|
Principal
Occupation(s)
During Past 5
Years
|
|
|
|
|
|
|
|
Stacey
Gillespie (1974)
|
|
Chief
Compliance
Officer
|
|
Term: Unlimited
Served since
November
2019
|
|
Cipperman
Compliance Services, LLC (Managing Director, 2015 to Present);
Boenning & Scattergood, Inc. (Chief Compliance Officer, 2007 to
2015)
|
Andrew
Chanin
(1985)
|
|
Secretary
|
|
Term: Unlimited
Served
since June 2019
|
|
Procure
Holdings LLC (Chief Executive Officer, 2018 to Present);
PureShares, LLC (CEO/COO, 2011 to Present)
|
Adrienne
Binik-Chanin
(1951)
|
|
Treasurer,
Chief Financial Officer and Principal Accounting
Officer
|
|
Term: Unlimited
Served since June 2019
|
|
Procure
Holdings LLC (CFO, 2018 to Present); ProcureAM LLC (CFO, 2017 to
Present); PureShares, LLC (Accountant, 2015 to Present); Chester
Medical Associates (Comptroller, 1990 to Present)
|
(1)
|
The
address of each Trustee or officer is c/o ProcureAM, LLC, 16
Firebush Road, Levittown, PA 19056.
|
(2)
|
Trustees
and Officers serve until their successors are duly elected and
qualified.
|
(3)
|
The
Fund is part of a “fund complex” as defined in the 1940
Act. The fund complex includes all open-end funds (including all of
their portfolios) advised by the Adviser and any funds that have an
investment adviser that is an affiliated person of the Adviser. As
of the date of this SAI, the fund complex consists of two
funds.
|
(4)
|
Robert
Tull is an “interested person” of the Trust (as that
term is defined in the 1940 Act) because of his affiliation with
the Adviser.
|
Description of Standing Board Committees
Audit Committee. The principal
responsibilities of the Audit Committee are the appointment,
compensation and oversight of the Trust’s independent
auditors, including the resolution of disagreements regarding
financial reporting between Trust management and such independent
auditors. The Audit Committee’s responsibilities include,
without limitation, to (i) oversee the accounting and financial
reporting processes of the Trust and its internal control over
financial reporting and, as the Committee deems appropriate, to
inquire into the internal control over financial reporting of
certain third-party service providers; (ii) oversee the quality and
integrity of the Fund’s financial statements and the
independent audits thereof; (iii) oversee, or, as appropriate,
assist Board oversight of, the Trust’s compliance with legal
and regulatory requirements that relate to the Trust’s
accounting and financial reporting, internal control over financial
reporting and independent audits; (iv) approve prior to appointment
the engagement of the Trust’s independent auditors and, in
connection therewith, to review and evaluate the qualifications,
independence and performance of the Trust’s independent
auditors; and (v) act as a liaison between the Trust’s
independent auditors and the full Board. The Board has adopted a
written charter for the Audit Committee. Lawrence Larkin
will serve as the Chairman of the
Audit Committee and all of the Independent Trustees serve on the
Trust’s Audit Committee.
Nominating and Governance Committee. The Nominating and Governance Committee has been
established to: (i) assist the Board in matters involving mutual
fund governance and industry practices; (ii) select and nominate
candidates for appointment or election to serve as Trustees who are
not “interested persons” of the Trust or its Advisor or
distributor (as defined by the 1940 Act); and (iii) advise the
Board on ways to improve its effectiveness. James Brenner will
serve as the Chairman of the Nominating and Governance Committee
and all of the Independent Trustees serve on the Nominating and
Governance Committee. As stated above, each Trustee holds office
for an indefinite term until the occurrence of certain events. In
filling Board vacancies, the Nominating Committee will consider
nominees recommended by shareholders. Nominee recommendations
should be submitted to the Trust at its mailing address stated in
the Fund’s Prospectus and should be directed to the attention
of the Procure ETF Trust I Nominating
Committee.
Valuation Committee. The
Valuation Committee is authorized to act for the Board in
connection with the valuation of portfolio securities held by the
Fund in accordance with the Trust’s Valuation
Procedures. Arlene Reyes will serve as the Chairman of the Valuation
Committee and all of the Independent Trustees serve on the
Valuation Committee, which meets on an ad hoc
basis.
Individual Trustee Qualifications
The Trust has concluded that each of the Trustees should serve on
the Board because of their ability to review and understand
information about the Trust and the Fund provided to them by
management, to identify and request other information they may deem
relevant to the performance of their duties, to question management
and other service providers regarding material factors bearing on
the management and administration of the Fund, and to exercise
their business judgment in a manner that serves the best interests
of the Fund’s shareholders. The Trust has concluded that each
of the Trustees should serve as a Trustee based on their own
experience, qualifications, attributes and skills as described
below.
The Trust has concluded that Robert Tull should serve as
trustee of the Fund because of the experience he has gained
as President of the Adviser and his extensive knowledge
of and experience in the financial services and ETF
industry.
The
Trust has concluded that Lawrence Larkin should serve as trustee of
the Fund because of his broad financial and ETF-related knowledge
acquired over a 65-year career working in consulting in the
financial sector, as well as his over 20-year experience consulting
in the ETF industry.
The
Trust has concluded that Arlene Reyes should serve as trustee of
the Fund because of her business experience in ETFs. Ms. Reyes has
been responsible for the operation of an ETF information website
for over 20 years, researching, organizing, and distributing news,
working papers, and reports related to the global ETF marketplace.
She has assisted in hosting yearly ETF award ceremonies and
conferences, which provide ETF education.
The
Trust has concluded that James Brenner should serve as trustee of
the Fund because of his extensive work experience in the asset
management industry, as well as his experience working with ETFs,
serving on other boards of trustees of other registered investment
companies.
Board Compensation
No officer, director or employee of the Adviser, its parent or
subsidiaries receives any compensation from the Trust for serving
as an officer or Trustee of the Trust. The Trust pays, in the
aggregate, each Independent Trustee an annual fee of $2000
per fund. The Chairmen of the Audit
Committee, the Valuation Committee and the Nominating and
Governance Committee each receive an additional annual fee of
$500. In addition, the
Independent Trustees are reimbursed for all reasonable travel
expenses relating to their attendance at the Board Meetings. The
following table sets forth certain information with respect to the
compensation of each Trustee, and reflects that the Trustees have
not received compensation to date.
Name and
Position
|
|
Aggregate
Compensation
From the
Trust
|
|
Pension or
Retirement Benefits Accrued As Part of Trust
Expenses
|
|
Estimated Annual
Benefits Upon Retirement
|
|
Total
Compensation From Trust and Fund Complex Paid to
Trustees(1)
|
|
|
|
|
|
|
|
|
|
Lawrence
Larkin, Trustee
|
|
$
0
|
|
N/A
|
|
N/A
|
|
$0
|
Arlene
Reyes, Trustee
|
|
$
0
|
|
N/A
|
|
N/A
|
|
$0
|
James
Brenner, Trustee
|
|
$
0
|
|
N/A
|
|
N/A
|
|
$0
|
Robert Tull, Trustee
|
|
None
|
|
None
|
|
None
|
|
None
|
(1)
|
“Fund
Complex” consists of all mutual funds and ETFs advised by the
Adviser and its affiliate advisers.
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Code of Ethics
The Trust, its Adviser and Subadviser have each adopted a code of
ethics under Rule 17j-1 of the 1940 Act that permit personnel
subject to their particular codes of ethics to invest in
securities, including securities that may be purchased or held by
the Fund.
Proxy
Voting Policy and Procedures
The
Board believes that the voting of proxies on securities held by the
Fund is an important element of the overall investment process. As
such, the Board has delegated responsibility for decisions
regarding proxy voting for securities held by the Fund to the
Adviser. The Adviser will vote such proxies in accordance with its
proxy policies and procedures, a summary of which is included in
Appendix A to this Statement of Additional Information. The Board
will periodically review the Fund’s proxy voting
record.
The
Trust is required to disclose annually the Fund’s complete
proxy voting record on Form N-PX covering the period July 1 through
June 30 and file it with the SEC no later than August 31 of each
year. The Fund’s Form N-PX will be available at no charge
upon request by calling 1-866-690-3837. It will also be available
on the SEC’s EDGAR website at www.sec.gov.
Control
Persons and Principal Holders of Securities
A
principal shareholder is any person who owns of record or
beneficially 5% or more of the outstanding shares of the Fund. A
control person is one who owns beneficially or through controlled
companies more than 25% of the voting securities of a company or
acknowledges the existence of control. Shareholders with a
controlling interest could affect the outcome of voting or the
direction of management of the Fund.
The
Fund had not commenced operations as of November 15, 2019. Prior to
the commencement of investment operations and the public launch of
the Fund, the Adviser owned all of the initial Shares issued by the
Fund. No other person owns of record or is known by the Fund to own
beneficially 5% or more of the Fund’s outstanding equity
securities.
Investment
Advisory and Subadvisory Services
The
following information supplements and should be read in conjunction
with the Prospectus.
Investment Adviser. ProcureAM, LLC, the Adviser, serves as
investment adviser to the Fund and along with the Board has overall
responsibility for the general management and administration of the
Trust, pursuant to the Investment Advisory Agreement between the
Trust and the Adviser (the “Advisory Agreement”). As of
the date of this SAI, the Adviser managed one other account. Under
the Advisory Agreement, the Adviser, subject to the supervision of
the Board, provides an investment program for the Fund and is
responsible for the investment of the Fund’s assets in
conformity with the stated investment policies of the Fund. The
Adviser is responsible for placing purchase and sale orders and
providing continuous supervision of the investment portfolio of the
Fund. The Adviser also arranges for the provision of distribution,
transfer agency, custody, administration and all other services
necessary for the Fund to operate.
After
an initial two-year period, the Advisory Agreement will continue in
effect with respect to the Fund from year to year provided such
continuance is specifically approved at least annually by (i) the
vote of a majority of the Fund’s outstanding voting
securities or a majority of the Trustees of the Trust, and (ii) the
vote of a majority of the Independent Trustees of the Trust, cast
in person at a meeting called for the purpose of voting on such
approval.
The
Advisory Agreement will terminate automatically if assigned (as
defined in the 1940 Act). The Advisory Agreement is also terminable
at any time without penalty by the Trustees of the Trust or by vote
of a majority of the outstanding voting securities of the Fund on
60 days’ written notice to the Adviser or by the Adviser on
60 days’ written notice to the Trust.
Pursuant
to the Advisory Agreement, the Adviser is entitled to receive a
fee, payable monthly, at an annual rate of 0.75% as a percentage of
the Fund’s average daily net assets.
In
consideration of the fees paid with respect to the Fund, the
Adviser has agreed to pay all expenses of the Trust, except (i)
brokerage and other transaction expenses, including taxes; (ii)
acquired fund fees and expenses; (iii) extraordinary legal fees or
expenses, such as those for litigation or arbitration; (iv) other
extraordinary expenses; (v) distribution fees and expenses paid by
the Trust under any distribution plan adopted pursuant to Rule
12b-1 under the 1940 Act; and (vi) the advisory fee payable to the
Adviser hereunder.
As of
the date of this SAI, the Fund has not commenced operations and,
therefore, has not yet incurred any advisory fees under the
Advisory Agreement.
In
addition to providing advisory services under the Advisory
Agreement, the Adviser also: (i) supervises all non-advisory
operations of the Fund; (ii) provides personnel to perform such
executive, administrative and clerical services as are reasonably
necessary to provide effective administration of the Fund; (iii)
arranges for (a) the preparation of all required tax returns, (b)
the preparation and submission of reports to existing shareholders,
(c) the periodic updating of prospectuses and statements of
additional information and (d) the preparation of reports to be
filed with the SEC and other regulatory authorities; (iv) maintains
the Fund’s records; and (v) provides office space and all
necessary office equipment and services.
Subadviser. Penserra Capital Management LLC
(“Subadviser” or “Penserra”) with its
principal office located at 4 Orinda Way, 100-A, Orinda California
94563, serves as the investment subadviser for the Fund pursuant to
an Investment Sub-Advisory Agreement between the Adviser and
Penserra Capital Management LLC (referred to as a
“Sub-Advisory Agreement”). The Subadviser is
responsible for placing purchase and sale orders and shall make
investment decisions for the Fund, subject to the supervision by
the Adviser. For its services, the Subadviser is compensated by the
Adviser. As of September 29, 2019, the Subadviser managed
approximately $1.6 billion in assets.
Portfolio Managers. The Subadviser acts as portfolio manager
for the Fund. The Subadviser will supervise and manage the
investment portfolio of the Fund and will direct the purchase and
sale of the Fund’s investment securities. The Subadviser
utilizes a team of investment professionals acting together to
manage the assets of the Fund. The team meets regularly to review
portfolio holdings and to discuss purchase and sale activity. The
team adjusts holdings in the portfolio as they deem appropriate in
the pursuit of the Fund’s investment objective.
Dustin
Lewellyn, Ernesto Tong, and Anand Desai of the Subadviser are the
Fund’s portfolio managers and are jointly responsible for the
day-to-day management of the Fund. The Portfolio Managers are
responsible for various functions related to portfolio management,
including, but not limited to, investing cash inflows, implementing
investment strategy, researching and reviewing investment strategy,
and overseeing members of their portfolio management team with more
limited responsibilities.
Mr.
Lewellyn has been Chief Investment Officer with Penserra since
2012. He was President and Founder of Golden Gate Investment
Consulting LLC from 2011 through 2015. Prior to that, Mr. Lewellyn
was a managing director at Charles Schwab Investment Management,
Inc. (“CSIM”), which he joined in 2009, and head of
portfolio management for Schwab ETFs. Prior to joining CSIM, he
worked for two years as director of ETF product management and
development at a major financial institution focused on asset and
wealth management. Prior to that, he was a portfolio manager for
institutional clients at a financial services firm for three years.
In addition, he held roles in portfolio operations and portfolio
management at a large asset management firm for more than 6
years.
Mr.
Tong has been a Managing Director with Penserra since 2015. Prior
to that, Mr. Tong spent seven years as vice president at Blackrock,
where he was a portfolio manager for a number of the iShares ETFs,
and prior to that, he spent two years in the firm’s index
research group.
Mr.
Desai has been a Vice President with Penserra since 2015. Prior to
that, Mr. Desai was a portfolio fund accountant at State Street for
five years.
Other
Accounts Managed
The
following tables provide additional information about other
portfolios or accounts managed by the Fund’s portfolio
managers as of September 29, 2019.
Total
number of other accounts managed by the portfolio managers within
each category below and the total assets in the accounts managed
within each category below.
Portfolio Manager
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Registered Investment Companies
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Other Pooled Investment Vehicles
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Other Accounts
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Number of Accounts
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Total Assets
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Number of Accounts
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Total Assets
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Number of Accounts
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Total Assets
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Dustin
Lewellyn
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30
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$1.6
billion
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1
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$8
million
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N/A
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N/A
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Ernesto
Tong
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30
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$1.6
billion
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1
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$8
million
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N/A
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N/A
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Anand
Desai
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30
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$1.6
billion
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1
|
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$8
million
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N/A
|
|
N/A
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Material Conflicts of Interest.
Because the portfolio managers manage multiple portfolios for
multiple clients, the potential for conflicts of interest exists.
Each portfolio manager may manage portfolios having substantially
the same investment style as the Fund. However, the portfolios
managed by a portfolio manager may not have portfolio compositions
identical to those of the Fund managed by the portfolio manager
due, for example, to specific investment limitations or guidelines
present in some portfolios or accounts, but not others. The
portfolio managers may purchase securities for one portfolio and
not another portfolio, and the performance of securities purchased
for one portfolio may vary from the performance of securities
purchased for other portfolios. A portfolio manager may place
transactions on behalf of other accounts that are directly or
indirectly contrary to investment decisions made on behalf of the
Fund, or make investment decisions that are similar to those made
for the Fund, both of which have the potential to adversely impact
the Fund depending on market conditions. For example, a portfolio
manager may purchase a security in one portfolio while
appropriately selling that same security in another portfolio. In
addition, some of these portfolios have fee structures that are or
have the potential to be higher than the advisory fees paid by the
Fund, which can cause potential conflicts in the allocation of
investment opportunities between the Fund and the other accounts.
However, the compensation structure for portfolio managers does not
generally provide incentive to favor one account over another
because that part of a manager’s bonus based on performance
is not based on the performance of one account to the exclusion of
others. There are many other factors considered in determining the
portfolio managers’ bonus. In addition, current trading
practices do not allow the Subadviser to intentionally favor one
portfolio over another as trades are executed as trade orders are
received. Portfolio’s rebalancing dates also generally vary
between fund families. Program trades created from the portfolio
rebalance are executed at market on close.
Compensation for the Portfolio Manager
The portfolio managers receive a base pay and an annual bonus
incentive based on performance against individual and
organizational unit objectives, as well as overall Subadviser
results. The plan is designed to align manager compensation with
investors' goals by rewarding portfolio managers who obtain results
consistent with the objectives of the products under the
individual’s management. In addition, these employees also
participate in a long-term incentive program. The long-term
incentive plan is eligible to senior level employees and is
designed to reward profitable growth in company value. An
employee's total compensation package is reviewed periodically to
ensure that they are competitive relative to the external
marketplace.
Ownership of Securities
The portfolio managers do not own Shares of the Fund.
Other
Service Providers
Administrator, Custodian and Transfer Agent. U.S. Bancorp
Fund Services, LLC (“USB”) and U.S. Bank, National
Association (“USBNA”) serve as the Fund’s
administrator, fund accountant and transfer agent, and as the
Fund’s custodian, respectively. Both USB and USBNA’s
principal address is 615 East Michigan Street. Milwaukee, WI 53202.
Under the Fund Administration Servicing Agreement and Fund
Accounting Servicing Agreement with the Trust, USB provides
necessary administrative, legal, tax, accounting services, and
financial reporting for the maintenance and operations of the Trust
and the Fund. USB is responsible for maintaining the books and
records and calculating the daily net asset value of the Fund. In
addition, USB makes available the office space, equipment,
personnel and facilities required to provide such
services.
Under
the Custody Agreement with the Trust, USBNA maintains in separate
accounts cash, securities and other assets of the Trust and the
Fund, keeps all necessary accounts and records, and provides other
services. Under the Custody Agreement, USBNA. is also authorized to
appoint certain foreign custodians or foreign custody managers for
Fund investments outside the United States.
Pursuant
to a Transfer Agent Servicing Agreement with the Trust, USB acts as
transfer agent to the Fund, dividend disbursing agent and
shareholder servicing agent to the Fund.
The
Adviser compensates USB and USBNA. for the foregoing services out
of the Adviser’s unified management fee.
Distributor. Quasar Distributors, LLC, the Distributor, is
located at 777 E Wisconsin Avenue, Milwaukee, WI 53202. The
Distributor, a wholly owned subsidiary of U.S. Bancorp, is a
broker-dealer registered under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”), and a member of the
Financial Industry Regulatory Authority (“FINRA”). The
Distributor has entered into a Services Agreement with ProcureAM
LLC to distribute the Fund.
Shares
will be continuously offered for sale by the Trust through the
Distributor only in whole Creation Units, as described in the
section of this SAI entitled “Purchase and Redemption of
Creation Units.” The Distributor also acts as an agent for
the Trust. The Distributor will deliver a prospectus to persons
purchasing Shares in Creation Units and will maintain records of
both orders placed with it and confirmations of acceptance
furnished by it. The Distributor has no role in determining the
investment policies of the Fund or which securities are to be
purchased or sold by the Fund.
The
Board intends to adopt a Distribution and Service Plan pursuant to
Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1
plan, the Fund will be authorized to pay an amount up to 0.25% of
its average daily net assets each year to finance activities
primarily intended to result in the sale of Creation Units of the
Fund or the provision of investor services. No Rule 12b-1 fees are
currently paid by the Fund and there are no plans to impose these
fees. However, in the event Rule 12b-1 fees are charged in the
future, they will be paid out of the Fund’s assets, and over
time these fees will increase the cost of your investment and they
may cost you more than certain other types of sales
charges.
Under
the Service and Distribution Plan, and as required by Rule 12b-1,
the Trustees will receive and review after the end of each calendar
quarter a written report provided by the Distributor of the amounts
expended under the Plan and the purpose for which such expenditures
were made.
The
Adviser and its affiliates may, out of their own resources, pay
amounts to third parties for distribution or marketing services on
behalf of the Fund. The making of these payments could create a
conflict of interest for a financial intermediary receiving such
payments.
Compliance Services Company. Cipperman Compliance Services,
LLC (“Cipperman”) will manage the compliance programs
of the Trust and the Fund. Stacey Gillespie of Cipperman will act
as Chief Compliance Officer (the “CCO”) of the Trust
and the Fund and perform the functions of the chief compliance
officer as described in Rule 38a-1 under the Investment Company Act
of 1940. The CCO shall have primary responsibility for
administering the Trust’s compliance policies and procedures
adopted pursuant to Rule 38a-1 (the “Compliance
Program”) and reviewing the Compliance Program, in the manner
specified in Rule 38a-1, at least annually, or as may be required
by Rule 38a-1, as may be amended from time to time. The CCO reports
directly to the Board of Trustees regarding the Compliance
Program.
Index Service Providers. Loyalty Preference Index,
Inc. (“Index
Provider”, wholly owned by LGBTQ Loyalty Holdings Inc.) is
the provider of the Underlying Index. The Adviser licenses the
Underlying Index from the Index Provider and sublicenses it to the
Fund. Fuzzy Logix is the index maintenance agent in implementing
the Index methodology for the Index Provider during rebalancing and
the Index annual reconstitution.
THE
INDEX PROVIDER DOES NOT GUARANTEE THE ACCURACY AND/OR THE
COMPLETENESS OF THE UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN
AND HAS NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS
THEREIN. THE INDEX PROVIDER MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY THE UNDERLYING INDEX, OWNERS OF THE
FUND OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE UNDERLYING
INDEX OR ANY DATA INCLUDED THEREIN. THE INDEX PROVIDER 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 UNDERLYING INDEX OR ANY DATA INCLUDED
THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
THE INDEX PROVIDER HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN
IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
Independent Registered Public Accounting Firm. Cohen &
Company Ltd. (“Cohen”), located at 1350 Euclid Ave.,
Suite 800, Cleveland, Ohio 44115, serves as independent registered
public accounting firm. Cohen will perform the annual audit of the
Fund’s financial statements, serve as tax adviser to the
Trust and will review the Fund’s federal, state and excise
tax returns, and advise the Trust on matters of accounting and
federal and state income taxation.
Counsel. K&L Gates LLP, located at 599 Lexington Avenue,
New York, NY 10022, is counsel to the Trust.
Brokerage
Transactions
Subject to the general supervision by the Adviser and the Board,
the Subadviser is responsible for decisions to buy and sell
securities for the Fund, the selection of brokers and dealers to
effect the transactions, which may be affiliates of the Adviser,
and the negotiation of brokerage commissions. The Fund may execute
brokerage or other agency transactions through registered
broker-dealers who receive compensation for their services in
conformity with the 1940 Act, the Exchange Act of 1934, and the
rules and regulations thereunder. Compensation may also be paid in
connection with riskless principal transactions (on the Exchange or
over-the-counter securities and securities listed on an exchange)
and agency or over-the-counter transactions executed with an
electronic communications network or an alternative trading
system.
The Fund will give primary consideration to obtaining the most
favorable prices and efficient executions of transactions in
implementing trading policy. Consistent with this policy, when
securities transactions are traded on an exchange, the Fund's
policy will be to pay commissions that are considered fair and
reasonable without necessarily determining that the lowest possible
commissions are paid in all circumstances. The Subadviser believes
that a requirement always to seek the lowest possible commission
cost could impede effective portfolio management and preclude the
Fund from obtaining a high quality of brokerage services. In
seeking to determine the reasonableness of brokerage commissions
paid in any transaction, the Subadviser will rely upon its
experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and
research services received from the broker effecting the
transaction. Such determinations will be necessarily subjective and
imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
The Subadviser does not consider sales of Shares by broker-dealers
as a factor in the selection of broker-dealers to execute portfolio
transactions.
As permitted by Section 28(e) of the 1934 Act, the Subadviser may
cause the Fund to pay a broker-dealer a commission for effecting a
securities transaction for the Fund that is in excess of the
commission that another broker-dealer would have charged for
effecting the transaction, if the Subadviser makes a good faith
determination that the broker’s commission paid by the Fund
is reasonable in relation to the value of the brokerage and
research services provided by the broker-dealer, viewed in terms of
either the particular transaction or the Subadviser’s overall
responsibilities to the Fund and its other investment advisory
clients. The practice of using a portion of the Fund’s
commission dollars to pay for brokerage and research services
provided to the Sub-Advisor is sometimes referred to as “soft
dollars.” Section 28(e) is sometimes referred to as a
“safe harbor,” because it permits this practice,
subject to a number of restrictions, including the
Subadviser’s compliance with certain procedural requirements
and limitations on the type of brokerage and research services that
qualify for the safe harbor.
Research products and services may include, but are not limited to,
general economic, political, business and market information and
reviews, industry and company information and reviews, evaluations
of securities and recommendations as to the purchase and sale of
securities, financial data on a company or companies, performance
and risk measuring services and analysis, stock price quotation
services, computerized historical financial databases and related
software, credit rating services, analysis of corporate
responsibility issues, brokerage analysts’ earnings
estimates, computerized links to current market data, software
dedicated to research, and portfolio modeling. Research services
may be provided in the form of reports, computer-generated data
feeds and other services, telephone contacts, and personal meetings
with securities analysts, as well as in the form of meetings
arranged with corporate officers and industry spokespersons,
economists, academics and governmental representatives. Brokerage
products and services assist in the execution, clearance and
settlement of securities transactions, as well as functions
incidental thereto, including but not limited to related
communication and connectivity services and equipment, software
related to order routing, market access, algorithmic trading, and
other trading activities. On occasion, a broker-dealer may furnish
the Subadviser with a service that has a mixed use (that is, the
service is used both for brokerage and research activities that are
within the safe harbor and for other activities). In this case, the
Subadviser is required to reasonably allocate the cost of the
service, so that any portion of the service that does not qualify
for the safe harbor is paid for by the Subadviser from its own
funds, and not by portfolio commissions paid by the
Fund.
Research products and services provided to the Subadviser by
broker-dealers that effect securities transactions for the Fund may
be used by the Subadviser in servicing all of its accounts.
Accordingly, not all of these services may be used by the
Subadviser in connection with the Fund. Some of these products and
services are also available to the Subadviser for cash, and some do
not have an explicit cost or determinable value. The research
received does not reduce the advisory fees paid to the Subadviser
for services provided to the Fund. The Subadviser’s expenses
would likely increase if the Subadviser had to generate these
research products and services through its own efforts, or if it
paid for these products or services itself.
As of the date of this SAI, the Fund has not commenced operations
and, therefore, has not entered into securities
transactions.
Payments by Procure and its Affiliates. Procure and/or its
affiliates (“Procure
Entities”) may pay certain broker-dealers, registered
investment advisers, banks and other financial intermediaries
(“Intermediaries”) for certain activities related to
the Fund, other Procure funds or exchange-traded products in
general. Procure Entities make these payments from their own assets
and not from the assets of the Fund. Although a portion of Procure
Entities’ revenue comes directly or indirectly in part from
fees paid by the Fund, other Procure funds or exchange-traded
products, these payments do not increase the price paid by
investors for the purchase of shares of, or the cost of owning, the
Fund, other Procure funds or exchange-traded products. Procure
Entities make payments for Intermediaries’ participation in
activities that are designed to make registered representatives,
other professionals and individual investors more knowledgeable
about exchange-traded products, including the Fund and other
Procure funds, or for other activities, such as participation in
marketing activities and presentations, educational training
programs, conferences, the development of technology platforms and
reporting systems (“Education Costs”). Procure Entities
also make payments to Intermediaries for certain printing,
publishing and mailing costs or materials relating to the Fund,
other Procure funds or exchange-traded products (“Publishing
Costs”). In addition, Procure Entities make payments to
Intermediaries that make shares of the Fund, other Procure funds or
exchange-traded products available to their clients, develop new
products that feature Procure or otherwise promote the Fund, other
Procure funds and exchange-traded products. Procure Entities may
also reimburse expenses or make payments from their own assets to
Intermediaries or other persons in consideration of services or
other activities that the Procure Entities believe may benefit the
Procure business or facilitate investment in the Fund, other
Procure funds or exchange-traded products. Payments of the type
described above are sometimes referred to as revenue-sharing
payments.
Payments
to an Intermediary may be significant to the Intermediary, and
amounts that Intermediaries pay to your salesperson or other
investment professional may also be significant for your
salesperson or other investment professional. Because an
Intermediary may make decisions about which investment options it
will recommend or make available to its clients or what services to
provide for various products based on payments it receives or is
eligible to receive, such payments may create conflicts of interest
between the Intermediary and its clients and these financial
incentives may cause the Intermediary to recommend the Fund, other
Procure funds or exchange-traded products over other investments.
The same conflicts of interest and financial incentives exist with
respect to your salesperson or other investment professional if he
or she receives similar payments from his or her Intermediary
firm.
In
addition, Procure Entities may enter into other contractual
arrangements with Intermediaries that the Procure Entities believe
may benefit the Procure business or facilitate investment in
Procure funds. Such agreements may include payments by Procure
Entities to such Intermediaries for data collection and provision,
technology support, platform enhancement, or co-marketing and
cross-promotional efforts. Payments made pursuant to such
arrangements may vary in any year and may be different for
different Intermediaries. In certain cases, the payments described
in the preceding sentence may be subject to certain minimum payment
levels. Such payments will not be asset- or
revenue-based.
Any
additions, modifications, or deletions to Intermediaries listed
above that have occurred since the date noted above are not
included in the list. Further, Procure Entities make Education
Costs and Publishing Costs payments to other Intermediaries that
are not listed above. Procure Entities may determine to make such
payments based on any number of metrics. For example, Procure
Entities may make payments at year-end or other intervals in a
fixed amount, an amount based upon an Intermediary’s services
at defined levels or an amount based on the Intermediary’s
net sales of one or more Procure funds in a year or other period,
any of which arrangements may include an agreed-upon minimum or
maximum payment, or any combination of the foregoing. As of the
date of this SAI, Procure anticipates that the payments paid by
Procure Entities in connection with the Fund, Procure funds and
exchange-traded products in general will be immaterial to Procure
Entities in the aggregate for the next year. Please contact your
salesperson or other investment professional for more information
regarding any such payments or financial incentives his or her
Intermediary firm may receive. Any payments made, or financial
incentives offered, by the Procure Entities to an Intermediary may
create the incentive for the Intermediary to encourage customers to
buy shares of the Fund, other Procure funds or other
exchange-traded products.
The
Fund may participate in certain market maker incentive programs of
a national securities exchange in which an affiliate of the Fund
would pay a fee to the exchange used for the purpose of
incentivizing one or more market makers in the securities of the
Fund to enhance the liquidity and quality of the secondary market
of securities of the Fund. The fee would then be credited by the
exchange to one or more market makers that meet or exceed liquidity
and market quality standards with respect to the securities of the
Fund. Each market maker incentive program is subject to approval
from the SEC. Any such fee payments made to an exchange will be
made by an affiliate of the Fund solely for the benefit of the Fund
and will not be paid from the Fund’s assets. Other funds
managed by Procure may also participate in such
programs.
Portfolio
Holdings Information
The
Trust has adopted a Portfolio Holdings Policy (the
“Policy”) designed to govern the disclosure of Fund
portfolio holdings and the use of material non-public information
about Fund holdings. The Policy applies to all officers, employees
and agents of the Fund, including the Adviser and Subadviser. The
Policy is designed to ensure that the disclosure of information
about the Fund’s portfolio holdings is consistent with
applicable legal requirements and otherwise in the best interest of
the Fund.
As an
ETF, information about the Fund’s portfolio holdings is made
available on a daily basis in accordance with the provisions of any
Order of the Securities and Exchange Commission (the
“SEC”) applicable to the Fund, regulations of the
Fund’s listing Exchange and other applicable SEC regulations,
orders and no-action relief. Such information typically reflects
all or a portion of the Fund’s anticipated portfolio holdings
as of the next Business Day (as defined below). This information is
used in connection with the creation and redemption process and is
disseminated on a daily basis through the facilities of the
Exchange, the National Securities Clearing Corporation (the
“NSCC”) and/or third party service
providers.
The
Fund will disclose on the Fund’s website (www.PALETFs.com) at
the start of each Business Day the identities and quantities of the
securities and other assets held by the Fund that will form the
basis of the Fund’s calculation of its net asset value (the
“NAV”) on that Business Day. The portfolio holdings so
disclosed will be based on information as of the close of business
on the prior Business Day and/or trades that have been completed
prior to the opening of business on that Business Day and that are
expected to settle on the Business Day. Online disclosure of such
holdings is publicly available at no charge.
Daily
access to the Fund’s portfolio holdings is permitted to
personnel of the Adviser, the Subadviser, the Distributor and the
Fund’s administrator, custodian and accountant and other
agents or service providers of the Trust who have need of such
information in connection with the ordinary course of their
respective duties to the Fund. The Fund’s Chief Compliance
Officer may authorize disclosure of portfolio
holdings.
The
Fund will disclose its complete portfolio holdings schedule in
public filings with the SEC on a monthly basis, based on the
Fund’s fiscal year, within sixty (60) days of the end of each
quarter, and will provide that information to shareholders, as
required by federal securities laws and regulations
thereunder.
No
person is authorized to disclose the Fund’s portfolio
holdings or other investment positions except in accordance with
the Policy. The Trust’s Board reviews the implementation of
the Policy on a periodic basis.
Indicative
Intra-Day Value
The approximate value of the Fund’s investments on a
per-Share basis, the Indicative Intra-Day Value (or
“IIV”) (also known as Indicative Optimized Portfolio
Value), is disseminated by ICE Data Services every 15 seconds
during hours of trading on the Exchange. The IIV should not be
viewed as a “real-time” update of NAV because the IIV
will be calculated by an independent third party calculator and may
not be calculated in the exact same manner as NAV, which is
computed daily.
The Exchange calculates the IIV for the Fund during hours of
trading on the Exchange by dividing the Estimated Fund Value as of
the time of the calculation by the total number of outstanding
Shares of the Fund.
“Estimated Fund
Value” is the sum of the
estimated amount of cash held in the Fund’s portfolio, the
estimated amount of accrued interest owing to the Fund and the
estimated value of the securities held in the Fund’s
portfolio, minus the estimated amount of liabilities. The IIV will
be calculated based on the same portfolio holdings disclosed on the
Fund’s website. In determining the estimated value for each
of the component securities, the IIV will use last sale, market
prices or other methods that would be considered appropriate for
pricing equity securities held by registered investment
companies.
Although the Fund provides the independent third party calculator
with information to calculate the IIV, the Fund is not involved in
the actual calculation of the IIV and are not responsible for the
calculation or dissemination of the IIV. The Fund makes no warranty
as to the accuracy of the IIV.
Additional
Information Concerning the Trust
The
Trust currently consists of one separate investment series or
portfolios called funds. The Trust issues shares of beneficial
interests in the funds with no par value. The Board may designate
additional funds.
Each
share issued by a fund has a pro rata interest in the assets of
that fund. Shares have no preemptive, exchange, subscription or
conversion rights and are freely transferable. Each share is
entitled to participate equally in dividends and distributions
declared by the Board with respect to the relevant fund, and in the
net distributable assets of such fund on liquidation.
Each
share has one vote with respect to matters upon which the
shareholder is entitled to vote. In any matter submitted to
shareholders for a vote, each fund shall hold a separate vote,
provided that shareholders of all affected funds will vote together
when: (i) required by the 1940 Act, or (ii) the Trustees determine
that the matter affects the interests of more than one
fund.
Under
Delaware law, the Trust is not required to hold an annual meeting
of shareholders unless required to do so under the 1940 Act. The
policy of the Trust is not to hold an annual meeting of
shareholders unless required to do so under the 1940 Act. All
shares (regardless of the fund) have noncumulative voting rights in
the election of members of the Board. Under Delaware law, Trustees
of the Trust may be removed by vote of the
shareholders.
Following
the creation of the initial Creation Unit(s) of shares of a fund
and immediately prior to the commencement of trading in such
fund’s shares, a holder of shares may be a “control
person” of the fund, as defined in Rule 0-1 under the 1940
Act. A fund cannot predict the length of time for which one or more
shareholders may remain a control person of the fund.
In
accordance with the Trust’s governing documents, the Board
may, without shareholder approval (unless such shareholder approval
is required by applicable law, including the 1940 Act), cause one
or more funds (each, a “New
Fund”) to merge, reorganize, consolidate, sell all or
substantially all of their assets, or take other similar actions
with, to or into another New Fund.
Termination
of the Trust or the Fund. The Trust or the Fund may be terminated
by a majority vote of the Board. Although the shares are not
automatically redeemable upon the occurrence of any specific event,
the number of shares in a Creation Unit may be altered by the
Trust. Therefore, in the event of a termination of the Trust or the
Fund, the Trust could determine to permit the shares to be
redeemable in aggregations smaller than Creation Units or to be
individually redeemable. In such circumstance, the Trust or the
Fund may make redemptions in-kind, for cash or for a combination of
cash or securities. Further, in the event of a termination of the
Trust or the Fund, the Trust or the Fund might elect to pay cash
redemptions to all shareholders, with an in-kind election for
shareholders owning in excess of a certain stated minimum
amount.
DTC as
Securities Depository for Shares of the Fund. Shares of the Fund
are represented by securities registered in the name of DTC or its
nominee and deposited with, or on behalf of, DTC.
DTC was
created in 1973 to enable electronic movement of securities between
its participants (“DTC
Participants”), and NSCC was established in 1976 to
provide a single settlement system for securities clearing and to
serve as central counterparty for securities trades among DTC
Participants. In 1999, DTC and NSCC were consolidated within The
Depository Trust & Clearing Corporation (“DTCC”) and became wholly-owned
subsidiaries of DTCC. The common stock of DTCC is owned by the DTC
Participants, but NYSE and FINRA, through subsidiaries, hold
preferred shares in DTCC that provide them with the right to elect
one member each to the DTCC board of directors. Access to the DTC
system is available to entities, such as banks, brokers, dealers
and trust companies, that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly
(“Indirect
Participants”).
Beneficial
ownership of shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants
and Indirect Participants. Ownership of beneficial interests in
shares (owners of such beneficial interests are referred to herein
as “Beneficial
Owners”) is shown on, and the transfer of ownership is
effected only through, records maintained by DTC (with respect to
DTC Participants) and on the records of DTC Participants (with
respect to Indirect Participants and Beneficial Owners that are not
DTC Participants). Beneficial Owners will receive from or through
the DTC Participant a written confirmation relating to their
purchase of shares. The laws of some jurisdictions may require that
certain purchasers of securities take physical delivery of such
securities in definitive form. Such laws may impair the ability of
certain investors to acquire beneficial interests in shares of the
Fund.
Conveyance
of all notices, statements and other communications to Beneficial
Owners is effected as follows. Pursuant to the Depositary Agreement
between the Trust and DTC, DTC is required to make available to the
Trust upon request and for a fee to be charged to the Trust a
listing of the shares of each Fund held by each DTC Participant.
The Trust shall inquire of each such DTC Participant as to the
number of Beneficial Owners holding shares, directly or indirectly,
through such DTC Participant. The Trust shall provide each such DTC
Participant with copies of such notice, statement or other
communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice,
statement or communication may be transmitted by such DTC
Participant, directly or indirectly, to such Beneficial Owners. In
addition, the Trust shall pay to each such DTC Participant a fair
and reasonable amount as reimbursement for the expenses attendant
to such transmittal, all subject to applicable statutory and
regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co.,
as the registered holder of all shares of the Trust. DTC or its
nominee, upon receipt of any such distributions, shall credit
immediately DTC Participants’ accounts with payments in
amounts proportionate to their respective beneficial interests in
shares of the Fund as shown on the records of DTC or its nominee.
Payments by DTC Participants to Indirect Participants and
Beneficial Owners of shares held through such DTC Participants will
be governed by standing instructions and customary practices, as is
now the case with securities held for the accounts of customers in
bearer form or registered in a “street name,” and will
be the responsibility of such DTC Participants.
The
Trust has no responsibility or liability for any aspect of the
records relating to or notices to Beneficial Owners, or payments
made on account of beneficial ownership interests in such shares,
or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests, or for any other aspect of
the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect
Participants and Beneficial Owners owning through such DTC
Participants. DTC may decide to discontinue providing its service
with respect to shares of the Trust at any time by giving
reasonable notice to the Trust and discharging its responsibilities
with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement
for DTC to perform its functions at a comparable cost.
Distribution of Shares. In connection with the Fund’s
launch, the Fund will be seeded through the sale of one or more
Creation Units by the Fund to one or more initial investors.
Initial investors participating in the seeding may be Authorized
Participants, a lead market maker or other third party investor or
an affiliate of the Fund or the Fund’s adviser. Each such
initial investor may sell some or all of the shares underlying the
Creation Unit(s) held by them pursuant to the registration
statement for the Fund (each, a “Selling Shareholder”), which
shares have been registered to permit the resale from time to time
after purchase. The Fund will not receive any of the proceeds from
the resale by the Selling Shareholders of these
shares.
Selling
Shareholders may sell shares owned by them directly or through
broker-dealers, in accordance with applicable law, on any national
securities exchange on which the shares may be listed or quoted at
the time of sale, through trading systems, in the OTC market or in
transactions other than on these exchanges or systems at fixed
prices, at prevailing market prices at the time of the sale, at
varying prices determined at the time of sale, or at negotiated
prices. These sales may be effected through brokerage transactions,
privately negotiated trades, block sales, entry into options or
other derivatives transactions or through any other means
authorized by applicable law. Selling Shareholders may redeem the
shares held in Creation Unit size by them through an Authorized
Participant.
Any
Selling Shareholder and any broker-dealer or agents participating
in the distribution of shares may be deemed to be
“underwriters” within the meaning of Section 2(a)(11)
of the 1933 Act, in connection with such sales.
Any
Selling Shareholder and any other person participating in such
distribution will be subject to applicable provisions of the 1934
Act and the rules and regulations thereunder.
Creation
and Redemption of Creation Units
Creation
The Trust issues and sells Shares of the Fund only in Creation
Units on a continuous basis on any Business Day through the
Distributor at the Shares’ NAV next determined after receipt
of an order in proper form. The Distributor processes purchase
orders only on a day that the Exchange is open
for trading (a “Business Day”). The Exchange is open for trading Monday
through Friday except for the following holidays: New Year’s
Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
The consideration for purchase of Creation Units of the Fund
generally consists of an in-kind deposit of a designated portfolio
of securities – the Deposit Securities
– for each Creation Unit
constituting a substantial replication, or representation, of the
securities included in the Fund’s portfolio as selected by
the Advisor (“Fund
Securities”) and an
amount of cash – the Cash Component
– computed as described below.
Together, the Deposit Securities and the Cash Component constitute
the “Fund Deposit,” which represents the minimum initial and
subsequent investment amount for a Creation Unit of the Fund. The
Cash Component is an amount equal to the difference between the NAV
of the Shares (per Creation Unit) and an amount equal to the market
value of the Deposit Securities (the “Deposit
Amount”). If the Cash
Component is a positive number (i.e., the NAV per Creation Unit exceeds the Deposit
Amount), the Authorized Participant will deliver the Cash
Component. If the Cash Component is a negative number
(i.e., the NAV per Creation Unit is less than the
Deposit Amount), the Authorized Participant will receive the Cash
Component. The Cash Component serves to compensate the Trust
or the Authorized Participant, as applicable, for any differences
between the NAV per Creation Unit and the Deposit
Securities.
In addition, the Trust reserves the right to permit or require the
substitution of an amount of cash (that is a “cash in
lieu” amount) to be added to the Cash Component to replace
any Deposit Security which may not be available in sufficient
quantity for delivery or that may not be eligible for transfer
through the systems of DTC or the Clearing Process (discussed
below) or for other similar reasons. The Trust also reserves the
right to permit or require a “cash in lieu” amount
where the delivery of Deposit Securities by the Authorized
Participant (as described below) would be restricted under the
securities laws or where delivery of Deposit Securities to the
Authorized Participant would result in the disposition of Deposit
Securities by the Authorized Participant becoming restricted under
the securities laws, and in certain other situations.
The custodian through the NSCC (see the section of this SAI
entitled “Purchase and Redemption of Creation
Units—Creation—Procedures for Creation of Creation
Units”), makes available on each Business Day, prior to the
opening of business on the Exchange (currently 9:30 a.m. New York
time), the list of the name and the required number of shares of
each Deposit Security to be included in the current Fund Deposit
(based on information at the end of the previous Business Day) for
the Fund. This Fund Deposit is applicable, subject to any
adjustments as described below, to orders to effect creations of
Creation Units of the Fund until such time as the next-announced
composition of the Deposit Securities is made
available.
The identity and number of shares of the Deposit Securities
required for a Fund Deposit for the Fund changes as rebalancing
adjustments and corporate action events are reflected within the
Fund from time to time by the Advisor, with a view to the
investment objective of the Fund. In addition, the Trust reserves
the right to permit the substitution of an amount of cash
— i.e., a “cash in lieu” amount — to be
added to the Cash Component to replace any Deposit Security that
may not be available in sufficient quantity for delivery or that
may not be eligible for transfer through the systems of DTC or the
Clearing Process (discussed below), or which might not be eligible
for trading by an Authorized Participant (as defined below), or the
investor for which it is acting, or other relevant
reason.
In addition to the list of names and number of securities
constituting the current Deposit Securities of a Fund Deposit, the
custodian, through the NSCC, also makes available on each Business
Day the estimated Cash Component, effective through and including
the previous Business Day, per outstanding Creation Unit of the
Fund.
Procedures for Creation of Creation Units
All orders to create Creation Units must be placed with the
Transfer Agent either (1) through Continuous Net Settlement System
of the NSCC (“Clearing
Process”), a clearing
agency that is registered with the SEC, by a “Participating
Party,” i.e., a broker-dealer or other participant in the
Clearing Process; or (2) outside the Clearing Process by a DTC
Participant (see the section of this SAI entitled “Additional
Information Concerning Shares — Book Entry Only
System”). In each case, the Participating Party or the DTC
Participant must have executed an agreement with the Distributor,
and accepted by the Transfer Agent, with respect to creations and
redemptions of Creation Units (“Participant
Agreement”); such parties
are collectively referred to as “APs” or “Authorized
Participants”. Investors
should contact the Distributor for the names of Authorized
Participants. All Shares, whether created through or outside the
Clearing Process, will be entered on the records of DTC in the name
of Cede & Co. for the account of a DTC
Participant.
The Distributor will process orders to purchase Creation Units
received by electronic means of communication set forth in the
Participation Agreement by the closing time of the regular trading
session on the Exchange (“Closing Time”) (normally 4:00 p.m. New York time), as
long as they are in proper form. If an order to purchase Creation
Units is received in proper form by Closing Time, then it will be
processed that day. Purchase orders received in proper form after
Closing Time will be processed on the following Business Day and
will be priced at the NAV determined on that day. Custom orders
must be received by the Transfer Agent no later than 3:00 p.m. New
York time on the trade date. All orders are subject to acceptance
by the Distributor.
A custom order may be placed by an Authorized Participant in the
event that the Trust permits the substitution of an amount of cash
to be added to the Cash Component to replace any Deposit Security
which may not be available in sufficient quantity for delivery or
which may not be eligible for trading by such Authorized
Participant or the investor for which it is acting or other
relevant reason. The date on which an order to create Creation
Units (or an order to redeem Creation Units, as discussed below) is
placed is referred to as the “Transmittal
Date”. Orders must be
transmitted by an Authorized Participant by electronic transmission
method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement, as described below in the sections of
this SAI entitled “Purchase and Redemption of Creation
Units—Placement of Creation Orders Using the Clearing
Process” and “Purchase and Redemption of Creation
Units—Placement of Creation Orders Outside the Clearing
Process”.
All orders to create Creation Units from investors who are not
Authorized Participants shall be placed with an Authorized
Participant in the form required by such Authorized Participant. In
addition, the Authorized Participant may request the investor to
make certain representations or enter into agreements with respect
to the order, e.g., to provide for payments of cash, when required.
Investors should be aware that their particular broker may not have
executed a Participant Agreement and, therefore, orders to create
Creation Units of the Fund have to be placed by the
investor’s broker through an Authorized Participant that has
executed a Participant Agreement. In such cases there may be
additional charges to such investor. At any given time, there may
be only a limited number of broker-dealers that have executed a
Participant Agreement.
Those placing orders for Creation Units through the Clearing
Process should afford sufficient time to permit proper submission
of the order to the Transfer Agent prior to the Closing Time on the
Transmittal Date. Orders for Creation Units that are effected
outside the Clearing Process are likely to require transmittal by
the DTC Participant earlier on the Transmittal Date than orders
effected using the Clearing Process. Those persons placing orders
outside the Clearing Process should ascertain the deadlines
applicable to DTC and the Federal Reserve Bank wire system by
contacting the operations department of the broker or depository
institution effectuating such transfer of the Fund Deposit. For
more information about Clearing Process and DTC, see the sections
of this SAI entitled “Purchase and Redemption of Creation
Units—Creation—Placement of Creation Orders Using the
Clearing Process” and “Purchase and Redemption of
Creation Units—Creation—Placement of Creation Orders
Outside the Clearing Process.”
Placement of Creation Orders Using the Clearing
Process
The Clearing Process is the process of creating or redeeming
Creation Units through the Continuous Net Settlement System of the
NSCC. Fund Deposits made through the Clearing Process must be
delivered through a Participating Party that has executed a
Participant Agreement. The Participant Agreement authorizes the
Distributor to transmit through the Custodian to NSCC, on behalf of
the Participating Party, such trade instructions as are necessary
to effect the Participating Party’s creation order. Pursuant
to such trade instructions to NSCC, the Participating Party agrees
to deliver the requisite Fund Deposit to the Trust, together with
such additional information as may be required by the Distributor.
An order to create Creation Units through the Clearing Process is
deemed received by the Distributor on the Transmittal Date if (1)
such order is received by the Distributor not later than the
Closing Time (or 3:00 p.m. New York Time, in the case of a custom
order) on such Transmittal Date and (2) all other procedures set
forth in the Participant Agreement are properly
followed.
Except as described below, and in all cases subject to the terms of
the applicable Participant Agreement, all orders to create Creation
Units of the Fund must be received by the Transfer Agent no later
than the closing time of the regular trading session of the
Exchange (“Order Cutoff Time”) (ordinarily 4:00 p.m.,
Eastern time) in each chase on the date such order is placed for
creation of Creation Units to be effected based on the NAV of
shares of such Fund as next determined after receipt of an order in
proper form. Orders requesting substitution of a
“cash-in-lieu” amount of a cash deposit (collectively,
“Non-Standard Orders”), must be received by the
Transfer Agent no later than 3:00 p.m., Eastern time. On days when
the Exchange closes earlier than normal (such as the day before a
holiday), the Fund requires standard orders to create Creation
Units to be placed by the earlier closing time and Non-Standard
Orders to create Creation Units must be received no later than one
hour prior to the earlier closing time. Notwithstanding the
foregoing, the Trust may, but is not required to, permit
Non-Standard Orders until 4:00 p.m., Eastern time, or until the
market close (in the event the Exchange closes early). The date on
which an order to create Creation Units (or an order to redeem
Creation Units, as discussed below) is placed is referred to as the
“Transmittal Date.” Orders must be transmitted by an
Authorized Participant through the Transfer Agent’s
electronic order system or by telephone or other transmission
method acceptable to the Transfer Agent and approved by the
Distributor pursuant to procedures set forth in the Participation
Agreement. Economic or market disruptions or changes, or telephone
or other communication failure may impede the ability to each the
Transfer Agent, Distributor or an Authorized
Participant.
Placement of Creation Orders Outside the Clearing
Process
Fund Deposits made outside the Clearing Process must be delivered
through a DTC Participant that has executed a Participant
Agreement. A DTC Participant who wishes to place an order creating
Creation Units to be effected outside the Clearing Process does not
need to be a Participating Party, but such orders must state that
the DTC Participant is not using the Clearing Process and that the
creation of Creation Units will instead be effected through
a transfer of cash and securities directly through
DTC. The Fund Deposit transfer must be ordered by the DTC
Participant on the Transmittal Date in a timely fashion so as to
ensure the delivery of the requisite number of Deposit Securities
through DTC to the account of the Fund by no later than 11:00 a.m.
New York time on the next Business Day following the Transmittal
Date (“DTC
Cut-Off-Time”).
All questions as to the number of Deposit Securities to be
delivered, or the amount of a Cash Component, and the validity,
form, and eligibility (including time of receipt) for the deposit
of any tendered securities, will be determined by the Trust, whose
determination shall be final and binding. The amount of cash equal
to the Cash Component must be transferred directly to the Custodian
through the Federal Reserve Bank wire transfer system in a timely
manner so as to be received by the Custodian no later than 2:00
p.m. New York time on the next Business Day following the
Transmittal Date. An order to create Creation Units outside the
Clearing Process is deemed received by the Distributor on the
Transmittal Date if (1) such order is received by the Distributor
not later than the Closing Time (or 3:00 p.m. New York time in the
case of a custom order) on such Transmittal Date and (2) all other
procedures set forth in the Participant Agreement are properly
followed. However, if the Custodian does not receive both the
requisite Deposit Securities and the Cash Component by 11:00 a.m.
on the next Business Day following the Transmittal Date, such order
will be canceled. Upon written notice to the Distributor, such
canceled order may be resubmitted the following Business Day using
a Fund Deposit as newly constituted to reflect the then-current
Deposit Securities and Cash Component. The delivery of Creation
Units so created will occur no later than the second Business Day
following the day on which the purchase order is deemed received by
the Distributor.
Additional transaction fees may be imposed with respect to
transactions effected through a DTC participant outside the
Clearing Process and in the limited circumstances in which any cash
can be used in lieu of Deposit Securities to create Creation Units.
See the section of this SAI entitled “Purchase and Sale of
Creation Units—Creation—Creation Transaction
Fee”.
Creation Units may be created in advance of receipt by the Trust of
all or a portion of the applicable Deposit Securities. In these
circumstances, the initial deposit will have a value greater than
the NAV of the Shares on the date the order is placed in proper
form because, in addition to available Deposit Securities, cash
must be deposited in an amount equal to the sum of (1) the Cash
Component plus (2) 115% of the then-current market value of the
undelivered Deposit Securities (“Additional Cash
Deposit”). The order
shall be deemed to be received on the Business Day on which the
order is placed provided that the order is placed in proper form
prior to Closing Time and funds in the appropriate amount are
deposited with the Custodian by 11:00 a.m. New York time the
following Business Day. If the order is not placed in proper form
by Closing Time or funds in the appropriate amount are not received
by 11:00 a.m. the next Business Day, then the order may be deemed
to be canceled and the Authorized Participant shall be liable to
the Fund for losses, if any, resulting therefrom. An additional
amount of cash shall be required to be deposited with the Trust,
pending receipt of the undelivered Deposit Securities to the extent
necessary to maintain the Additional Cash Deposit with the Trust in
an amount at least equal to 115% of the daily marked-to-market
value of the undelivered Deposit Securities. To the extent that
undelivered Deposit Securities are not received by 1:00 p.m. New
York time on the second Business Day following the day on which the
purchase order is deemed received by the Distributor, or in the
event a marked-to-market payment is not made within one Business
Day following notification by the Distributor that such a payment
is required, the Trust may use the cash on deposit to purchase the
undelivered Deposit Securities. Authorized Participants will be liable to the
Trust and the Fund for the costs incurred by the Trust in
connection with any such purchases. These costs will be deemed to
include the amount by which the actual purchase price of the
Deposit Securities exceeds the market value of such Deposit
Securities on the day the purchase order was deemed received by the
Distributor plus the brokerage and related transaction costs
associated with such purchases. The Trust will return any unused
portion of the Additional Cash Deposit once all of the undelivered
Deposit Securities have been properly received by the Custodian or
purchased by the Trust and deposited into the Trust. In addition, a
transaction fee will be charged in all cases. See the section of
this SAI entitled “Purchase and Redemption of Creation
Units—Creation—Creation Transaction Fee.” The
delivery of Creation Units so created will occur no later than the
second Business Day following the day on which the purchase order
is deemed received by the Distributor.
Acceptance of Orders for Creation Units
The Trust reserves the absolute right to reject a creation order
transmitted to it by the Distributor for any reason, including if:
(1) the order is not in proper form; (2) the investor(s), upon
obtaining the Shares ordered, would own 80% or more of the
currently outstanding Shares of the Fund; (3) the Deposit
Securities delivered are not as disseminated for that date by the
Custodian, as described above; (4) acceptance of the Deposit
Securities would have certain adverse tax consequences to the Fund;
(5) acceptance of the Fund Deposit would, in the opinion of
counsel, be unlawful; (6) acceptance of the Fund Deposit would
otherwise, in the discretion of the Trust or the Advisor, have an
adverse effect on the Trust or the rights of beneficial owners; or
(7) there exist circumstances outside the control of the Trust, the
Custodian, the Distributor and the Advisor that make it for all
practical purposes impossible to process creation orders. Examples
of such circumstances include acts of God; public service or
utility problems such as fires, floods, extreme weather conditions,
and power outages resulting in telephone, telecopy, and computer
failures; market conditions or activities causing trading halts;
systems failures involving computer or other information systems
affecting the Trust, the Advisor, the Distributor, DTC, NSCC, the
Custodian or sub-custodian, or any other participant in the
creation process; and similar extraordinary events. The Distributor
shall notify a prospective creator of a Creation Unit and/or the
Authorized Participant acting on behalf of such prospective creator
of its rejection of the order. The Trust, the Custodian, any
sub-custodian and the Distributor are under no duty, however, to
give notification of any defects or irregularities in the delivery
of Fund Deposits nor shall any of them incur any liability for the
failure to give any such notification. All questions as to the
number of shares of each security in the Deposit Securities, and
the validity, form, eligibility, and acceptance for deposit of any
securities to be delivered shall be determined by the Trust and the
Trust’s determination shall be final and
binding.
Creation Units typically are issued on a “T+2 basis”
(that is, two Business Days after trade date).
To the extent contemplated by an Authorized Participant’s
agreement with the Distributor, the Trust will issue Creation Units
to such Authorized Participant notwithstanding the fact that the
corresponding Deposit Securities have not been received in part or
in whole, in reliance on the undertaking of the Authorized
Participant to deliver the missing Deposit Securities as soon as
possible, which undertaking shall be secured by such Authorized
Participant’s delivery and maintenance of collateral having a
value equal to 115%, which the Advisor may change from time to
time, of the value of the missing Deposit Securities in accordance
with the Trust’s then-effective procedures. Such collateral
must be delivered no later than 2:00 p.m., Eastern Time, on the
contractual settlement date. The only collateral that is acceptable
to the Trust is cash in U.S. Dollars or an irrevocable letter of
credit in form, and drawn on a bank, that is satisfactory to the
Trust. The cash collateral posted by the Authorized Participant may
be invested at the risk of the Authorized Participant, and income,
if any, on invested cash collateral will be paid to that Authorized
Participant. Information concerning the Trust’s current
procedures for collateralization of missing Deposit Securities is
set forth in the Participation Agreement. The Authorized
Participant Agreement will permit the Trust to buy the missing
Deposit Securities at any time and will subject the Authorized
Participant to liability for any shortfall between the cost to the
Trust of purchasing such securities and the cash collateral or the
amount that may be drawn under any letter of credit.
In certain cases, Authorized Participants will create and redeem
Creation Units on the same trade date. In these instances, the
Trust reserves the right to settle these transactions on a net
basis. All questions as to the amount of cash required to be
delivered, the number of shares of each security in the Deposit
Securities, and the validity, form, eligibility, and acceptance for
deposit of any securities to be delivered, as applicable, shall be
determined by the Trust, and the Trust’s determination shall
be final and binding.
Creation Transaction Fee
Authorized Participants will be required to pay a fixed transaction
fee (the “Creation Transaction
Fee”) in connection with
creations or redemptions or to offset the transfer and other
transaction costs associated with the issuance of Creation Units.
The standard Creation Transaction Fee will be the same regardless
of the number of Creation Units purchased by an investor on the
applicable Business Day. The Creation Transaction Fee charged by
the Fund for each creation order is $500.
An additional variable fee of up to 2.00% of the value of each
Creation Unit may be imposed. The variable transaction fee is
expected to be higher for (1) creations effected outside the
Clearing Process and (2) creations made whole or in part in cash
(to offset the Trust’s brokerage and other transaction costs
associated with using cash to purchase the requisite Deposit
Securities). Investors are responsible for the costs of
transferring the securities constituting the Deposit Securities to
the account of the Trust.
In order to seek to replicate the in-kind creation order process
for creation orders executed in whole or in part with cash, the
Trust expects to purchase, in the secondary market or otherwise
gain exposure to, the portfolio securities that could have been
delivered as a result of an in-kind creation order pursuant to
local law or market convention, or for other reasons
(“Creation Market
Purchases”). In such
cases where the Trust makes Creation Market Purchases, the
Authorized Participant will reimburse the Trust for, among other
things, any difference between the market value at which the
Financial Instruments were purchased by the Trust and the
“cash-in-lieu” amount, applicable registration fees,
brokerage commissions, and certain taxes.
Redemption
The process to redeem Creation Units is essentially the reverse of
the process by which Creation Units are created, as described
above. To redeem Shares directly from the Fund, an investor must be
an Authorized Participant or must redeem through an Authorized
Participant. The Trust redeems Creation Units on a continuous basis
on any Business Day through the Distributor at the Shares’
NAV next determined after receipt of an order in proper form. The
Fund will not redeem Shares in amounts less than Creation Units.
Authorized Participants must accumulate enough Shares in the
secondary market to constitute a Creation Unit in order to have
such Shares redeemed by the Trust. There can be no assurance,
however, that there will be sufficient liquidity in the public
trading market at any time to permit assembly of a Creation
Unit.
Generally, Creation Units of the Fund will be redeemed in-kind, at
NAV per Share next computed, plus a transaction fee as described
below. The Custodian, through the NSCC, makes available prior to
the opening of business on the Exchange (currently 9:30 a.m. New
York time) on each Business Day, the identity of the Fund
Securities that will be applicable (subject to possible amendment
or correction) to redemption requests received in proper form (as
described below) on that day. Fund Securities received on
redemption may not be identical to Deposit Securities that are
applicable to creations of Creation Units. The redemption proceeds for a Creation Unit
consists of Fund Securities — as announced on the Business
Day the request for redemption is received in proper form —
plus or minus cash in an amount equal to the difference between the
NAV of the Shares being redeemed, as next determined after a
receipt of a redemption request in proper form, and the value of
the Fund Securities (“Cash Redemption
Amount”), less a
redemption transaction fee (see the section of this SAI entitled
“Purchase and Redemption of Creation
Units—Redemption—Redemption Transaction
Fee”).
The right of redemption may be suspended or the date of payment
postponed with respect to the Fund (1) for any period during which
the NYSE is closed (other than customary weekend and holiday
closings); (2) for any period during which trading on the Exchange
is suspended or restricted; (3) for any period during which an
emergency exists as a result of which disposal of the Shares of the
Fund or determination of the Fund’s NAV is not reasonably
practicable; or (4) in such other circumstances as is permitted by
the SEC.
Deliveries of redemption proceeds by the Fund generally will be
made within two Business Days (that is “T+2”). However,
the Fund reserves the right to settle redemption transactions and
deliver redemption proceeds on a basis other than T+2 to
accommodate foreign market holiday schedules, to account for
different treatment among foreign and U.S. markets of dividend
record dates and dividend ex-dates (that is the last date the
holder of a security can sell the security and still receive
dividends payable on the security sold), and in certain other
circumstances.
Placement of Redemption Orders Using the Clearing
Process
Orders to redeem Creation Units through the Clearing Process must
be delivered through an Authorized Participant that has executed a
Participant Agreement. Investors other than Authorized Participants
are responsible for making arrangements with an Authorized
Participant for an order to redeem. An order to redeem Creation
Units is deemed received by the Trust on the Transmittal Date if:
(1) such order is received by the Transfer Agent not later than
Closing Time on such Transmittal Date; and (2) all other
procedures set forth in the Participant Agreement are properly
followed. Such order will be effected based on the NAV of the Fund
as next determined. An order to redeem Creation Units using the
Clearing Process made in proper form but received by the Transfer
Agent after Closing Time will be deemed received on the next
Business Day immediately following the Transmittal Date and will be
effected at the NAV determined on such next Business Day. All
orders are subject to acceptance by the Distributor. The requisite
Fund Securities and Cash Redemption Amount will be transferred by
the second NSCC business day following the date on which such
request for redemption is deemed received.
Placement of Redemption Orders Outside the Clearing
Process
Orders to redeem Creation Units outside the Clearing Process must
be delivered through a DTC Participant that has executed the
Participant Agreement. A DTC Participant who wishes to place an
order for redemption of Creation Units to be effected outside the
Clearing Process does not need to be a Participating Party, but
such orders must state that the DTC Participant is not using the
Clearing Process and that redemption of Creation Units will instead
be effected through transfer of Shares directly through DTC. An
order to redeem Creation Units outside the Clearing Process is
deemed received by the Distributor on the Transmittal Date if (1)
such order is received by the Transfer Agent not later than Closing
Time on such Transmittal Date; (2) such order is accompanied or
followed by the requisite number of Shares, which delivery must be
made through DTC to the Custodian no later than the DTC
Cut-Off-Time, and the Cash Redemption Amount, if owed to the Fund,
which delivery must be made by 2:00 p.m. New York Time; and (3) all
other procedures set forth in the Participant Agreement are
properly followed. After the Transfer Agent receives, and the
Distributor has accepted, an order for redemption outside the
Clearing Process, the Transfer Agent will initiate procedures to
transfer the requisite Fund Securities which are expected to be
delivered and the Cash Redemption Amount, if any, by the second
Business Day following the Transmittal Date.
The calculation of the value of the Fund Securities and the Cash
Redemption Amount to be delivered or received upon redemption (by
the Authorized Participant or the Trust, as applicable) will be
made by the Custodian according to the procedures set forth the
section of this SAI entitled “Determination of Net Asset
Value” computed on the Business Day on which a redemption
order is deemed received by the Transfer Agent and accepted by the
Distributor. Therefore, if a redemption order in proper form is
submitted to the Transfer Agent by a DTC Participant not later than
Closing Time on the Transmittal Date, and the requisite number of
Shares of the Fund are delivered to the Custodian prior to the DTC
Cut-Off-Time, then the value of the Fund Securities and the Cash
Redemption Amount to be delivered or received (by the Authorized
Participant or the Trust, as applicable) will be determined by the
Custodian on such Transmittal Date. If, however, either (1) the
requisite number of Shares of the Fund are not delivered by the DTC
Cut-Off-Time, as described above, or (2) the redemption order is
not submitted in proper form, then the redemption order will not be
deemed received as of the Transmittal Date. In such case, the value
of Fund Securities and the Cash Redemption Amount to be delivered
or received will be computed on the Business Day following the
Transmittal Date provided that the Shares of the Fund are delivered
through DTC to the Custodian by 11:00 a.m. New York time the
following Business Day pursuant to a properly submitted redemption
order.
The Trust may in its discretion at any time, or from time to time,
exercise its option to redeem Shares by providing the redemption
proceeds in cash, and the redeeming Authorized Participant will be
required to receive its redemption proceeds in cash. In addition,
an investor may request a redemption in cash that the Trust may
permit, in its sole discretion. In either case, the investor will
receive a cash payment equal to the NAV of its Shares based on the
NAV of Shares of the Fund next determined after the redemption
request is received in proper form (minus a transaction fee which
will include an additional charge for cash redemptions to offset
the Fund’s brokerage and other transaction costs associated
with the disposition of Fund Securities). The Fund may also, in its
sole discretion, upon request of a shareholder, provide such
redeemer a portfolio of securities that differs from the exact
composition of the Fund Securities, or cash in lieu of some
securities added to the Cash Redemption Amount, but in no event
will the total value of the securities delivered and the cash
transmitted differ from the NAV. Redemptions of Shares for Fund
Securities will be subject to compliance with applicable federal
and state securities laws and the Fund (whether or not it otherwise
permits cash redemptions) reserves the right to redeem Creation
Units for cash to the extent that the Trust could not lawfully
deliver specific Fund Securities upon redemptions or could not do
so without first registering the Fund Securities under such laws.
An Authorized Participant or an investor for which it is acting
that is subject to a legal restriction with respect to a particular
security included in the Fund Securities applicable to the
redemption of a Creation Unit may be paid an equivalent amount of
cash. The Authorized Participant may request the redeeming
Beneficial Owner of the Shares to complete an order form or to
enter into agreements with respect to such matters as compensating
cash payment, beneficial ownership of shares, or delivery
instructions.
Redemption Transaction Fee
Investors will be required to pay to the Custodian a fixed
transaction fee (“Redemption Transaction
Fee”) to offset the
transfer and other transaction costs associated with the redemption
of Creation Units. The standard redemption transaction fee will be
the same regardless of the number of Creation Units redeemed by an
investor on the applicable Business Day. The Redemption Transaction
Fee charged by the Fund for each redemption order is
$500.
An additional variable fee of up to 2.00% of the value of each
Creation Unit may be imposed. The variable transaction free is
expected to be higher for (1) redemptions effected outside the
Clearing Process and (2) redemptions made in cash (to offset the
Trust’s brokerage and other transaction costs associate with
the sale of Fund Securities). Investors will also bear the costs of
transferring the Fund Securities from the Trust to their account or
on their order.
In
order to seek to replicate the in-kind redemption order process for
creation orders executed in whole or in part with cash, the Trust
expects to sell, in the secondary market, the portfolio securities
or settle any financial instruments that may not be permitted to be
re-registered in the name of the Participating Party as a result of
an in-kind redemption order pursuant to local law or market
convention, or for other reasons (“Market Sales”). In such cases
where the Trust makes Market Sales, the Authorized Participant will
reimburse the Trust for, among other things, any difference between
the market value at which the securities and other financial
instruments were sold or settled by the Trust and the
“cash-in-lieu” amount, applicable registration fees,
brokerage commissions, and certain taxes.
Continuous
Offering
The method by which Creation Units are created and traded may raise
certain issues under applicable securities laws. Because new
Creation Units are issued and sold by the Trust on an ongoing
basis, at any point a “distribution,” as such term is
used in the Securities Act, may occur. Broker-dealers and other
persons are cautioned that some activities on their part may,
depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them
statutory underwriters and subject them to the prospectus delivery
and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a
statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent
Shares, and sells such Shares directly to customers, or if it
chooses to couple the creation of a supply of new Shares with an
active selling effort involving solicitation of secondary market
demand for Shares. A determination of whether one is an underwriter
for purposes of the Securities Act must take into account all the
facts and circumstances pertaining to the activities of the
broker-dealer or its client in the particular case, and the
examples mentioned above should not be considered a complete
description of all the activities that could lead to a
categorization as an underwriter.
Broker-dealers who are not “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. This is because the prospectus delivery
exemption in Section 4(3) of the Securities Act is not available in
respect of such transactions as a result of Section 24(d) of the
1940 Act. As a result, broker-dealer firms should note that dealers
who are not underwriters but are participating in a distribution
(as contrasted with ordinary secondary market transactions) and
thus dealing with the Shares that are part of an over-allotment
within the meaning of Section 4(3)(A) of the Securities Act would
be unable to take advantage of the prospectus delivery exemption
provided by Section 4(3) of the Securities Act. Firms that incur a
prospectus delivery obligation with respect to Shares are reminded
that, under Rule 153 of the Securities Act, a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to an
exchange member in connection with a sale on the Exchange is
satisfied by the fact that the prospectus is available at the
Exchange upon request. The prospectus delivery mechanism provided
in Rule 153 is only available with respect to transactions on an
exchange.
Determination
of Net Asset Value
The
following information supplements and should be read in conjunction
with the section in the Prospectus entitled “Determination of
Net Asset Value (NAV)”.
Valuation of Shares. The NAV of each Fund is determined as
of the close of the regular trading session on the Exchange
(ordinarily 4:00 p.m., Eastern time) on each day that such exchange
is open. Any assets or liabilities denominated in currencies other
than the U.S. dollar are converted into U.S. dollars at the current
market rates on the date of valuation as quoted by one or more
sources.
Valuation
of securities held by the Fund is as follows:
Equity Investments. Equity securities traded on a recognized
securities exchange (e.g.,
NYSE), on separate trading boards of a securities exchange or
through a market system that provides contemporaneous transaction
pricing information (each, an “Exchange”) are valued using
information obtained via independent pricing services, generally at
the closing price on the Exchange on which the security is
primarily traded, or if an Exchange closing price is not available,
the last traded price on that Exchange prior to the time as of
which the Fund’s assets or liabilities are valued. However,
under certain circumstances, other means of determining current
market value may be used. If an equity security is traded on more
than one Exchange, the current market value of the security where
it is primarily traded generally will be used. In the event that
there are no sales involving an equity security held by the Fund on
a day on which the Fund values such security, the prior day’s
price will be used, unless, in accordance with valuation procedures
approved by the Board (the “Valuation Procedures”), the
Adviser determines in good faith that such prior day’s price
no longer reflects the fair value of the security, in which case
such asset would be treated as a Fair Value Asset (as defined
below).
Options, Futures, Swaps and Other Derivatives.
Exchange-traded equity options for which market quotations are
readily available are valued at the mean of the last bid and ask
prices as quoted on the Exchange or the board of trade on which
such options are traded. In the event that there is no mean price
available for an exchange traded equity option held by the Fund on
a day on which the Fund values such option, the last bid (long
positions) or ask (short positions) price, if available, will be
used as the value of such option. If no such bid or ask price is
available on a day on which the Fund values such option, the prior
day’s price will be used, unless the Adviser determines in
good faith that such prior day’s price no longer reflects the
fair value of the option, in which case such option will be treated
as a Fair Value Asset (as defined below). OTC derivatives are
valued using the last available bid prices or current market
quotations provided by dealers or prices (including evaluated
prices) supplied by the Fund’s approved independent
third-party pricing services, each in accordance with the Valuation
Procedures. OTC derivatives may be valued using a mathematical
model which may incorporate a number of market data factors.
Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their settle price as of the close of
such exchanges. Swap agreements and other derivatives are generally
valued daily based upon quotations from market makers or by a
pricing service in accordance with the Valuation
Procedures.
Underlying Funds. Shares of underlying ETFs will be valued
at their most recent closing price on an Exchange. Shares of
underlying money market funds will be valued at their
NAV.
General Valuation Information. The price the Fund could
receive upon the sale of any particular portfolio investment may
differ from the Fund’s valuation of the investment,
particularly for securities that trade in thin or volatile markets
or that are valued using a fair valuation methodology or a price
provided by an independent pricing service. As a result, the price
received upon the sale of an investment may be less than the value
ascribed by the Fund, and the Fund could realize a greater than
expected loss or lesser than expected gain upon the sale of the
investment. The Fund’s ability to value its investment may
also be impacted by technological issues and/or errors by pricing
services or other third-party service providers.
All
cash, receivables and current payables are carried on the
Fund’s books at their face value.
Prices
obtained from independent third-party pricing services,
broker-dealers or market makers to value the Fund’s
securities and other assets and liabilities are based on
information available at the time the Fund values its assets and
liabilities. In the event that a pricing service quotation is
revised or updated subsequent to the day on which the Fund valued
such security or other asset or liability, the revised pricing
service quotation generally will be applied prospectively. Such
determination will be made considering pertinent facts and
circumstances surrounding the revision.
Certain
of the securities acquired by the Fund may be traded on foreign
exchanges or OTC markets on days on which the Fund’s NAV is
not calculated. In such cases, the NAV of the Fund’s shares
may be significantly affected on days when Authorized Participants
can neither purchase nor redeem shares of the Fund.
Generally,
trading in non-U.S. securities, U.S. government securities, money
market instruments and certain fixed-income securities is
substantially completed each day at various times prior to the
close of business on the NYSE. The values of such securities used
in computing the NAV of the Fund are determined as of such
times.
Use of
fair value prices and certain current market valuations could
result in a difference between the prices used to calculate the
Fund’s NAV and the prices used in the Underlying Index,
which, in turn, could result in a difference between the
Fund’s performance and the performance of the Underlying
Index.
Fair Value. When market quotations are not readily available
or are believed in good faith by the Adviser to be unreliable, the
Fund’s investments are valued at fair value (“Fair
Value Assets”). Fair Value Assets are valued by the Adviser
in accordance with the Valuation Procedures. the Adviser may
reasonably conclude that a market quotation is not readily
available or is unreliable if, among other things, a security or
other asset or liability does not have a price source due to its
complete lack of trading, if the Adviser believes in good faith
that a market quotation from a broker-dealer or other source is
unreliable (e.g., where it
varies significantly from a recent trade, or no longer reflects the
fair value of the security or other asset or liability subsequent
to the most recent market quotation), or where the security or
other asset or liability is only thinly-traded or due to the
occurrence of a significant event subsequent to the most recent
market quotation. For this purpose, a “significant
event” is deemed to occur if the Adviser determines, in its
reasonable business judgment, that an event has occurred after the
close of trading for an asset or liability but prior to or at the
time of pricing the Fund’s assets or liabilities, and that
the event is likely to cause a material change to the closing
market price of the assets or liabilities held by the Fund.
Non-U.S. securities whose values are affected by volatility that
occurs in the markets or in related or highly correlated assets
(e.g., ADRs, GDRs or ETFs
that invest in components of the Underlying Index) on a trading day
after the close of non-U.S. securities markets may be fair valued.
On any day the NYSE is open and a foreign market or the primary
exchange on which a foreign asset or liability is traded is closed,
such asset or liability will be valued using the prior day’s
price, provided that the Adviser is not aware of any significant
event or other information that would cause such price to no longer
reflect the fair value of the asset or liability, in which case
such asset or liability would be treated as a Fair Value
Asset.
the
Adviser will submit its recommendations regarding the valuation
and/or valuation methodologies for Fair Value Assets to the
Trust’s Valuation Committee. The Valuation Committee may
accept, modify or reject any recommendations. In addition, the
Fund’s accounting agent periodically endeavors to confirm the
prices it receives from all third-party pricing services, index
providers and broker-dealers, and, with the assistance of the
Adviser, to regularly evaluate the values assigned to the
securities and other assets and liabilities of the Fund. The
pricing of all Fair Value Assets is subsequently reported to and,
where appropriate, ratified by the Board.
When
determining the price for a Fair Value Asset, the Valuation
Committee will seek to determine the price that the Fund might
reasonably expect to receive upon the current sale of that asset or
liability in an arm’s-length transaction on the date on which
the assets or liabilities are being valued, and does not seek to
determine the price that the Fund might expect to receive for
selling the asset, or the cost of extinguishing a liability, at a
later time or if it holds the asset or liability to maturity. Fair
value determinations will be based upon all available factors that
the Valuation Committee deems relevant at the time of the
determination, and may be based on analytical values determined by
using proprietary or third-party valuation models.
Fair
value represents a good faith approximation of the value of an
asset or liability. When determining the fair value of an asset,
one or more of a variety of fair valuation methodologies may be
used (depending on certain factors, including the asset type). For
example, the asset may be priced on the basis of the original cost
of the investment or, alternatively, using proprietary or
third-party models (including models that rely upon direct
portfolio management pricing inputs and which reflect the
significance attributed to the various factors and assumptions
being considered). Prices of actual, executed or historical
transactions in the relevant asset and/or liability (or related or
comparable assets and/or liabilities) or, where appropriate, an
appraisal by a third-party experienced in the valuation of similar
assets and/or liabilities, may also be used as a basis for
establishing the fair value of an asset or liability. The fair
value of one or more assets or liabilities may not, in retrospect,
be the price at which those assets or liabilities could have been
sold during the period in which the particular fair values were
used in determining the Fund’s NAV. As a result, the
Fund’s sale or redemption of its shares at NAV, at a time
when a holding or holdings are valued at fair value, may have the
effect of diluting or increasing the economic interest of existing
shareholders.
The
Fund’s annual audited financial statements, which are
prepared in accordance with accounting principles generally
accepted in the United States of America (“US GAAP”),
follow the requirements for valuation set forth in Financial
Accounting Standards Board Accounting Standards Codification Topic
820, “Fair Value Measurements and Disclosures”
(“ASC 820”), which defines and establishes a framework
for measuring fair value under US GAAP and expands financial
statement disclosure requirements relating to fair value
measurements. Generally, ASC 820 and other accounting rules
applicable to funds and various assets in which they invest are
evolving. Such changes may adversely affect the Fund. For example,
the evolution of rules governing the determination of the fair
market value of assets or liabilities to the extent such rules
become more stringent would tend to increase the cost and/or reduce
the availability of third-party determinations of fair market
value. This may in turn increase the costs associated with selling
assets or affect their liquidity due to the Fund’s inability
to obtain a third-party determination of fair market
value.
Taxation
Set forth below is a discussion of certain U.S. federal income tax
considerations affecting the Fund and the purchase, ownership and
disposition of Shares. It is based upon the Code, the regulations
promulgated thereunder, judicial authorities, and administrative
rulings and practices as in effect as of the date of this SAI, all
of which are subject to change, possibly with retroactive effect.
The following information supplements should be read in conjunction
with the section in the Prospectus entitled “Dividends,
Distributions, and Taxes”.
This summary assumes that the Fund shareholder holds Shares as
capital assets within the meaning of the Code, and does not hold
Shares in connection with a trade or business. This summary does
not address the potential U.S. federal income tax considerations
possibly applicable to an investment in Shares to Fund shareholders
holding Shares through a partnership (or other pass-through entity)
or to Fund shareholders subject to special tax rules. Prospective
Fund shareholders are urged to consult their own tax advisers with
respect to the specific federal, state, local, and foreign tax
consequences of investing in Shares based on their particular
circumstances.
The Fund has not requested and will not request an advance ruling
from the Internal Revenue Service (“IRS”) as to the federal income tax matters
described below. The IRS could adopt positions contrary to those
discussed below and such positions could be sustained. Prospective
investors should consult their own tax advisers with regard to the
federal tax consequences of the purchase, ownership, or disposition
of Shares, as well as the tax consequences arising under the laws
of any state, foreign country, or other taxing
jurisdiction.
Tax Treatment of the Fund
In General. The Fund intends to
qualify and elect to be treated as a RIC under the Code. To qualify
and maintain its tax status as a RIC, the Fund must meet annually
certain income and asset diversification requirements and must
distribute annually at least the sum of ninety percent (90%) of its
“investment company taxable income” (which includes
dividends, interest, and net short-term capital gains) and ninety
percent (90%) of its net exempt interest income. As a RIC, the Fund
generally will not have to pay corporate-level federal income taxes
on any ordinary income or capital gains that it distributes to its
shareholders.
With respect to some or all of its investments, the Fund may be
required to recognize taxable income in advance of receiving the
related cash payment. For example, if the Fund invests in original
issue discount obligations (such as zero coupon debt instruments or
debt instruments with payment-in-kind interest), the Fund will be
required to include as interest income a portion of the original
issue discount that accrues over the term of the obligation, even
if the related cash payment is not received by the Fund until a
later year. Under the “wash sale” rules, the Fund may
not be able to deduct a loss on a disposition of a portfolio
security. As a result, the Fund may be required to make an annual
income distribution greater than the total cash actually received
during the year. Such distribution may be made from the cash assets
of the Fund or by selling portfolio securities. The Fund may
realize gains or losses from such sales, in which event the
Fund’s shareholders may receive a larger capital gain
distribution than they would in the absence of such
transactions.
The Fund will be subject to a four percent (4%) excise tax on
certain undistributed income if the Fund does not distribute to its
shareholders in each calendar year at least 98% of its ordinary
income for the calendar year plus 98.2% of its capital gain net
income for the twelve months ended October 31 of such year, as well
as 100% of any previously distributed income from prior years. The
Fund intends to make distributions necessary to avoid the 4% excise
tax.
Failure to Maintain RIC Status.
If the Fund fails to qualify as a RIC for any year (subject to
certain curative measures allowed by the Code), the Fund will be
subject to regular corporate-level income tax in that year on all
of its taxable income, regardless of whether the Fund makes any
distributions to its shareholders. In addition, distributions will
be taxable to the Fund’s shareholders generally as ordinary
dividends to the extent of the Fund’s current and accumulated
earnings and profits. Distributions from a non-qualifying
Fund’s earnings and profits will be taxable to the
Fund’s shareholders as regular dividends, possibly eligible
for (1) in the case of an individual Fund shareholder, treatment as
a qualifying dividend (as discussed below) subject to tax at
preferential capital gains rates or (2) in the case of a corporate
Fund shareholder, a dividends-received
deduction.
PFIC Investments. The Fund may
purchase shares in a foreign corporation treated as a
“passive foreign investment company”
(“PFIC”) for federal income tax purposes. As a
result, the Fund may be subject to federal income tax (plus charges
in the nature of interest on previously-deferred income taxes on
the PFIC’s income) on “excess distributions” made
on or gain from a sale (or other disposition) of the PFIC shares
even if the Fund distributes the excess distributions to its
shareholders.
In lieu of the income tax and deferred tax interest charges on
excess distributions on and dispositions of a PFIC’s shares,
the Fund can elect to treat the PFIC as a “qualified electing
fund”, provided that the PFIC agrees to provide the Fund with
adequate information regarding its annual results and other aspects
of its operations. With a “qualified electing fund”
election in place, the Fund must include in its income each year
its share (whether distributed or not) of the ordinary earnings and
net capital gain of a PFIC.
In the alternative, the Fund can elect to mark-to-market at the end
of each taxable year its PFIC shares. The Fund would recognize as
ordinary income any increase in the value of the PFIC shares and as
an ordinary loss (up to any prior income resulting from the
mark-to-market election) any decrease in the value of the PFIC
shares.
With a “mark-to-market” or “qualified election
fund” election in place on a PFIC, the Fund might be required
to recognize in a year income in excess of its actual distributions
on and proceeds from dispositions of the PFIC’s shares. Any
such income would be subject to the RIC distribution requirements
and would be taken into account for purposes of the 4% excise tax
(described above).
Futures Contracts. The Fund may be required to
mark-to-market and recognize as income for each taxable year its
net unrealized gains and losses on certain futures contracts. In
addition, the Fund may be required to defer the recognition of
losses on futures contracts to the extent of any unrecognized gains
on related positions held by the Fund. Any income from futures
contracts would be subject to the RIC distribution requirements and
would be taken into account for purposes of the 4% excise tax
(described above).
Special or Uncertain Tax Consequences. The Fund’s investment or other activities
could be subject to special and complex tax rules that may produce
differing tax consequences, such as disallowing or limiting the use
of losses or deductions (such as the “wash sale”
rules), causing the recognition of income or gain without a
corresponding receipt of cash, affecting the time as to when a
purchase or sale of stock or securities is deemed to occur, or
altering the characterization of certain complex financial
transactions. The Fund will monitor its investment activities for
any adverse effects that may result from these special tax
rules.
The Fund may engage in investment or other activities the treatment
of which may not be clear or may be subject to recharacterization
by the IRS. In particular, the tax treatment of swaps and other
derivatives and income from foreign currency transactions is
unclear for purposes of determining the Fund’s status as a
RIC. If a final determination on the tax treatment of the
Fund’s investment or other activities differs from the
Fund’s original expectations, the final determination could
adversely affect the Fund’s status as a RIC or the timing or
character of income recognized by the Fund, requiring the Fund to
purchase or sell assets, alter its portfolio or take other action
in order to comply with the final determination.
Tax Treatment of Fund Shareholders
Fund Distributions. In general,
Fund distributions are subject to federal income tax when paid,
regardless of whether they consist of cash or property or are
reinvested in Shares. However, any Fund distribution declared in
October, November, or December of any calendar year and payable to
shareholders of record on a specified date during such month will
be deemed to have been received by each Fund shareholder on
December 31 of such calendar year, provided such dividend is
actually paid during January of the following calendar
year.
Distributions of the Fund’s net investment income (other
than, as discussed below, qualifying dividend income) and net
short-term capital gains are taxable as ordinary income to the
extent of the Fund’s current or accumulated earnings and
profits. Distributions of the Fund’s net long-term capital
gains in excess of net short-term capital losses are taxable as
long-term capital gain to the extent of the Fund’s current or
accumulated earnings and profits, regardless of the Fund
shareholder’s holding period in the Fund’s Shares.
Distributions of qualifying dividend income are taxable as
long-term capital gain to the extent of the Fund’s current or
accumulated earnings and profits, provided that the Fund
shareholder meets certain holding period and other requirements
with respect to the distributing Fund’s Shares and the
distributing Fund meets certain holding period and other
requirements with respect to its dividend-paying stocks. To the
extent that the Fund makes a distribution of income received by
such Fund in lieu of dividends with respect to securities on loan
pursuant to a securities lending transaction, such income will not
constitute qualified dividend income to individual shareholders and
will not be eligible for the dividends-received deduction for
corporate shareholders.
The Fund intends to distribute its long-term capital gains at least
annually. However, by providing written notice to its shareholders
no later than 60 days after its year-end, the Fund may elect to
retain some or all of its long-term capital gains and designate the
retained amount as a “deemed distribution”. In that
event, the Fund pays income tax on the retained long-term capital
gain, and each Fund shareholder recognizes a proportionate share of
the Fund’s undistributed long-term capital gain. In addition,
each Fund shareholder can claim a refundable tax credit for the
shareholder’s proportionate share of the Fund’s income
taxes paid on the undistributed long-term capital gain and increase
the tax basis of the Shares by an amount equal to the
shareholder’s proportionate share of the Fund’s
undistributed long-term capital gains, reduced by the amount of the
shareholder’s tax credit.
Long-term capital gains of non-corporate Fund shareholders
(i.e., individuals, trusts, and estates) are taxed at a
maximum rate of 20%.
In addition, high-income individuals (and certain trusts and
estates) will be subject to a 3.8% Medicare tax on net investment
income (which generally includes all Fund distributions and gains
from the sale of Shares) in addition to otherwise applicable
federal income tax. Please consult your tax adviser regarding this
tax.
Investors considering buying Shares just prior to a distribution
should be aware that, although the price of the Shares purchased at
such time may reflect the forthcoming distribution, such
distribution nevertheless may be taxable (as opposed to a
non-taxable return of capital).
Sales of Shares. Any capital
gain or loss realized upon a sale of Shares is treated generally as
a long-term gain or loss if the Shares have been held for more than
one year. Any capital gain or loss realized upon a sale of Shares
held for one year or less is generally treated as a short-term gain
or loss, except that any capital loss on the sale of Shares held
for six months or less is treated as long-term capital loss to the
extent that capital gain dividends were paid with respect to such
Shares.
In-Kind Creation Unit Issues and Redemptions. On an issue of Shares as part of a Creation Unit
made by means of an in-kind deposit, an Authorized Participant
recognizes capital gain or loss equal to the difference between (1)
the fair market where the creation is conducted in-kind by deposit
of Deposit Securities value (at issue) of the issued Shares (plus any cash received by the
Authorized Participant as part of the issue) and (2) the Authorized
Participant’s aggregate basis in the exchanged securities
(plus any cash paid by the Authorized Participant as part of the
issue). On a redemption of Shares as part of a Creation Unit where
the redemption is conducted in-kind by a payment of Fund
Securities, an Authorized Participant recognizes capital gain or
loss equal to the difference between (1) the fair market value (at
redemption) of the securities received (plus any cash received by
the Authorized Participant as part of the redemption) and (2) the
Authorized Participant’s basis in the redeemed Shares (plus
any cash paid by the Authorized Participant as part of the
redemption). However, the IRS may assert, under
the “wash sale” rules or on the basis that
there has been no significant change in the Authorized
Participant’s economic position, that any loss on an issue or
redemption of Creation Units cannot be deducted
currently.
In general, any capital gain or loss recognized upon the issue or
redemption of Shares (as components of a Creation Unit) is treated
either as long-term capital gain or loss, if the deposited
securities (in the case of an issue) or the Shares (in the case of
a redemption) have been held for more than one year, or otherwise
as short-term capital gain or loss. However, any capital loss
recognized on a redemption of Shares held for six months or less is
treated as long-term capital loss to the extent that capital gain
dividends were paid with respect to such Shares.
The Fund may be subject to foreign income taxes and may be able to
elect to pass-along such credit to its shareholders. If this
election is available and the Fund elects such treatment, the
amount of such credit will be treated as an additional distribution
by the Fund and, subject to various limitations of the Code, its
shareholders will be entitled to claim a foreign tax credit to
offset their tax liability. Please consult your tax adviser
regarding whether you will be able to use such credit against your
tax liability.
Back-Up Withholding. The Fund
may be required to report certain information on the Fund
shareholder to the IRS and withhold federal income tax
(“backup withholding”) at a 24% rate from all taxable
distributions and redemption proceeds payable to the Fund
shareholder if the Fund shareholder fails to provide the Fund with
a correct taxpayer identification number (or, in the case of a U.S.
individual, a social security number) or a completed exemption
certificate (e.g., an IRS Form W-8BEN or W- 8BEN-E, as applicable,
in the case of a foreign Fund shareholder) or if the IRS notifies
the Fund that the Fund shareholder is otherwise subject to backup
withholding. Backup withholding is not an additional tax and any
amount withheld may be credited against the Fund
shareholder’s federal income tax
liability.
Tax Shelter Reporting Regulations. If the Fund shareholder recognizes a loss with
respect to Shares of $2 million or more for an individual Fund
shareholder or $10 million or more for a corporate shareholder in
any single taxable year (or a greater loss over a combination of
years), the Fund shareholder may be required file a disclosure
statement with the IRS. Significant penalties may be imposed upon
the failure to comply with these reporting
rules.
Special Issues for Foreign Shareholders
In general, if the Fund shareholder is not a U.S. citizen or
resident or if the Fund shareholder is a foreign entity, the
Fund’s ordinary income dividends (including distributions of
other amounts that would not be subject to U.S. withholding tax if
paid directly to foreign Fund shareholders) will be subject, in
general, to withholding tax at a rate of 30% (or at a lower rate
established under an applicable tax treaty). However
interest-related dividends and short-term capital gain dividends
generally will not be subject to withholding tax; provided that the
foreign Fund shareholder furnishes the Fund with a completed IRS
Form W-8BEN or W-8BEN-E, as applicable, (or acceptable substitute
documentation) establishing the Fund shareholder’s status as
foreign and that the Fund does not have actual knowledge or reason
to know that the foreign Fund shareholder would be subject to
withholding tax if the foreign Fund shareholder were to receive the
related amounts directly rather than as dividends from the
Fund.
Under current law, gain on a sale of Shares or an exchange of such
Shares will be exempt from U.S. federal income tax (including
withholding at the source) unless (1) in the case of an individual
foreign Fund shareholder, the Fund shareholder is physically
present in the United States for more than 182 days during the
taxable year and meets certain other requirements, or (2) at any
time during the shorter of the period during which the foreign Fund
shareholder held such Shares of the Fund and the five-year period
ending on the date of the disposition of those shares, the Fund was
a “U.S. real property holding corporation” (as defined
below), and the foreign Fund shareholder actually or constructively
held more than 5% of the Shares. In the case of a disposition
described in clause (2) of the preceding sentence, the gain would
be taxed in the same manner as for a domestic Fund shareholder and
in certain cases will be collected through withholding at the
source in an amount equal to 15% of the sales
proceeds.
Unless treated as a “domestically-controlled” RIC, the
Fund will be a “U.S. real property holding corporation”
if the fair market value of its U.S. real property interests (which
includes shares of U.S. real property holding corporations and
certain participating debt securities) equals or exceeds 50% of the
fair market value of such interests plus its interests in real
property located outside the United States plus any other assets
used or held for use in a business. A “domestically
controlled” RIC is any RIC in which at all times during the
relevant testing period 50% or more in value of the RIC’s
stock was owned by U.S. persons.
Under the Foreign Account Tax Compliance Act (i.e., FATCA), foreign shareholders will be subject to
U.S. withholding tax of 30 percent on all U.S. source income
(including all dividends from the Fund), and beginning in 2019, on
gross proceeds from the sale of U.S. stocks and securities
(including the sale of Shares), unless they comply with certain
reporting requirements. Complying with such requirements will
require the shareholder to provide and certify certain information
about itself and (where applicable) its beneficial owners, and
foreign financial institutions generally will be required to enter
in an agreement with the U.S. Internal Revenue Service or tax
authority in the institution’s own country to provide certain
information regarding such shareholder’s account holders.
Please consult your tax adviser regarding this
tax.
To claim a credit or refund for any Fund-level taxes on any
undistributed long-term capital gains (as discussed above) or any
taxes collected through withholding, a foreign Fund shareholder
must obtain a U.S. taxpayer identification number and file a
federal income tax return even if the foreign Fund shareholder
would not otherwise be required to obtain a U.S. taxpayer
identification number or file a U.S. income tax
return.
The
foregoing discussion is a summary of certain material U.S. federal
income tax considerations only and is not intended as a substitute
for careful tax planning. Purchasers of shares should consult their
own tax advisers as to the tax consequences of investing in such
shares, including consequences under state, local and non-U.S. tax
laws. Finally, the foregoing discussion is based on applicable
provisions of the Internal Revenue Code, regulations, judicial
authority and administrative interpretations in effect on the date
of this SAI. Changes in applicable authority could materially
affect the conclusions discussed above, and such changes often
occur.
Miscellaneous
Information
The
Fund relies on the services of the Adviser, Subadviser and its
other service providers, including the Distributor, administrator,
custodian and transfer agent. Further information about the duties
and roles of these service providers is set out in this SAI.
Investors who acquire shares of the Fund are not parties to the
relevant agreement with these service providers and do not have
express contractual rights against the Fund or its service
providers, except certain institutional investors that are
Authorized Participants may have certain express contractual rights
with respect to the Distributor under the terms of the relevant
authorized participant agreement and as otherwise required by
law.
The
Fund is not sponsored, endorsed, sold, or promoted by Nasdaq, Inc.
Nasdaq, Inc. makes no representation or warranty, express or
implied, to the owners of Shares or any member of the public
regarding the advisability of investing in securities generally or
in the Fund particularly or the ability of the Fund to achieve its
objective. Nasdaq, Inc. has no obligation or liability in
connection with the administration, marketing, or trading of the
Fund.
For
purposes of the 1940 Act, the Fund is a registered investment
company, and the acquisition of Shares by other registered
investment companies and companies relying on exemption from
registration as investment companies under Section 3(c)(1) or
3(c)(7) of the 1940 Act is subject to the restrictions of Section
12(d)(1) of the 1940 Act, except as permitted by an exemptive order
that permits registered investment companies to invest in the Fund
beyond those limitations.
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Shareholder of LGBTQ + ESG100 ETF and
Board
of Trustees of Procure
ETF Trust I
Opinion on the Financial Statement
We have
audited the accompanying statement of assets and liabilities of
LGBTQ + ESG100 ETF (the “Fund”), a series of Procure
ETF Trust I, as of October 29, 2019, including the related notes
(collectively referred to as the “financial
statement”). In our opinion, the financial statement presents
fairly, in all material respects, the financial position of the
Fund as of October 29, 2019, in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
This
financial statement is the responsibility of the Fund’s
management. Our responsibility is to express an opinion on the
Fund’s financial statement based on our audit. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Fund in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audit in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement
is free of material misstatement, whether due to error or
fraud.
Our
audit included performing procedures to assess the risks of
material misstatement of the financial statement, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures include examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statement
and confirmation of cash owned as of October 29, 2019, by
correspondence with the custodian. Our audit also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the financial statement. We believe that our audit provides a
reasonable basis for our opinion.
We have
served as the auditor for one or more ProcureAM, LLC’s
investment companies since 2018.
/s/ COHEN & COMPANY, LTD.
COHEN
& COMPANY, LTD.
Cleveland,
Ohio
December
10, 2019
LGBTQ
+ ESG100 ETF
Statement of Assets
and Liabilities
October 29,
2019
|
|
|
|
|
|
|
Assets:
|
|
|
|
Cash at
Custodian
|
$100,000
|
|
|
Total
Assets
|
$100,000
|
|
|
Liabilities
|
$-
|
|
|
Total
Liabilities
|
$-
|
|
|
Net
Assets:
|
$100,000
|
|
|
Net
Assets Consist of:
|
|
Paid-In
Capital
|
$100,000
|
|
|
Net
Asset Value
|
|
(unlimited
shares authorized):
|
|
Net
Assets
|
$100,000
|
Capital Shares
Issued and Outstanding
|
4,000
|
|
|
Net Asset Value,
Offering and Redemption
|
|
Price Per
Share
|
$25.00
|
|
|
|
|
The
accompanying notes are an integral part of this financial
statement.
|
LGBTQ +
ESG100 ETF
NOTES TO THE FINANCIAL STATEMENT
October
29, 2019
Procure
ETF Trust I (the “Trust”), a Delaware statutory trust
organized on June 11, 2019, is an open-end management investment
company registered under the Investment Company Act of 1940, as
amended (the “1940 Act”), and authorized to have
multiple investment series, one of which is the LGBTQ + ESG100 ETF
(the “Fund”), a diversified series of the Trust. The
investment objective of the Fund is to provide investment results
that, before fees and expenses, correspond generally to the total
return performance of an equity index called the “LGBTQ
Loyalty 100 Index” developed by LGBTQ Loyalty™
Holdings, Inc. As of October 29, 2019, the Trust has had no
operations other than those actions relating to organizational and
registration matters, including the sale and issuance to ProcureAM,
LLC (the “Sole Shareholder” and “Advisor”)
of 4,000 shares of the Fund. The proceeds of the 4,000 shares were
held in cash. The Fund currently offers one class of shares that
has no front-end sales load, no deferred sales charge and no
redemption fee. The Fund may issue an unlimited number of shares
(“Shares”) of beneficial interest, with no par value.
All Shares of the Fund have equal rights and
privileges.
Shares
of the Fund are expected to be listed and traded on the Nasdaq,
Inc. Market prices for the Shares may be different from their net
asset value (“NAV”). The Fund expects to issue and
redeem Shares on a continuous basis at NAV only in large blocks of
Shares, typically 25,000 Shares, called “Creation
Units.” Creation Units will be issued and redeemed
principally in-kind for securities included in a specified
universe. Once created, Shares generally will trade in the
secondary market at market prices that change throughout the day in
amounts less than a Creation Unit. Except when aggregated in
Creation Units, Shares are not redeemable securities of the Fund.
Shares of the Fund may only be purchased or redeemed by certain
financial institutions (“Authorized Participants”). An
Authorized Participant is either (i) a broker-dealer or other
participant in the clearing process through the Continuous Net
Settlement System of the National Securities Clearing Corporations
or (ii) a DTC participant and, in each case must have executed a
Participant Agreement with the Fund’s distributor. Most
retail investors will not qualify as Authorized Participants or
have the resources to buy and sell whole Creation Units. Therefore,
they will be unable to purchase or redeem the Shares directly from
the Fund. Rather, most retail investors will purchase Shares in the
secondary market with the assistance of a broker and will be
subject to customary brokerage commissions or fees.
2.
Summary
of Significant Accounting Policies
The
Fund is an investment company and accordingly follows the
investment company accounting and reporting guidance of the
Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification Topic 946 “Financial
Services – Investment Companies”.
The
following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its
financial statement. The financial statement has been prepared in
conformity with accounting principles generally accepted in the
United States of America (“GAAP”).
LGBTQ +
ESG100 ETF
NOTES TO THE FINANCIAL STATEMENT
October
29, 2019
(a) Use
of Estimates
The
preparation of the financial statement in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of this financial
statement. Actual results could differ from those
estimates.
(b)
Indemnifications
Under
the Fund’s organizational documents, its officers and
Trustees are indemnified against certain liabilities arising out of
the performance of their duties to the Fund. In addition, in the
normal course of business, the Fund enters into contracts with
service providers and others that provide general indemnification
clauses. The Fund’s maximum exposure under the contracts is
unknown, as this would involve future claims that may be made
against the Fund. However, based on experience, the Fund expects
the risk of loss to be remote.
(c)
Federal Income Taxes
The
Fund intends to elect and to qualify to be taxed as a
“regulated investment company” under Subchapter M of
the Internal Revenue Code of 1986, as amended. If so qualified, the
Fund generally will not be subject to federal income tax to the
extent it distributes substantially all of its net investment
income and capital gains to shareholders. The Fund generally
intends to operate in a manner such that it will not be liable for
federal income or excise taxes.
(d)
Organizational and Offering Costs
All
organizational and offering costs for the Fund will be borne by the
Advisor and are not subject to reimbursement.
(e)
Cash
Cash
includes non-interest bearing non-restricted cash with one
institution.
Pursuant
to an Investment Advisory Agreement (“Advisory
Agreement”) between the Trust, on behalf of the Fund, and the
Advisor, the Advisor provides investment advice to the Fund and
oversees the day-to-day operations of the Fund, subject to the
direction and control of the Board and the officers of the Trust.
Under the Advisory Agreement, the Advisor agrees to pay all
expenses of the Trust, except brokerage and other transaction
expenses including taxes; acquired fund fees and expenses;
extraordinary legal fees or expenses, such as those for litigation
or arbitration; other extraordinary expenses; distribution fees and
expenses paid by the Trust under any distribution plan
adopted
LGBTQ +
ESG100 ETF
NOTES TO THE FINANCIAL STATEMENT
October
29, 2019
pursuant
to Rule 12b-1 under the 1940 Act; and the advisory fee payable to
the Advisor hereunder. For services provided to the Fund, the Fund
pays the Advisor 0.75% at an annual rate based on the Fund’s
average daily net assets.
Penserra
Capital Management, LLC intends to serve as the Sub-Advisor (the
“Sub-Advisor”) to the fund. The Sub-Advisor has overall
responsibility for selecting and continuously monitoring the
Fund’s investments. The Advisor has overall responsibility
for overseeing the investment of the Fund’s assets, managing
the Fund’s business affairs and providing certain clerical,
bookkeeping and other administrative services for the
Trust.
U.S.
Bank Global Fund Services, a subsidiary of U.S. Bancorp, intends to
serve as the Fund’s fund accountant, administrator and
transfer agent pursuant to certain fund accounting servicing, fund
administration servicing and transfer agent servicing agreements.
U.S. Bank National Association, a subsidiary of U.S. Bancorp,
intends to serve as the Fund’s custodian pursuant to a
custody agreement. Quasar Distributors, LLC, an affiliate of U.S.
Bank Global Fund Services, intends to serve as the Fund’s
distributor pursuant to a distribution agreement.
The
Fund has adopted a Distribution and Service (12b-1) Plan, pursuant
to which payments of up to 0.25% of the average daily net assets
may be made by the Fund. The Board of Trustees of the Fund has
determined that no such payment will be made, and there are no
plans in place to implement the fee.
A
Trustee and certain officers of the Trust are also
employees/officers of the Advisor.
The
beneficial ownership, either directly or indirectly, of more than
25% of the voting securities of a fund creates a presumption of
control of the fund, under Section 2(a)(9) of the 1940 Act. As of
the date of this financial statement, the Advisor owned 100% of the
outstanding shares of the Fund.
5. Subsequent Events
In
preparing this financial statement, Management has evaluated events
and transactions for potential recognition or disclosure through
the date this financial statement was issued. There were no events
or transactions that occurred during the period subsequent to
October 29, 2019, that materially impacted the amounts or
disclosures in the Fund’s statement.
Appendix A - Proxy
Voting Policy and Proxy Voting Guidelines
The
Adviser exercises its proxy voting rights with regard to the
holdings in the Fund’s investment portfolio with the goals of
maximizing the value of the Fund’s investments, promoting
accountability of a company’s management and board of
directors (collectively, the “Management”) to its
shareholders, aligning the interests of management with those of
shareholders, and increasing transparency of a company’s
business and operations.
The
Adviser seeks to avoid material conflicts of interest through its
use of a third party proxy services vendor (the “Proxy
Vendor”), which applies detailed, pre-determined proxy voting
guidelines (the “Voting Guidelines”) in an objective
and consistent manner across client accounts, based on research and
recommendations provided by a third party vendor, and without
consideration of any client relationship factors. The Adviser
engages a third party as an independent fiduciary to vote all
proxies for the Fund.
All
proxy voting proposals are reviewed, categorized, analyzed and
voted in accordance with the Voting Guidelines. These guidelines
are reviewed periodically and updated as necessary to reflect new
issues and any changes in our policies on specific issues. Items
that can be categorized under the Voting Guidelines will be voted
in accordance with any applicable guidelines. Proposals that cannot
be categorized under the Voting Guidelines will be referred to the
Portfolio Oversight Committee for discussion and vote.
Additionally, the Portfolio Oversight Committee may review any
proposal where it has identified a particular company, industry or
issue for special scrutiny. With regard to voting proxies of
foreign companies, the Adviser weighs the cost of voting, and
potential inability to sell the securities (which may occur during
the voting process) against the benefit of voting the proxies to
determine whether or not to vote.