Prospectus
Precidian ETFs Trust
Precidian ETFs Trust
(‘‘Trust’’) is a registered investment company consisting of separate investment portfolios called ‘‘Funds.’’ This Prospectus relates solely to the following Fund:
Name
|
| Ticker
Symbol
|
MAXIS® Nikkei 225 Index Fund
|
| NKY
|
The Fund is an
exchange-traded fund. This means that shares of the Fund are listed on NYSE Arca, Inc. (‘‘NYSE Arca’’) and trade at market prices. The market price for the Fund’s shares may be different
from its net asset value per share (‘‘NAV’’).
Neither the Securities and
Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal
offense.
July 28, 2015
(As Amended and Restated October 1, 2015)
|
Not FDIC Insured
| May Lose Value
| No Bank Guarantee
|
MAXIS® Nikkei 225 Index Fund
Investment Objective
The
Fund seeks investment results that correspond (before fees and expenses) generally to the price and yield performance of its underlying index, the Nikkei Stock Average, commonly called the ‘‘Nikkei
225’’ (the ‘‘Underlying Index’’).
Fees and
Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund (‘‘Shares’’). Investors purchasing Shares through a broker-dealer on a national securities
exchange or in the over-the-counter market (the ‘‘Secondary Market’’) may be subject to customary brokerage commissions charged by their broker which are not reflected in the table set forth
below.
Shareholder Fees (fees paid directly from your investment):
No
shareholder fees are levied by the Fund for purchases and sales made on the Secondary Market.
Annual
Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
Management Fee
| 0.50%
|
Distribution and/or Service (12b-1) Fees
| 0.00%
|
Other Expenses
| 0.05%
|
Total Annual Fund Operating Expenses
| 0.55%
|
Fee Waiver and/or Expense Reimbursement(a)
| (0.05)%
|
Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement
| 0.50%
|
(a)
| Precidian Funds LLC (the ‘‘Advisor’’) has contractually agreed to reduce its management fees and to reimburse other expenses to the extent ‘‘Total Annual Fund
Operating Expenses’’ (but excluding interest, taxes, brokerage commissions, other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary
expenses not incurred in the ordinary course of the Fund’s business, and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the Investment Company Act), as a percentage of
average daily net assets, exceed 0.50% for the Fund through July 30, 2016. After such date, the expense limitation may be renewed, terminated or revised by the Advisor.
|
Example:
This
example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. This example does not take into account brokerage commissions that you pay when purchasing or
selling Shares of the Fund.
The
example assumes that you invest $10,000 in the Fund for the time periods indicated and then redeem all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each
year, and that the Fund’s expenses are equal to the Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement for the first year and the Total Annual Fund Operating Expenses for the
remaining years. Although your actual costs may be higher or lower, based on these assumptions your approximate costs would be:
1 Year
| 3 Years
| 5 Years
| 10 Years
|
$51
| $171
| $302
| $684
|
Portfolio Turnover
The
Fund pays transaction costs, such as commissions, when it buys and sells securities (or ‘‘turns over’’ its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and
may result in higher taxes when Shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the example, affect the Fund’s performance. During the fiscal
year ended March 31, 2015, the Fund’s portfolio turnover rate was 3% of the average value of its portfolio.
Principal Investment Strategies
The
Fund, under normal circumstances, invests at least 80% of its assets in the securities in its Underlying Index or in depositary receipts representing securities in its Underlying Index
(‘‘DRs’’).
The
Nikkei 225, which is published by Nikkei Inc. (the ‘‘Index Provider’’), measures the performance of 225 highly liquid stocks traded on the large cap or ‘‘first’’ section
of the Tokyo Stock Exchange. The components of the Underlying Index are given an equal weighting based on a par value of 50 Japanese Yen per share, whereby the prices of stocks with other par values are adjusted to
also reflect a par value of 50 Japanese Yen per share. As of June 30, 2015, the Underlying Index’s three largest sectors were consumer
discretionary,
industrials and information technology. As of June 30, 2015, the Underlying Index, which is considered diversified, was comprised of component securities with market capitalizations greater than 33.5 billion Yen
(Unitika Ltd) that have a daily average traded volume of at least 7,730 shares per day (Sky Perfect JSAT Holdings) over the past three months. The total market capitalization of the Underlying Index as of June 30,
2015 was in excess of 372 trillion Yen.
Indexing Investment Approach. The Fund is not managed according to traditional methods of ‘‘active’’ investment management, which involve the buying and selling of securities based upon economic,
financial and market analysis and investment judgment. Instead, the Fund, utilizing a ‘‘passive’’ or indexing investment approach, attempts to approximate the investment performance of the
Underlying Index by investing in a portfolio of securities that generally replicates the Underlying Index. The Fund may or may not hold all of the securities in the Underlying Index and may, from time to time, engage
in a representative sampling strategy.
Principal Risks of Investing in the Fund
As
with any investment, you could lose all or part of your investment in the Fund, and the Fund’s performance could trail that of other investments. The Fund is subject to the principal risks noted below, any of
which may adversely affect the Fund’s net asset value (‘‘NAV’’), trading price, yield, total return and ability to meet its investment objective.
Index Risk. The performance of the Underlying Index and the Fund may deviate from that of the market the Underlying Index seeks to track due to changes that are reflected in the market more quickly
than the Underlying Index, which will reconstitute its component securities only on an annual basis and will rebalance intermittently individual index component securities for corporate actions under the Index
Provider’s methodology.
Index Tracking Risk. Although the Fund attempts to track the performance of its Underlying Index, the Fund may not be able to duplicate its exact composition or return for any number of reasons. To the extent
the Advisor uses a representative sampling indexing strategy to manage the Fund, index tracking risk will be higher than if a replication strategy were implemented.
Market
Risk. The prices of the securities in the Fund are subject to the risk associated with investing in the stock market, including sudden and unpredictable drops in value. An investment in the Fund
may lose money.
Risks of Investing in Japan. The Underlying Index is comprised of securities of companies that are traded on the Tokyo Stock Exchange and domiciled in Japan. The risks of investing in the Japanese market include risks
of natural disasters, lack of natural resources, reliance on trading partners (including the United States and Asian and European economies), national security, unpredictable political climate, large government debt,
currency fluctuation and an aging labor force. The realization of such risks could have a negative impact on the value of securities of Japanese companies.
Nikkei 225 Sector Concentration Risk. The three largest sector concentrations of the Underlying Index are the consumer discretionary, industrials and information technology sectors. Consumer product companies are affected by
interest rates, exchange rates, competition, and consumer confidence and preferences. Manufacturing companies may face supply and demand constraints and product obsolescence issues and can experience losses due to
government regulations, environmental damage and product liability claims, and changes in exchange rates and commodity prices. Information technology companies are subject to risks of limited financing, competition,
technological obsolescence and patent rights or regulatory approval delays.
Currency Risk. Because the Fund’s NAV is determined in U.S. Dollars, the Fund’s NAV could decline if the Japanese Yen depreciates against the U.S. Dollar.
Risk of Investing in Depositary Receipts. The Fund may invest in DRs, including certain unsponsored DRs. Both sponsored and unsponsored DRs involve risk not experienced when investing directly in the equity securities of an issuer.
This includes the fact that the issuers of the securities underlying unsponsored DRs are not obligated to disclose material information in the U.S. and, therefore, there may be less information available regarding
such issuers and there may not be a correlation between such information and the market value of the depository receipts.
Valuation Risk. Since the component securities of the Underlying Index principally trade on the Tokyo Stock Exchange, the value of the securities in the Fund’s portfolio may change on days when
shareholders will not be able to purchase or sell the Fund’s shares on the NYSE Arca.
Concentration Risk. To the extent that the Underlying Index is concentrated in a particular industry, the Fund also will be concentrated in that industry. Concentrated Fund investments will subject the Fund to
a greater risk of loss as a result of adverse economic, business or other developments than if its investments were diversified across different industry sectors.
Equity
Securities Risk. Equity securities are subject to changes in value and their values may be more volatile than other asset classes, such as fixed-income securities.
Exchange-Traded Fund Risk. The Fund’s Shares may trade at a premium or discount to their NAV. Also, an active market for the Fund’s Shares may not develop and market trading may be halted if trading in
one or more of the Fund’s underlying securities is halted.
Performance
The
bar chart and table that follow show how the Fund has performed on a calendar year basis and provide an indication of the risks of investing in the Fund by showing changes in the Fund’s performance from year to
year and by showing how the Fund’s average annual total returns compare with those of the Nikkei 225 Index. Past performance (before and after taxes) does not necessarily indicate how the Fund will perform in
the future. For current performance information, please visit the Fund’s website at www.precidianfunds.com.
For
the period shown in the bar chart above:
Best Quarter
| (March 31, 2012):
| 11.89%
|
Worst Quarter
| (June 30, 2012):
| -7.49%
|
The
year-to-date return as of the quarter ended June 30, 2015 is 14.06%.
Average Annual Total Returns
(for the periods ended December 31, 2014)
|
| One Year
|
| Since
Inception
of Fund
|
| Inception Date
of Fund
|
Before Taxes
|
| -4.83%
|
| 5.67%
|
| July 8, 2011
|
After Taxes on Distributions
|
| -4.95%
|
| 5.48%
|
| =
|
After Taxes on Distributions and Sale of Shares
|
| -2.38%
|
| 4.53%
|
| =
|
Nikkei 225 Index*
|
| -4.54%
|
| 5.92%
|
| =
|
*Reflects no deduction for fees, expenses or taxes.
Average annual total returns are shown on a before- and after-tax basis for the Fund. After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the
impact of state and local taxes. Actual after-tax returns depend on an investor’s tax situation and may differ from those shown. After-tax returns shown are not relevant to investors who hold shares through
tax-deferred arrangements, such as 401(k) plans or individual retirement plans. After-tax returns may exceed the return before taxes due to an assumed tax benefit from realizing a capital loss on a sale of Shares.
Investment Advisor and Sub-Advisor
Precidian Funds LLC is the investment advisor to the Fund.
Northern Trust Investments, Inc. (‘‘NTI’’ or the ‘‘Sub-Advisor’’) serves as the sub-advisor to the Fund.
Portfolio Managers
Robert
Anstine is a Vice President and Portfolio Manager of the Sub-Advisor. Mr. Anstine has been a portfolio manager of the Fund since October 2013.
Patrick Dwyer is a Vice President and Portfolio Manager of the Sub-Advisor. Mr. Dwyer has been a portfolio manager of the Fund since February 2014.
Purchase
and Sale of Fund Shares
Unlike conventional mutual funds, the Fund issues and redeems Shares on a continuous basis, at NAV, only in blocks of 500,000 Shares or whole multiples thereof (‘‘Creation Units’’). The
Fund’s Creation Units are issued and redeemed principally in-kind for securities included in the Fund. Retail investors may purchase or sell Shares only in the Secondary Market. Shares of the Fund trade at
market price rather than NAV. As such, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax
Information
The
Fund’s distributions are taxable and will generally be taxed as ordinary income, dividend income or capital gains.
Financial Intermediary Compensation
If
you purchase Shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Advisor or other related companies may pay the intermediary for the sale of Fund Shares and related
services 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.
Overview
The Trust is an
investment company consisting of one diversified investment portfolio, the MAXIS® Nikkei 225 Index Fund, that is an exchange-traded fund (‘‘ETF’’). ETFs are funds whose shares are listed on a stock
exchange and traded like equity securities at market prices. An ETF, such as the Fund, allows you to buy or sell shares that represent the collective performance of a selected group of securities. Index ETFs are
designed to add the flexibility, ease and liquidity of stock-trading to the benefits of traditional index fund investing. The Fund seeks investment results that correspond (before fees and expenses) generally to the
price and yield performance of its Underlying Index.
Shares of the Fund are
listed and trade at market prices on the NYSE Arca. The market price for a Share of the Fund may be different from the Fund’s most recent NAV per Share. Similar to shares of an index mutual fund, each Share of
the Fund represents a partial ownership in an underlying portfolio of securities intended to track a market 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 NAV, Shares of the Fund may be purchased or redeemed directly from the Fund at NAV solely by Authorized Participants (only certain large institutions that enter into agreements with
the Fund’s distributor are authorized to transact in creation units with the Fund, and they are referred to herein as “Authorized Participants”). 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.
This prospectus provides
the information you need to make an informed decision about investing in the Fund. It contains important facts about the Trust as a whole and the Fund in particular.
Precidian Funds LLC is
the investment advisor to the Fund. Northern Trust Investments, Inc. serves as the sub-advisor to the Fund.
Additional
Description of the Principal Strategies of the Fund
The Fund employs a
‘‘passive management’’ — or indexing — investment approach designed to track the performance of its Underlying Index. The Fund is not managed according to traditional methods of
‘‘active’’ investment management, which involve the buying and selling of securities based upon economic, financial and market analysis and investment judgment. Unlike many investment
companies, the Fund does not try to ‘‘beat’’ the index it tracks and does not seek temporary defensive positions when markets decline or appear overvalued. Indexing may eliminate the chance
that the Fund will substantially outperform the Underlying Index, but it also may reduce some of the risks of active management, such as poor security selection. Indexing seeks to achieve lower costs and better
after-tax performance by keeping portfolio turnover low in comparison to actively managed investment companies.
The Fund invests at
least 80% of its net assets in component securities of issuers (or DRs based on the securities of such issuers) that comprise its Underlying Index. The Advisor or the Sub-Advisor manages the Fund by using a
‘‘replication’’ indexing strategy when possible; provided, however, that it may use a ‘‘representative sampling’’ indexing strategy under various circumstances where it
is not possible or practicable to use a replication indexing strategy. Replication indexing strategies involve the purchase of the component securities (or DRs) of the Underlying Index in substantially the same
weighting as in the Underlying Index. A representative sampling indexing strategy involves investing in a representative sample of securities that collectively has an investment profile similar to the Underlying
Index. The securities selected for representative sampling 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 and yield) and liquidity measures similar to those of the Underlying Index. To the extent that the Advisor or Sub-Advisor uses a representative sampling indexing strategy in
managing the Fund, the Fund may or may not hold all of the securities in its Underlying Index.
The Nikkei 225 is
sponsored by Nikkei Inc., which is independent of the Fund, the Advisor and the Sub-Advisor. The Index Provider determines the composition and relative weightings of the securities in the Underlying Index and
publishes information regarding the market value of the Underlying Index. The criteria for inclusion in the Underlying Index is discussed in the Fund’s Statement of Additional Information
(‘‘SAI’’). The Underlying Index is an equity index of securities comprising 225 highly liquid stocks traded on the large cap or first section of the Tokyo Stock Exchange. The components of the
Underlying Index are given an equal weighting based on a par value of 50 Japanese Yen per share, whereby the prices of stocks with other par values are adjusted to also reflect a par value of 50 Japanese Yen per
share. The Advisor and the Sub-Advisor seek a correlation over time of 0.95 or better between the Fund’s performance, before fees and expenses, and the performance of the Underlying Index. A figure of 1.00 would
represent perfect correlation.
An index is a
theoretical financial calculation while the Fund is an actual investment portfolio. The performance of the Fund and its Underlying Index may vary due to transaction costs, non-U.S. currency valuation, 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 legal restrictions (such as diversification
requirements) that apply to the Fund but not to the Underlying Index, the use of representative sampling and fees and expenses incurred by the Fund. ‘‘Tracking error’’ is the difference between
the performance (return) of the Fund’s portfolio and that of its Underlying Index. The Advisor expects that, over time, the Fund’s tracking error will not exceed 5%. The Fund generally
uses a replication strategy.
‘‘Replication’’ is an indexing strategy in which a fund invests in substantially all of the securities in its underlying index in approximately the same proportions as in the underlying index.
The Fund may or may not hold all of the securities in the Underlying Index and may, from time to time, engage in a representative sampling strategy.
The Fund will
concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the Underlying Index is so concentrated. Securities of
the U.S. government (including its agencies and instrumentalities) and repurchase agreements collateralized by U.S. government securities are not considered to be issued by members of any industry.
Additional
Description of the Principal Risks of the Fund
Investors in the Fund
should carefully consider the risks of investing in the Fund as set forth in the Fund’s Summary Information section under ‘‘Principal Risks.’’ To the extent such risks apply, they are
discussed hereunder in greater detail.
Index Risk. The Underlying Index and the Fund reconstitute and rebalance only when the Index Provider determines to reconstitute and rebalance the Underlying Index, which may cause the performance of
the Underlying Index and the Fund to deviate from that of the market the Underlying Index seeks to track. This deviation results from changes to index component securities being reflected in the market more quickly
than the Index Provider’s methodology can track because of the annual reconstitution process and the intermittent rebalancing of individual index component securities for corporate actions.
Index Tracking
Risk. Imperfect correlation between the Fund’s portfolio securities and those in the Underlying Index, rounding of prices, changes to the Underlying Index, exchange rate fluctuations and
regulatory requirements may cause tracking error, which is the divergence of the Fund’s performance from that of the Underlying Index. 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. Moreover, tracking error may arise if the Fund’s creation and
redemption process is disrupted. In addition, tracking error may be created by ‘‘Valuation Risk,’’ ‘‘Currency Risk,’’ ‘‘Risk of Investing in Depositary
Receipts’’ or the use of derivative instruments to track Underlying Index components.
Market Risk. The market price of investments owned by the Fund may go up or down, sometimes rapidly or unpredictably. Investments may decline in value due to factors affecting securities markets
generally or particular industries represented in the securities markets.
Risk of Investing in
Japan. The Fund invests in securities of companies that are principally located in Japan. Investments in Japan are associated with the following risks:
•
| Geographic Risk. Japan is located in a part of the world that has historically been prone to natural disasters such as earthquakes, volcanoes and tsunamis and is economically sensitive to environmental
events. Any such event could result in a significant adverse impact on the Japanese economy.
|
•
| Lack of Natural Resources Risk. Japan is an island state with few natural resources and limited land area and is reliant on imports for its commodity needs. In particular, the Japanese economy is
dependent on global sources of petroleum products, including those in the Middle East. Any disruptions, fluctuations or shortages in the commodity markets could have a negative impact on the Japanese economy.
|
•
| Reliance On Trading Partners Risk. The Japanese economy is heavily dependent on international trade, including trade with the U.S., other Asian countries and European nations, and has
been adversely affected by trade tariffs, other protectionist measures and rising commodity prices. Japanese economic growth has generally been dependent on the U.S. and Chinese economies, with trade increasing with
China in recent years.
|
○
| Asian Economic Risk. Certain Asian economies have experienced over-extension of credit, currency devaluations and restrictions, high unemployment, high inflation, decreased exports and economic
recessions. Economic or political events in any one country can have a significant economic effect on the entire Asian region as well as on major trading partners outside Asia and any adverse event in the Asian
markets may have a significant adverse effect on the Japanese economy.
|
○
| U.S. Economic Risk. The U.S. is a significant trading partner of Japan. Decreasing U.S. imports, new trade regulations, changes in the U.S. Dollar exchange rates or a recession in the U.S. may have an
adverse impact on the Japanese economy. The U.S. economy has been in recession for a number of years and the U.S. Dollar has experienced weakness against the Japanese Yen. Continued weakness in the U.S. economy or the
U.S. Dollar could adversely affect Japanese trade with the U.S.
|
○
| European Economic Risk. The Economic and Monetary Union of the European Union (‘‘EU’’) requires compliance with restrictions on inflation rates, deficits,
interest rates, debt levels and fiscal and monetary controls, each of which
|
| may significantly affect every country in Europe. Decreasing imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro, the default or threat of
default by an EU member country on its sovereign debt, and recessions in EU economies may have a significant adverse effect on the economies of EU member countries. The European financial markets have recently
experienced volatility and adverse trends due to concerns about rising government debt levels of several European countries, including Greece, Spain, Ireland, Italy and Portugal. Continuation of these trends could
adversely affect Japanese trade with Europe.
|
•
| National Security Risk. Japan’s relations with its neighbors, particularly China, North Korea, South Korea and Russia, have at times been strained due to territorial disputes, historical
animosities and defense concerns. Most recently, the Japanese government has shown concern over the increased nuclear and military activity of North Korea and about maritime territorial claims asserted by China.
Strained relations may cause uncertainty in the Japanese markets and adversely affect the overall Japanese economy in times of crisis.
|
•
| Structural Risks. Japan may be subject to risks relating to political, economic and labor risks. Any of these risks, individually or in the aggregate, could adversely affect
investments in the Fund:
|
○
| Political Risk. Historically, Japan has been subject to unpredictable national politics and may experience frequent political turnover. Future political developments may lead to changes in policy that
might adversely affect the Fund’s investments.
|
○
| Large Government Debt Risk. The Japanese economy faces several concerns, including a financial system with large levels of nonperforming loans, over-leveraged corporate balance sheets, extensive
cross-ownership by major corporations, a changing corporate governance structure, and large government deficits.
|
○
| Currency Risk. The Japanese Yen has fluctuated widely at times and any increase in its value may cause a decline in exports that could weaken the economy.
|
○
| Labor Risk. Japan has an aging workforce. Its labor market is undergoing fundamental structural changes, as traditional lifetime employment clashes with the need for increased labor
mobility, which may adversely affect Japan’s economic competitiveness.
|
Nikkei 225 Sector
Concentration Risk. The Fund’s investments may be concentrated in companies in the consumer discretionary, industrials and information technology sectors because these sectors typically represent the
three largest sector concentrations of the Underlying Index. Each of these sectors exhibit the following risks:
•
| Consumer Discretionary Sector Risk. The success of consumer product manufacturers and retailers is closely tied to the performance of domestic and international economies, interest rates, exchange
rates, competition, consumer confidence, changes in demographics and consumer preferences. Companies in this sector depend heavily on disposable household income and consumer spending and may be strongly affected by
fads and marketing campaigns. These companies may be subject to severe competition, which may adversely affect their profitability.
|
•
| Industrials Sector Risk. The stock prices of companies in the industrials sector are affected by supply and demand both for their specific product or service and for industrials sector products in
general. The products of manufacturing companies may face product obsolescence due to rapid technological developments and frequent new product introduction. Government regulations, world events and economic
conditions affect the performance of companies in the industrials sector. Industrial companies may be adversely affected by liability for environmental damage, product liability claims and exchange rates. The
industrials sector may also be adversely affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
|
•
| Information Technology Sector Risk. Information technology companies can be significantly affected by the failure to obtain, or delays in obtaining, financing or regulatory approval,
intense competition, product compatibility, consumer preferences, corporate capital expenditure, rapid obsolescence and research and development of new products. Companies in the information technology sector also
face competition or potential competition with numerous alternative technologies. In addition, the highly competitive information technology sector may cause the prices for these products and services to decline in
the future.
|
Currency Risk. Because the Fund’s NAV is determined on the basis of the U.S. Dollar, investors may lose money if the Japanese Yen depreciates against the U.S. Dollar, even if the local currency
value of the Fund’s holdings in that market increases.
Risk of Investing in
Depositary Receipts. The Fund may invest in DRs, including listed unsponsored DRs that have been in existence since 1984. Unsponsored DRs may be established by a depositary without participation by the
underlying issuer. Holders of an unsponsored DR generally bear all the costs associated with establishing the unsponsored DR. These investments may involve
additional risks and considerations
including, for example, risks related to adverse political and economic developments unique to a country or region, currency fluctuations or controls and the possibility of expropriation, nationalization or
confiscatory taxation. The issuers of the securities underlying unsponsored DRs are not obligated to disclose material information in the U.S. and, therefore, there may be less information available regarding such
issuers and there may not be a correlation between such information and the market value of the depositary receipts. Additionally, to the extent the value of a DR held by the Fund fails to track that of the underlying
security, the use of the DR may result in tracking error in the Fund.
Valuation Risk. Because non-U.S. exchanges such as the Tokyo Stock Exchange may be open on days when the Fund does not price its Shares, the value of the securities in the Fund’s portfolio may change
on days when shareholders will not be able to purchase or sell the Fund’s Shares.
Concentration
Risk. To the extent that the Fund’s portfolio reflects its Underlying Index’s concentration in the securities of companies in a particular market, industry, group of industries,
country, region, group of countries, sector or asset class, the Fund may be adversely affected by the performance of those securities, may be subject to increased price volatility and may be more susceptible to
adverse economic, market, political or regulatory occurrences affecting that market, industry, group of industries, country, region, group of countries, sector or asset class.
Equity Securities
Risk. The trading price of equity securities, including the prices of Fund Shares, will fluctuate in response to a variety of factors. These factors include events impacting a single issuer, as
well as political, market and economic developments that affect specific market segments and the market as a whole. The Fund’s NAV and market price, like stock prices generally, will fluctuate within a wide
range in response to these factors. As a result, an investor could lose money over short or even long periods.
Exchange-Traded Fund
Risk. The Fund’s Shares may trade at a premium or discount to their NAV for different reasons. For example, the Fund’s NAV will fluctuate in response to changes in the market value of
its holdings, while the market prices of the Fund’s Shares will fluctuate in accordance with changes in NAV as well as the supply and demand for the Shares. Also, an active market for the Fund’s Shares may
not develop and market trading may be halted if trading in one or more of the Fund’s underlying securities is halted.
Additional
Investment Strategies
The Fund invests at
least 80% of its net assets in component securities of issuers (or DRs based on the securities of such issuers) that comprise its Underlying Index. As a non-principal investment strategy, the Fund may invest its
remaining assets in money market instruments, including repurchase agreements or funds that invest exclusively in money market instruments (subject to applicable limitations under the Investment Company Act, or
exemptions therefrom), convertible securities, rights and warrants, structured notes (notes on which the amount of principal repayment and interest payments are based on the movement of one or more specified factors,
such as the movement of a particular stock or stock index) and in options, futures contracts and swaps. Options, forwards, futures contracts, swaps, convertible securities and structured notes may be used by the Fund
in seeking performance that corresponds to the Underlying Index, and in managing cash flows. The Fund will not invest in money market instruments as part of a temporary defensive strategy to protect against potential
stock market declines.
The Commodities
Futures Trading Commission (the “CFTC”) has imposed limitations on commodities trading by certain regulated entities, including advisers of registered investment companies. Pursuant to the limitations, in
order to qualify for an exclusion from registration and regulation as a commodity pool operator under the Commodity Exchange Act (“CEA”), a Fund may only use a de minimis amount of commodity interests (such as futures contracts, options on futures contracts, and swaps) other than for bona fide hedging purposes (as defined by the CFTC). A de minimis amount is defined as an amount such that the aggregate initial margin and premiums required to establish these positions (after taking into account unrealized profits and
unrealized losses on any such positions and excusing the amount by which options that are “in-the-money” at the time of purchase) may not exceed 5% of the Fund’s net asset value (after taking into
account unrealized profits and unrealized losses on any such positions). To the extent the Advisor or Sub-Advisor makes investments on behalf of the Fund that are regulated by the CFTC, it intends to do so in
accordance with Rule 4.5 under the CEA. The Advisor has filed a notice of eligibility for exclusion from the definition of the term “commodity pool operator” in accordance with Rule 4.5 and is therefore
not subject to registration or regulation as a commodity pool operator under the CEA. The Sub-Advisor is registered and regulated as a “commodity pool operator” under the CEA.
The Fund may enter into
forward foreign currency contracts in connection with settling planned purchases or sales of securities, to hedge currency exposure associated with some or all of the Fund’s securities or as a part of an
investment strategy.
As an additional
non-principal strategy, the Fund may lend its portfolio securities to brokers, dealers and other financial institutions desiring to borrow securities to complete transactions and for other purposes. In connection with
such loans, the Fund receives liquid collateral equal to at least 102% of the value of loaned domestic securities and 105% of the value of loaned foreign securities on a daily basis. This collateral is
marked-to-market on a daily basis. Although the Fund will receive collateral in connection with all loans of its securities holdings, the Fund would be exposed to a risk of loss should a borrower default on its
obligation to return the borrowed
securities (e.g., the loaned securities may have appreciated beyond the value of the collateral held by the Fund). In addition, the Fund will bear the risk of loss of any cash collateral that it
invests.
The Advisor anticipates
that it may take approximately two business days (i.e., each day the NYSE Arca is open for trading) for additions and deletions to the Underlying Index to be reflected in the portfolio composition of the Fund.
Each of the policies
and strategies described in this Prospectus, including the investment objective of the Fund, constitutes a non-fundamental policy that may be changed by the Board of Trustees of the Trust without shareholder approval.
Certain fundamental policies of the Fund are set forth in the Fund’s SAI under ‘‘Investment Restrictions.’’
Additional Risks
Indexing Risk. The Advisor and the Sub-Advisor use a passive indexing strategy — either replication or representative sampling — to manage the Fund. The Fund invests in the securities included
in, or representative of, its Underlying Index regardless of their investment merit. The Fund does not attempt to outperform its Underlying Index or take defensive positions in declining markets. As a result, the
Fund’s performance may be adversely affected by a general decline in the Japanese markets relating to the Underlying Index.
Asset Class
Risk. The returns from the types of securities in which the Fund invests may under-perform returns from the various general securities markets or different asset classes. This may cause the Fund
to under-perform other investment vehicles that invest in different asset classes. Different types of securities (for example, large-, mid- and small-capitalization stocks) tend to go through cycles of doing better
— or worse — than the general securities markets. In the past, these periods have lasted for as long as several years.
Issuer Risk. The performance of the Fund depends on the performance of individual companies in which the Fund invests. Any issuer 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, disruptions in supply, labor problems or shortages, corporate restructurings, fraudulent disclosures 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.
Settlement Cycle
Risk. For every occurrence of one or more intervening holidays in the Japanese market that are not holidays observed in the U.S. equity market, the redemption settlement cycle will be extended by
the number of days relating to such intervening holidays. In addition to holidays, other unforeseeable closings in the non-U.S. market due to emergencies may also prevent the Fund from delivering securities within
normal settlement period. The securities delivery cycles currently practicable for transferring portfolio securities to redeeming investors, coupled with a non-Japanese holiday schedule, will require a delivery
process longer than seven calendar days, in certain circumstances, meaning that the realization of investment proceeds of Authorized Participants redeeming Creation Units may be delayed.
Trading Price
Risk. Shares of the Fund trade on the NYSE Arca at prices at, above or below their most recent NAV. The per share 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 since the most recent calculation. The trading prices of the Fund’s Shares fluctuate continuously throughout trading hours based on market supply and
demand rather than NAV. The trading prices of the Fund’s Shares may deviate significantly from NAV during periods of market volatility. The Advisor believes that large discounts or premiums to the NAV of the
Fund are not likely to be sustained over the long-term because Shares can be created and redeemed in Creation Units at NAV (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 likely that the Fund’s Shares normally will trade on exchanges at prices close to the Fund’s next
calculated NAV, market prices are not expected to correlate exactly with the Fund’s NAV due to timing reasons as well as market supply and demand factors. In addition, disruptions to creations and redemptions or
the existence of extreme market volatility may result in trading prices that differ significantly from NAV. If a shareholder purchases at a time when the market price is at a premium to the NAV or sells at a time when
the market price is at a discount to the NAV, the shareholder may sustain losses.
Securities Lending
Risk. The Fund may lend its portfolio securities. In connection with such loans, the Fund receives liquid collateral equal to at least 102% of the value of loaned domestic securities and 105% of
the value of loaned foreign securities on a daily basis. This collateral is marked to market on a daily basis. Although the Fund will receive collateral in connection with all loans of its securities holdings, the
Fund would be exposed to a risk of loss should a borrower default on its obligation to return the borrowed securities (e.g., the loaned securities may have appreciated beyond the value of the collateral held by the Fund). In addition, the Fund will bear the risk of loss of any cash collateral that it
invests.
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. As a non-principal investment
strategy, the Fund may utilize futures, options and swaps to track its Underlying Index or individual components of an Underlying Index. The Fund will have exposure to derivative risks, which include a number of risks
based on the structure of the underlying instrument and the counterparty to the derivatives transaction. These risks include leveraging risk where losses may be magnified if the derivative contains an element of
leverage, liquidity risk if the Fund is
unable to sell a derivative or is
otherwise required to reserve its assets against its exposure under the derivative, interest rate risk if the derivative is interest-rate sensitive, market risk associated with the market in which the derivative
trades (if any), credit risk of the counterparty to the derivative contract that may impair the value of the Fund’s derivative and the risk that the Advisor or Sub-Advisor fail to utilize derivatives in a manner
to achieve the Fund’s investment goal. To the extent the Fund utilizes derivatives that are entered into over-the-counter (i.e., futures, options or swaps that are not traded on an exchange), the Fund may also have exposure to the risk of a counterparty’s default, and the risk that the Fund may
improperly value a derivative for which market quotations are unavailable. Each of the types of derivatives in which the Fund may invest exhibit the following risks:
•
| Options Risk. Options invested in by the Fund may be closed out only on an exchange providing a secondary market therefor. If no liquid secondary market exists for an option, the Fund may not be able to
close out the position it holds in the option, subjecting the Fund to the risk of adverse price movements. If the Fund cannot close out a position on an option, it would continue to be required to make margin payments
in cash. There also exists a risk of loss by the Fund of margin deposits in the event of the bankruptcy of a broker with whom the Fund has an open position.
|
•
| Futures Risk. Futures contracts invested in by the Fund may be closed out only on an exchange providing a secondary market therefor. If no liquid secondary market exists for a futures contract, the Fund
may not be able to close out the position it holds in the futures contract, subjecting the Fund to the risk of adverse price movements. The lack of a secondary market may occur due to triggering of daily limits in
price movement for futures contracts on certain exchanges. When a daily limit set by an exchange is met, the exchange does not permit additional trading on such day, potentially preventing the Fund from closing out
the position it holds in any applicable future. If the Fund cannot close out a position on a futures contract, it would continue to be required to make margin payments in cash. The index tracked by a futures contract
may differ from and even have a negative correlation to the Fund’s Underlying Index, resulting in the returns from such a contract not matching the performance of the Underlying Index and the possible risk of
loss. There also exists a risk of loss by the Fund of margin deposits in the event of the bankruptcy of a broker with whom the Fund has an open position.
|
•
| Swaps Risk. If the value of the specified security, index or other instrument tracked by a swap moves against the position held by the Fund, the Fund may be required to pay the dollar value of the
decrease in value (or increase in value, for an inverse swap) to the counterparty. To the extent that the Fund utilizes total return swaps, such instruments will be considered illiquid by the Fund and the Fund will be
required to segregate liquid assets under contractual obligations. Such segregation could limit the Fund’s investment flexibility or impact the Fund’s ability to meet current obligations, such as
redemption requests from Authorized Participants.
|
•
| Futures and Swaps Counterparty Risk. The number of counterparties may vary over time. During periods of credit market turmoil or when the amount invested by the Fund in futures
contracts or total return swaps is limited relative to the Fund’s total net assets, the Fund may have only one or a few counterparties. In such circumstances, the Fund will be exposed to greater counterparty
risk and the Fund may be unable to enter into futures contracts or total return swaps on terms that make economic sense, potentially preventing the Fund from achieving its investment objective or requiring it to enter
into other types of derivative transactions which feature greater cost or risks. Further, a decline in the creditworthiness of a counterparty may impair the value of that counterparty’s futures or swaps with the
Fund, which could result in the loss of all value of the derivative.
|
Forward Foreign
Currency Contracts Risk. The Fund may enter into forward foreign currency exchange contracts in order to facilitate local settlements or to protect against currency exposure in connection with their distributions
to shareholders. The Fund does not expect to engage in currency transactions for speculative purposes or for purposes of hedging against declines in the value of the Fund’s assets that are denominated in a
foreign currency.
Forward foreign
currency contracts are privately negotiated transactions, and can have substantial price volatility. As a result, they offer less protection against default by the other party than is available for instruments traded
on an exchange. The institutions that deal in forward currency contracts are not required to continue to make markets in the currencies they trade and these markets can experience periods of illiquidity.
Management Risk. The Fund may not fully replicate its Underlying Index and may hold securities not included in its Underlying Index. As a result and to the extent the Fund utilizes a representative sampling
strategy, the Fund is subject to the risk that the Advisor’s or the Sub-Advisor’s investment management strategy, the implementation of which is subject to a number of constraints, may not produce the
intended results.
Shares are not Individually
Redeemable
Shares may be redeemed
by the Fund only in large blocks known as ‘‘Creation Units’’ which are expected to be worth in excess of one million dollars each. The Fund may not redeem Shares in fractional Creation Units.
Only certain large institutions that enter into agreements with the Fund’s distributor are authorized to transact in Creation Units with the Fund. These entities are referred to as
‘‘Authorized
Participants.’’ The Fund’s distributor is Foreside Fund Services, LLC (sometimes referred to herein as the “Distributor”). All other persons or entities transacting in Shares must do so
in the Secondary Market.
Continuous
Offering
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 1933, as amended (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 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 Investment Company
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 NYSE Arca is satisfied by the fact that the Fund’s prospectus is available at the NYSE Arca 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 500,000 Shares. The number of Shares
in a Creation Unit will not change, except 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 (‘‘DTC Participant’’), and, in each case, must have executed an agreement with the Distributor with respect to creations and redemptions of Creation Units
(‘‘Participation Agreement’’). Because Creation Units 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.
Shares are listed on
the NYSE Arca and are publicly traded. Retail investors may purchase or sell Shares in the Secondary Market (not from the Fund) through a broker or dealer. For information about acquiring or selling Shares in the
Secondary Market, please contact your broker or dealer or financial advisor.
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 set forth herein are summaries, and the summaries only apply to shareholders who purchase or redeem Creation Units (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 broker-dealers. Shares of the Fund are listed for trading in the Secondary Market on the NYSE Arca and may also trade on other exchanges or in
the over-the-counter market. 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 likely 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 U.S. dollars and cents per Share. For information about buying and selling Shares in the Secondary Market, please contact your broker or dealer or financial advisor.
The exchange on which
the Fund’s shares are listed is open for trading Monday through Friday and is closed on weekends and the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund’s primary listing exchange is the NYSE Arca.
The Fund’s Shares
trade under the trading symbol ‘‘NKY’’ (Cusip No. 74016W106).
Section 12(d)(1) of
the Investment Company Act restricts investments by registered investment companies in the securities of other investment companies. Registered investment companies are permitted to invest in the Fund beyond the
limits set forth in Section 12(d)(1), subject to certain terms and conditions set forth in an SEC exemptive order issued to the Trust, including that such investment companies enter into a written agreement with the
Trust.
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, 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.
Management
The Board of Trustees
of the Trust is responsible for the general oversight of the management of the Fund, including general supervision of the Advisor, Sub-Advisor and other service providers, but it is not involved in the day-to-day
management of the Trust. The Board of Trustees appoints officers who are responsible for the day-to-day operations of the Fund. A list of the Trustees and Trust Officers, and their present and principal occupations is
provided in the Fund’s SAI.
Investment Advisor
The Advisor is a
Delaware limited liability company formed on May 14, 2010 that is a wholly-owned indirect subsidiary of Precidian Investments LLC. The Advisor has been registered as an investment adviser with the SEC since April 8,
2011 and maintains its principal office at 350 Main St., Suite 9, Bedminster, New Jersey 07921. The Advisor does not manage any other investment companies, does not provide investment advice to any other clients and
has limited experience as an investment advisor.
The Advisor serves as
advisor to the Fund pursuant to an Investment Advisory Agreement (‘‘Advisory Agreement’’). Subject at all times to the supervision and approval of the Board, the Advisor is responsible for the
overall management of the Trust. The Advisor has arranged for sub-advisory, distribution, custody, fund administration, transfer agency and all other services necessary for the Fund to operate. The Advisor has
delegated to the Sub-Advisor authority to determine what investments should be purchased and sold, and to place orders for all such purchases and sales, on behalf of the Fund.
As compensation for its
services and its assumption of certain expenses, the Fund pays the Advisor a management fee equal to a percentage of the Fund’s average daily net assets that accrues daily and is paid monthly, as follows:
Fund Name
|
| Management Fee
|
MAXIS® Nikkei 225 Index Fund
|
| 0.50%
|
The Advisor may
voluntarily waive any portion of its advisory fee from time to time, and may discontinue or modify any such voluntary limitations in the future at its discretion.
A discussion regarding
the basis for the Board of Trustees approving the renewal of the Advisory Agreement and the sub-advisory agreement with the Sub-Advisor (the “Sub-Advisory Agreement”) is available in the Fund’s most
recent Semi-Annual Report to shareholders for the most recent semiannual period ended September 30.
Expense Limitation
Agreement. The Advisor has entered into an Expense Limitation Agreement with the Fund under which it has agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in
an amount that limits ‘‘Total Annual Fund Operating Expenses’’ (but excluding interest, taxes, brokerage commissions, other expenditures which are capitalized in accordance with generally
accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of the Fund’s business, and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1
under the Investment Company Act) to not more than the below listed operating expense limit of the average daily net assets for the Fund through July 30, 2016.
Fund Name
|
| Operating Expense Limit
|
MAXIS® Nikkei 225 Index Fund
|
| 0.50%
|
The Advisor currently
expects that the contractual agreement will continue from year-to-year provided such continuance is approved by the Board. The Fund may terminate the Expense Limitation Agreement at any time. The Advisor may also
terminate the Expense Limitation Agreement at the end of the then-current term upon not less than 90 days’ notice to the Fund as set forth in the Expense Limitation Agreement. The terms of the Expense Limitation
Agreement may be revised upon renewal (no revisions to the agreement have been made in connection with its renewal). The Advisor is permitted to recoup from the Fund previously waived fees or reimbursed expenses for
three years from the fiscal year in which fees were waived or expenses reimbursed as long as such recoupment does not cause Fund operating expenses to exceed the then applicable operating expense limit.
Other Expenses. Under the Advisory Agreement, the Advisor has agreed to pay all expenses of the Trust, except for: (i) brokerage expenses and other expenses (such as stamp taxes) connected with the
execution of portfolio transactions or in connection with creation and redemption transactions; (ii) interest and tax expenses; (iii) dividend or distribution expenses; (iv) legal fees or expenses in connection with
any arbitration, litigation or pending or threatened arbitration or litigation, including any settlements in connection therewith; (v) compensation and expenses of each Trustee who is not an interested person of the
Trust (each an ‘‘Independent Trustee’’); (vi) compensation and expenses of counsel to the Independent Trustees; (vii) distribution fees and expenses, if any, paid by the Trust under any
distribution plan adopted pursuant to Rule 12b-1 under the Investment Company Act; (viii) extraordinary expenses, as determined under generally accepted accounting principles; and (ix) the advisory fee payable to the
Advisor.
Fund Name
|
| Other Expenses
|
MAXIS® Nikkei 225 Index Fund
|
| 0.05%
|
The Advisor and its
affiliates may deal, trade and invest for their own accounts in the types of securities in which the Fund also may invest. The Advisor does not use inside information in making investment decisions on behalf of the
Fund.
The Sub-Advisor
Northern Trust
Investments, Inc. serves as sub-advisor to the Fund. NTI, located at 50 South LaSalle Street, Chicago, IL 60603, an indirect subsidiary of Northern Trust Corporation, is an Illinois State Banking Corporation and an
investment adviser registered under the Investment Advisers Act. It primarily manages assets for institutional and individual separately managed accounts, investment companies and bank common and collective funds.
Northern Trust
Corporation is regulated by the Board of Governors of the Federal Reserve System as a financial holding company under the U.S. Bank Holding Company Act of 1956, as amended. As of March 31, 2015, Northern Trust
Corporation, through its subsidiaries, had assets under custody of $6.09 trillion and assets under investment management of $960.1 billion.
The Sub-Advisor is
responsible for managing the investment operations and the composition of the Fund, including the purchase, retention and disposition of the investments, securities and cash contained in the Fund, in accordance with
the Fund’s investment objective and strategies as stated in the Trust’s Prospectuses and SAI, as from time to time in effect. In connection with these responsibilities and duties, the Sub-Advisor is
responsible for providing supervision of the Fund’s investments and conducting a
continuous program of investment
evaluation and, if appropriate, sales and reinvestment of the Fund’s assets. The Sub-Advisor is responsible for the proxy voting of the Fund’s portfolio securities under the Trust’s proxy voting
policies and procedures. The Sub-Advisor also is responsible for furnishing the Advisor or the Trust with statistical information in respect of the investments that the Fund may hold or contemplate purchasing, as the
Advisor or the Trust may reasonably request. The Sub-Advisor, on its own initiative, apprises the Trust of important developments materially affecting the Fund and furnishes the Trust from time to time such
information as it may believe appropriate for this purpose. The Sub-Advisor also has responsibility for implementing all purchases and sales of investments for the Fund it advises in a manner consistent with its
policies.
As compensation for the
services provided by the Sub-Advisor pursuant to the Sub-Advisory Agreement, the Advisor shall pay the Sub-Advisor within 10 business days of the last business day of each month as follows:
(a)
| 0.004167% multiplied by: (i) the value of the average daily net assets of the Fund during the then prior month; or (ii) $1 billion, whichever is less, plus
|
(b)
| 0.003333% multiplied by the excess of the average daily net assets of the Fund during the then prior month above $1 billion (if any);
|
provided, however,
that: (x) the minimum monthly fee that is to be paid by the Advisor to the Sub-Advisor is not to be less than $14,583; and (y) any fees due under the Sub-Advisory Agreement with respect to partial months shall be
pro-rated using the ratio of: (i) the actual number of business days on which sub-advisory services were provided during such partial month over; (ii) the total number of business days for such month.
Portfolio Management
The Sub-Advisor acts
as portfolio manager for the Fund pursuant to the Sub-Advisory Agreement. The Sub-Advisor supervises and manages the investment portfolio of the Fund and directs the purchase and sale of the Fund’s investment
securities. The Sub-Advisor utilizes a team of investment professionals acting together to manage the assets of the Fund, which is currently comprised of two portfolio managers. The team meets regularly to review
portfolio holdings and to discuss purchase and sale activity. The team adjusts holdings in the portfolio as it deems appropriate in the pursuit of the Fund’s investment objective.
Portfolio Managers
The individual Portfolio
Managers responsible for the day-to-day management of the portfolio of the Fund operate as a team and are:
Robert Anstine is Vice
President of NTI. Mr. Anstine joined NTI in 2011 and is responsible for managing various global index equity portfolios. In addition, he has been a portfolio manager for the FlexShares ETFs since their inception in
September 2011. Prior to joining NTI and since 2007, Mr. Anstine worked at Northern Trust as an operations manager.
Patrick Dwyer is Vice
President of NTI. Mr. Dwyer joined NTI in 2003 and is responsible for managing various global index equity portfolios. Prior to this role, Mr. Dwyer was a senior portfolio manager responsible for the management of
international equity index portfolios in developed, emerging, and frontier markets, and currency and futures overlays. Before Mr. Dwyer’s involvement with the international equity index team, he was an index
analyst and portfolio manager on the US index team.
More Information
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.
Other Service
Providers
Index Provider
The Underlying Index
is sponsored by Nikkei Inc. which is independent of the Fund and the Advisor and the Sub-Advisor. The Index Provider determines the composition and relative weightings of the securities in the Underlying Index and
publishes information regarding the market value of the Underlying Index.
Nikkei Inc. is a leading
media provider for business in Japan, which publishes five newspapers and operates online news sites. It consistently provides high-quality information on business and the economy.
Fund Administrator,
Custodian, Accounting and Transfer Agent
JPMorgan Chase Bank, N.A.
(‘‘JPMCB’’) serves as administrator, custodian, transfer agent, index receipt agent and dividend disbursing agent of the Trust and the Fund. JPMCB is located at One Chase Manhattan Plaza, New
York, New York 10005.
Pursuant to the Fund
Servicing Agreement with the Trust, JPMCB provides administrative, regulatory, tax, financial reporting and fund accounting services for the maintenance and operation of the Trust and the Fund. In addition, JPMCB
makes office space, equipment, personnel and facilities available to provide such services.
Pursuant to the Global
Custody Agreement with the Trust, JPMCB maintains cash, securities and other assets of the Trust and the Fund in separate accounts, keeps all required books and records and provides other necessary services. JPMCB is
required, upon the order of the Trust, to deliver securities held by JPMCB and to make payments for securities purchased by the Fund.
Pursuant to the Agency
Services Agreement with the Trust, JPMCB acts as transfer agent and index receipt agent for the Fund’s authorized and issued Shares of beneficial interest and as dividend disbursing agent of the Trust.
Distributor
The Distributor, a
Delaware limited liability company, serves as the distributor of Creation Units for the Fund on an agency basis. The Distributor does not maintain a secondary market in Shares. The Distributor has no role in
determining the policies of the Fund or the securities that are purchased or sold by the Fund. The Distributor’s principal address is Three Canal Plaza, Suite 100, Portland, Maine 04101.
Securities Lending Agent
The Fund may lend its
portfolio securities to certain creditworthy borrowers under certain conditions described in the SAI, and will receive collateral for each loaned security which is marked to market each trading day. Engaging in loans
of its portfolio securities enables the Fund to receive a portion of the income generated by the lending of such securities and then investing in the collateral until the loan is terminated. Such loans may be
terminated at any time by the Fund. Securities lending involves the risk of loss of rights in the collateral or delay in recovery of the collateral should the borrower fail to return the securities loaned or become
insolvent. JPMCB acts as Securities Lending Agent for the Fund subject to the supervision of the Advisor. For this service, JPMCB receives a fee to cover the custodial, administrative and related costs of securities
lending.
Independent Registered
Public Accounting Firm
PricewaterhouseCoopers
LLP, 125 High Street, Boston, Massachusetts 02110, serves as the independent registered public accounting firm for the Trust.
Legal Counsel
Foley & Lardner LLP,
777 East Wisconsin Avenue, Suite 3800, Milwaukee, Wisconsin 53202, serves as counsel to the Trust.
Other Service Providers
Foreside Compliance
Services, LLC (‘‘FCS’’), an affiliate of the Distributor, provides an Anti-Money Laundering Officer and Chief Compliance Officer to the Fund. Foreside Management Services, LLC
(‘‘FMS’’), an affiliate of the Distributor, provides a Principal Financial Officer to the Fund.
The Distributor, FCS and
FMS are not affiliated with the Advisor, Sub-Advisor or JPMCB or their affiliates.
Frequent Trading
The Trust’s
Board of Trustees has not adopted policies and procedures with respect to frequent purchases and redemptions of Fund Shares by Fund 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 Fund Shares on a short-term basis. In
addition, the Board considered that, unlike traditional mutual funds, the Fund’s 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 Fund’s 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 (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.
Service and
Distribution Plan
The Board of Trustees
of the Trust has adopted a Service and Distribution Plan pursuant to Rule 12b-1 under the Investment Company 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 for certain distribution-related activities. The Trust’s Board of Trustees has resolved not to authorize the payment of Rule 12b-1 fees prior to July 30, 2016. However, in the
event Rule 12b-1 fees are charged in the future, they will be paid out of the respective Fund’s assets, and over time they will increase the cost of your investment and they may cost you more than certain other
types of sales charges.
The Advisor 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.
Determination of
Net Asset Value (NAV)
The NAV of the Shares
for the Fund is equal to the Fund’s total assets minus the Fund’s total liabilities divided by the total number of Shares outstanding, based on prices of the Fund’s portfolio securities at the time
of closing, provided that: (a) any assets or liabilities denominated in currencies other than the U.S. Dollar shall be translated into U.S. Dollars at the prevailing market rates on the date of valuation as quoted by
one or more major banks or dealers that makes a two-way market in such currencies (or a data service provider based on quotations received from such banks or dealers); and (b) U.S. fixed-income assets may be valued as
of the announced closing time for trading in fixed-income instruments on any day that the Securities Industry and Financial Markets Association announces an early closing time. 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 securities and
other assets of the Fund are valued pursuant to the pricing policy and procedures approved by the Board. In calculating NAV, the Fund’s investments are valued using market quotations when available. When market
quotations are not readily available, are deemed unreliable or do not reflect material events occurring between the close of local markets and the time of valuation, investments are valued using fair value pricing as
determined in good faith by the Advisor 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; (3) securities whose trading has been halted or suspended; and (4) foreign securities traded on exchanges that close
before the Fund’s NAV is calculated. In particular the Fund will hold securities traded on the Tokyo Stock Exchange that may be fair valued from time to time since that exchange closes before the Fund’s
NAV is calculated. Because non-U.S. exchanges such as the Tokyo Stock Exchange may be open on days when the Fund does not price its shares, the value of the securities in the Fund’s portfolio may change on days
when shareholders will not be able to purchase or sell the Fund’s shares.
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 respective Fund invests pursuant to its investment objective,
strategies and limitations.
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.
The NAV is calculated by
the administrator and custodian and determined each business day as of the close of regular trading on the NYSE Arca (ordinarily 4:00 p.m. New York time).
Dividends,
Distributions and Taxes
Net Investment Income and
Capital Gains
As the Fund 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 from stock dividends. These amounts, net of expenses, are typically passed along to Fund 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.’’
Net investment income
and net capital gains are typically distributed to shareholders at least annually. Dividends may be declared and paid more frequently to improve index tracking or to comply with the distribution requirements of the
Internal Revenue Code (‘‘Code’’). In addition, the Fund may determine to distribute at least annually amounts representing the full dividend yield net of expenses on the underlying investment
securities, as if the Fund owned the underlying investment 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 which represents a return of capital.
The Fund reserves the
right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve its status as a regulated investment company (‘‘RIC’’) or to avoid
imposition of income or excise taxes on undistributed income or realized gains.
Dividends and other
distributions on Shares of the Fund are distributed on a pro rata basis to beneficial owners of such Shares. Dividend payments are made through DTC Participants and indirect participants to beneficial owners then of record with proceeds
received from the Fund.
Distributions in cash may
be reinvested automatically in additional Shares of your 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 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 all potential US federal income tax considerations possibly applicable to an investment in Shares of the Fund,
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 advisors
with respect to the specific federal, state, local and foreign tax consequences of investing in Fund Shares.
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 separate ‘‘regulated investment company’’ under the Code. To qualify and maintain its tax status as a regulated investment company, the Fund must meet
annually certain income and asset diversification requirements and must distribute annually at least 90% of its ‘‘investment company taxable income’’ (which includes dividends, interest and net
short-term capital gains).
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 the Fund’s 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. The Fund intends to make distributions necessary to avoid the 4% excise tax.
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 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 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 (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 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.
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 the 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, Fund distributions of qualifying dividend income to non-corporate Fund shareholders qualify for
taxation at long-term capital gain rates.
In addition, if
applicable to a Fund shareholder, recent legislation imposes a new 3.8 percent Medicare contribution tax on net investment income. 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, an Authorized Participant recognizes capital gain or loss equal to the difference between: (i) the fair market value (at issue)
of the issued Shares (plus any cash received by the Authorized Participant as part of the issue); and (ii) 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, an Authorized Participant recognizes capital gain or loss equal to the difference between: (i) the fair market value
(at redemption) of the securities received (plus any cash received by the Authorized Participant as part of the redemption); and (ii) 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 Fund shareholder to the IRS and withhold federal income tax (‘‘backup withholding’’) at a 28% 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 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 a Fund shareholder’s federal income tax liability.
Special Issues for
Foreign Shareholders. If a Fund shareholder is not a U.S. citizen or resident or if a Fund shareholder is a foreign entity, the Fund’s ordinary income dividends (including distributions of net short-term
capital gains and 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, for Fund tax years that begin on or before December 31, 2013, 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 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 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.
Recently enacted
legislation, will subject foreign shareholders to U.S. withholding tax of 30% on all U.S. source income (including all dividends from the Fund) beginning in 2014, and gross proceeds from the sale of U.S. stocks and
securities (including the sale of Fund Shares) beginning in 2017, unless they comply with certainly newly-enacted 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 IRS to provide it with 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 Fund 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, and for special tax treatment on the sale and distribution by certain funds, please see the section of the SAI entitled ‘‘Federal Income
Taxes.’’
Transaction Fees
Authorized
Participants are charged standard creation and redemption transaction fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. The standard creation and
redemption transaction fee is $4,000. The standard creation transaction fee is charged to each purchaser on the day such purchaser creates a Creation Unit. The standard creation transaction fee is the same regardless
of the number of Creation Units purchased by an investor on the same day. Similarly, the standard redemption transaction fee is the same regardless of the number of Creation Units redeemed on the same day. Authorized
Participants who place creation orders through DTC for cash (when cash creations are available or specified) will also be responsible for the brokerage and other transaction costs of the Fund relating to the cash
portion of such creation order. In addition, purchasers of Shares in Creation Units are responsible for payment of the costs of transferring securities to the Fund and redeemers of Shares in Creation Units are
responsible for the costs of transferring securities from the Fund. Investors who use the services of a broker or other such intermediary may pay fees for such services.
Code of Ethics
The Trust, the
Advisor, the Sub-Advisor, and the Distributor each have adopted a code of ethics under Rule 17j-1 of the Investment Company Act which is designed to prevent affiliated persons of the Trust, the Advisor, and the
Sub-Advisor 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.
Fund Website and
Disclosure of Portfolio Holdings
The Advisor maintains
a website for the Fund at www.precidianfunds.com. The website for the Fund contains the following information, on a per-Share basis, for the Fund: (1) the prior business day’s NAV; (2) the market closing price
or the reported mid point of the bid-ask spread at the time of NAV calculation (‘‘Bid-Ask Price’’); and (3) a calculation of the premium or discount of the market closing price or the Bid-Ask
Price against such NAV. In addition, on each business day, before the commencement of trading in Shares
on the NYSE Arca, the Fund will disclose
on its website (www.precidianfunds.com) the identities and quantities of the portfolio securities and other assets held by the Fund that will form the basis for the calculation of NAV at the end of the business
day.
A description of the
Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the SAI.
Disclaimers and
Other Information
The Fund is not
sponsored, endorsed, sold or promoted by Nikkei Inc. Nikkei 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 objectives. The Advisor is licensing, and then sub-licensing to the Trust, certain trademarks and trade names of Nikkei Inc.
and of the Underlying Index, which is determined, composed and calculated by Nikkei Inc. without regard to the Fund. Nikkei Inc. has no obligation or liability in connection with the administration, marketing or
trading of the Fund.
Nikkei Stock Average
(the ‘‘NSA’’) is copyrighted material calculated in a methodology independently developed and created by Nikkei Inc., and Nikkei Inc. is the sole exclusive owner of the copyright and other
intellectual property rights in the NSA itself and the methodology to calculate the NSA. All intellectual properties and any other rights in the marks indicating Nikkei and the NSA belong to Nikkei Inc. The Fund is
managed and operated exclusively by the Advisor. Nikkei Inc. assumes no obligation or responsibility for the management, operation and transactions of the Fund. Nikkei Inc. is not obligated to continuously announce
the NSA and is not liable for any error, delay, interruption, suspension or cessation of announcement thereof. Nikkei Inc. has the right to change the component stocks included in the NSA, the calculation methodology
of the NSA or any other details of the NSA and has the right to suspend or cease the announcement of the NSA without owning any liability to any other third party.
Precidian Funds LLC
does not guarantee the accuracy or the completeness of the Underlying Index or any data included therein and Precidian Funds LLC shall have no liability for any errors, omissions or interruptions therein. Precidian
Funds LLC makes no warranty, express or implied, to the owners of Shares of the Fund or to any other person or entity, as to results to be obtained by the Fund from the use of the Underlying Index or any data included
therein. Precidian Funds LLC 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, with respect to the Underlying Index in no event shall Precidian Funds LLC have any liability for any special, punitive, direct, indirect or consequential
damages (including lost profits), even if notified of the possibility of such damages.
The Trust was
organized as a Delaware statutory trust on August 27, 2010. Its Declaration of Trust currently permits the Trust to issue an unlimited number of Shares of beneficial interest. If shareholders are required to vote on
any matters, each Share outstanding would be entitled to one vote. Annual meetings of shareholders will not be held except as required by the Investment Company Act and other applicable law. See the Fund’s SAI
for more information concerning the Trust’s form of organization.
For purposes of the
Investment Company 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 Investment Company Act is subject to the restrictions of Section 12(d)(1) of the Investment Company Act, except as permitted by an exemptive order that permits registered
investment companies to invest in the Fund beyond those limitations.
PrecidianSM is a service mark of Precidian Funds LLC.
Nikkei® is a registered trademark of Nikkei Inc. Nikkei Stock AverageSM and the Nikkei 225SM are service marks of Nikkei Inc.
MAXIS® is a registered trademark of Mitsubishi UFJ Asset Management Co., Ltd.
Financial
Highlights
The financial
highlights table is intended to help you understand the Fund’s financial performance from commencement of operations through March 31, 2015. Certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that an investor would have earned (lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been
audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose report, along with the Fund’s financial statements for the period ended March 31, 2015, is included in the annual
report of the Fund and is available upon request.
| MAXIS®
Nikkei 225 Index Fund
|
| Year-Ended
March 31, 2015
|
| Year-Ended
March 31, 2014
|
| Year-Ended
March 31, 2013
|
| July 8, 2011*
through
March 31, 2012
|
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period):
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, beginning of period
| $17.15
|
|
| $15.80
|
|
| $14.67
|
|
| $15.00
|
|
Investment Operations:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(a)
| 0.14
|
|
| 0.13
|
|
| 0.22
|
|
| 0.24
|
|
Net realized and unrealized gain (loss) on investments
| 1.96
|
|
| 1.50
|
|
| 1.14
|
|
| (0.48)(b)
|
|
Total investment operations
| 2.10
|
|
| 1.63
|
|
| 1.36
|
|
| (0.24)
|
|
Distributions:
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
| (0.20)
|
|
| (0.28)
|
|
| (0.23)
|
|
| (0.09)
|
|
Total distributions
| (0.20)
|
|
| (0.28)
|
|
| (0.23)
|
|
| (0.09)
|
|
Net asset value, end of period
| $19.05
|
|
| $17.15
|
|
| $15.80
|
|
| $14.67
|
|
Market value, end of period
| $19.06
|
|
| $17.10
|
|
| $15.80(c)
|
|
| 14.76
|
|
Total Return:
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value(d)
| 12.33%
|
|
| 10.38%
|
|
| 9.53%
|
|
| (1.55)%(e)
|
|
Market value(f)
| 12.72%
|
|
| 10.07%(c)
|
|
| 8.85%(c)
|
|
| (0.97)%(e)
|
|
Ratios and Supplemental Data:
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of expenses to average net assets
| 0.55%
|
|
| 0.53%
|
|
| 0.53%
|
|
| 0.53%(g)
|
|
Ratio of expenses to average net assets, net of reimbursement
| 0.50%
|
|
| 0.50%
|
|
| 0.50%
|
|
| 0.50%(g)
|
|
Ratio of net investment income to average net assets
| 0.83%
|
|
| 0.76%
|
|
| 1.58%
|
|
| 2.37%(g)
|
|
Net assets, end of period (in thousands)
| $95,370
|
|
| $120,156
|
|
| $229,199
|
|
| $198,131
|
|
Portfolio turnover rate(h)
| 3%
|
|
| 2%
|
|
| —(i)
|
|
| —(e)(i)
|
|
*
| Commencement of investment operations.
|
(a)
| Per share net investment income (loss) has been calculated using the average daily share method.
|
(b)
| The amount shown for a share outstanding throughout the period is not in accordance with the aggregate net realized and unrealized gain (loss) for that period because of the timing of sales and
repurchases of the Fund shares in relation to fluctuating market value of the investments in the Fund.
|
(c)
| The market value return is for the period April 1, 2012 through March 28, 2013. The market price is from March 28, 2013. March 28, 2013 was the last day of NYSE Arca trading for the Fund’s fiscal
year. The NYSE Arca is the principal exchange on which the Fund’s shares trade.
|
(d)
| Net asset value total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value
during the period, and redemption on the last day of the period at net asset value. This percentage is not an indication of the performance of a shareholder’s investment in the Fund based on market value due to
differences between the market price of the shares and the net asset value per share of the Fund.
|
(e)
| Not annualized for periods less than one year.
|
(f)
| Market value total return is calculated assuming an initial investment made at the market value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during
the period, if any, and redemption on the last day of the period at market value. Market value is determined by the official midpoint bid/ask from the NYSE Arca. Market value may be greater or less than net asset
value, depending on the Fund’s closing price on the listed market.
|
(g)
| Annualized for periods less than one year.
|
(h)
| In-kind transactions are not included in portfolio turnover calculations.
|
(i)
| Less than 0.5%.
|
Privacy Policy
Precidian ETFs Trust 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.
Precidian ETFs Trust
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:
Annual/Semi-Annual
Report
Additional information
about the Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders. In the Fund’s annual report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund’s performance during its last fiscal year. The Annual Report for the period ended March 31, 2015 is available to shareholders free of charge.
Statement of Additional
Information
Additional information
about the Fund and its policies is also available in the Fund’s SAI. The SAI is incorporated by reference into this Prospectus (and is legally considered part of this Prospectus).
The Fund’s
annual and semi-annual reports (when available) and the SAI are available free of charge upon request by calling Precidian Funds LLC at 1-855-621-0930. You can also access and download the annual and semi-annual
reports and the SAI at the Fund’s website: http://www.precidianfunds.com.
To obtain other
information and for shareholder inquiries:
By telephone:
| 1-855-621-0930
|
|
|
By mail:
| Precidian ETFs Trust
|
| c/o Foreside Fund Services, LLC
|
| Three Canal Plaza, Suite 100
|
| Portland, Maine 04101
|
|
|
On the Internet:
| SEC Edgar database: www.sec.gov; or
|
| The Trust: www.precidianfunds.com
|
You may review and
obtain copies of Fund documents (including the SAI) by visiting the SEC’s public reference room in Washington, D.C. You may also obtain copies of Fund documents, after paying a duplicating fee, by writing to the
SEC’s Public Reference Section, Washington, D.C. 20549-1520 or by electronic request to: publicinfo@sec.gov. Information on the operation of the public reference room may be obtained by calling the SEC at (202)
551-8090.
No person is authorized
to give any information or to make any representations about the Fund and its Shares not contained in this Prospectus and you should not rely on any other information. Read and keep the Prospectus for future
reference.
Dealers effecting
transactions in the Fund’s 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 811-22524.
Statement of
Additional Information
PRECIDIAN ETFs TRUST
This
Statement of Additional Information (“SAI”) is not a prospectus. It should be read in conjunction with and is incorporated by reference into the prospectus dated July 28, 2015 (As Amended and Restated
October 1, 2015) (“Prospectus”) for the Precidian ETFs Trust (“Trust”), relating to the series identified in the table below (the “Fund”), as it may be revised from time to time.
A
copy of the Prospectus relating to the Fund and the Fund’s Annual Report and Semi-Annual Report may be obtained without charge by writing to the Trust, c/o Foreside Fund Services, LLC, Three Canal Plaza, Suite
100, Portland, Maine 04101, by calling 1-855-621-0930, or by visiting the Trust’s website at www.precidianfunds.com.
Fund
Name
|
| Ticker
Symbol
|
| CUSIP
|
| Exchange
|
MAXIS® Nikkei 225 Index Fund
|
| NKY
|
| 74016W106
|
| NYSE Arca
|
The
Fund’s March 31, 2015 financial statements, included in the Fund’s Annual Report that is filed with the Securities and Exchange Commission on Form N-CSR on June 5, 2015, are incorporated by reference into
this SAI.
Capitalized terms used but not defined herein have the same meaning as in the Prospectus, unless otherwise noted.
Dated:
July 28, 2015
(As Amended and Restated October 1, 2015)
No
person has been authorized to give any information or to make any representations other than those contained in this SAI and the Prospectus and, if given or made, such information or representations may not be relied
upon as having been authorized by the Trust.
The
information contained herein regarding the index underlying the Fund (“Underlying Index”) and the Index Provider was provided by the Index Provider, while the information contained herein regarding the
securities markets and The Depository Trust Company (“DTC”) was obtained from publicly available sources. The Underlying Index is the Nikkei Stock Average, commonly called the “Nikkei 225” and
the Index Provider is Nikkei Inc.
SHARES OF THE TRUST ARE NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY NIKKEI INC. NIKKEI INC. MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THE SHARES OF THE TRUST OR ANY MEMBER OF THE
PUBLIC REGARDING THE ADVISABILITY OF TRADING IN THE PRODUCT(S). NIKKEI INC. HAS NO OBLIGATION TO TAKE THE NEEDS OF NIKKEI INC. (IN ITS CAPACITY AS LICENSEE OF THE UNDERLYING INDEX, THE “LICENSEE”) OR THE
OWNERS OF THE SHARES OF THE TRUST INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE UNDERLYING INDEX. NIKKEI INC. IS NOT RESPONSIBLE FOR AND HAS NOT PARTICIPATED IN THE DETERMINATION OF THE TIMING OF,
PRICES AT, OR QUANTITIES OF THE SHARES OF THE TRUST TO BE LISTED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THE SHARES OF THE TRUST ARE TO BE CONVERTED INTO CASH. NIKKEI INC. HAS NO OBLIGATION OR
LIABILITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR TRADING OF THE SHARES OF THE TRUST.
NIKKEI INC. DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE UNDERLYING INDEX OR ANY DATA INCLUDED THEREIN AND NIKKEI INC. SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
NIKKEI INC. MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE SHARES OF THE TRUST, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE UNDERLYING INDEX OR ANY DATA INCLUDED
THEREIN. NIKKEI INC. 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 NIKKEI INC. HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN NIKKEI INC. AND THE LICENSEE.
PrecidianSM is a service mark of Precidian Funds LLC.
Nikkei® is a registered trademark of Nikkei Inc. Nikkei Stock AverageSM and the Nikkei 225SM are service marks of Nikkei Inc.
MAXIS® is a registered trademark of Mitsubishi UFJ Asset Management Co., Ltd.
GENERAL DESCRIPTION OF
THE TRUST AND THE FUND
The
Trust was organized as a Delaware statutory trust on August 27, 2010 as NEXT ETFs Trust and is authorized to have multiple segregated series or portfolios. The name of the Trust was changed on May 16, 2011 to
Precidian ETFs Trust. The Trust is an open-end, management investment company registered under the Investment Company Act of 1940, as amended (“1940 Act”). The Trust currently consists of one diversified
investment portfolio. This SAI addresses the following investment portfolio of the Trust: MAXIS® Nikkei 225 Index Fund.
Other
portfolios may be added to the Trust in the future. The shares of the Fund are referred to herein as “Fund Shares” or “Shares.”
The
Fund is managed by Precidian Funds LLC (“Advisor”). The Advisor has been registered as an investment adviser with the Securities and Exchange Commission (“SEC”) since April 8, 2011.
The
Fund offers and issues Shares at net asset value (“NAV”) only in aggregations of a specified number of Shares (each, a “Creation Unit”), generally in exchange for a basket of equity securities
included in the Underlying Index (“Deposit Securities”), together with the deposit of a specified cash payment (“Cash Component”). Fund Shares trade on the NYSE Arca, Inc. (the
“Exchange”) at market prices that may be below, at, or above NAV. Shares are redeemable only in Creation Units and, generally, in exchange for Deposit Securities and a Cash Component.
The
Trust reserves the right to offer a “cash” option for creations and redemptions of Fund Shares. Fund Shares may be issued in advance of receipt of Deposit Securities subject to various conditions,
including a requirement to maintain on deposit with the Trust cash at least equal to 115%, which the Advisor may change from time to time, of the market value of the missing Deposit Securities. Transaction fees for
cash creations or redemptions may be higher than the transaction fees associated with in-kind creations or redemptions. In all cases, conditions and fees will be limited in accordance with the requirements of SEC
rules and regulations applicable to management investment companies offering redeemable securities.
EXCHANGE LISTING AND
TRADING
Shares of the Fund are listed for trading and trade throughout the day on the Exchange. 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 delisting 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 for 30 or more consecutive trading days; (ii) the value of the Underlying Index is no longer calculated or available; or (iii) 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 such 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 termination of the Fund.
As in
the case of other stocks traded on the Exchange, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels.
The
Trust reserves the right to adjust the price levels of the Shares in the future 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.
INVESTMENT OBJECTIVES
AND POLICIES
Investment Objectives
The
investment objective of the Fund is to provide investment results that correspond generally to the price and yield (before the Fund’s fees and expenses) of the Nikkei 225 Index created by Nikkei Inc. (the
“Index Provider”). There can be no assurance that the Fund’s objective will be achieved.
All
investment objectives and investment policies not specifically designated as fundamental may be changed without shareholder approval. Additional information about the Fund, its policies, and the investment instruments
it may hold, is provided below.
The
Fund’s share prices will fluctuate with market, economic and, to the extent applicable, foreign exchange conditions. The Fund should not be relied upon as a complete investment program.
The
Index Provider uses a proprietary rules-based methodology (“Index Methodology”) to construct and maintain the Underlying Index of the Fund. The Underlying Index to the Fund and the Index Methodology for
the Underlying Index, including a list of the component securities of the Underlying Index, can be found on the Trust’s website at www.precidianfunds.com.
Investment Restrictions
The
investment restrictions set forth below have been adopted by the Board of Trustees of the Trust (“Board”) as fundamental policies that cannot be changed with respect to the Fund without the affirmative
vote of the holders of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Fund. The investment objective of the Fund and all other investment policies or practices of the Fund are
considered by the Trust not to be fundamental and accordingly may be changed without shareholder approval. For purposes of the 1940 Act, a “majority of the outstanding voting securities” means the lesser
of the vote of: (i) 67% or more of the Shares of the Fund present at a meeting, if the holders of more than 50% of the outstanding Shares of the Fund are present or represented by proxy; or (ii) more than 50% of the
Shares 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 encumbrance of securities or assets of, or borrowings by, the Fund, except that percentage limitations with respect to the borrowing of money will be subject to continuous compliance.
As a
matter of fundamental policy, the Fund may not:
A.
| Invest 25% of its total assets in the securities of issuers conducting their principal business activities in the same industry or group of industries (excluding the U.S. government or any of its
agencies or instrumentalities). Nonetheless, to the extent the Fund’s Underlying Index is concentrated in a particular industry or group of industries, the Fund’s investments will exceed this 25%
limitation to the extent that it is necessary to gain exposure to Underlying Index Components (as defined below) to track its Underlying Index.
|
B.
| Borrow money, except as permitted under the 1940 Act, and as interpreted or modified by regulation from time to time.
|
C.
| Make loans, except through: (a) the purchase of debt obligations in accordance with the Fund’s investment objective and policies; (b) repurchase agreements with banks, brokers, dealers and other
financial institutions; and (c) loans of securities as permitted by applicable law.
|
D.
| Underwrite securities issued by others, except to the extent that the sale of portfolio securities by the Fund may be deemed to be an underwriting.
|
E.
| Purchase, hold or deal in real estate, although the Fund may purchase and sell securities or other investments that are secured by real estate or interests therein or that reflect the return of an index
of real estate values, securities of real estate investment trusts and other companies that are engaged primarily in real estate-related businesses and mortgage-related securities and may hold and sell real estate
acquired by the Fund as a result of the ownership of securities.
|
F.
| Invest in commodities or currencies, except that the Fund may invest in: (a) publicly traded commodity pools or (b) financial instruments (such as structured notes, swaps, futures contracts, forward
contracts, and options on such contracts) (i) on commodities or currencies; (ii) that represent indices of commodity or currency prices; (iii) that reflect the return of such indices; or (iv) that are securities or
other instruments backed by commodities.
|
G.
| Issue senior securities to the extent such issuance would violate applicable law.
|
As a
“diversified fund,” the Fund is limited by the 1940 Act with respect to 75% of its total assets such that it does not invest more than 5% of its total assets in securities of any one issuer and does not
acquire more than 10% of the outstanding voting securities of any one issuer (excluding cash and cash items, government securities, and securities of other investment companies). The remaining 25% of the Fund’s
total assets may be invested in any manner.
As
long as the aforementioned investment restrictions are complied with, the Fund may invest its remaining assets in money market instruments, including repurchase agreements or funds that invest exclusively in money
market instruments (subject to applicable limits under the 1940 Act, or exemptions therefrom) convertible securities, structured notes (notes on which the principal repayment and interest payments are based on the
movement of one or more factors, such as the movement of a particular stock or stock index), and/or stock index futures contracts, options on such futures contracts, swap agreements, forward contracts, reverse
repurchase agreements, stock options and stock index options (collectively, “Financial Instruments”). Financial Instruments may be used by the Fund in seeking performance that corresponds to the Underlying
Index and in managing cash flows. The Fund will not directly employ leverage in its investment strategies. These investments may be made to invest uncommitted cash balances or, in limited circumstances, to assist in
meeting shareholder redemptions of Creation Units. The Fund also will not invest in money market instruments as part of a temporary defensive strategy to protect against potential stock market declines.
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 Risks of Investing in the Fund,” “Additional Description of
the Principal Risks of the Fund” and “Additional Risks.” The discussion below supplements, and should be read in conjunction with, such sections of the Fund’s Prospectus.
General
Investment in the Fund should be made with an understanding that the value of the portfolio of securities held by such Fund may fluctuate in accordance with changes in the financial condition of the issuers of the
portfolio securities, the value of common stocks generally and other factors.
The
Fund is not actively managed by traditional methods and therefore the adverse financial condition of any one issuer will not result in the elimination of its securities from the portfolio securities held by the Fund
unless the securities of such issuer are removed from the Underlying Index.
An
investment in the Fund should also be made with an understanding that the Fund will not be able to replicate exactly the performance of its Underlying Index because the total return generated by its portfolio
securities will be reduced by transaction costs incurred in adjusting the actual balance of such securities and other Fund expenses, whereas such transaction costs and expenses are not included in the calculation of
its Underlying Index. It is also possible that for short periods of time, the Fund may not fully replicate the performance of its Underlying Index due to the temporary unavailability of certain Underlying Index
securities in the Secondary Market or due to other extraordinary circumstances. Such events are unlikely to continue for an extended period of time because the Fund is required to correct such imbalances by means of
adjusting the composition of its portfolio securities. It is also possible that the composition of the Fund may not exactly replicate the composition of its Underlying Index if the Fund has to adjust its portfolio
securities in order to continue to qualify as a “regulated investment company” under the U.S. Internal Revenue Code of 1986, as amended (“Code”).
The
Fund seeks to track the Underlying Index, which in turn seeks to track the overall performance of the publicly traded companies comprising the Nikkei 225, in such weighting as appear in the Nikkei 225. Under normal
circumstances, at least 80% of the Fund’s net assets, plus the amount of any borrowings for investment purposes will be invested in its Underlying Index Components. In addition, the Fund may invest up to 20% of
its net assets in investments not included in its Underlying Index, but which the Advisor or Sub-Advisor believes will help the Fund track its Underlying Index. For example, there may be instances in which the
Sub-Advisor may choose to purchase (or sell) securities not in the Underlying Index which the Sub-Advisor believes are appropriate to substitute for one or more Underlying Index Components in seeking to replicate,
before fees and expenses, the performance of the Underlying Index.
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 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 Code may limit the investment flexibility of the Fund and may make it less likely that it will meet its investment objective.
Tracking Error Risk
The
Fund’s performance may not match its Underlying Index during any period of time. Although the Fund attempts to track the performance of its Underlying Index, the Fund may not be able to duplicate its exact
composition or return for any number of reasons, including but not limited to risk that the strategies used by the Advisor and Sub-Advisor to match the performance of the Underlying Index may fail to produce the
intended results, liquidity risk and new fund risk, as well as the incurring of Fund fees and expenses, which the Underlying Index does not incur.
The
Fund is expected to fair value the foreign securities it holds. To the extent the Fund calculates its NAV based on fair value prices and the value of the Underlying Index is based on the securities’ closing
price on local foreign markets (i.e., the value of the Underlying Index is not based on fair value prices), the Fund’s ability to track the Underlying Index may be adversely affected. To the extent that the
value of assets denominated in foreign currencies is converted into U.S. Dollars using exchange rates selected by the Advisor or the Sub-Advisor that differ from the exchange rates selected by the Index Provider for
use in calculating the Underlying Index, the Fund’s ability to track the Underlying Index may be adversely impacted. In addition, the Fund may not be able to invest in certain securities included in the
Underlying Index due to restrictions or limitations imposed by or a lack of liquidity in certain countries and stock exchanges in which such securities trade or may be delayed in purchasing or selling securities
included in the Underlying Index. In addition, if the Fund utilizes depositary receipts and/or derivative instruments, its return may not correlate as well with the Underlying Index as would be the case if the Fund
purchased all the securities in the Underlying Index directly.
Common Stock
The
Fund invests in common stock. Common stock is issued by companies principally to raise cash for business purposes and represents a residual interest in the issuing company. The Fund participates in the success or
failure of any company in which it holds stock. The prices of equity securities change in response to many factors, including the historical and prospective earnings of the issuer, the value of its assets, general
economic conditions, interest rates, investor perceptions and market liquidity.
Non-U.S. Securities
The
Fund intends to gain exposure to publicly-traded common stocks of Japanese issuers. To the extent the Fund gains exposure to stocks or other investments of non-U.S. issuers, the Fund’s investment in such stocks
may be in the form of American Depositary Receipts, Global Depositary Receipts and European Depositary Receipts (collectively, “DRs”). DRs are receipts, typically issued by a bank or trust issuer, which
evidence ownership of underlying securities issued by a non-U.S. issuer. For American DRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a non-U.S. issuer. For
other forms of DRs, the depository may be a non-U.S. or a U.S. entity, and the underlying securities may be issued by a non-U.S. or a U.S. issuer. DRs are not necessarily denominated in the same currency as their
underlying securities. Generally, American DRs, issued in registered form, are designed for use in the U.S. securities markets, and European DRs, issued in bearer form, are designed for use in European securities
markets. Global DRs are tradable both in the U.S. and in Europe and are designed for use throughout the world.
The
Fund will not invest in any unlisted DR or any DR that the Advisor or Sub-Advisor deems illiquid at the time of purchase or for which pricing information is not readily available. In general, DRs must be sponsored,
but the Fund may invest in unsponsored DRs under certain limited circumstances. The issuers of unsponsored DRs are not obligated to disclose material information in the U.S. Therefore there may be less information
available regarding such issuers and there may be no correlation between available information and the market value of the DRs.
Investing in the securities or other investments of Japanese issuers involves special risks and considerations not typically associated with investing in U.S. issuers. The risks of investing in the Japanese market
include risks of natural disasters, lack of natural resources, reliance on trading partners (including the U.S. and Asian and European economies), national security, unpredictable political climate, large government
debt, currency fluctuation and an aging labor force. Non-U.S. issuers may be subject to less governmental regulation than U.S. issuers. Moreover, individual non-U.S. economies may differ favorably or unfavorably from
the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital reinvestment, resource self-sufficiency and balance of payment positions.
Lending Portfolio
Securities
The
Fund may lend portfolio securities constituting up to 33 1⁄3% of its total assets (as permitted by the 1940 Act) to unaffiliated broker-dealers, banks or other recognized institutional borrowers of securities, provided that
the borrower at all times maintains with the Fund’s collateral account cash, U.S. government securities, eligible foreign government securities or provides an irrevocable letter of credit in favor of the Fund
equal in value to at least 102% of the value of loaned domestic securities and 105% of the value of loaned foreign securities on a daily basis. During the time portfolio securities are on loan, the borrower pays the
Fund an amount equivalent to any dividends or interest paid on such securities, and the Fund may receive an agreed-upon amount of interest income (to be retained by the Fund) from a borrower who delivered equivalent
collateral or provided a letter of credit. Loans are subject to termination at the option of the Fund or the borrower. The Fund may invest any cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower who has delivered equivalent collateral or a letter of credit. The Fund may pay reasonable administrative and custodial fees in connection with a loan and may
pay a negotiated portion of the income earned on the cash to the borrower or placing broker. The Fund does not have the right to vote securities on loan, but could terminate the loan and regain the right to vote if
that were considered important with respect to the investment.
The
primary risk in securities lending is a default by the borrower during a sharp rise in price of the borrowed security resulting in a deficiency in the collateral posted by the borrower. The Fund will seek to minimize
this risk by requiring that the value of the securities loaned be computed each day and additional collateral be furnished each day if required.
The
Fund pays a portion of the interest or fees earned from securities lending to a borrower as described above and to a securities lending agent who administers the lending program in accordance with guidelines approved
by the Board. To the extent that the Fund engages in securities lending, JPMorgan Chase Bank, N.A. (“JPMCB”) acts as securities lending agent for the Fund. JPMCB receives a portion of the revenues
generated by securities lending activities as compensation for its services.
Repurchase Agreements
The
Fund may enter into 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 rated in the highest rating category generally by at least two nationally recognized statistical rating organizations (“NRSRO”), or, if unrated,
determined to be of comparable quality by JPMCB. Collateral, however, is not limited to the foregoing and may include for example obligations rated below the highest category by NRSROs. Collateral for a repurchase
agreement may also include securities that the Fund could not hold directly without the repurchase obligation. Irrespective of the type of collateral underlying the repurchase agreement, in the case of a repurchase
agreement entered into by a non-money market fund, the repurchase obligation of a seller must be of comparable credit quality to securities which are rated in one of the two highest rating categories by any NRSRO.
Repurchase agreements pose certain risks for a 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 longer maturities may be subject to greater price fluctuations than higher
quality collateral and collateral with shorter maturities. 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 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
The
Fund may enter into reverse repurchase agreements, which 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 the Advisor or Sub-Advisor believes it will be advantageous to the Fund. The use of reverse repurchase agreements
may exaggerate any interim 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 such commitments. Under the 1940 Act, reverse repurchase agreements are considered borrowings.
Money Market Instruments
The
Fund may invest a portion of its assets in high-quality money market instruments on an ongoing basis rather than in Underlying Index Components, when it would be more efficient or less expensive for the Fund to do so,
or as cover for Financial Instruments, for liquidity purposes, or to earn interest. The instruments in which the Fund may invest include: (1) short-term obligations issued by the U.S. government; (2) negotiable
certificates of deposit (“CDs”), fixed time deposits and bankers’ acceptances of U.S. and foreign banks and similar institutions; (3) commercial paper rated at the date of purchase
“Prime-1” by Moody’s Investors Service, Inc. or “A-1+” or “A-1” by Standard & Poor’s Ratings Group, Inc., a division of The McGraw-Hill Companies, Inc., or, if
unrated, of comparable quality as determined by the Advisor or Sub-Advisor; (4) repurchase agreements; and (5) money market mutual funds. CDs are short-term negotiable obligations of commercial banks. Time deposits
are non-negotiable deposits maintained in banking institutions for specified periods of time at stated interest rates. Banker’s acceptances are time drafts drawn on commercial banks by borrowers, usually in
connection with international transactions.
Futures Contracts and
Options
The
Fund may enter into futures contracts and options. Futures contracts generally provide for the future sale by one party and purchase by another party of a specified instrument, index or commodity at a specified future
time and at a specified price. Stock index futures contracts are settled daily with a payment by one party to the other of a cash amount based on the difference between the level of the stock index specified in the
contract from one day to the next. Futures contracts are standardized as to maturity date and underlying instrument and are traded on futures exchanges. The Fund may use futures contracts, and options on futures
contracts based on other indexes or combinations of indexes that the Advisor or Sub-Advisor believes to be representative of the Underlying Index.
Although futures contracts (other than cash settled futures contracts including most stock index futures contracts) by their terms call for actual delivery or acceptance of the underlying instrument or commodity, in
most cases the contracts are closed out before the maturity date without the making or taking of delivery. Closing out an open futures position is done by taking an opposite position (“buying” a contract
which has previously been “sold” or “selling” a contract previously “purchased”) in an identical contract to terminate the position. Brokerage commissions are incurred when a
futures contract position is opened or closed.
Futures traders are required to make a good faith margin deposit in cash or government securities with a broker or custodian to initiate and maintain open positions in futures contracts. A margin deposit is intended
to assure completion of the contract (delivery or acceptance of the underlying instrument or commodity or payment of the cash settlement amount) if it is not terminated prior to the specified delivery date. Brokers
may establish deposit requirements which are higher than the exchange minimums. Futures contracts are customarily purchased and sold on margin deposits which may range upward from less than 5% of the value of the
contract being traded.
After a
futures contract position is opened, the value of the contract is marked to market daily. If the futures contract price changes to the extent that the margin on deposit does not satisfy margin requirements, payment of
additional “variation” margin will be required.
Conversely, a change in the contract value may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation margin payments are made to and from the futures broker for as
long as the contract remains open. The Fund expects to earn interest income on its margin deposits.
The
Fund may use futures contracts and options thereon, together with positions in cash and money market instruments, to simulate full investment in the Underlying Index. To the extent liquid futures contracts are not
available for the Underlying Index, the Advisor or Sub-Advisor may seek to utilize other instruments that it believes to be correlated to the Underlying Index components or a subset of the components.
Restrictions on the Use of
Futures and Options
Except as otherwise specified in the Fund’s Prospectus or this SAI, there are no limitations on the extent to which the Fund may engage in transactions involving futures and options thereon. The Fund will take
steps to prevent its futures positions from “leveraging” its securities holdings. When it has a long futures position, it will maintain with its custodian bank, cash or liquid securities having a value
equal to the notional value of the contract (less any margin deposited in connection with the position). When it has a short futures position, as part of a complex stock replication strategy the Fund will maintain
with its custodian bank assets substantially identical to those underlying the contract or cash and liquid securities (or a combination of the foregoing) having a value equal to the net obligation of the Fund under
the contract (less the value of any margin deposits in connection with the position).
Risks of Futures and
Options Transactions
Positions in futures contracts and options may be closed out only on an exchange which provides a secondary market therefor. However, there can be no assurance that a liquid secondary market will exist for any
particular futures contract or option at any specific time. Thus, it may not be possible to close a futures or options position. In the event of adverse price movements, the Fund would continue to be required to make
daily cash payments to maintain its required margin. In such situations, if the Fund has insufficient cash, it may have to sell its portfolio securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery of the instruments underlying futures contracts it has sold.
The
Fund will seek to minimize the risk that it will be unable to close out a futures or options contract by only entering into futures and options for which there appears to be a liquid secondary market.
The
risk of loss in trading futures contracts or uncovered call options in some strategies (e.g., selling uncovered stock index futures contracts) is potentially unlimited. The Fund does not plan to use futures and options contracts in this way. The risk of a futures
position may still be large as traditionally measured due to the low margin deposits required. In many cases, a relatively small price movement in a futures contract may result in immediate and substantial loss or
gain to the investor relative to the size of a required margin deposit. The Fund, however, intends to utilize futures and options contracts in a manner designed to limit its risk exposure to that which is comparable
to what it would have incurred through direct investment in stocks.
Utilization of futures transactions by the Fund involves the risk of imperfect or even negative correlation to the Fund’s Underlying Index if the index underlying the futures contracts differs from the
Fund’s Underlying Index. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with whom the Fund has an open position in the futures contract or option.
Certain financial futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures
contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that
day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting
some futures traders to substantial losses.
Total Return Swaps
Total return swaps give the Fund the right to receive the appreciation in the value of a specified security, index or other instrument in return for a fee paid to the counterparty, which will typically be an agreed
upon interest rate. Total return swaps can also be used to replicate an exposure to a short position in an asset class where the Fund has the right to receive the depreciation in value of a specified security, index
or other instrument (“inverse swaps”). If the underlying asset in a total return swap declines in value (or increases in value, if an inverse swap) over the term of the swap, the Fund may also be required
to pay the dollar value of that decline (or increase, if an inverse swap) to the counterparty.
The
Fund may use total return swaps to replicate an Underlying Index Component’s performance. These total return swaps would reference the performance of a security that is an Underlying Index Component.
Total return swaps are considered illiquid by the Fund. Consequently, the Fund will segregate liquid assets, which may include securities, cash or cash equivalents, to cover the Fund’s daily marked-to-market
net obligations under outstanding swap agreements. This segregation of assets may limit the Fund’s investment flexibility, as well as its ability to meet redemption requests or other current obligations.
Futures and Swap
Counterparties
The
Advisor or Sub-Advisor will monitor and manage the counterparty risk posed by the counterparties, subject to the oversight of the Board, and take actions as necessary to decrease counterparty risk to the Fund by,
among other things, reducing futures contract and swap exposures to certain counterparties and/or seeking alternate or additional counterparties.
The
number of counterparties may vary over time. During periods of credit market turmoil or when the aggregate futures contract or swap notional amount needed by the Fund is relatively small given the level of the
Fund’s net assets, the Fund may have only one or a few counterparties. In such circumstances, the Fund will be exposed to greater counterparty risk. Moreover, the Fund may be unable to enter into any futures
contract or total return swap on terms that make economic sense (e.g., they may be too costly). To the extent that the Fund is unable to enter into either futures contracts or total return swaps, it may not be able to meet its investment objective.
If the Fund is unable to enter into either futures contracts or total return swaps, it may engage in other types of derivative transactions, although the added costs, higher asset segregation requirements and lower
correlation to Underlying Index Component performance of these other derivatives may adversely affect the Fund’s ability to meet its investment objective.
With
regard to derivatives that are not traded on an exchange, the Fund will use only high-rated counterparties, and standards of creditworthiness, as measured by credit ratings, will determine eligible counterparties.
Differing standards may be employed, depending on the term, size and interest-rate sensitivity of a transaction, types of counterparty, and potential for impact on the Fund. As a general rule, the Fund will enter into
transactions only with counterparties whose obligations are rated (or whose obligations under the contemplated derivatives transaction are supported by a credit support provider whose obligations are rated) in the
“BBB+” category or above as rated by Standard & Poor’s or Fitch, or the “Baal” category or above as rated by Moody’s.
Borrowing Money
The
Fund may, as a non-principal investment strategy, borrow money from a bank up to a limit of one-third of the market value of its assets, but only for temporary or emergency purposes. To the extent that the Fund
borrows money, it may be leveraged, and, at such times, the Fund may appreciate or depreciate in value more rapidly than its Underlying Index.
Securities of Investment
Companies
The
Fund may invest in the securities of other investment companies (including money market funds) and real estate investment trusts (“REITs”) to the extent allowed by law. Pursuant to the 1940 Act, the
Fund’s investment in investment companies is limited to, subject to certain exceptions: (i) 3% of the total outstanding voting stock of any one investment company; (ii) 5% of the Fund’s total assets with
respect to any one investment company and (iii) 10% of the Fund’s total assets with respect to investment companies in the aggregate. To the extent allowed by law or regulation, the Fund may invest its assets in
the securities of investment companies that are money market funds, including those advised by or otherwise affiliated with the
Advisor or the Sub-Advisor, in excess of
the limits discussed above. Other investment companies in which the Fund invests can be expected to incur fees and expenses for operations, such as investment advisory and administration fees that would be in addition
to those incurred by the Fund.
Illiquid Securities
The
Fund may invest up to an aggregate amount of 15% of its net assets in illiquid securities. Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments that lack
readily available markets. This percentage limitation is subject to continuous compliance.
Forward Foreign Currency
Contracts
The
Fund may enter into forward foreign currency exchange contracts in order to facilitate local settlements or to protect against currency exposure in connection with their distributions to shareholders. The Fund does
not expect to engage in currency transactions for speculative purposes or for purposes of hedging against declines in the value of the Fund’s assets that are denominated in a foreign currency.
Forward foreign currency contracts are privately negotiated transactions, and may have substantial price volatility. As a result, these transactions offer less protection against default by the counterparty than is
available for instruments traded on an exchange. The institutions that deal in forward currency contracts are not required to continue to make markets in the currencies in which they trade and these markets may
experience periods of liquidity.
Concentration
As
noted above, to the extent the Fund’s Underlying Index is concentrated in a particular industry or group of industries, the Fund’s investments will exceed 25% in such industry or group of industries to the
extent that it is necessary to gain exposure to Underlying Index Components to track the Underlying Index. If the Fund focuses its investments in specific industries or sectors, then the Fund is more susceptible to
developments affecting those industries and sectors than a more broadly diversified fund.
Future Developments
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 Fund’s Prospectus, provided they are consistent with the Fund’s
investment objective and do not violate any investment restrictions or policies.
Portfolio Turnover
The
Fund’s portfolio turnover may vary from year to year, as well as within a year. The overall reasonableness of brokerage commissions is evaluated by the Advisor or the Sub-Advisor based upon its knowledge of
available information as to the general level of commissions paid by other institutional investors for comparable services. In addition, the Fund’s portfolio turnover level may adversely affect the ability of
the Fund to achieve its investment objective. “Portfolio Turnover Rate” is defined under the rules of the SEC as the lesser of the value of the securities purchased or securities sold, excluding all
securities whose maturities at time of acquisition were one year or less, divided by the average monthly value of such securities owned during the year. In-kind subscriptions and redemptions are not included in the
portfolio turnover calculations. Based on this definition, instruments with remaining maturities of less than one year are excluded from the calculation of the Portfolio Turnover Rate. Instruments excluded from the
calculation of portfolio turnover generally would include future contracts, swap agreements and option contracts in which the Fund invests since such contracts generally have a remaining maturity of less than one
year. ETFs, such as the Fund, may incur very low levels of portfolio turnover (or none at all in accordance with the SEC methodology described above) because of the way in which they operate and the way shares are
created in Creation Units. However, a low or zero Portfolio Turnover Rate should not be assumed to be indicative of the amount of gains that the Fund may or may not distribute to shareholders, as the instruments
excluded from the calculation described above may have generated taxable gains upon their sale or maturity.
For
the fiscal year ended March 31, 2015, the annual portfolio turnover rate for the Fund was 3%. For the fiscal year ended March 31, 2014, the annual portfolio turnover rate for the Fund was 2%. For the fiscal year ended
March 31, 2013, the annual portfolio turnover rate for the Fund was less than 0.5%.
Dividend Risk
There
is no guarantee that the issuer 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.
DISCLOSURE OF
PORTFOLIO HOLDINGS
The
Trust has adopted a Portfolio Holdings Policy (“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 Advisor and the Sub-Advisor. 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 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.
This information is used in connection with the Creation and Redemption process and is disseminated on a daily basis through the facilities of the Listing Exchange, the National Securities Clearing Corporation
(“NSCC”) and/or third party service providers.
The
Fund will disclose on the Fund’s website (www.precidianfunds.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 (“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 Advisor, the Sub-Advisor, 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 quarterly basis, based on the Fund’s fiscal year, within sixty (60) days of the end of the 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.
CONSTRUCTION AND
MAINTENANCE OF THE UNDERLYING INDEX
The
Nikkei 225, which is published by Nikkei Inc., measures the performance of 225 highly liquid stocks traded on the first section of the Tokyo Stock Exchange. The components of the Underlying Index are given an equal
weighting based on a par value of 50 Japanese Yen per share, whereby the prices of stocks with other par values are adjusted to also reflect a par value of 50 Japanese Yen per share.
Component Selection
Criteria
The
Underlying Index is governed by transparent, objective rules for security selection, exclusion, rebalancing, and adjustments for corporate actions. To be eligible for inclusion in the Underlying Index, a stock must be
listed on the Tokyo Stock Exchange, be domiciled in Japan and have sufficient historical fundamental data available so that Nikkei Inc. can classify investment style.
Issue Changes
Securities are added or deleted from the Underlying Index based on rules outlined for security selection, exclusion, rebalancing, and adjustments for corporate actions as set forth in the Underlying Index’s
rulebook. Nikkei Inc. makes no subjective determinations related to index composition.
Index Maintenance
The
Underlying Index is reconstituted annually. If the designated date for reconstitution is a holiday, reconstitution occurs on the immediately following business day. Reconstitution is carried out after the day’s
closing index values have been determined.
Index Availability
The
Underlying Index is calculated continuously and is available from major data vendors.
MANAGEMENT
Board of Trustees and
Officers
The
business of the Trust is managed under the direction of the Trust’s Board. Subject to the provisions of the Trust’s Declaration of Trust, its By-Laws and Delaware law, the Trustees have all powers
necessary and convenient to carry out this responsibility. The Board elects the officers of the Trust who are responsible for administering the Trust’s day-to-day operations. Each Trustee serves until his or her
successor is duly elected or appointed and qualified.
The
Board is currently comprised of three Trustees. One Trustee is an employee of the Advisor. This Trustee is an “Interested Person” (as defined under Section 2(a)(19) of the 1940 Act) of the Trust
(“Interested Trustee”). Two of the Trustees and their immediate family members have no affiliation or business connection with the Advisor, the Sub-Advisor or the Fund’s principal underwriter or any
of their affiliated persons and do not own any stock or other securities issued by the Advisor, the Sub-Advisor or the Fund’s principal underwriter. These Trustees are not Interested Persons of the Trust and are
referred to herein as “Independent Trustees.”
The
name, year of birth and principal occupations during the past five years for each Trustee and officer of the Trust is set forth below, along with the other public directorships held by the Trustees during the past
five years.
Name and
Year of
Birth(1)
|
| Position(s)
Held with
Trust
|
| Length of
Time
Served(2)
|
| Principal Occupation(s)
During
Past
5 Years
|
| Number of
Portfolios
in Fund
Complex Overseen
by Trustee
|
| Other
Directorships
Held by Trustee During the Past Five Years
|
Independent Trustees:
|
|
|
|
|
|
|
|
|
|
|
John V. Sinon, 1964
|
| Trustee
|
| Since May 2011
|
| Director of Finance and Accounting, Pyramid Consulting Group, LLC (2014 to present); President, The Sinon Group LLC (2001 to 2014) (recruiting
firm).
|
| 1
|
| None
|
Dennis J. DeCore, 1950
|
| Trustee
|
| Since May 2014
|
| Private Investor (2012 to present); Managing Director, Mitsubishi UFJ Securities – USA (2008 to 2012) (a consolidated subsidiary of the
Mitsubishi UJF Financial Group).
|
| 1
|
| None
|
Interested Trustees(3):
|
|
|
|
|
|
|
|
|
|
|
Mark S. Criscitello, 1961
|
| Chairman & Trustee
Chief Operating
Officer
Treasurer & Principal
Financial Officer
|
| Since August 2010
Since May 2011
From January 2011
to May 2011
|
| Chief Financial Officer, Precidian Funds LLC (2011 to present); Chief Financial Officer, Precidian Investments LLC (2007 to present); Chief
Operating Officer and Chief Financial Officer, Clearance and Execution Division, Bear Hunter (1999 to 2007).
|
| 1
|
| None
|
Other Officers:
|
|
|
|
|
|
|
|
|
|
|
Daniel J. McCabe, 1963
|
| President and Principal Executive Officer
|
| Since January 2011
|
| Chief Executive Officer, Precidian Funds LLC (2011 to present); Chief Executive Officer, Precidian Investments LLC (2007 to present).
|
| N/A
|
| N/A
|
J. Stuart Thomas, 1966
|
| Secretary
|
| Since January 2011
|
| Secretary, Precidian Funds LLC (2011 to present); Principal, Precidian Investments LLC (2005 to present).
|
| N/A
|
| N/A
|
Name and
Year of
Birth(1)
|
| Position(s)
Held with
Trust
|
| Length of
Time
Served(2)
|
| Principal Occupation(s)
During
Past
5 Years
|
| Number of
Portfolios
in Fund
Complex Overseen
by Trustee
|
| Other
Directorships
Held by Trustee During the Past Five Years
|
William Cox, 1966
|
| Treasurer, Chief Financial Officer and Principal Financial Officer
|
| Since May 2013
|
| Director, Principal Financial Officer, Foreside Management Services LLC (May 2013 to present); Department Head Vice President, Fund
Administration, State Street Corp. (1997 to 2012).(4)
|
| N/A
|
| N/A
|
Donna M. Rogers, 1966
|
| Chief Compliance Officer
|
| Since May 2011
|
| Managing Director, Foreside Compliance Services, LLC (December 2010 to present); Senior Vice President, State Street Bank (formerly Investors
Bank & Trust Company) (September 2004 to December 2010)(4)
|
| N/A
|
| N/A
|
(1) The address of each Trustee or officer is c/o Precidian Funds LLC, 350 Main St., Suite 9, Bedminster, New Jersey 07921.
(2) Trustees and Officers serve until their successors are duly elected and qualified.
(3) Mark Criscitello is an “interested person” of the Trust (as that term is defined in the 1940 Act) because of his affiliations with the Advisor.
(4) William Cox and Donna Rogers serve as officers to other unaffiliated mutual funds for which the Distributor (or its affiliates) act as Distributor or provider of other
services.
Board — Leadership
Structure and Oversight Responsibilities
Overall responsibility for oversight of the Fund rests with the Board. The Board has engaged the Advisor to manage the Fund on a day-to day basis. The Board is responsible for overseeing the Advisor, the Sub-Advisor
and other service providers in the operations of the Fund in accordance with the provisions of the 1940 Act, applicable provisions of state and other laws and the Trust’s charter. The Board is currently composed
of three members, two of whom are Independent Trustees. The Board currently conducts regular meetings four times a year. In addition, the Board frequently holds special in-person or telephonic meetings or informal
conference calls to discuss specific matters that may arise or require action between regular meetings. The Independent Trustees meet regularly outside the presence of management, in executive session or with other
service providers to the Trust.
The
Board has appointed Mark Criscitello to serve in the role of Chairman. The Chairman’s role is to preside at all meetings of the Board and to act as a liaison with service providers, officers, attorneys, and
other Trustees generally between meetings. The Chairman may also perform such other functions as may be delegated by the Board from time to time. The Board has established a Nominating Committee, an Audit Committee
and a Pricing and Valuation Committee to assist the Board in the oversight and direction of the business and affairs of the Fund, and from time to time may establish ad-hoc committees or informal working groups to
review and address the policies and practices of the Fund with respect to certain specified matters. The Board and each standing Committee conduct annual assessments of their oversight function and structure. Although
an Interested Trustee, Mr. Criscitello, has been appointed to serve as Chairman, the Board determined not to appoint a lead Independent Trustee. The Board has determined that the Board’s leadership structure is
appropriate because it allows the Board to exercise independent judgment over management and it allocates areas of responsibility among committees of Independent Trustees and the full Board to enhance effective
oversight.
Day-to-day risk management with respect to the Fund is the responsibility of the Advisor or other service providers (depending on the nature of the risk), subject to the supervision of the Advisor. The Fund is
subject to a number of risks, including investment, compliance, operational and valuation risks, among others. While there are a number of risk management functions performed by the Advisor and other service
providers, as applicable, it is not possible to eliminate all of the risks applicable to the Fund. The Trustees have an oversight role in this area, satisfying themselves that risk management processes are in place
and operating effectively. Risk oversight forms part of the Board’s general oversight of the Fund and is addressed as part of various Board and committee activities. The Board, directly or through a committee,
also reviews reports from, among others, management and the independent registered public accounting firm for the Trust, as appropriate, regarding risks faced by the Fund and management’s
risk functions. The Board has
appointed a Chief Compliance Officer who oversees the implementation and testing of the Trust’s compliance program and reports to the Board regarding compliance matters for the Trust and its principal service
providers. In testing and maintaining the compliance program, the Chief Compliance Officer assesses key compliance risks affecting the Fund, and addresses them in reports to the Board.
The
Board held four regular meetings and no special meetings in the fiscal year ended March 31, 2015.
Standing Board
Committees
The
Board of Trustees has established three standing committees in connection with its governance of the Fund: the Audit, Nominating, and Pricing and Valuation Committees. The Audit Committee held two meetings in the
fiscal year ended March 31, 2015. The Nominating Committee held one meeting in the fiscal year ended March 31, 2015. The Pricing and Valuation Committee did not hold any meetings in the fiscal year ended March 31,
2015. Each Independent Trustee serves on the Audit Committee, the Nominating Committee and the Pricing and Valuation Committee of the Board.
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) 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 (iv) 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. All of the Independent Trustees serve on the Trust’s Audit Committee. The Board has not designated an audit committee financial expert at this time because
it believes that the background and experience of both Audit Committee members presently obviates the need for such designation.
The
Nominating Committee has been established to: (i) assist the Board of Trustees in matters involving 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, Sub-Advisor or the Fund’s principal underwriter; and (iii) advise the Board of Trustees on ways to improve its effectiveness.
All of the Independent Trustees serve on the Nominating 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 Precidian ETFs Trust Nominating Committee.
The
Pricing and Valuation Committee is authorized to act for the Board of Trustees in connection with the valuation of portfolio securities held by the Fund in accordance with the Trust’s Pricing and Valuation
Guidelines. The Independent Trustees serve on the Pricing and Valuation Committee along with the officers of the Advisor. The Pricing and Valuation Committee meets when needed.
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 each of Messrs. Sinon and DeCore should serve as Trustees of the Fund because of their knowledge of and experience in the accounting and financial services industries.
The
Trust has concluded that Mr. Criscitello should serve as Trustee of the Trust because of his knowledge of and experience in the financial services industry and the experience he has gained serving as a principal and
executive officer of the Advisor.
Trustees’ Ownership
of Fund Shares
Listed below for each Trustee is a dollar range of securities beneficially owned in the Trust together with the aggregate dollar range of equity securities in all registered investment companies overseen by each
Trustee that are in the same family of investment companies as the Trust, as of December 31, 2014.
Name of
Trustee
|
| Fund
Name
|
| Dollar
Range of
Equity
Securities in
Fund
|
| Aggregate Dollar
Range of Equity
Securities in All
Registered
Investment
Companies
Overseen by Trustee
in Family of
Investment
Companies(1)
|
Independent Trustees:
|
|
|
|
|
|
|
John Sinon
|
| MAXIS® Nikkei 225 Index Fund
|
| None
|
| None
|
Dennis DeCore
|
| MAXIS® Nikkei 225 Index Fund
|
| None
|
| None
|
Interested Trustee:
|
|
|
|
|
|
|
Mark Criscitello
|
| MAXIS® Nikkei 225 Index Fund
|
| None
|
| None
|
(1) “Family of Investment Companies” consists of all mutual funds and ETFs advised by the Advisor and its affiliate advisors.
Board Compensation
Each
Independent Trustee receives an annual retainer of $25,000. The following table sets forth certain information with respect to the compensation of each Trustee for the fiscal year ended March 31, 2015. Geoffrey Clark
resigned as a Trustee effective as of the close of business on May 14, 2014, and Dennis DeCore was appointed as a Trustee effectives as of May 14, 2014. Mr. DeCore will receive an annual retainer of $25,000 in his
capacity as an Independent Trustee.
Name of
Person,
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)
|
Independent Trustees:
|
|
|
|
|
|
|
|
|
John Sinon, Trustee
|
| $25,000
|
| N/A
|
| N/A
|
| $25,000
|
Geoffrey Clark, Trustee(2)
|
| $3,091
|
| N/A
|
| N/A
|
| $3,091
|
Dennis DeCore, Trustee
|
| $21,909
|
| N/A
|
| N/A
|
| $21,909
|
Interested Trustee:
|
|
|
|
|
|
|
|
|
Mark Criscitello,
Chairman and Trustee
|
| None
|
| None
|
| None
|
| None
|
(1) “Fund Complex” consists of all mutual funds and ETFs advised by the Advisor and its affiliate advisors.
(2) Mr. Clark resigned as a Trustee effective as of the close of business on May 14, 2014. Mr. DeCore was appointed as Trustee on that same day.
CODE OF ETHICS
The
Trust, the Advisor and the Sub-Advisor have each adopted a code of ethics under Rule 17j-1 of the 1940 Act that sets forth officers, trustees’ and advisory personnel’s fiduciary responsibilities regarding
the Fund, establishes procedures for personal investing, and restricts certain transactions. Persons subject to either the Trust’s, the Advisor’s or the Sub-Advisor’s code of ethics, including
investment personnel, may invest in securities for their own investment accounts, including, subject to certain conditions, securities that may be purchased or held by the Fund. As the statutory underwriter for the
Fund, the Distributor is not required under Rule 17j-1 of the 1940 Act to maintain a code of ethics since the Distributor and its directors, officers and employees are not affiliated with the Trust, the Advisor or the
Sub-Advisor.
PROXY VOTING POLICIES
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 Sub-Advisor. The Sub-Advisor will vote such proxies in accordance with their proxy policies and procedures. The Board will periodically review the Fund’s proxy voting
record. The Fund’s Proxy Voting Policies and Procedures are attached hereto as Appendix A and the Sub-Advisor’s Proxy Voting Policies, Procedures and Guidelines are attached hereto as Appendix B (the “Sub-Advisor’s Proxy Policy”), while the proxy voting guidelines of the independent third party voting service referenced in the
Sub-Advisor’s Proxy Policy are attached hereto as Appendix C.
The
Trust is required to disclose annually the Fund’s complete proxy voting record on Form N-PX covering the period of July 1st through June 30th and file it with the SEC no later than August 31st of each year. The Fund’s Form N-PX will be available at no charge upon request by calling 1-855-621-0930. It will also be available on
the SEC’s website at www.sec.gov.
CONTROL PERSONS AND
PRINCIPAL HOLDERS OF SECURITIES
The
Trustees and officers of the Trust collectively owned less than 1% of each of the Funds’ outstanding shares as of July 6, 2015.
Although the Trust does not have information concerning the beneficial ownership of Shares nominally held by Depository Trust Company, the name and percentage ownership of each DTC participant that owned of record
5% or more of the outstanding Shares of a Fund participants, as of July 6, 2015, are as follows:
Owner Name
|
| Percentage Ownership
|
Goldman Sachs & Co.
PO Box 3197
New York, NY 10008
|
| 15.81%
|
J.P. Morgan Clearing Corporation
14201 North Dallas Parkway, Floor 12
Dallas, TX 75254
|
| 13.23%
|
Charles Schwab & Co., Inc.
PO Box 64930
Phoenix, AZ 85082
|
| 12.03%
|
National Financial Services LLC
PO Box 673004
Dallas, TX 75267
|
| 8.23%
|
Merrill Lynch
Hopewell Bldg. 6
1600 Merrill Lynch Drive
Pennington, NJ 08534
|
| 6.11%
|
Brown Brothers Harriman & Co.
50 Post Office Square
Boston, MA 02110
|
| 6.10%
|
No
person is deemed to “control” the Fund, as that term is defined in the 1940 Act, because the Fund does not know of any person who owns beneficially or through controlled companies more than 25% of the
Fund’s shares or who acknowledges the existence of control. The Fund does not control any person.
MANAGEMENT SERVICES
The
following information supplements and should be read in conjunction with the section in the Prospectus entitled “Management.”
Investment Advisor
Precidian Funds LLC, a Delaware limited liability company, serves as investment advisor to the Fund and has overall responsibility for the general management and administration of the Trust, pursuant to the
Investment Advisory Agreement between the Trust and the Advisor (“Advisory Agreement”). The Advisor was organized in 2010 and is located at 350 Main Street, Suite 9, Bedminster, New Jersey 07921. Under the
Advisory Agreement, the Advisor, subject to the supervision of the Board, provides an investment program for the Fund and is responsible for the retention of sub-advisors to manage the investment of the Fund’s
assets in conformity with the stated investment policies of the Fund if the Advisor does not provide these services directly. The Advisor or a sub-advisor is responsible for placing purchase and sale orders and
providing continuous supervision of the investment portfolio of each of the Fund. The Advisor also arranges for the provision of distribution, transfer agency, custody, administration and all other services necessary
for the Fund to operate.
In
addition to providing advisory services, under the Advisory Agreement, the Advisor 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.
Other
Expenses. Under the Investment Advisory Agreement, the Advisor has agreed to pay all expenses of the Trust, except for: (i) brokerage expenses and other expenses (such as stamp taxes) connected with
the execution of portfolio transactions or in connection with creation and redemption transactions; (ii) interest and tax expenses; (iii) dividend or distribution expenses; (iv) legal fees or expenses in connection
with any arbitration, litigation or pending or threatened arbitration or litigation, including any settlements in connection therewith; (v) compensation and expenses of each Independent Trustee; (vi) compensation and
expenses of counsel to the Independent Trustees; (vii) distribution fees and expenses, if any, paid by the Trust under any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act; (viii) extraordinary
expenses, as determined under generally accepted accounting principles; and (ix) the advisory fee payable to the Advisor.
Term. The Advisory Agreement will remain in effect for an initial two-year term from commencement of operations and will continue in effect with respect to the Fund from year to year thereafter
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 Advisor or by the Advisor on 60 days’ written notice to the Trust.
Expense Limitation Agreement. The Advisor has entered into an Expense Limitation Agreement with the Fund under which it has agreed to waive or reduce its fees and to assume other expenses of the Fund, if necessary, in
an amount that limits “Total Annual Fund Operating Expenses” (but excluding interest, taxes, brokerage commissions, other expenditures which are capitalized in accordance with generally accepted accounting
principles, other extraordinary expenses not incurred in the ordinary course of the Fund’s business, and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the 1940 Act) to
not more than the below listed operating expense limit of the average daily net assets for the Fund through July 30, 2016.
Fund
Name
|
| Operating Expense
Limit
|
MAXIS® Nikkei 225 Index Fund
|
| 0.50%
|
The
Advisor currently expects that the contractual agreement will continue from year-to-year provided such continuance is approved by the Board. The Fund may terminate the Expense Limitation Agreement at any time. The
Advisor may also terminate the Expense Limitation Agreement at the end of the then-current term upon not less than 90 days’ notice to the Fund as set forth in the Expense Limitation Agreement. The terms of the
Expense Limitation Agreement may be revised upon renewal. The Advisor is permitted to recoup from the Fund previously waived fees or reimbursed expenses for three years from the fiscal year in which fees were waived
or expenses reimbursed as long as such recoupment does not cause Fund operating expenses to exceed the then applicable operating expense limit.
Compensation. Pursuant to the Advisory Agreement the Advisor is entitled to receive a fee, payable monthly, at the annual rate based on a percentage of the Fund’s average daily net assets as
follows:
Fund Name
|
| Management Fee
|
MAXIS® Nikkei 225 Index Fund
|
| 0.50%
|
From
time to time, the Advisor may waive all or a portion of its fees.
During the fiscal year ended March 31, 2015, the total investment advisory fees earned by the Advisor totaled $482,330. During the fiscal year ended March 31, 2014, the total investment advisory fees earned by the
Advisor totaled $771,550. During the fiscal year ended March 31, 2013, the total investment advisory fees earned by the Advisor totaled $919,313.
Sub-Advisor
Northern Trust Investments, Inc. (“NTI” or the “Sub-Advisor”), which is unaffiliated with the Advisor, is the investment sub-advisor to the Fund. NTI, located at 50 South LaSalle Street,
Chicago, IL 60603, an indirect subsidiary of Northern Trust Corporation, is an Illinois State Banking Corporation and an investment adviser registered under the Investment Advisers Act of 1940, as amended. NTI
primarily manages assets for institutional and individual separately managed accounts, investment companies and bank common and collective funds. As of March 31, 2015, Northern Trust Corporation, through its
subsidiaries, had approximately $960.1 billion in assets under management. Pursuant to a sub-advisory agreement between NTI and the Advisor (the “Sub-Advisory Agreement”), NTI will manage the investment
and reinvestment of the Fund’s assets on an ongoing basis under the supervision of the Advisor.
Pursuant to the Sub-Advisory Agreement the Sub-Advisor is entitled to receive a fee, payable monthly by the Advisor, at the annual rate of 0.004167% of the Fund’s average daily net assets. During the fiscal
year ended March 31, 2015, the Advisor paid to the Sub-Advisor $175,000. During the fiscal year ended March 31, 2014, the Advisor paid to the Sub-Advisor $174,996. During the fiscal year ended March 31, 2013, the
Advisor paid to the Sub-Advisor $174,996.
Portfolio Managers
The
Sub-Advisor acts as portfolio manager for the Fund pursuant to the Sub-Advisory Agreement. The Sub-Advisor supervises and manages the investment portfolio of the Fund and directs the purchase and sale of such
Fund’s investment securities. The Sub-Advisor 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.
The
individual members of the team responsible for the day-to-day management of the portfolios of the Fund operate as a team and are:
Robert Anstine is Vice President of NTI. Mr. Anstine joined NTI in 2011 and is responsible for managing various global index equity portfolios. In addition, he has been a portfolio manager for the
FlexShares ETFs since their inception in September 2011. Prior to joining NTI and since 2007, Mr. Anstine worked at Northern Trust as an operations manager.
Patrick Dwyer is Vice President of NTI. Mr. Dwyer joined NTI in 2003 and is responsible for managing various global index equity portfolios. Prior to this role, Mr. Dwyer was a senior portfolio
manager responsible for the management of international equity index portfolios in developed, emerging, and frontier markets, and currency and futures overlays. Before Mr. Dwyer’s involvement with the
international equity index team, he was an index analyst and portfolio manager on the US index team.
Other Accounts Managed
The
following table provides additional information about other portfolios or accounts managed by Mr. Anstine as of March 31, 2015. The table reflects the total number of other accounts managed by Mr. Anstine within each
category below and the total assets in the accounts managed within each category below. Mr. Anstine does not manage accounts on a performance basis.
Portfolio
Manager
| Registered Investment
Companies
|
| Other Pooled
Investment
Vehicles
|
| Other Accounts
|
Number of
Accounts
|
| Total
Assets
($billion)
|
| Number of
Accounts
|
| Total
Assets
($billion)
|
| Number of
Accounts
|
| Total
Assets
($billion)
|
Robert Anstine
| 12
|
| $5.8
|
| 0
|
| $0
|
| 14
|
| $1.36
|
The
following table provides additional information about other portfolios or accounts managed by Mr. Dwyer as of March 31, 2015. The table reflects the total number of other accounts managed by Mr. Dwyer within each
category below and the total assets in the accounts managed within each category below. Mr. Dwyer does not manage accounts on a performance basis.
Portfolio
Manager
| Registered Investment
Companies
|
| Other Pooled
Investment
Vehicles
|
| Other Accounts
|
Number of
Accounts
|
| Total
Assets
($billion)
|
| Number of
Accounts
|
| Total
Assets
($billion)
|
| Number of
Accounts
|
| Total
Assets
($billion)
|
Patrick Dwyer
| 19
|
| $13
|
| 48
|
| $40.8
|
| 70
|
| $21.2
|
Potential 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 manager’s bonus and there is no formula that is applied to weight the factors listed (see “Portfolio Manager
Compensation Structure” below). In addition, current trading practices do not allow NTI to intentionally favor one portfolio over another as trades are executed as trade orders are received. Rebalancing dates
also generally vary between fund families. Program trades created from the portfolio rebalance are executed at market on close.
Portfolio Manager
Compensation Structure
Compensation for the portfolio managers is based on the competitive marketplace and consists of a fixed base salary plus a variable annual cash incentive award. In addition, non-cash incentives, such as stock
options or restricted stock of Northern Trust Corporation, may be awarded from time to time. The annual incentive award is discretionary and is based on a quantitative and qualitative evaluation of each portfolio
manager’s investment performance and contribution to his or her respective team plus the financial performance of the investment business unit and Northern Trust Corporation as a whole. The annual incentive
award is not based on performance of the Fund or the amount of assets held in the Fund. Moreover, no material differences exist between the compensation structure for mutual fund accounts and other types of
accounts.
Portfolio Manager Ownership
of Securities
The
portfolio managers do not own Shares of the Fund.
OTHER SERVICE
PROVIDERS
Administrator, Custodian
and Transfer Agent
JPMorgan Chase Bank, N.A. (“JPMCB”) serves as administrator, custodian, transfer agent, index receipt agent and dividend disbursing agent of the Trust and the Fund (in such capacities, the “Fund
Administrator” or “Administrator,” the “Custodian” or the “Transfer Agent,” as applicable). JPMCB is located at One Chase Manhattan Plaza, New York, NY 10005.
Pursuant to the Fund Servicing Agreement (the “Administration Agreement”), JPMCB provides necessary administrative, legal, tax, accounting services, and financial reporting for the maintenance and
operations of the Trust and the Fund. In addition, JPMCB makes available the office space, equipment, personnel and facilities required to provide such services.
The
Administrator supervises the overall administration of the Trust and the Fund, including, among other responsibilities, assisting in the preparation and filing of documents required for compliance by the Fund with
applicable laws and regulations and arranging for the maintenance of books and records of the Fund. The Administrator provides persons satisfactory to the Board to serve as officers of the Trust.
The
Custodian has agreed to (1) make receipts and disbursements of money on behalf of the Fund ; (2) collect and receive all income and other payments and distributions on account of the Fund’s portfolio investments;
(3) respond to correspondence from Fund shareholders and others relating
to its duties; and (4) make periodic
reports to the Fund concerning the Fund’s operations. The Custodian does not exercise any supervisory function over the purchase and sale of securities.
As
transfer agent and dividend paying agent for the Fund, the Transfer Agent has agreed to (1) issue and redeem Shares of the Fund; (2) make dividend and other distributions to shareholders of the Fund; (3) respond to
correspondence by Fund shareholders and others relating to its duties; (4) maintain shareholder accounts; and (5) make periodic reports to the Fund.
As
compensation for the foregoing services, JPMCB receives certain out-of-pocket costs, transaction fees and asset-based fees which are paid monthly by the Advisor, pursuant to the Investment Advisory Agreement.
Securities Lending Agent
JPMCB serves as Securities Lending Agent for the Trust and the Fund under the supervision of the Advisor. Under the Securities Lending Agreement with the Trust, JPMCB, acting as agent for the Fund, may lend
Portfolio Securities to certain creditworthy borrowers under certain conditions described above under the heading “Investment Strategies And Risks — Lending Portfolio Securities.” The Fund receives
the value of any interest or cash or non-cash distributions paid on its loaned Portfolio Securities and will pay reasonable administrative and custodial fees in connection with the loan of such Portfolio Securities
and related costs including securities movement, settlement of trades involving cash received as collateral, custody of collateral and marking to market loans.
Index Provider
Nikkei Inc. (the “Index Provider”) is the index provider for the Fund and is the sponsor of the Nikkei Stock Average, commonly referred to as the Nikkei 225. The Nikkei 225 is an equity index comprised
of 225 highly liquid stocks traded on the first section of the Tokyo Stock Exchange. The components of the Underlying Index are given an equal weighting based on a par value of 50 Japanese Yen per share, whereby the
prices of stocks with other par values are adjusted to also reflect a par value of 50 Japanese Yen per share. As of June 30, 2015, the Underlying Index’s three largest sectors were 24.07% Consumer Discretionary,
22.19% Industrials and 13.72% Information Technology. Many financial products linked to the Nikkei 225, including investment trusts and index futures, have been developed and are traded on financial exchanges
worldwide. Nikkei Inc. is a leading media provider for business in Japan, which publishes five newspapers and operates online news sites.
The
Index Provider has entered into an index licensing agreement (the “Licensing Agreement”) with the Advisor to allow the Advisor’s use of the Underlying Index for the operation of the Fund. The Advisor
pays a licensing fee to the Index Provider from the Advisor’s management fees or other resources. The Advisor has, in turn, entered into a sub-licensing agreement (the “Sub-Licensing Agreement”) with
the Trust to allow the Fund to utilize the Underlying Index. The Fund pays no fees to Nikkei Inc. or the Advisor under the Sub-Licensing Agreement.
Distributor
Foreside Fund Services, LLC (“Foreside” or the “Distributor”), a Delaware limited liability company, serves as the distributor of Creation Units for the Fund on an agency basis. The
Distributor’s principal address is Three Canal Plaza, Portland, Maine 04101. The Distributor is a broker-dealer registered under the Securities Exchange Act of 1934, as amended (“Exchange Act”), and
a member of the Financial Industry Regulatory Authority (“FINRA”).
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
Distributor does not receive compensation from the Fund for its distribution services except the distribution/service fees with respect to the shares of those classes for which a Rule 12b-1 distribution plan is
effective. The Advisor pays the Distributor a fee for certain distribution related services.
The
Board has adopted a Service and Distribution 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 their average daily net
assets each year for certain distribution-related activities. The Board has resolved not to authorize the payment of Rule 12b-1 fees prior to July 30, 2016. However, in the event Rule 12b-1 fees are charged in the
future, they will be paid out of the Fund’s assets. Over time they 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
Advisor 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.
Independent Registered
Public Accounting Firm
The
Trustees have selected the firm of PricewaterhouseCoopers LLP, 125 High Street, Boston, Massachusetts 02110, to serve as independent registered public accounting firm for the Fund for the current fiscal year and to
audit the annual financial statements of the Fund, prepare the Fund’s federal, state and excise tax returns, and consult with the Fund on matters of accounting and federal and state income taxation.
The
independent registered public accounting firm will audit the financial statements of the Fund at least once each year. Shareholders will receive annual audited and semi-annual (unaudited) reports when published and
written confirmation of all transactions in their account. A copy of the most recent Annual Report will accompany the SAI whenever a shareholder or a prospective investor requests it.
Legal Counsel
Foley
& Lardner LLP, 777 East Wisconsin Avenue, Suite 3800, Milwaukee, Wisconsin 53202, serves as legal counsel to the Trust.
Additional Service
Providers
Pursuant to a Fund CCO Agreement (“Compliance Agreement”) with the Trust, Foreside Compliance Services, LLC (“FCS”), an affiliate of the Distributor, provides a Chief Compliance Officer
(“CCO”) for the Trust. Pursuant to a Fund AML Officer Agreement (“AML Agreement”) FCS provides the Trust’s Anti-Money Laundering Officer (“AMLO”). Pursuant to a Fund
PFO/Treasurer Agreement (“PFO Agreement”) with the Trust, Foreside Management Services, LLC (“FMS”), an affiliate of the Distributor, provides a Principal Financial Officer and Treasurer
(“PFO”) to the Trust. As compensation for the foregoing services, FCS and FMS receive certain out of pocket costs and fixed fees which are accrued daily and paid monthly. Pursuant to the Advisory
agreement, the Trust’s investment advisor has agreed to pay to FCS and FMS such costs and fees due to FCS and FMS from the Trust. The Compliance, AML and PFO Agreements with respect to the Trust continue in
effect until terminated and are terminable with or without cause and without penalty by the Board of the Trust or by FCS or FMS with respect to the Trust on 60 days’ written notice to the other party.
Notwithstanding the foregoing, the Compliance Agreement and the AML Agreement provide, respectively, that the Trust’s CCO and the Trust’s AMLO may be removed by the Board at any time with or without cause
and without penalty. Under the Compliance, AML and PFO Agreements, FCS and FMS, respectively, are not liable to the Trust or the Trust’s shareholders for any act or omission, except for bad faith, reckless
disregard, negligence, willful misfeasance, fraud or breach of the Compliance, AML and PFO Agreements. In addition, FCS and FMS and certain related parties (such as officers of FCS, FMS or certain officers of the
Distributor and persons who control FCS, FMS or the Distributor) are indemnified by the Trust against any and all claims and expenses related to FCS’s or FMS’s actions or omissions, except for any act or
omission resulting from FCS’s or FMS’s willful misfeasance, bad faith, fraud or negligence in the performance of its duties or by reason of its reckless disregard or breach of its obligations and duties
under the Compliance, AML and PFO Agreements.
PORTFOLIO TRANSACTIONS
AND BROKERAGE
Subject to the general supervision by the Board, the Advisor and the Sub-Advisor are 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 Advisor or the Sub-Advisor, 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, and the rules and regulations thereunder. Compensation may also be paid in connection with riskless principal transactions (in
Nasdaq or over-the-counter securities and securities listed on an exchange) and agency Nasdaq or over-the-counter transactions executed with an electronic communications network or an alternative trading system.
The
Fund gives 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 is to pay commissions which are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. The Advisor
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 Advisor relies 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 are necessarily subjective and imprecise, as in most cases an exact dollar value for those
services is not ascertainable.
The
Advisor does not consider the provision or value of research, products or services a broker or dealer may provide, if any, as a factor in the selection of a broker or dealer or the determination of the reasonableness
of commissions paid in connection with portfolio transactions. The Advisor does not consider sales of Shares by broker-dealers as a factor in the selection of broker-dealers to execute portfolio transactions.
The
Fund paid $2,431 in aggregate brokerage commissions for the fiscal year ended March 31, 2015. The Fund paid $2,433 in aggregate brokerage commissions for the fiscal year ended March 31, 2014. The Fund paid $2,171 in
aggregate brokerage commissions for the fiscal year ended March 31, 2013. The Fund did not pay any brokerage commissions to any affiliates of the Fund.
The
value of the Fund’s aggregate holdings of the securities of its regular brokers or dealers (as defined in Rule 10b-1 under the Investment Company Act), if any portion of such holdings were purchased during the
period ended March 31, 2015, are as follows:
Regular Broker-Dealer
|
| Debt (D)/Equity (E)
|
| Aggregate Holdings
(000’s)
|
Mitsubishi UFJ Financial Group, Inc.
|
| E
|
| $136
|
ADDITIONAL INFORMATION
CONCERNING SHARES
Organization and
Description of Shares of Beneficial Interest
The
Trust is a Delaware statutory trust and registered investment company. The Trust was organized on August 27, 2010, and has authorized capital of an unlimited number of shares of beneficial interest of no par value
which may be issued in more than one class or series.
Under Delaware law, the Trust is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. If requested
by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of the Trust’s shareholders for the purpose of voting upon the question of removal of a Trustee and will
assist in communications with other Trust shareholders. Shareholders holding two-thirds of Shares outstanding may remove Trustees from office by votes cast at a meeting of Trust shareholders or by written consent.
All
Shares are freely transferable; provided, however, that Shares may not be redeemed individually, but only in Creation Units. The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares
have any preference to conversion, exchange, dividends, retirements, liquidation, redemption or any other feature. Shares have equal voting rights, except that, if the Trust creates additional funds, only Shares of
that fund may be entitled to vote on a matter affecting that particular fund. Trust shareholders are entitled to require the Trust to redeem Creation Units if such shareholders are Authorized Participants. The
Declaration of Trust confers upon the Board the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust
reserves the right to adjust the stock prices of Shares to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no
effect on the net assets of the Fund.
The
Trust’s Declaration of Trust disclaims liability of the shareholders or the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The
Declaration of Trust provides for indemnification by the Trust for all loss and expense of the Fund’s shareholders held personally liable for the obligations of the Trust. The risk of a Trust’s shareholder
incurring financial loss on account of shareholder liability is limited to circumstances in which the Fund itself would not be able to meet the Trust’s obligations and this risk should be considered remote. If
the Fund does not grow to a size to permit it to be economically viable, the Fund may cease operations. In such an event, shareholders may be required to liquidate or transfer their Shares at an inopportune time and
shareholders may lose money on their investment.
BOOK ENTRY ONLY
SYSTEM
DTC
acts as securities depository for the Shares. The Shares of the Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided
below, certificates are not issued for Shares.
DTC
has advised the Trust as follows: DTC, the world’s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a member of the Federal Reserve System, a
“clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and
provides asset servicing for over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt issues and money market instruments (from over 100 countries). DTC was created to hold securities
of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic computerized book-entry
transfers and pledges in accounts of DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include both U.S. and non-U.S. securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is the holding company for
DTC, the NSCC and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. More specifically, DTCC is owned by a number of its DTC
Participants and by the New York Stock Exchange, Inc., the NYSE Alternext US (formerly known as the American Stock Exchange LLC) (“Alternext”) and FINRA.
Access to the DTC system is also available to others such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (“Indirect
Participants”). DTC agrees with
and represents to DTC Participants that it administers its book-entry system in accordance with its rules and bylaws and requirements of law. 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 receive from or through 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.
Beneficial Owners of Shares are not be entitled to have Shares registered in their names, do not receive or are entitled to receive physical delivery of certificates in definitive form and are not considered the
registered holders of the Shares. Accordingly, each Beneficial Owner must rely on the procedures of DTC, DTC Participants and any Indirect Participants through which such Beneficial Owner holds its interests in order
to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event the Trust requests any action of holders of Shares, or a Beneficial Owner desires to take any
action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that the DTC Participants would authorize the Indirect Participants
and Beneficial Owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial Owners owning through them. DTC, through its nominee Cede & Co., is the
record owner of all outstanding Shares.
Conveyance of all notices, statements and other communications to Beneficial Owners are effected as follows. DTC makes available to the Trust upon request and for a fee to be charged to the Trust a listing of Shares
holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall
provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice,
statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as
reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements. Beneficial Owners may wish to take certain steps to augment the transmission to them of
notices of significant events with respect to Shares by providing their names and addresses to the DTC registrar and request that copies of notices be provided directly to them.
Distributions of Shares shall be made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall immediately credit DTC
Participants’ accounts with payments in amounts proportionate to their respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect
Participants and Beneficial Owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for any aspects of the records relating to or notices
to Beneficial Owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any
other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC
may determine to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates
representing ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Alternext.
DTC
rules applicable to DTC Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org.
PURCHASE 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 (as defined below) 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.
Deposit of Securities and
Deposit or Delivery of Cash
The
consideration for purchase of Creation Units of the Fund generally consists of the Deposit Securities for each Creation Unit constituting a substantial replication, or representation, of the securities included in the
relevant Fund’s portfolio as selected by the Advisor (“Fund Securities”) and
the Cash Component computed as described
below. Together, the Deposit Securities and the Cash Component constitute the “Fund Deposit,” which represents the minimum investment amount for a Creation Unit of the Fund.
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 Amount (as defined below). The Cash Component is an
amount equal to the difference between the NAV of the Fund Shares (per Creation Unit) and the “Deposit Amount,” an amount equal to the market value of the Deposit Securities. If the Cash Component is a
positive number (i.e., the NAV per Creation Unit exceeds the Deposit Amount), the Authorized Participant shall 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 shall receive the Cash Component.
The
Custodian through 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 the 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 the 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.
Purchases of Creation Units principally or in part for cash, if permitted, shall be effected in essentially the same manner as in-kind purchases of Creation Units of the Fund. In the case of a cash purchase, the
Authorized Participant must pay the Fund Deposit entirely or in part in cash. The Authorized Participant placing a cash creation order shall be responsible for the Fund’s brokerage and other transaction costs
associated with using the cash to purchase the Deposit Securities of the Fund, in addition to the creation transaction fee for such Fund.
Procedures for Creation of
Creation Units
All
orders to create Creation Units must be placed with the Distributor 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 with respect to creations and
redemptions of Creation Units (a “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 Fund Shares, whether created through or outside the Clearing Process, are entered on the records of DTC in the name of Cede & Co. for the account of a DTC
Participant.
The
Distributor processes orders to purchase Creation Units received by U.S. mail, telephone, facsimile and other electronic means of communication 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. Mail is received periodically throughout the day. An order sent by U.S. mail is opened and time stamped when it is
received. 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 Distributor no later than 3:00 p.m. New York time on the trade date. 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 telephone or other 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 Clearing Process” and “Purchase and Redemption of Creation Units—Placement of Creation Orders Outside 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 Distributor 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 Through the Clearing Process
The
Clearing Process is the process of creating or redeeming Creation Units through the Continuous Net Settlement System of 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 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 on such Transmittal Date; and (2) all other procedures set forth in the Participant Agreement are properly followed.
Placement of Creation
Orders Outside 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 securities and cash 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, 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 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 required Deposit Securities and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively, 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 the 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 third Business Day following the day on which the purchase order is deemed received by the Distributor.
Additional transaction costs may be borne by Authorized Participants 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
Fund Shares on the date the order is placed in proper form since, in addition to available Deposit Securities, cash must be deposited in an amount equal to the sum of: (1) the Cash Component plus; (2) 125% 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. New York time 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 125% 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 third 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 third 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 if: (1) the order is not in proper form; (2) the investor(s), upon obtaining the Fund 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 Transaction Fee
Authorized Participants will be required to pay a fixed transaction fee (“Creation Transaction Fee”) of $4,000 for each creation order which represents the maximum transaction fee. Authorized
Participants placing a creation order in whole or in part in cash will also be responsible for 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.
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.
With
respect to the Fund, the Custodian, through 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. Unless cash redemptions are available or specified for the Fund, the redemption proceeds for a Creation Unit generally consist 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 Fund 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: (1) for any period during which the Exchange 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 Fund’s portfolio securities or determination of the Fund’s NAV
is not reasonably practicable; or (4) in such other circumstances as is permitted by the SEC.
Placement of Redemption
Orders Through 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 Distributor 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 relevant Fund as next determined. An order to redeem Creation Units using the Clearing Process made in proper form
but received by the Distributor 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. The
requisite Fund Securities and the Cash Redemption Amount will be transferred by the third NSCC business day following the date on which such request for redemption is deemed received.
Placement of Redemption
Orders Outside 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 Fund 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 Distributor not later than Closing Time on such Transmittal Date; (2) such order is accompanied or followed by the requisite number of Fund 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 Distributor receives an order for redemption outside the Clearing Process, the Distributor will initiate procedures to transfer the requisite Fund
Securities which are expected to be delivered and the Cash Redemption Amount, if any, by the third 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 Distributor.
Therefore, if a redemption order in proper form is submitted to the Distributor 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 relevant 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 the 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 Fund Shares of the relevant 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.
If
it is not possible to effect deliveries of the Fund Securities, the Trust may in its discretion exercise its option to redeem Fund Shares 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, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV
of its Fund Shares based on the NAV of Shares of the relevant 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 Fund 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 Fund 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
Authorized Participants will be required to pay a fixed transaction fee (“Redemption Transaction Fee”) of $4,000 for each redemption order, which represents the maximum transaction fee.
Authorized Participants will also bear the costs of transferring the Fund Securities from the Trust to their account or on their order.
Cash Creations and
Redemptions
The
Trust reserves the right to offer a “cash” option for creations or redemptions of all Fund Shares, although it has no current intention of doing so for the Fund. A cash creation would involve the delivery
of cash in lieu of some or all Deposit Securities for such creation order. In each instance of such cash creations, Authorized Participants placing creation orders will be responsible for Trust brokerage and other
transaction costs associated with using cash to purchase the requisite Deposit Securities. Authorized Participants will also be charged the Creation Transaction Fee or Redemption
Transaction Fee. In all cases, such fees
will be limited in accordance with the requirements of the SEC applicable to management investment companies offering redeemable securities.
Regular Holidays
For
every occurrence of one or more intervening holidays in the Japanese market that are not holidays observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of days relating to
such intervening holidays. In addition to holidays, other unforeseeable closings in the non-U.S. market due to emergencies may also prevent the Fund from delivering securities within normal settlement period.
The
securities delivery cycles currently practicable for transferring portfolio securities to redeeming investors, coupled with a non-U.S. market holiday schedule, will require a delivery process longer than seven
calendar days, in certain circumstances. The holidays applicable to the Fund during such periods are listed below, as are instances where more than seven days will be needed to deliver redemption proceeds. Although
certain holidays may occur on different dates in subsequent years, the number of days required to deliver redemption proceeds in any given year is not expected to exceed the maximum number of days listed below for the
Fund. The proclamation of new holidays, the treatment by market participants of certain days as “informal holidays” (e.g., days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of existing holidays, or changes in local
securities delivery practices, could affect the information set forth herein at some time in the future.
The
dates through July 30, 2016 in which the regular holidays affecting the Japanese securities market are as follows (please note these holiday schedules are subject to potential changes in the Japanese securities
market):
2015 – 2016
|
|
|
|
September 21, 2015
| November 23, 2015
| February 11, 2016
| May 5, 2016
|
September 22, 2015
| December 23, 2015
| March 21, 2016
| July 18, 2016
|
September 23, 2015
| December 31, 2015
| April 29, 2016
|
|
October 12, 2015
| January 1, 2016
| May 3, 2016
|
|
November 3,2015
| January 11, 2016
| May 4, 2016
|
|
Redemptions
The
longest redemption cycle for the Fund is a function of the longest redemption cycle among Japanese stocks comprising the Fund. In the calendar years 2015 and 2016, the dates of regular Japanese holidays presenting the
worst-case redemption cycle for the Fund are as follows:
September 16, 2015
|
| 8*
|
September 17, 2015
|
| 8*
|
September 18, 2015
|
| 10*
|
April 27, 2016
|
| 9*
|
April 28, 2016
|
| 11*
|
May 2, 2016
|
| 8*
|
* These
worst-case redemption cycles are based on information regarding regular holidays, which may be out of date. Holiday schedules are subject to potential changes in the Japanese securities market. Based on changes in
holidays, longer (worse) redemption cycles are possible.
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 of 1933, as amended, (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).”
The
NAV per Share for the Fund is computed by dividing the value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by the total number of Shares outstanding, rounded to the nearest cent. Expenses and fees, including the management fee,
are accrued daily and taken into account for purposes of determining NAV. The NAV of the Fund is determined as of the close of the regular trading session on the Exchange (ordinarily 4:00 p.m., New York 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.
In
computing the Fund’s NAV, the Fund’s portfolio securities are valued based on market quotations. When market quotations are not readily available for a portfolio security the Fund must use such
security’s fair value as determined in good faith in accordance with the Fund’s Pricing and Valuation Guidelines which are approved by the Board of Trustees.
The
value of the Fund’s portfolio securities is based on such securities’ closing price on local markets when available. If a portfolio security’s market price is not readily available or does not
otherwise accurately reflect the fair value of such security, the portfolio security will be valued by another method that the Advisor believes will better reflect fair value in accordance with the Trust’s
valuation policies and procedures approved by the Board of Trustees.
The
Fund may use fair value pricing in a variety of circumstances, including but not limited to, situations when the value of the Fund’s portfolio security has been materially affected by events occurring after the
close of the market on which such security is principally traded (such as a corporate action or other news that may materially affect the price of such security) or trading in such security has been suspended or
halted. In addition, the Fund may fair value foreign equity portfolio securities each day the Fund calculates its NAV. Accordingly, the Fund’s NAV may reflect certain portfolio securities’ fair values
rather than their market prices.
Fair
value pricing involves subjective judgments and it is possible that a fair value determination for a portfolio security is materially different than the value that could be realized upon the sale of such security. In
addition, fair value pricing could result in a difference between the prices used to calculate the Fund’s NAV and the prices used by the Fund’s Underlying Index. This may adversely affect the Fund’s
ability to track its Underlying Index. With respect to securities that are primarily listed on foreign exchanges, the value of the Fund’s portfolio securities may change on days when you will not be able to
purchase or sell your Shares.
INDICATIVE INTRA-DAY
VALUE
The
approximate value of the Fund’s investments on a per-Share basis, the Indicative Intra-Day Value or IIV, is disseminated by the Exchange 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 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. “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 is not responsible for the calculation or
dissemination of the IIV. The Fund makes no warranty as to the accuracy of the IIV.
DIVIDENDS AND
DISTRIBUTIONS
General Policies
The
following information supplements and should be read in conjunction with the section in the Prospectus entitled “Dividends, Distributions and Taxes.”
Dividends from net investment income are declared and paid at least annually by the Fund. Distributions of net realized capital gains, if any, generally are declared and paid once a year, but the Trust may make
distributions on a more frequent basis for the Fund to improve its Underlying Index tracking or to comply with the distribution requirements of the Code, in all events in a manner consistent with the provisions of the
1940 Act. In addition, the Trust may distribute at least annually amounts representing the full dividend yield on the underlying Portfolio Securities of the Fund, net of expenses of the Fund, as if the Fund owned such
underlying Portfolio Securities for the entire dividend period in which case some portion of each distribution may result in a return of capital for tax purposes for certain shareholders.
Dividends and other distributions on Shares are distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through DTC Participants and Indirect Participants
to Beneficial Owners then of record with proceeds received from the Trust. The Trust makes additional distributions to the minimum extent necessary (i) to distribute the entire annual taxable income of the Trust, plus
any net capital gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of the Code. Management of the Trust reserves the right to declare special dividends if, in its reasonable discretion, such
action is necessary or advisable to preserve the status of the Fund as a “regulated investment company” (a “RIC”) or to avoid imposition of income or excise taxes on undistributed income.
Dividend Reinvestment
Service
No
reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of the Fund through DTC Participants for reinvestment of
their dividend distributions. If this service is used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole Shares of the Fund. Beneficial Owners should contact
their broker to determine the availability and costs of the service and the details of participation therein. Brokers may require Beneficial Owners to adhere to specific procedures and timetables.
FEDERAL INCOME
TAXES
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 Internal Revenue Code of 1986, as amended
(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, including
the following information which also supplements and should be read in conjunction with the section in the Prospectus entitled “Dividends, Distributions and Taxes.”
The
following is a summary of the material U.S. federal income tax considerations applicable to an investment in Fund Shares. The summary is based on the laws in effect on the date of this SAI 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 Fund shareholder holds Fund Shares as capital assets within the
meaning of the Code, and does not hold Fund 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
Fund Shares, to Fund shareholders holding Fund 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 advisors with respect to the specific federal, state, local and foreign tax consequences of investing in Fund Shares.
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
In
General. The Fund qualifies and has elected to be treated as a separate RIC under the Code. To maintain its tax status as a RIC, the Fund must meet annually certain income and asset diversification
requirements and must distribute annually at least ninety percent of its “investment company taxable income” (which includes dividends, interest and net short-term capital gains). As a RIC, the Fund
generally does 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 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. 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: (i) 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 (ii) 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” (a “PFIC”) for federal income tax purposes. As a result, the
Fund may be subject to increased 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 increased 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 underlying 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, under certain conditions, 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).
Foreign Currency Transactions. Gains or losses attributable to fluctuations in exchange rates between the time the Fund accrues income, expenses or other items denominated in a foreign currency and the time the Fund
actually collects or pays such items are generally treated as ordinary income or loss. Similarly, gains or losses on foreign currency forward contracts and the disposition of debt securities denominated in a foreign
currency, to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are also treated as ordinary income or loss.
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 re-invested in Fund 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 a 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.
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 Fund 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, Fund distributions of qualifying dividend income to non-corporate Fund shareholders qualify for
taxation at long-term capital gain rates.
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.
Investors considering buying Fund Shares just prior to a distribution should be aware that, although the price of the Fund 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).
REIT/REMIC Investments. The Fund may invest in Real Estate Investment Trusts (“REITs”) owning residual interests in real estate mortgage investment conduits (“REMICs”). Income from a REIT to
the extent attributable to a REMIC residual interest (known as “excess inclusion” income) is allocated to the Fund’s shareholders in proportion to the dividends received from the Fund, producing the
same income tax consequences as if the Fund shareholders directly received the excess inclusion income. In general, excess inclusion income (i) cannot be offset by net operating losses (subject to a limited exception
for certain thrift institutions), (ii) constitutes “unrelated business taxable income” to certain entities (such as a qualified pension plan, an individual retirement account, a 401(k) plan, a Keogh plan
or other tax-exempt entity), and (iii) in the case of a foreign shareholder, does not qualify for any withholding tax reduction or exemption. In addition, if at any time during any taxable year certain types of
entities own Fund Shares, the Fund will be subject to a tax equal to the product of (i) the excess inclusion income allocable to such entities and (ii) the highest U.S. federal income tax rate imposed on corporations.
The Fund is also subject to information reporting with respect to any excess inclusion income.
Sales of Fund Shares. Any capital gain or loss realized upon a sale of Fund Shares is treated generally as a long-term gain or loss if the Fund Shares have been held for more than one year. Any capital gain or
loss realized upon a sale of Fund 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 Fund 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 Fund Shares.
Creation Unit Issues and Redemptions. On an issue of Fund Shares as part of a Creation Unit, an Authorized Participant recognizes capital gain or loss equal to the difference between (i) the fair market value (at issue) of the
issued Fund Shares (plus any cash received by the Authorized Participant as part of the issue) and (ii) 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 Fund Shares as part of a Creation Unit, an Authorized Participant recognizes capital gain or loss equal to the difference between (i) the fair market
value (at redemption) of the securities received (plus any cash received by the Authorized Participant as part of the redemption) and (ii) the Authorized Participant’s basis in the redeemed Fund 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 Fund 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 Fund 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 Fund 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 Fund 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, Fund shareholders will be entitled to claim a foreign tax credit to offset their tax liability. Please consult your
tax advisor regarding whether you will be able to use such credit against your tax liability.
Medicare Tax. An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from redemptions
or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the case of an individual) or
“adjusted gross income” (in the case of an estate or trust) exceeds certain threshold amounts.
Back-Up Withholding. The Fund may be required to report certain information on a Fund shareholder to the IRS and withhold federal income tax (“backup withholding”) at a 28% 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 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 a Fund shareholder’s federal income tax liability.
Tax
Shelter Reporting Regulations. If a Fund shareholder recognizes a loss with respect to Fund Shares of $2 million or more for an individual Fund shareholder or $10 million or more for a corporate stockholder in any single
taxable year (or a greater loss over a combination of years), the Fund shareholder must 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 a Fund shareholder is not a U.S. citizen or resident or if a Fund shareholder is a foreign entity, the Fund’s ordinary income dividends (including distributions of net short-term
capital gains and 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, for Fund tax years that begin on or before December 31, 2013, 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 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 Fund Shares or an exchange of such stockholder’s Shares of the Fund will be exempt from U.S. federal income tax (including withholding at the source) unless: (i) 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 (ii) 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 Fund Shares of the same class. In the case of a disposition described in
clause; (iii) 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 10%
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. This provision relating to domestically controlled regulated investment companies generally will not apply after December 31, 2013.
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.
Investments in U.S. Real Property. In general, if the Fund is a “U.S. real property holding corporation,” (determined without the exception for “domestically-controlled” RICs and publicly-traded RICs)
distributions by the Fund attributable to gains from “U.S. real property interests” (including gain on the sale of shares in certain “non-domestically controlled” REITs and certain capital gain
dividends from REITs) will be treated as income effectively connected to a trade or business within the United States, subject generally to tax at the same rates applicable to domestic Fund
shareholders and, in the case of the
foreign corporate Fund shareholder, a “branch profits” tax at a rate of 30% (or other applicable lower rate). Such distributions will be subject to U.S. withholding tax and will generally give rise to an
obligation on the part of the foreign stockholder to file a U.S. federal income tax return.
Even
if the Fund is treated as a U.S. real property holding company, distributions on and sales of the Fund Shares will not be treated as income effectively connected with a U.S. trade or business in the case of a foreign
Fund shareholder owning (for the applicable period) 5% or less (by class) of the Fund Shares. In general, these provisions generally will not apply after December 31, 2013, provided, however, that such provisions will
continue to apply thereafter in respect of distributions by a regulated investment company that is a U.S. real property holding corporation or would be so treated for this purpose to the extent such distributions are
attributable to certain capital gain dividends from REITs. Investors are advised to consult their own tax advisers with respect to the application to their own circumstances of the above-described rules.
Foreign stockholders that engage in certain “wash sale” and/or substitute dividend payment transactions the effect of which is to avoid the receipt of distributions from the Fund that would be treated as
gain effectively connected with a U.S. trade or business will be treated as having received such distributions. All shareholders of the Fund should consult their tax advisors regarding the application of these tax
provisions.
Foreign shareholders are subject to U.S. withholding tax of 30% on all U.S. source income (including all dividends from the Fund) beginning in 2014, and gross proceeds from the sale of U.S. stocks and securities
(including the sale of Fund Shares) beginning in 2017, unless they comply with certainly newly-enacted 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 IRS to provide it with certain information
regarding such shareholder’s account holders. Please consult your tax advisor regarding this tax.
FINANCIAL
STATEMENTS
PricewaterhouseCoopers LLP, located at 125 High Street, Boston, Massachusetts 02110, serves as independent registered public accounting firm to the Trust and performs the annual audit of the financial statements of
the Fund. The Fund’s Annual Report to Shareholders for the fiscal period ended March 31, 2015 (the “Annual Report”) is hereby incorporated by reference herein. Copies of the Trust’s Annual
Report may be obtained upon request and without charge, by writing to the Trust, c/o Precidian Funds LLC, 350 Main St., Suite 9, Bedminster, New Jersey 07921.
OTHER INFORMATION
The
Fund is not sponsored, endorsed, sold or promoted by the Exchange. The Exchange 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 their objective. The Exchange 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.
Shareholder inquiries may be made by writing to the Trust, c/o Precidian Funds LLC, 350 Main St., Suite 9, Bedminster, New Jersey 07921.
Appendix A
Precidian ETFs Trust
Proxy Voting Policies and Procedures
It is the policy of the Board of Trustees
(the “Board”) of the Precidian ETFs Trust (the “Fund”) to delegate the responsibility for voting proxies relating
to the securities held by the Fund to the investment sub-advisor, Northern Trust Global Investments (the “Sub-Advisor”
), subject to the Board’s continuing oversight. The Board hereby delegates such responsibility to the Sub-Advisor, and directs
the Sub-Advisor to vote proxies relating to Fund portfolio securities managed by the Sub-Advisor consistent with the duties and
procedures set forth below. The Sub-Advisor may retain a third party to review, monitor and recommend how to vote proxies in a
manner consistent with the duties and procedures set forth below, to ensure such proxies are voted on a timely basis and to provide
reporting and/or record retention services in connection with proxy voting for the Fund.
The right to vote a proxy with respect
to securities held by the Fund is an asset to the Fund. The Sub-Advisor, to which authority to vote on behalf of the Fund is delegated,
acts as a fiduciary of the Fund and must vote proxies in a matter consistent with the best interest of the Fund and its shareholders.
In discharging this fiduciary duty, the Sub-Advisor must maintain and adhere to its policies and procedures for addressing conflicts
of interest and must vote in a manner substantially consistent with its policies, procedures and guidelines, as presented to the
Board.
The following are the procedures adopted by the Board for the
administration of this policy:
| A. | Review of Advisor's Proxy Voting Procedures . The Sub-Advisor shall present to the
Board their policies, procedures and other guidelines for voting proxies at least annually, and must notify the Board promptly
of material changes to any of these documents, including changes to policies and procedures addressing conflicts of interest. |
| B. | Voting Record Reporting . The Sub-Advisor shall ensure that the voting record necessary
for the completion and filing of Form N-PX is provided to the Fund's administrator at least annually. Such voting record information
shall be in a form acceptable to the Fund and shall be provided at such time(s) as are required for the timely filing of Form N-PX
and at such additional times(s) as the Fund and the Sub-Advisor may agree from time to time. With respect to those proxies that
the Sub-Advisor has identified as involving a conflict of interest, the Sub-Advisor shall submit a report indicating the nature
of the conflict of interest and how that conflict was resolved with respect to the voting of the proxy. |
| C. | Conflicts of Interest . Any actual or potential conflicts of interest between the
Sub-Advisor and the Fund's shareholders arising from the proxy voting process will be addressed by the relevant Sub-Advisor and
the Sub-Advisor's application of its proxy voting procedures pursuant to the delegation of proxy voting responsibilities to the
Sub-Advisor. In the event that the Sub-Advisor notifies the Chief Compliance Officer of the Fund (the “CCO”) that a conflict
of interest cannot be resolved under the Sub-Advisor's Proxy Voting Procedures, and the CCO is responsible for notifying the Chairman
of the Board of the Fund of the irreconcilable conflict of interest and assisting the Chairman with any actions he determines are
necessary. |
As it is used in this document,
the term “conflict of interest” refers to a situation in which the Sub-Advisor or an affiliated person of the sub-advisor
has a financial interest in a matter presented by a proxy other than the obligation they incur as Sub-Advisor to the Fund which
could potentially compromise the Sub-Advisor's independence of judgment and action with respect to the voting of the proxy.
The delegation by the Board
of the authority to vote proxies relating to securities of the Fund is entirely voluntary and may be revoked by the Board, in whole
or in part, at any time.
| 5. | Disclosure of Policy or Description/Proxy Voting Record |
A. The Fund will disclose
this proxy voting policy or a description of it (and the advisor's proxy voting policy or a description of it), in the Fund's Statement
of Additional Information (“SAI”). The Fund also will disclose in its SAI that information is available about how the
Fund voted proxies during the most recent twelve-month period ended June 30 without charge, upon request, (i) either by calling
a specified toll-free telephone number, or on the Fund's website at a specified address, or both, and (ii) on the Commission's
website. Upon any request for a proxy voting record by telephone, the Fund will send the policy or the description (or a copy of
the SAI containing the policy or description) by first-class mail or other prompt delivery method within three business days of
receipt of the request.
B. The Fund will disclose
in its annual and semi-annual shareholder reports that this proxy voting policy or a description of it (and the advisor's proxy
voting policy or a description) is available without charge, upon request, (i) by calling a specified toll-free telephone number,
(ii) on the Fund's website, if applicable, and (iii) on the Commission's website. Upon any request for a proxy voting policy or
description of it, the Fund will send the policy or the description (or a copy of the SAI containing the policy or description)
by first-class mail or other prompt delivery method within three business days of receipt of the request.
C. The Fund also will
disclose in its annual and semi-annual shareholder reports that information is available about how the Fund voted proxies during
the most recent twelve-month period ended June 30 without charge, upon request, (i) either by calling a specified toll-free telephone
number, or on or through the Fund's website at a specified address, or both, and (ii) on the Commission's website. Upon any request
for a proxy voting record by telephone, the Fund will send the information disclosed in the Fund's most recently filed report on
Form N-PX by first-class mail or other prompt delivery method within three business days of receipt of the request.
D. The Fund will file
Form N-PX containing its proxy voting record for the most recent twelve-month period ended June 30 with the SEC, and will provide
a copy of the report (in paper form, online, or by reference to the SEC's website) to shareholders who request it.
E. The Fund will disclose
its proxy voting record for the most recent twelve-month period ended June 30 (on Form N-PX or otherwise) to shareholders either
in paper form upon request, or on its website.
The Fund currently satisfies the disclosure obligation
set forth in Section 5 above by:
| · | describing the proxy voting policy in
the Fund's SAI and disclosing in the Fund's SAI that the information is available about how the Fund voted proxies during the most
recent twelve-month period ended June 30 without charge, upon request by calling a specified toll-free telephone number and on
the Commission's website; |
| · | disclosing
in its annual and semi-annual shareholder reports that this proxy voting policy (and the |
| | advisor's
proxy voting policy or a description) is available without charge,
upon request by calling a specified toll-free telephone number and on the Commission's
website; |
| · | disclosing in its annual and semi-annual shareholder reports that
information is available about how the Fund voted proxies during the most recent twelve-month period ended June 30 without charge,
upon request, by calling a specified toll-free telephone number and on the Commission's website; and |
| · | providing any shareholder, upon request,
a paper form of the most recently filed report on Form N-PX by first-class mail or other prompt delivery method within three business
days of receipt of the request. |
The Board shall review from time to time this policy to determine
its sufficiency and shall make and approve any changes that it deems necessary from time to time.
Appendix B
NORTHERN TRUST
PROXY VOTING
POLICIES, PROCEDURES AND
GUIDELINES
Revised 08/31/15
Northern Trust
Proxy Voting
Policies and Procedures
These policies and procedures (and the
guidelines that follow) apply to the voting of proxies by Northern Trust Corporation affiliates (“Northern Trust”)
for accounts over which Northern Trust has been granted proxy voting discretion.
SECTION 1. PROXY VOTING GUIDELINES
The fundamental precept followed by Northern
Trust in voting proxies is to ensure that the manner in which shares are voted is in the best interest of clients/beneficiaries
and the value of the investment. As used in these policies and procedures the term “clients/beneficiaries” means any
person or entity having the legal or beneficial ownership interest, as the case may be, in a trust, custody or investment management
account over which Northern Trust has discretionary voting authority.
Absent special circumstances of the
types described in these policies and procedures, Northern Trust will generally exercise its proxy voting discretion in accordance
with the guidelines set forth below. In situations where the application of Northern Trust’s guidelines would be inappropriate
for particular proxy issues of non-U.S. companies due to local market standards, customs and best practices, Northern Trust will
instruct its Proxy Voting Service (defined below in Section 3) to provide a vote recommendation based on the Proxy Voting Service’s
relevant global guidelines. Examples of such issues include “poison pill” defenses, which are allowed to be approved
by a company’s board of directors without shareholder approval in a number of countries, and definitions of director independence,
which vary significantly from country to country.
The foregoing domestic and global proxy voting guidelines are
collectively referred to in these policies and procedures as the “Proxy Guidelines”.
SECTION 2. PROXY COMMITTEE
Northern Trust’s Proxy Committee
has responsibility for the content, interpretation and application of the Proxy Guidelines. Membership of the Proxy Committee consists
of a group of senior Northern Trust investment and compliance officers. Meetings of the Proxy Committee may be called by the Chairperson
or, in his or her absence, by any two committee members. Meetings may be conducted in person or telephonically. A majority of committee
members present (in person or by proxy) will constitute a quorum for the transacting of business at any meeting. The approval of
proxy votes or changes to these policies and procedures or the Proxy Guidelines may be made by majority vote of those present (in
person or by proxy) at a meeting called for that purpose. Alternatively, the Committee may approve proxy votes or changes to these
policies and procedures or the Proxy Guidelines by a majority vote communicated telephonically (without a meeting) or electronically,
provided that any action so approved is properly documented and reflected in minutes of the next meeting of the Committee.
SECTION 3. PROXY VOTING SERVICE
Northern Trust has delegated to an independent
third party proxy voting service (“Proxy Voting Service”), the responsibility to review proxy proposals and to make
voting recommendations to the Proxy Committee in a manner consistent with the Proxy Guidelines. For proxy proposals that under
the Proxy Guidelines are to be voted on a case-by-case basis, Northern Trust provides supplementary instructions to the Proxy Voting
Service to guide it in making vote recommendations. Northern Trust has instructed the Proxy Voting Service not to exercise
any discretion in making vote recommendations and to seek guidance whenever it encounters situations that are either not covered
by the Proxy Guidelines or where application of the Proxy Guidelines is unclear. In the event that the Proxy Voting
Service does not or will not provide recommendations with respect to proxy proposals for securities over which Northern Trust or
its affiliates have voting discretion, the relevant proxy analyst at Northern Trust responsible for the issuer or its business
sector shall be responsible for reviewing the proxy proposal and making a voting recommendation to the Proxy Committee consistent
with the Proxy Guidelines.
The Proxy
Committee will review the Proxy Voting Service on an annual basis. In connection with that review, it will assess: (1) the
Proxy Voting Service’s capacity and competency in analyzing proxy issues; (2) the adequacy of the Proxy Voting Service’s
staffing and personnel; (3) whether the Proxy Voting Service has robust policies and procedures that enable it to make proxy
voting recommendations based on current and accurate information; and (4) the Proxy Voting Service’s ability to identify
and address any real or potential conflicts of interests that exist or may have existed between the firm and its employees and
the voting recommendations it made to Northern Trust. The Proxy Committee will also regularly monitor the Proxy Voting Service
by requesting information from the Proxy Service to determine whether any real or potential conflicts of interest exist as a result
of changes to the firm’s business or internal policies. The Proxy Voting Service will also be required to proactively communicate
any (i) business changes or (ii) changes and updates to the firm’s policies and procedures that could impact the adequacy
and quality of the proxy voting services or the firm’s ability to effectively manage conflicts.
SECTION 4. APPLICATION OF PROXY GUIDELINES
It is intended that the Proxy Guidelines
will be applied with a measure of flexibility. Accordingly, except as otherwise provided in these policies and procedures, the
Proxy Committee may vote proxies contrary to the recommendations of the Proxy Voting Service, or, in the circumstances described
in Section 3 above, a Northern Trust proxy analyst, if it determines such action to be in the best interests of Northern
Trust clients/beneficiaries. In the exercise of such discretion the Proxy Committee may take into account a wide array of factors
relating to the matter under consideration, the nature of the proposal, and the company involved. As a result, a proxy may be voted
in one manner in the case of one company and in a different manner in the case of another where, for example, the past history
of the company, the character and integrity of its management, the role of outside directors, and the company’s record of
producing performance for investors justifies a high degree of confidence in the company and the effect of the proposal on the
value of the investment. Similarly, poor past performance, uncertainties about management and future directions, and other factors
may lead to a conclusion that particular proposals present unacceptable investment risks and should not be supported. In addition,
the proposals should be evaluated in context. For example, a particular proposal may be acceptable standing alone, but objectionable
when part of an existing or proposed package, such as where the effect may be to entrench management. Special circumstances may
also justify casting different votes for different clients/beneficiaries with respect to the same proxy vote.
The Proxy Committee will document the rationale
for any proxy voted contrary to the recommendation of the Proxy Voting Service or, in the circumstances described in Section 3
above, a Northern Trust proxy analyst.
SECTION 5. CONFLICTS OF INTEREST
The Proxy Committee may occasionally be subject to conflicts
of interest in the voting of proxies. Clear examples include proxy votes on securities issued by Northern Trust Corporation or
its affiliates and proxy votes on matters in which Northern Trust has a direct financial interest (such as shareholder approval
of a change in mutual fund advisory fees where Northern Trust is the fund advisor). Conflicts of interest may also be present due
to relationships that Northern Trust, its board members, executive officers, and others maintain with the issuers of securities,
proponents of shareholder proposals, participants in proxy contests, corporate directors or candidates for directorships.
Northern Trust has sought to address proxy related conflicts
of interest in various ways, including the establishment, composition and authority of the Proxy Committee, and by its delegation
of primary responsibility for proxy review and vote recommendation functions to the Proxy Voting Service. For these reasons the
potential for conflicts of interest in the voting of proxies generally arises only where the Proxy Committee is considering the
possibility of voting in a manner contrary to a vote recommendation received from the Proxy Voting Service or where the Proxy Voting
Service has not provided a vote recommendation. In these situations, the Proxy Committee will need to determine if a conflict of
interest exists and, in situations where a conflict is determined to exist, if the conflict is so severe that the Proxy Committee
is unable to exercise independent judgment. Conflicts for which the Proxy Committee determines it is unable to exercise independent
judgment are referred to in these policies and procedures as “Disabling Conflicts” and other conflicts are referred
to as “Non-Disabling Conflicts”.
Conflicts where the Proxy Committee has received a vote recommendation
from the Proxy Voting Service. Where the Proxy Committee determines that it is subject to a Disabling Conflict, it will vote
in accordance with the vote recommendation received from the Proxy Voting Service. Where the Proxy Committee determines that it
is subject to a Non-Disabling Conflict, it either may vote in accordance with the vote recommendation received from the Proxy Voting
Service, or it may vote contrary to the vote recommendation received from the Proxy Voting Service if the Proxy Committee determines,
consistent with its duty of loyalty and care, and by a vote of at least 70% of its voting members, that the interests of clients/beneficiaries
would be better served by voting contrary to such vote recommendation.
Conflicts where the Proxy Committee has not received a vote
recommendation from the Proxy Voting Service. Where the Proxy Committee determines that it is subject to a Disabling Conflict,
it may resolve the conflict in any of the following ways, which may vary, consistent with its duty of loyalty and care, depending
upon the facts and circumstances of each situation and the requirements of applicable law:
| · | Following the vote recommendation of an independent fiduciary appointed for that purpose |
| · | Voting pursuant to client direction |
| · | Voting pursuant to a “mirror voting” arrangement (under which shares are voted in the same manner and proportion
as some or all of the other shares not voted by the Proxy Committee). |
Where the Proxy Committee determines that is subject to a Non-Disabling
Conflict, it may resolve the conflict in a manner consistent with the preceding paragraph or it may vote in its discretion, provided
that any discretionary vote that favors a party that is the source of the conflict may only be made if the Proxy Committee determines,
consistent with its duty of loyalty and care, and by a vote of at least 70% of its voting members, that the interests of clients/beneficiaries
are best served by such vote.
SECTION 6. PROXY VOTING RECORDS; CLIENT
DISCLOSURES
Northern Trust will maintain the following records relating
to proxy votes cast under these policies and procedures:
| I. | A copy of these policies and procedures. |
| II. | A copy of each proxy statement Northern Trust receives
regarding client securities. |
| III. | A record of each vote cast by Northern Trust on behalf
of a client. |
| IV. | A copy of any document created by the Proxy Committee that
was material to making a decision how to vote proxies on behalf of a client or that memorialized the basis for that decision. |
| V. | A copy of each written client request for information on how Northern Trust voted proxies on behalf of the client, and a copy
of any written response by Northern Trust to any (written or oral) client request for information on how Northern Trust voted proxies
on behalf of the requesting client. |
The foregoing records will be retained for such period of time
as is required to comply with applicable laws and regulations. Northern Trust may rely on one or more third parties to make and
retain the records referred to in items II. and III. above.
The Proxy Committee will cause copies of the foregoing records,
as they relate to particular clients, to be provided to those clients upon request. It is generally the policy of Northern Trust
not to disclose its proxy voting records to third parties, except as may be required by applicable laws and regulations.
SECTION 7. ERISA ACCOUNTS
Plans governed by the Employee Retirement
Income Security Act of 1974, as amended (“ERISA”), are to be administered consistent with the terms of the governing
plan documents and applicable provisions of ERISA. In cases where sole proxy voting discretion rests with Northern Trust, the foregoing
policies and procedures will be followed, subject to the fiduciary responsibility standards of ERISA. These standards generally
require fiduciaries to act prudently and to discharge their duties solely in the interests of participants and beneficiaries. The
Department of Labor has indicated that the voting decisions of ERISA fiduciaries must generally focus on the course that would
most likely increase the value of the stock being voted.
The documents governing ERISA individual
account plans may set forth various procedures for voting “employer securities” held by the plan. Where
authority over the investment of plan assets is granted to plan participants, many individual account plans provide that proxies
for employer securities will be voted in accordance with directions received from plan participants as to shares allocated to their
plan accounts. In some cases, the governing plan documents may further provide that unallocated shares and/or allocated shares
for which no participant directions are received will be voted in accordance with a proportional voting method in which such shares
are voted proportionately in the same manner as are allocated shares for which directions from participants have been received.
Consistent with Labor Department positions, it is the policy of Northern Trust to follow the provisions of a plan’s governing
documents in the voting of employer securities unless it determines that to do so would breach its fiduciary duties under ERISA.
SECTION 8. MUTUAL FUNDS
Proxies of registered management investment companies will be
voted subject to any applicable investment restrictions of the fund and, to the extent applicable, in accordance with any resolutions
or other instructions approved by authorized persons of the fund.
SECTION 9. OTHER SPECIAL SITUATIONS
Proxies of funds or accounts that specify
the use of proxy guidelines other than the Proxy Guidelines will be voted in accordance with these other guidelines. Northern Trust
may choose not to vote proxies in certain situations or for certain accounts either where it deems the cost of doing so to be prohibitive
or where the exercise of voting rights could restrict the ability of an account’s portfolio manager to freely trade the security
in question. For example, in accordance with local law or business practices, many foreign companies prevent the sales of shares
that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting
(“share blocking”). Due to these restrictions, Northern Trust must balance the benefits to its clients of voting
proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares
at the most advantageous time. For companies in countries with share blocking periods, the disadvantage of being unable to
sell the stock regardless of changing conditions generally outweighs the advantages of voting at the shareholder meeting for routine
items. Accordingly, Northern Trust will not vote those proxies in the absence of an unusual, significant vote. Various
accounts over which Northern Trust has proxy voting discretion participate in securities lending programs administered by Northern
Trust or a third party. Because title to loaned securities passes to the borrower, Northern Trust will be unable to vote any security
that is out on loan to a borrower on a proxy record date. If Northern Trust has investment discretion, however, it reserves the
right of the portfolio manager to instruct the lending agent to terminate a loan in situations where the matter to be voted upon
is deemed to be material to the investment and the benefits of voting the security are deemed to outweigh the costs of terminating
the loan.
Northern Trust
Proxy Voting Guidelines
I. The Board of Directors
A. Voting on Director Nominees in Uncontested
Elections
Northern Trust generally votes for director
nominees in uncontested elections absent countervailing factors such as a lack of director independence (see below), chronic, unjustified
absenteeism, concerns regarding the inattentiveness of the nominee, including the number of public company boards on which the
nominee sits, and if the nominee sits on an audit, compensation or risk committee, concerns regarding the actions taken by such
committees.
B. Director Independence
For any situations not already
covered by a rule or regulation, Northern Trust will generally vote for shareholder proposals requesting that the board of a company
be comprised of a majority of independent directors and will generally vote against shareholder proposals requesting that the board
of a company be comprised of a supermajority of independent directors.. Northern Trust generally votes for shareholder proposals
that request that the board audit, compensation and/or nominating committees include independent directors exclusively
and withholds votes for the election of non-independent directors serving on an audit, compensation
or nominating committee or board. In addition, Northern Trust generally leaves the choice of chairman to the board’s discretion
as Northern Trust’s support for proposals that principal committees consist exclusively of independent directors and that
the board be comprised of a majority of independent directors provides sufficient checks and balances.
For all situations that involve a NASDAQ or a NYSE listed company,
Northern Trust will use the NASDAQ’s or the NYSE’s definition, respectively, of an independent director to determine
a board candidate’s status. In any other situation, Northern Trust will consider a board candidate or member to lack independence
if the proposed director:
a) Receives, or one of the proposed director’s immediate
family members receives, more than $100,000 per year in direct compensation from the listed company, other than director and committee
fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any
way on continued service); such person is presumed not to be independent until three years after he or she ceases to receive more
than $100,000 per year in such compensation.
b) Is affiliated with or employed by, or if one of the proposed
director’s immediate family members is affiliated with or employed in a professional capacity by, a present or former auditor
of the company; the proposed director will not be considered "independent" until three years after the end of either
the affiliation or the auditing relationship.
c) Is employed, or one of the proposed director’s immediate
family members is employed, as an executive officer of another company where any of the listed company's present executives serves
on that company's compensation committee; the proposed director will not be considered "independent" until three years
after the end of such service or the employment relationship.
d) Is an executive officer or an employee, or one of the proposed
director’s immediate family members is an executive officer, of another company (A) that accounts for at least 2% or $1 million,
whichever is greater, of the listed company's consolidated gross revenues, or (B) for which the listed company accounts for at
least 2% or $1 million, whichever is greater, of such other company's consolidated gross revenues; in each case, the proposed director
is not considered "independent" until three years after consolidated gross revenues fall below that threshold.
C. Lead Independent Director
Northern Trust generally votes for shareholder proposals in
support of the appointment of a lead independent director
D. Overboarding Issues
Northern Trust generally votes against a director nominee
if it is a CEO who sits on more than three public boards (for their outside boards only) or a non-CEO who sits on more than six
public boards.
E. Stock Ownership Requirements
Northern Trust generally votes against
shareholder proposals requiring directors to own a minimum amount of company stock in order to qualify as a director, or to remain
on the board.
F. Term of Office
Northern Trust generally votes against
shareholder proposals to limit the tenure of outside directors.
G. Director and Officer Indemnification
and Liability Protection
Proposals concerning director and officer
indemnification and liability protection are evaluated on a case by case basis. Northern Trust generally votes for proposals
providing indemnification protection to officers and directors, and for proposals limiting the liability of officers and
directors for monetary damages, provided such proposals do not appear to conflict with applicable law and cover only future actions.
H Charitable Contributions
Northern Trust votes against shareholder
proposals to eliminate, direct or otherwise restrict charitable contributions.
II. Proxy Contests
A. Voting for Director Nominees in Contested
Elections
Votes in a contested election of directors
are evaluated on a case-by-case basis, considering the following factors:
| • | long-term financial performance of the target company relative to its industry; |
| • | management's track record; |
| • | background to the proxy contest; |
| • | qualifications of director nominees (both slates); |
| • | evaluation of what each side is offering shareholders as well as the likelihood that the proposed
objectives and goals can be met; and |
| • | stock ownership positions. |
B. Reimburse Proxy Solicitation Expenses
Decisions
to provide full reimbursement for dissidents waging a proxy contest are made on a case-by-case basis. Northern Trust will
generally support such proposals in cases where (i) Northern Trust votes in favor the dissidents and (ii) the proposal is voted
on the same proxy as the dissident slate and, as such, is specifically related to the contested proxy at issue.
Northern Trust generally votes for proposals
allowing shareholders to elect replacements and fill vacancies.
III. Auditors
Ratifying Auditors
Northern Trust generally votes for
proposals to ratify auditors, unless: an auditor has a financial interest in or association with the company, and is therefore
not independent; or there is reason to believe that the independent auditor has rendered an opinion which is neither accurate nor
indicative of the company's financial position.
Northern Trust generally votes against
shareholder proposals that seek to restrict management’s ability to utilize selected auditors, subject to the qualifications
set forth above.
IV. Proxy Contest Defenses
A. Board Structure: Staggered vs. Annual
Elections
Northern Trust generally votes against
proposals to classify the board and for proposals to repeal classified boards and to elect all directors annually.
B. Shareholder Ability to Remove Directors
Northern Trust generally votes for proposals
that provide that directors may be removed only for cause.
Northern Trust generally votes for proposals
allowing shareholders to elect replacements and fill vacancies.
C. Cumulative Voting
Northern Trust generally votes against
proposals to eliminate cumulative voting, unless such proposals are intended to effectuate a majority voting policy.
Northern Trust generally votes for
proposals to institute cumulative voting, unless the company has previously adopted a majority voting policy, or a majority voting
shareholder proposal, consistent with Northern Trust’s majority voting guidelines, is on the ballot at the same time as the
cumulative voting proposal, in which case Northern Trust generally votes against such cumulative voting proposals.
D. Majority
Voting
In analyzing shareholder proposals calling for directors in
uncontested elections to be elected by an affirmative majority of votes cast, Northern Trust focuses on whether or not the company
has adopted a written majority voting (or majority withhold) policy that provides for a meaningful alternative to affirmative majority
voting.
In cases where companies have not adopted a written majority
voting (or majority withhold) policy, Northern Trust generally votes for shareholder majority voting proposals.
In cases where companies have adopted a written majority voting
(or majority withhold) policy, Northern Trust generally votes against shareholder majority voting proposals, provided that
the policy is set forth in the company's annual proxy statement and either:
- requires nominees who receive majority withhold
votes to tender their resignation to the board;
- sets forth a clear and reasonable timetable
for decision-making regarding the nominee's status; and
- does not contain any specific infirmities that
would render it an ineffective alternative to an affirmative majority voting standard
or otherwise provides a meaningful alternative to affirmative
majority voting.
In determining the adequacy of a company's
majority voting (or majority withhold) policy, Northern Trust may also consider, without limitation, any factors set forth in the
policy that are to be taken into account by the board in considering a nominee's resignation and the range of actions open to the
board in responding to the resignation (e.g., acceptance of the resignation, maintaining the director but curing the underlying
causes of the withheld votes, etc.).
E. Shareholder Ability to Call Special
Meetings
Northern
Trust generally votes for proposals to restrict or prohibit shareholder ability to call special meetings, but will vote
against such proposals and in favor of shareholder proposals to allow shareholders to call special meetings if the minimum ownership
requirement is at least 10% of outstanding shares.
F. Shareholder Ability to Act by Written
Consent
Northern Trust generally votes against
shareholder proposals allowing shareholders to take action by written consent. Northern Trust will review on a case-by-case
basis management proposals allowing shareholders to take action by written consent
G. Shareholder Ability to Alter the
Size of the Board
Northern Trust generally votes against
proposals limiting management’s ability to alter the size of the board.
V. Tender Offer Defenses
A. Poison Pills
Northern Trust generally votes against
shareholder proposals that ask a company to submit its poison pill for shareholder ratification.
Northern Trust will review on a case-by-case
basis management proposals to ratify a poison pill.
B. Fair Price Provisions
Northern Trust will review votes on a case-by-case
on fair price proposals, taking into consideration whether the shareholder vote requirement embedded in the provision is no more
than a majority of disinterested shares.
Northern Trust generally votes for
shareholder proposals to lower the shareholder vote requirement in existing fair price provisions.
C. Greenmail
Northern Trust generally votes for
proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict a company's ability to make greenmail payments.
Northern Trust votes on a case-by-case
basis anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
D. Pale Greenmail
Northern Trust votes on a case-by-case
basis restructuring plans that involve the payment of pale greenmail.
E. Unequal Voting Rights
Northern Trust generally votes against
dual class exchange offers.
Northern Trust generally votes against
dual class recapitalizations.
| F. | Supermajority Shareholder Vote Requirement to Amend
the Charter or Bylaws |
Northern Trust generally votes against
management proposals to require a supermajority shareholder vote to approve charter and bylaw amendments.
Northern Trust generally votes for shareholder
proposals to lower supermajority shareholder vote requirements for charter and bylaw amendments.
| G. | Supermajority Shareholder Vote Requirement to Approve
Mergers |
Northern Trust generally votes against
management proposals to require a supermajority shareholder vote to approve mergers and other significant business combinations.
Northern Trust generally votes for shareholder
proposals to lower supermajority shareholder vote requirements for mergers and other significant business combinations.
| H. | White Squire Placements |
Northern Trust generally votes for shareholder proposals
to require shareholder approval of blank check preferred stock issues for other than general corporate purposes, unless the company
has committed to issuing such shares with no more than one vote per share.
VI. Miscellaneous Governance Provisions
Northern Trust generally votes for
proposals requiring confidential voting and independent vote tabulators.
Northern Trust generally votes against
shareholder proposals that would allow significant company shareholders equal access to management's proxy material in order
to evaluate and propose voting recommendations on proxy proposals and director nominees, and in order to nominate their own candidates
to the board.
Northern Trust votes on a case-by-case
basis bundled or "conditioned" proxy proposals. In the case of items that are conditioned upon each other, we examine
the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders'
best interests, we vote against the proposals. If the combined effect is positive, we support such proposals.
| D. | Shareholder Advisory Committees |
Northern Trust votes on a case-by-case
basis, proposals to establish a shareholder advisory committee.
E. Board
of Directors Failure to Respond to Certain Majority Approved Shareholder Proposals
Northern Trust votes on a case-by-case
basis on whether to withhold votes from certain directors in the event the board of directors has failed to adequately respond
to a majority approved shareholder proposal. Northern Trust will generally not withhold votes from directors in cases where Northern
Trust previously voted against the majority approved shareholder proposal. In cases where Northern Trust previously voted in favor
of the majority approved shareholder proposal, it will first determine whether it is appropriate under the circumstances to withhold
votes from any directors, and if it determines that such action is appropriate it will then determine the director or directors
from which votes should be withheld. Factors that will be taken into consideration include the documented response of the board,
if any, concerning its action or inaction relating to the relevant shareholder proposal, whether particular board members served
on a committee that was responsible for determining a response to the shareholder proposal, the importance of retaining particular
directors or groups of directors to protect shareholder value, and such other factors as Northern Trust may deem appropriate.
F. Board
Of Directors Failure to Adequately Respond to Rejected Board Compensation Proposals.
Northern Trust votes on a case by case
basis on whether to withhold votes from certain directors in the event the board of directors has not adequately responded to situations
in which board proposals for approval of executive compensation have failed to receive majority shareholder approval.
G. Succession
Policies
Northern Trust generally votes for
proposals seeking disclosure on a CEO succession planning policy, considering the scope of the request and the company’s
existing disclosure on its current CEO succession planning process.
H. Proxy
Access
Northern Trust votes on a case by case
basis on proxy access proposals. Northern Trust will consider a number of factors, including the company’s performance, the
performance of the company’s board, the ownership thresholds and holding duration contained in the resolution and the proportion
of directors that shareholders may nominate each year.
VII. Capital Structure
| A. | Common Stock Authorization |
Northern Trust votes on a case-by-case
basis, proposals to increase the number of shares of common stock authorized for issue.
| B. | Stock Distributions: Splits and Dividends |
Northern Trust generally votes for
management proposals to increase common share authorization for a stock split, provided that the split does not result in an increase
of authorized but unissued shares of more than 100% after giving effect to the shares needed for the split.
Northern Trust generally votes for management
proposals to implement a reverse stock split, provided that the reverse split does not result in an increase of authorized but
unissued shares of more than 100% after giving effect to the shares needed for the reverse split.
| D. | Blank Check Preferred Authorization |
Absent special
circumstances (e.g., actions taken in the context of a hostile takeover attempt) indicating an abusive purpose, Northern Trust
generally votes against proposals that would authorize the creation of new classes of preferred stock with unspecified voting,
conversion, dividend and distribution, and other rights, stock unless the voting, conversion, dividend and distribution, and other
rights are specified and the voting rights are limited to one vote per share.
E. Shareholder Proposals Regarding Blank
Check Preferred Stock
Northern Trust generally votes for shareholder
proposals requiring blank check preferred stock placements to be submitted for shareholder ratification unless the shares are to
be issued for the purpose of raising capital or making acquisitions.
| F. | Adjust Par Value of Common Stock |
Northern Trust generally votes for management
proposals to reduce the par value of common stock.
Northern Trust reviews on a case-by-case
basis, proposals to create or abolish preemptive rights. In evaluating proposals on preemptive rights, we look at the size
of a company and the characteristics of its shareholder base. We generally oppose preemptive rights for publicly-held companies
with a broad stockholder base.
Northern Trust reviews on a case-by-case
basis, proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan. We consider
the following issues:
| • | Dilution — How much will ownership interest of existing shareholders be reduced, and
how extreme will dilution to any future earnings be? |
| • | Change in Control — Will the transaction result in a change in control of the company? |
| • | Bankruptcy — Is the threat of bankruptcy, which would result in severe losses in shareholder
value, the main factor driving the debt restructuring? |
Generally, we approve proposals that facilitate
debt restructurings unless there are clear signs of self-dealing or other abuses.
| I. | Share Repurchase Programs |
Northern Trust generally votes for management
proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms.
VIII. Executive and Director Compensation
Northern Trust votes on a case-by-case
basis on executive and director compensation plans. Northern Trust generally votes against compensation plans if
:
a. The
exercise price is less than 100% of fair market value at the time of grant; or
b. The
company has repriced underwater stock options during the past three years; or
c. The
company fails the following described burn rate test.
A company will generally fail Northern Trust 's burn rate test
if its three year average burn rate exceeds 2% AND exceeds an amount that is one standard deviation in excess of its GICS industry
mean (segmented by Russell 3000 and non-Russell 3000 companies). A company that exceeds both of the foregoing three year average
burn rates amounts can avoid a negative vote if it commits in a public filing to maintain a burn rate over the next three fiscal
years that is no higher than one standard deviation in excess of its industry mean as calculated at the time of the proposal. Restricted
shares or other "full-value" awards granted will be counted against the burn rate based on the following multiplier that
varies based on a company's annual stock price volatility:
Company Characteristics | |
Annual Stock Price Volatility | |
Multiplier |
High Volatility | |
53% or greater | |
1.5 to 1 |
MediumVolatility | |
25% to 52.99% | |
2.0 to 1 |
Low Volatility | |
25% or lower | |
4.0 to 1 |
| A. | OBRA-Related Compensation Proposals |
| · | Amendments that Place a Cap on Annual Grant or Amend Administrative Features |
Northern Trust generally votes for
plans that simply amend shareholder-approved plans to include administrative features or place a cap on the annual grants any one
participant may receive to comply with the provisions of Section 162(m) of OBRA.
| · | Amendments to Added Performance-Based Goals |
Northern Trust generally votes for amendments
to add performance goals to existing compensation plans to comply with the provisions of Section 162(m) of OBRA.
| · | Amendments to Increase Shares and Retain Tax Deductions Under OBRA |
Votes on amendments to existing plans that
would both increase shares reserved AND qualify the plan for favorable tax treatment under the provisions of Section 162(m)
should be evaluated on a case-by-case basis.
| · | Approval of Cash or Cash-and-Stock Bonus Plans |
Northern Trust generally votes for cash
or cash-and-stock bonus plans to exempt the compensation from taxes under the provisions of Section 162(m) of OBRA.
| B. | Proposals Concerning Executive and Director Pay |
Northern Trust generally votes for proposals
that call for ratification of the compensation of the named Executive Officers and the accompanying narrative disclosure of material
factors provided to understand the Summary Compensation Table in the Company's proxy statement where Northern Trust believes that
the specific circumstances relating to the individual company warrant such shareholder involvement.
Northern Trust votes on a case by case
basis on shareholder advisory votes concerning the compensation of named executive officers, taking into account whether the
current disclosure of factors required by Item 402 of Regulation S-K is adequate, whether the executive compensation is sufficiently
tied to performance goals, whether performance metrics are adequately disclosed and reasonable and whether the ratio of discretionary
to overall executive compensation is adequately explained in the performance metrics. .
Northern Trust generally votes proposals
regarding the frequency of advisory votes on executive compensation in accordance with the recommendation of the issuer's board
of directors, as long as such recommendations are in compliance with existing rules and regulations. If the issuer's board of directors
does not make a recommendation, then Northern Trust generally votes for the frequency of such votes to occur on a triennial
basis, unless regulations or rules dictate that such votes should occur on a more frequent basis.
Northern Trust generally votes on a case-by-case basis
all other shareholder proposals that seek additional disclosure of executive and director pay information.
Northern Trust votes on a case-by-case basis all other
shareholder proposals that seek to limit executive and director pay.
| C. | Golden and Tin Parachutes |
Northern Trust generally votes against
shareholder proposals to have golden and tin parachutes submitted for shareholder ratification.
| D. | Employee Stock Ownership Plans (ESOPs) and Other Broad-Based
Employee Stock Plans |
Northern Trust generally votes for
proposals to approve an ESOP or other broad-based employee stock purchase or ownership plan, or to increase authorized shares for
such existing plans, except in cases when the number of shares allocated to such plans is “excessive” (i.e., generally
greater than ten percent (10%) of outstanding shares).
| E. | 401(k) Employee Benefit Plans |
Northern Trust generally votes for proposals
to implement a 401(k) savings plan for employees.
| F. | Director
Retirement Benefits |
Northern Trust generally votes for shareholder
proposals requesting companies cease to pay retirement benefits to directors.
IX. State of Incorporation
| A. | Voting on State Takeover Statutes |
Northern Trust votes on a case-by-case
basis proposals to opt in or out of state takeover statutes (including control share acquisition statutes, control share cash-out
statutes, freezeout provisions, fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract
provisions, anti-greenmail provisions, and disgorgement provisions).
| B. | Voting on Reincorporation Proposals |
Proposals to change a company's state of
incorporation are examined on a case-by-case basis.
X. Mergers and Corporate Restructurings
| A. | Mergers and Acquisitions |
Votes on mergers and acquisitions are considered
on a case-by-case basis, taking into account at least the following:
| • | anticipated financial and operating benefits; |
| • | offer price (cost vs. premium); |
| • | prospects of the combined companies; |
| • | how the deal was negotiated; and |
| • | changes in corporate governance and their impact on shareholder rights. |
Northern Trust generally votes on a case-by-case basis
in cases where, in connection with a merger or acquisition seeking shareholder approval, a separate shareholder vote is required
to approve any agreements or understandings regarding compensation disclosed pursuant to Item 402(t) of Regulation S-K (golden
parachute arrangements).
| B. | Corporate Restructuring |
Votes on corporate restructuring proposals,
including minority squeezeouts, leveraged buyouts, spin-offs, liquidations, and asset sales are considered on a case-by-case
basis.
Votes on spin-offs are considered on a
case-by-case basis depending on the tax and regulatory advantages, planned use of sale proceeds, market focus, and managerial
incentives.
Votes on asset sales are made on a case-by-case
basis after considering the impact on the balance sheet/working capital, value received for the asset, and potential elimination
of diseconomies.
Votes on liquidations are made on a case-by-case
basis after reviewing management's efforts to pursue other alternatives, appraisal value of assets, and the compensation plan
for executives managing the liquidation.
Northern Trust generally votes for proposals
to restore, or provide shareholders with, rights of appraisal.
| G. | Changing Corporate Name |
Northern Trust generally votes for
changing the corporate name.
Northern Trust generally votes against
proposals giving management discretion to adjourn a meeting of shareholders in order to solicit additional votes.
XI. Mutual Funds
Votes on trustee nominees are evaluated
on a case-by-case basis.
| B. | Investment Advisory Agreement |
Votes on investment advisory agreements
are evaluated on a case-by-case basis.
| C. | Fundamental Investment Restrictions |
Votes on amendments to a fund’s fundamental
investment restrictions are evaluated on a case-by-case basis.
| D. | Distribution Agreements |
Votes on distribution agreements are evaluated
on a case-by-case basis.
XII. Social and Environmental Issues
A. Northern
Trust generally votes for proposals advocating the elimination of workplace discrimination based on sexual orientation
or gender identity.
B Northern Trust generally votes for
proposals requesting increased disclosure regarding the environmental impact of a company’s operations and products and
initiatives to curtail these risks, unless sufficient information has been disclosed to shareholders or is otherwise publicly available.
C Northern Trust generally votes for proposals requesting
the issuance of corporate sustainability reports, as well as disclosure, where relevant, concerning the emission of greenhouse
gasses and the use of fracturing in connection with the extraction of natural gases,
D. Northern
Trust generally votes for proposals requesting the issuance of reports by a company detailing its energy efficiency plans.
E. Northern
Trust generally votes for proposals requesting that a company take reasonable steps to ensure that women and minority candidates
are in the pool from which board nominees are chosen or that request that women and minority candidates are routinely sought as
part of every board search the company undertakes;
F. Northern
Trust generally votes for proposals requesting increased disclosure or reporting regarding animal treatment issues that may impact
a company’s operations and products, especially in relation to food production, unless sufficient information on that topic
has already been disclosed to shareholders or is otherwise publicly available.
In other social and environmental issues,
Northern Trust generally supports the position of a company’s board of directors when voting on shareholder initiated social
and environmental proposals. Although Northern Trust acknowledges that the economic and social considerations underlying such proposals
are often closely intertwined, we believe that in most cases the management group and elected directors are best positioned to
make corporate decisions on these proposals.
Appendix C

Japan
Proxy
Voting Guidelines
2015
Benchmark Policy Recommendations
Effective for Meetings on or after February
1, 2015
Published January 7, 2015
www.issgovernance.com
© 2015 ISS │ Institutional Shareholder Services
 |
2015
Japan Proxy Voting Guidelines |
TABLE OF CONTENTS
1. |
ROUTINE/MISCELLANEOUS |
4 |
|
Approval of Financial Statements |
4 |
|
Income Allocation |
4 |
|
Election of Statutory Auditors |
4 |
|
Audit Firm Appointments |
4 |
|
|
|
2. |
ELECTION OF DIRECTORS |
5 |
|
Mulitple Outsiders- Policy for 2016 |
6 |
|
ISS Independence criteria for Japan |
8 |
|
|
|
3. |
ARTICLE AMENDMENTS |
8 |
|
Expansion of business activities |
8 |
|
Adoption of a U.S.-style three committee board structure |
8 |
|
Adoption of a Board with Audit Committee Structure (Japan) |
8 |
|
Increase in authorized capital |
8 |
|
Creation/modification of preferred shares/class shares |
9 |
|
Repurchase of shares at board’s discretion |
9 |
|
Allow company to make rules governing the exercise of shareholders’ rights |
9 |
|
Limit rights of odd shareholders |
9 |
|
Lower quorum requirement |
9 |
|
Amendments related to takeover defenses |
9 |
|
Decrease in maximum board size |
9 |
|
Supermajority vote requirement to remove a director |
9 |
|
Reduce directors’ term in office from two years to one year |
9 |
|
Remove language preventing classification of board |
9 |
|
Limitations of liability for directors/statutory auditors |
9 |
|
Limitations of liability for external auditors |
9 |
|
Payment of dividends at the board’s discretion |
10 |
|
Management buyout related amendments |
10 |
|
|
|
4. |
COMPENSATION |
10 |
|
Annual Bonuses for Directors/Statutory Auditors |
10 |
|
Retirement Bonuses |
10 |
|
Special Payments in Connection with Abolition of Retirement Bonus System |
10 |
|
Stock Option Plans/Deep-Discounted Stock Option Plans |
10 |
|
Stock Option Plans |
10 |
|
Deep-Discounted Stock Option Plans |
11 |
|
Director Compensation Ceiling |
11 |
|
Statutory Auditor Compensation Ceiling |
11 |
|
|
|
5. |
SHARE REPURCHASE PLANS |
11 |
|
|
|
6. |
TAKEOVER DEFENSE PLANS (POISON PILLS) |
12 |
|
|
|
7. |
MERGERS & ACQUISITIONS, THIRD-PARTY SHARE ISSUANCES (PRIVATE PLACEMENTS) |
12 |
|
|
Enabling the financial community to manage
governance risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
2 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
8. |
SHAREHOLDER PROPOSALS |
13 |
|
|
|
9. |
SOCIAL/ENVIRONMENTAL ISSUES |
13 |
|
Global
Approach |
13 |
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
3 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
1.
ROUTINE/MISCELLANEOUS
Approval
of Financial Statements
|  | General
Recommendation: Generally
vote for the approval of financial statements, unless: |
| › | External auditor expressed no opinion, or raised concerns; or |
| › | Statutory auditors/audit committee raised concerns; or |
| › | There are concerns about the financial statements presented or audit procedures used. |
Income
Allocation
|  | General
Recommendation: Generally
vote for approval of income allocation, unless: |
| › | Payout ratio is consistently low without adequate justification; or |
| › | Payout ratio is too high, potentially damaging financial health. |
Election
of Statutory Auditors
|  | General
Recommendation: Generally vote for the election
of statutory auditors, unless: |
| › | The outside
statutory auditor nominee is regarded as non-independent based on ISS
independence criteria for Japan; or |
| › | The outside statutory nominee attended less than 75 percent
of meetings of the board of directors or board of statutory auditors during the year under review; or |
| › | The statutory auditor is judged to be responsible for clear mismanagement or shareholder-unfriendly behavior. |
| › | Egregious actions related to a statutory auditor’s service on other boards that raise substantial doubt about his or her ability
to effectively oversee management and serve the best interests of shareholders at any company. |
Audit
Firm Appointments
|  | General
Recommendation: Generally
vote for the appointment of audit firms, unless there are serious concerns related to
changing auditors. |
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
4 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
|  | General Recommendation:
ISS has three policies for director elections in Japan: one for companies
with a statutory auditor board structure, one for companies with a U.S.-type three committee
structure, and one for companies with a board with audit committee structure. |
| 1. | At companies with a statutory auditory structure: vote for the election of directors, except: |
| › | Top executive(s)1 at a company that has underperformed in terms of capital efficiency (i.e., when the company has
posted average return on equity (ROE) of less than five percent over the last five fiscal years)2, unless an improvement3
is observed; |
| › | Top executive(s) if the board, after the shareholder meeting, does not include at least one outsider, regardless of independence; |
| › | Top executive(s) at a company that has a controlling shareholder, where the board, after the shareholder
meeting, does not include at least two independent directors based on ISS independence criteria for Japan; |
| › | An outside director nominee who attended less than 75 percent of board meetings during the year
under review4; or |
| › | Top executive(s) who are responsible for not implementing a shareholder proposal which
has received a majority’s of votes cast, or not putting a similar proposal on the ballot as a management proposal the following
year (with a management recommendation of for), when that proposal is deemed to be in the interest of independent shareholders. |
| 2. | At companies with a U.S.-type three committee structure: (In addition to the guidelines for companies with a statutory
auditor structure) vote for the election of directors, except where: |
| › | An outside director nominee is regarded as non-independent based on ISS independence criteria for Japan, and the board, after
the shareholder meeting, is not majority independent; or |
| › | Where the company has a controlling shareholder, a director nominee sits on the nomination committee and is an insider, or
non-independent outsider, when the board, after the shareholder meeting, does not include at least two independent directors based
on ISS independence criteria for Japan. |
| 3. | At companies with a board with audit committee structure: (In addition to the guidelines for companies with a statutory
auditor structure) vote for the election of directors, except where: |
| › | An outside
director nominee who is also nominated as an audit committee member6 is regarded
as non-independent based on ISS independence criteria for Japan. |
Regardless of governance structure,
under extraordinary circumstances, vote against individual directors, members of a committee, or the entire board, due to:
1
In most cases, the top executive will be the “shacho” (president). However, there are companies where the decision-making
authority also rests with the “kaicho” (executive chairman) or “daihyo torishimariyaku” (representative director).
2
Exceptions may be considered for cases such as where the top executive has newly joined the company in connection with a bailout
or restructuring. This policy will not be applied to companies which have been public for less than five years.
3
Improvement is defined as ROE of five percent or greater for the most recent fiscal year.
4
The attendance of inside directors is not disclosed in Japan.
5
Many Japanese shareholder proposals are submitted as article amendments, which require supermajority support in order to pass.
6
Outside director nominees who are not nominated as audit committee members are not subject to this policy.
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
5 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
| › | Material failures of governance, stewardship,
risk oversight, or fiduciary responsibilities at the company; |
| › | Failure to replace management as appropriate;
or |
| › | Egregious actions related to a director’s service
on other boards that raise substantial doubt about his or her ability to effectively
oversee management and serve the best interests of shareholders at any company. |
Mulitple
Outsiders- Policy for 2016
|  | General
Recommendation: Starting in February 2016, vote against the top executive(s)
at a company if the board after the shareholder meeting does not include multiple outsiders7. |
Discussion
ISS believes that a voting policy in a given market should
reflect specific characteristics of that market. In Japan, lack of board independence is the core governance issue. A lack of
board independence makes it difficult for shareholders’ voices to be reflected in board discussions. Japanese boards are often
criticized for shareholder unfriendly decisions, such as hoarding cash, and tying up assets in cross-shareholdings. In other cases,
they appear reluctant to sell or shut down unprofitable businesses, thus putting the interests of company insiders ahead of the
benefits for common shareholders. Alternatively, Japanese corporate managers are often criticized for not taking risks in making
value enhancing strategic investment decisions for future growth, due to a consensus-based decision-making process on boards dominated
by insiders.
These problematic practices, which tend to lead to low
capital efficiency, can be assessed by evaluating ROE. The updated policy therefore is adopted to augment the current policy of
opposing top executives on all-insider boards (intended to increase board independence), by newly applying a financial metric
which measures shareholder value creation, which in turn should be the ultimate goal of increasing board independence.
ROE is not the sole indicator to measure shareholder
value creation, but it still can be a viable metric in the context of Japanese corporate governance for the following reasons.
First, many investors have cited low capital efficiency
as a primary reason for the low returns from Japanese equity investments over the years. Indeed, Japanese companies’ ROE
is low compared to other markets. According to the Ito Reviews8 by the Ministry of Economy, Trade and Industry, the
average ROE for fiscal 2012 was only 5.3 percent for Japanese companies, compared to 22.6 percent for U.S. companies and 15.0
percent for European companies. In the report, Japanese companies are encouraged to increase their ROEs “in a manner befitting
their respective businesses and connect this activity to generating sustainable growth.” It also notes that “... [Japanese]
companies should be conscious that the minimum expected level of ROE is 8%, and should strive to further increase their ROEs beyond
this level...”
Second, the recent corporate governance debate in Japan
has evolved with ROE as an important element. The Abe administration’s economic policy includes measures to improve Japanese companies’
capital efficiency. The administration requested the Tokyo Stock Exchange and Nikkei to create a new equity index to be composed
of companies deemed shareholder friendly. The new JPX Nikkei 400 index, launched in response to the request, evaluates, among
other factors, ROE to select index component companies, with a view to increasing awareness of the importance of ROE among Japanese
companies.
7
“Multiple outsiders” could mean two outsiders (regardless
of independence) or two outsiders (at least one of whom is independent). The definition may depend on factors such as the provisions
of Japan’s Corporate Governance Code, currently in the draft stage. The new policy may initially be applied only to large companies
(i.e., those in major indices).
8 http://www.meti.go.jp/english/press/2014/0806
04.html
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
6 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
In addition, at the request of the administration,
the Financial Services Agency released in February Japan’s Stewardship Code9 for investors holding Japanese equities,
which aims to increase constructive shareholder engagement with companies. Measures to increase capital efficiency are cited in
the code as one topic for such engagement. As of August 29, 160 institutions have signed the code.
According to ISS’ 2013-14 policy survey results, a
significant majority of investor respondents indicated that ISS should either always consider company performance when evaluating
directors or consider it when a company has exhibited problematic governance practices that the board does not appear to be addressing.
In fact, Japanese institutional shareholders have already
used ROE (in many cases a 3 - 5 percent ROE threshold) as a key factor when evaluating director election proposals, to address
the issue of low capital efficiency at Japanese companies. The approach was originally inspired by the Pension Fund Association
(PFA) of Japan, which employed a director election policy factoring in ROE beginning in 2007. Although the PFA currently does
not have a stated ROE-based director election policy, domestic institutional shareholders continue to employ ROE in voting on
directors.
As Japanese boards virtually function as management
committees, rather than as supervising organs, it is reasonable for shareholders to oppose top executives when performance is
poor. Note that 98 percent of Japanese companies employ a statutory auditor system, under which they do not have legally binding
nomination committees. Therefore, it is unrealistic to expect that board members could remove top executives when necessary. The
updated policy reflects the unique market circumstances of Japan.
The 5 percent threshold was chosen as a minimum ROE
level acceptable to investors as an equity risk premium, based on discussions with institutional investors in Japan holding Japanese
equities. Therefore, the threshold should be interpreted as a minimum acceptable level and not as a target. The five year measurement
period was chosen so as not to penalize companies for a short-term performance downturn which could be needed for investments
for sustainable growth over the long term.
Multiple Outsiders: Corporate governance in
Japan has long been criticized for lack of outside director oversight. However, the situation has changed. Companies with at least
one outside director made up a minority of those companies tracked by ISS until recently, but the proportion of such companies,
which had been increasing by one to two percentage points every year, began to increase sharply in 2013. As of June 2014, only
29 percent of listed company boards lack even a single outside director, according to ISS data.
In 2013, ISS began recommending against top executives
if the board after the shareholder meeting did not include at least one outsider, regardless of independence. It was in 2010 when
more than half of Japanese companies started to have at least one outsider for the first time. Given that a majority of Japanese
boards have at least one outsider, having outsiders on the board is no longer an alien concept among the Japanese business community,
corporations and institutional shareholders alike.
In fact, today, a majority of large Japanese companies
already have at least two outside directors. Of Nikkei 225 index member companies, 72 percent have multiple outsiders, and of
companies constituting the JPX-Nikkei 400 index, 55 percent have multiple outsiders (as of September 2014). Given this progress,
strengthening the board independence threshold by requiring multiple outsiders, particularly for such large companies, is reasonable.
Under the new approach, the policy will not be implemented
until 2016. This one-year moratorium is intended to give companies sufficient time to recruit qualified outside director candidates.
For 2015, we will not recommend against a top executive if the board has only one outsider.
9
http://www.fsa.go.jp/en/refer/councils/stewardship/index.html
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
7 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
ISS
Independence criteria for Japan
Those outside director candidates falling into any of the following
categories should be regarded as non-independent:
| ›
| Individuals who work or worked at major shareholders of the company in question; |
| ›
| Individuals who work or worked at main lenders/banks to the company in question; |
| ›
| Individuals who work or worked at the lead underwriter(s) of the company in question; |
| ›
| Individuals who work or worked at business partners of the company in question and the transaction value is material from the
recipient’s perspective or is not disclosed; |
| ›
| Individuals who worked at the company’s audit firm; |
| ›
| Individuals who offer or offered professional services such as legal advice, financial advice, tax advice or consulting services
to the company in question; or |
| ›
| Individuals who have a relative(s) working at the company in question. |
3.
ARTICLE AMENDMENTS
Amendments are nearly always bundled together as a single voting
resolution, and ISS’ general approach is to oppose article amendments as a whole when they include changes ISS opposes. The following
are some of the most common or significant types of changes to articles.
Expansion
of business activities
|
General
Recommendation: Generally
vote for an expansion of business activities, unless a company has performed poorly for several years and seeks business expansion
into a risky enterprise unrelated to its core business. |
Adoption
of a U.S.-style three committee board structure
|
General
Recommendation: Generally
vote for the adoption of a U.S. style, three-committee board structure, unless none of the outside director candidates meets
ISS criteria on independence. |
Adoption
of a Board with Audit Committee Structure (Japan)
|
General
Recommendation: Generally
vote for an article amendment to adopt a board with audit committee structure.
However, if the adoption of the new governance structure would eliminate shareholders’ ability to submit shareholder
proposals on income allocation, vote against the article amendments. Vote case-by-case if the board currently has a three-committee
structure. |
Increase
in authorized capital
|
General
Recommendation: Generally
vote case-by-case on this request if the company explicitly provides reasons for the increase. |
If the company does not provide reasons for the increase,
generally vote for proposals to increase authorized capital, unless:
| ›
| The increase in authorized capital exceeds 100 percent of the currently authorized capital; or |
| › | The increase leaves the company with less than 30 percent of the proposed authorized capital outstanding; or |
| › | The increase is intended for a poison pill, which ISS opposes. |
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
8 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
9 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
|
Payment of dividends
at the board’s discretion |
|
|
|
General Recommendation:
Generally vote against proposals allowing the board to pay
dividends at its discretion. |
|
|
|
Management buyout
related amendments |
|
|
|
General Recommendation:
Generally vote case-by-case on management related buyout
amendments. |
|
|
|
4.
COMPENSATION |
|
|
|
Annual Bonuses
for Directors/Statutory Auditors |
|
|
|
General Recommendation:
Vote for approval of annual bonuses, unless recipients include
those who are judged to be responsible for clear mismanagement or shareholder-unfriendly behavior. |
|
|
|
Retirement Bonuses |
|
General
Recommendation: Generally
vote for approval of retirement bonuses, unless: |
|
› |
Recipients include outsiders10;
or |
|
› |
Neither the individual payments nor the aggregate amount of the payments is disclosed; or |
|
› |
Recipients include those who are judged to be responsible for clear mismanagement or shareholder-unfriendly behavior. |
|
Special Payments
in Connection with Abolition of Retirement Bonus System |
|
|
|
General Recommendation:
Generally vote for approval of special payments in connection
with abolition of retirement bonus system, unless: |
|
› |
Recipients include outsiders11; or |
|
› |
Neither the individual payments nor the aggregate amount of the payments is disclosed; or |
|
› |
Recipients include those who are judged to be responsible for clear mismanagement or shareholder-unfriendly behavior. |
Stock
Option Plans/Deep-Discounted Stock Option Plans
Stock Option Plans
|  | General
Recommendation: Generally vote for approval of stock option plans, unless: |
|
› |
Total dilution from proposed plan(s) and previous option plans exceeds 5 percent for mature companies, or 10 percent for growth companies; or; |
10 However, in rare occasions, ISS may support
payment to outsiders on a case-by-case basis, if the individual amount is disclosed and not excessive.
11 Id.
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
10 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
|
› |
Recipients include individuals who are not in a position to affect the company’s stock price, including employees of business partners or unspecified “collaborators;” or |
|
› |
The maximum number of options that can be issued per year is not disclosed. |
Deep-Discounted Stock Option Plans
 |
General Recommendation:
Generally vote for approval of deep-discounted stock option plans, unless: |
|
› |
Total dilution from proposed plan(s) and previous option plans exceeds 5 percent for mature companies, or 10 percent for growth companies; or |
|
› |
Recipients include individuals who are not in a position to affect the company’s stock price, including employees of business partners or unspecified “collaborators;” or |
|
› |
The maximum number of options that can be issued per year is not disclosed; or |
|
› |
No specific performance hurdles are specified (However, if the vesting period before exercise lasts for at least three years, this policy may not apply). |
Director
Compensation Ceiling
 |
General
Recommendation: Generally
vote for proposals seeking to increase director fees, if: |
|
› |
The specific reason(s) for the increase are explained; or |
|
› |
The company is introducing or increasing a ceiling for performance-based compensation. |
Vote case-by-case on proposals seeking
to increase director fees, taking into account the company’s stock price performance and capital efficiency if:
|
› |
The proposals are intended to increase fixed cash compensation or do not specify whether it is fixed or performance-based compensation which will be increased. |
Generally vote against proposals seeking
to increase director fees if there are serious concerns about corporate malfeasance.
Statutory Auditor
Compensation Ceiling
 | General
Recommendation:
Generally vote for
proposals seeking to increase statutory auditor compensation ceiling, unless statutory
auditors are judged to be responsible for clear mismanagement or shareholder-unfriendly
behavior. |
5.
SHARE REPURCHASE PLANS
 |
General Recommendation:
Vote for the share repurchase plans, unless: |
|
› |
The proposed repurchase plan exceeds 10 percent of issued share capital without explanation; or |
|
› |
There are serious concerns about a possible adverse impact on shareholder value. |
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
11 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
6. TAKEOVER
DEFENSE PLANS (POISON PILLS)
 |
General Recommendation:
Generally vote for the approval of takeover defense plans
(poison pills), unless: |
|
(Necessary conditions) |
|
› |
The board does not include at least 20 percent
(but no fewer than two) independent directors after the shareholder meeting;
or |
|
› |
These independent directors fail to meet
ISS guidelines on board meeting attendance; or |
|
› |
The directors are not subject to annual election; or |
|
› |
One or more members of the bid evaluation committee cannot be regarded as independent based on ISS criteria for independence; or |
|
› |
The trigger threshold is set at less than 20 percent of shares outstanding; or |
|
› |
The duration of the poison pill exceeds three years; or |
|
› |
There are other protective or entrenchment tools that can serve as takeover defenses, including blocking stakes held by management-friendly shareholders, or setting the maximum board size to the actual board size to eliminate vacant seats, or tightening of procedures for removing a director from office; or |
|
› |
The company fails to release its proxy circular at least three weeks prior to the meeting, to give shareholders sufficient time to study the details of the proposal and question management about them. |
|
|
|
|
(Second stage of analysis) |
|
|
|
|
› |
The company has not disclosed what specific steps it is taking to address the vulnerability to a takeover by enhancing shareholder value. |
7. MERGERS
& ACQUISITIONS, THIRD-PARTY SHARE ISSUANCES (PRIVATE PLACEMENTS)
For every M&A and Third-Party Placement analysis,
ISS reviews publicly available information as of the date of the report and evaluates the merits and drawbacks of the proposed
transaction, balancing various and sometimes countervailing factors including:
 |
General Recommendation: Generally
vote case-by-case on mergers, acquisitions, and third-party placements, taking into account the following: |
|
› |
Valuation — Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? |
|
› |
Market reaction — How has the market responded to the proposed deal? A negative market reaction will cause ISS to scrutinize a deal more closely. |
|
› |
Strategic rationale — Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions. |
|
› |
Conflicts of interest — Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? ISS will consider whether any special interests may have influenced these directors and officers to support or recommend the merger. |
|
› |
Governance — Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance. |
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
12 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
8. SHAREHOLDER
PROPOSALS
 |
General Recommendation:
Vote all shareholder proposals on a case-by-case basis. |
Generally vote for proposals that would improve the
company’s corporate governance or business profile at a reasonable cost.
Generally vote against proposals that limit the company’s
business activities or capabilities or result in significant costs being incurred with little or no benefit.
9. SOCIAL/ENVIRONMENTAL
ISSUES
Global Approach
Issues covered under the policy include a wide range
of topics, including consumer and product safety, environment and energy, labor covered standards and human rights, workplace and
board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding
all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short term or long
term.
 |
General Recommendation:
Generally vote case-by-case, taking into consideration whether implementation of the proposal is likely to enhance or
protect shareholder value, and in addition the following will be considered: |
|
› |
If the issues presented in the proposal are more appropriately or effectively dealt with through legislation or government regulation; |
|
› |
If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal; |
|
› |
Whether the proposal’s request is unduly burdensome (scope, timeframe, or cost) or overly prescriptive; |
|
› |
The company’s approach compared with any industry standard practices for addressing the issue(s) raised by the proposal; |
|
› |
If the proposal requests increased disclosure or greater transparency, whether or not reasonable and sufficient information is currently available to shareholders from the company or from other publicly available sources; and |
|
› |
If the proposal requests increased disclosure or greater transparency, whether or not implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage. |
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
13 of 14 |
 |
2015
Japan Proxy Voting Guidelines |
This document and all of the information
contained in it, including without limitation all text, data, graphs, and charts (collectively, the “Information”) is
the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.
The Information has not been submitted
to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the
Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any security,
financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express
any opinion regarding any issuer, securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use
it may make or permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES
OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION,
ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A
PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and
to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct,
indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of
such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.

The
Global Leader In Corporate Governance
www.issgovernance.com
|
|
Enabling the financial community to manage governance
risk for the benefit of shareholders. |
|
© 2015 ISS │ Institutional Shareholder Services |
14 of 14 |