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Spain
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Sweden
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Switzerland
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Taiwan
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Thailand
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United Kingdom
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United States
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May 1
December 24
December 25
December 31
January 1
April 2
April 5
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May 1
May 21
June 19
December 24
December 25
December 31
January 1
April 2
April 5
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May 1
May 21
June 1
December 24
December 25
December 31
January 1
April 2
April 5
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May 1
June 25
October 1
October 9
October 10
January 1
February 11
February 12
February 15
February 16
April 5
|
May 1
May 4
May 6
June 3
July 6
July 28
August 12
October 13
October 23
December 7
December 10
December 31
January 1
April 6
April 13
April 14
April 15
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May 8
May 25
August 31
December 24
December 25
December 31
January 1
April 2
April 5
|
May 25
July 3
September 7
November 26
December 25
January 1
January 18
February 15
April 2
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Federal Tax Matters
This section
summarizes some of the main U.S. federal income tax consequences of owning shares of the Fund. This section is current as of the date of the SAI. Tax laws and interpretations change frequently, and these summaries do
not describe all of the tax consequences to all taxpayers. For example, these summaries generally do not describe your situation if you are a corporation, a non-U.S. person, a broker-dealer or other investor with
special circumstances. In addition, this section does not describe your state, local or foreign tax consequences.
This federal
income tax summary is based in part on the advice of counsel to the Fund. The Internal Revenue Service could disagree with any conclusions set forth in this section. In addition, our counsel was not asked to review,
and has not reached a conclusion with respect to, the federal income tax treatment of the assets to be deposited in the Fund. This may not be sufficient for prospective investors to use for the purpose of avoiding
penalties under federal tax law.
As with any
investment, prospective investors should seek advice based on their individual circumstances from their own tax advisor.
The Fund intends
to qualify annually and to elect to be treated as a regulated investment company under the Internal Revenue Code of 1986, as amended (the “Code”).
To qualify for
the favorable U.S. federal income tax treatment generally accorded to regulated investment companies, the Fund must, among other things, (i) derive in each taxable year at least 90% of its gross income from dividends,
interest, payments with respect to securities loans and gains from the sale or other disposition of stock, securities or foreign currencies or other income derived with respect to its business of investing in such
stock, securities or currencies, or net income derived from interests in certain publicly traded partnerships; (ii) diversify its holdings so that, at the end of each quarter of the taxable year, (a) at least 50% of
the market value of the Fund's assets is represented by cash and cash items (including receivables), U.S. government securities, the securities of other regulated investment companies and other securities, with such
other securities of any one issuer generally limited for the purposes of this calculation to an amount not greater than 5% of the value of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or the securities of other regulated investment companies) of
any one issuer, or two or more issuers which the Fund controls which are engaged in the same, similar or related trades or businesses, or the securities of one or more of certain publicly traded partnerships; and
(iii) distribute at least 90% of its investment company taxable income (which includes, among other items, dividends, interest and net short-term capital gains in excess of net long-term capital losses) and at least
90% of its net tax-exempt interest income each taxable year. There are certain exceptions for failure to qualify if the failure is for reasonable cause or is de minimis, and certain corrective action is taken and certain tax payments are made by the Fund.
As a regulated
investment company, the Fund generally will not be subject to U.S. federal income tax on its investment company taxable income (as that term is defined in the Code, but without regard to the deduction for dividends
paid) and
net capital gain (the excess of net long-term
capital gain over net short-term capital loss), if any, that it distributes to shareholders. The Fund intends to distribute to its shareholders, at least annually, substantially all of its investment company taxable
income and net capital gain. If the Fund retains any net capital gain or investment company taxable income, it will generally be subject to federal income tax at regular corporate rates on the amount retained. In
addition, amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax unless, generally, the Fund distributes during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) at least 98.2% of its capital gains in excess of its capital
losses (adjusted for certain ordinary losses) for the one-year period ending October 31 of the calendar year, and (3) any ordinary income and capital gains for previous years that were not distributed during those
years. In order to prevent application of the excise tax, the Fund intends to make its distributions in accordance with the calendar year distribution requirement. A distribution will be treated as paid on December 31
of the current calendar year if it is declared by the Fund in October, November or December with a record date in such a month and paid by the Fund during January of the following calendar year. Such distributions
will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received.
Subject to
certain reasonable cause and de minimis exceptions, if the Fund fails to qualify as a regulated investment company or fails to satisfy the 90% distribution requirement in any taxable year, the Fund would be taxed
as an ordinary corporation on its taxable income (even if such income were distributed to its shareholders) and all distributions out of earnings and profits would be taxed to shareholders as ordinary income.
Distributions
Dividends paid out of the Fund's investment company taxable income are generally taxable to a shareholder as ordinary income to the extent of the Fund’s earnings and profits, whether paid in cash or reinvested
in additional shares. However, certain ordinary income distributions received from the Fund may be taxed at capital gains tax rates. In particular, ordinary income dividends received by an individual shareholder from
a regulated investment company such as the Fund are generally taxed at the same rates that apply to net capital gain, provided that certain holding period requirements are satisfied and provided the dividends are
attributable to qualifying dividends received by the Fund itself. Dividends received by the Fund from foreign corporations are qualifying dividends eligible for this lower tax rate only in certain circumstances. The
Fund will provide notice to its shareholders of the amount of any distributions that may be taken into account as a dividend which is eligible for the capital gains tax rates. The Fund cannot make any guarantees as to
the amount of any distribution which will be regarded as a qualifying dividend.
Income from
the Fund may also be subject to a 3.8% “Medicare tax.” This tax generally applies to net investment income if the taxpayer’s adjusted gross income exceeds certain threshold amounts, which are
$250,000 in the case of married couples filing joint returns and $200,000 in the case of single individuals.
A corporation
that owns shares generally will not be entitled to the dividends received deduction with respect to many dividends received from the Fund because the dividends received deduction is generally not available for
distributions from regulated investment companies. However, certain ordinary income dividends on shares that are attributable to qualifying dividends received by the Fund from certain domestic corporations may be
reported by the Fund as being eligible for the dividends received deduction.
Distributions
of net capital gain (the excess of net long-term capital gain over net short-term capital loss), if any, properly reported as capital gain dividends are taxable to a shareholder as long-term capital gains, regardless
of how long the shareholder has held Fund shares. Shareholders receiving distributions in the form of additional shares, rather than cash, generally will have a tax basis in each such share equal to the value of a
share of the Fund on the reinvestment date. A distribution of an amount in excess of the Fund's current and accumulated earnings and profits will be treated by a shareholder as a return of capital which is applied
against and reduces the shareholder’s basis in his or her shares. To the extent that the amount of any such distribution exceeds the shareholder’s basis in his or her shares, the excess will be treated by
the shareholder as gain from a sale or exchange of the shares.
Shareholders will be notified annually as to the U.S. federal income tax status of distributions and shareholders receiving distributions in the form of additional shares will receive a report as to the value of
those shares.
Sale or Exchange of Fund Shares
Upon the sale or other disposition of shares of the Fund, which a shareholder holds as a capital asset, such a shareholder may realize a capital gain or loss which will be long-term or short-term, depending upon the
shareholder’s holding period for the shares. Generally, a shareholder’s gain or loss will be a long-term gain or loss if the shares have been held for more than one year.
Any loss
realized on a sale or exchange will be disallowed to the extent that shares disposed of are replaced (including through reinvestment of dividends) within a period of 61 days beginning 30 days before and ending 30 days
after disposition of shares or to the extent that the shareholder, during such period, acquires or enters into an option or contract to acquire, substantially identical stock or securities. In such a case, the basis
of the shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on a disposition of Fund shares held by the shareholder for six months or less will be treated as a long-term
capital loss to the extent of any distributions of long-term capital gain received by the shareholder with respect to such shares.
Taxes on Purchase and Redemption of
Creation Units
If a
shareholder exchanges securities for Creation Units, the shareholder will generally recognize a gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the
time and the shareholder’s aggregate basis in the securities surrendered and the Cash Component paid. If a shareholder exchanges Creation Units for securities, then the shareholder will generally recognize a
gain or loss equal to the difference between the shareholder’s basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The Internal Revenue Service,
however, may assert that a loss realized upon an exchange of securities for Creation Units or Creation Units for securities cannot be deducted currently under the rules governing “wash sales,” or on the
basis that there has been no significant change in economic position.
Nature of Fund Investments
Certain of the
Fund's investment practices are subject to special and complex federal income tax provisions that may, among other things, (i) disallow, suspend or otherwise limit the allowance of certain losses or deductions; (ii)
convert lower taxed long-term capital gain into higher taxed short-term capital gain or ordinary income; (iii) convert an ordinary loss or a deduction into a capital loss (the deductibility of which is more limited);
(iv) cause the Fund to recognize income or gain without a corresponding receipt of cash; (v) adversely affect the time as to when a purchase or sale of stock or securities is deemed to occur; and (vi) adversely alter
the characterization of certain complex financial transactions.
Futures Contracts
The Subsidiary’s transactions in futures contracts will be subject to special provisions of the Code that, among other things, may affect the character of gains and losses realized by the Subsidiary (i.e., may affect whether gains or losses are ordinary or capital, or short-term or long-term), may accelerate recognition of income to the Subsidiary and may defer Subsidiary losses.
Because the Subsidiary is a controlled foreign corporation for U.S. federal income tax purposes, this treatment of the Subsidiary’s income will affect the income the Fund must recognize. These rules could,
therefore, affect the character, amount and timing of distributions to shareholders. These provisions also (a) will require the Subsidiary to mark-to-market certain types of the positions in its portfolio (i.e., treat them as if they were closed out), and (b) may cause the Subsidiary and the Fund to recognize income without the Fund receiving cash with which to make distributions in
amounts necessary to satisfy the 90% distribution requirement for qualifying to be taxed as a regulated investment company and the distribution requirements for avoiding excise taxes.
Investments in Certain Foreign
Corporations
If the Fund
holds an equity interest in any “passive foreign investment companies” (“PFICs”), which are generally certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends,
certain rents and royalties or capital gains) or that hold at least 50% of their assets in investments producing such passive income, the Fund could be subject to U.S. federal income tax and additional interest
charges on gains and certain distributions with respect to those equity interests, even if all the income or gain is timely distributed to its shareholders. The Fund will not be able to pass through to its
shareholders any credit or deduction for such taxes. The Fund may be able to make an election that could ameliorate these adverse tax consequences. In this case, the Fund would recognize as ordinary income any
increase in the value of such PFIC shares, and as ordinary loss any decrease in such value to the extent it did not exceed prior increases
included in income. Under this election, the
Fund might be required to recognize in a year income in excess of its distributions from PFICs and its proceeds from dispositions of PFIC stock during that year, and such income would nevertheless be subject to the
distribution requirement and would be taken into account for purposes of the 4% excise tax (described above). Dividends paid by PFICs are not treated as qualified dividend income.
Backup Withholding
The Fund may
be required to withhold U.S. federal income tax from all taxable distributions and sale proceeds payable to shareholders who fail to provide the Fund with their correct taxpayer identification number or fail to make
required certifications, or who have been notified by the Internal Revenue Service that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code generally are
exempt from such backup withholding. This withholding is not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability.
Non-U.S. Shareholders
U.S. taxation
of a shareholder who, as to the United States, is a nonresident alien individual, a foreign trust or estate, a foreign corporation or foreign partnership (“non-U.S. shareholder”) depends on whether the income of the Fund is “effectively connected” with a U.S. trade or business carried on by the shareholder.
In addition to
the rules described in this section concerning the potential imposition of withholding on distributions to non-U.S. persons, distributions to non-U.S. persons that are “financial institutions” may be
subject to a withholding tax of 30% unless an agreement is in place between the financial institution and the U.S. Treasury to collect and disclose information about accounts, equity investments or debt interests in
the financial institution held by one or more U.S. persons or the institution is resident in a jurisdiction that has entered into such an agreement with the U.S. Treasury. For these purposes, a “financial
institution” means any entity that (i) accepts deposits in the ordinary course of a banking or similar business; (ii) holds financial assets for the account of others as a substantial portion of its business; or
(iii) is engaged (or holds itself out as being engaged) primarily in the business of investing, reinvesting or trading in securities, partnership interests, commodities or any interest (including a futures contract or
option) in such securities, partnership interests or commodities. This withholding tax is also scheduled to apply to the gross proceeds from the disposition of securities that produce U.S. source interest or dividends after December 31, 2018. However, proposed regulations may eliminate the requirement to withhold on payments of gross proceeds from dispositions.
Distributions
to non-financial non-U.S. entities (other than publicly traded foreign entities, entities owned by residents of U.S. possessions, foreign governments, international organizations or foreign central banks) will also be
subject to a withholding tax of 30% if the entity does not certify that the entity does not have any substantial U.S. owners or provide the name, address and TIN of each substantial U.S. owner. This withholding tax is
also scheduled to apply to the gross proceeds from the disposition of securities that produce U.S. source interest or dividends after December 31, 2018. However, proposed regulations may eliminate the requirement to
withhold on payments of gross proceeds from dispositions.
Income Not
Effectively Connected. If the income from the Fund is not “effectively connected” with a U.S. trade or business carried on by the non-U.S. shareholder, distributions of investment company taxable
income will generally be subject to a U.S. tax of 30% (or lower treaty rate), which tax is generally withheld from such distributions.
Distributions
of capital gain dividends and any amounts retained by the Fund which are properly reported by the Fund as undistributed capital gains will not be subject to U.S. tax at the rate of 30% (or lower treaty rate) unless
the non-U.S. shareholder is a nonresident alien individual and is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements. However, this 30% tax on
capital gains of nonresident alien individuals who are physically present in the United States for more than the 182 day period only applies in exceptional cases because any individual present in the United States for
more than 182 days during the taxable year is generally treated as a resident for U.S. income tax purposes; in that case, he or she would be subject to U.S. income tax on his or her worldwide income at the graduated
rates applicable to U.S. citizens, rather than the 30% U.S. tax. In the case of a non-U.S. shareholder who is a nonresident alien individual, the Fund may be required to withhold U.S. income tax from distributions of
net capital gain unless the non-U.S. shareholder certifies his or her non-U.S. status under penalties of perjury or otherwise establishes an exemption. If a non-U.S. shareholder is a nonresident alien individual, any
gain such shareholder realizes upon the sale or exchange of such shareholder’s shares of the Fund in the United States will ordinarily be exempt from U.S. tax unless the gain is U.S. source income and such
shareholder is physically present in the United States for more than 182 days during the taxable year and meets certain other requirements.
Distributions
from the Fund that are properly reported by the Fund as an interest-related dividend attributable to certain interest income received by the Fund or as a short-term capital gain dividend attributable to certain net
short-term capital gain income received by the Fund may not be subject to U.S. federal income taxes, including withholding taxes when received by certain non-U.S. investors, provided that the Fund makes certain
elections and certain other conditions are met.
In addition,
capital gain distributions attributable to gains from U.S. real property interests (including certain U.S. real property holding corporations) will generally be subject to United States withholding tax and will give
rise to an obligation on the part of the foreign shareholder to file a United States tax return.
Income
Effectively Connected. If the income from the Fund is “effectively connected” with a U.S. trade or business carried on by a non-U.S. shareholder, then distributions of investment company taxable
income and capital gain dividends, any amounts retained by the Fund which are properly reported by the Fund as undistributed capital gains and any gains realized upon the sale or exchange of shares of the Fund will be
subject to U.S. income tax at the graduated rates applicable to U.S. citizens, residents and domestic corporations. Non-U.S. corporate shareholders may also be subject to the branch profits tax imposed by the Code.
The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may differ from those described herein. Non-U.S. shareholders are advised to consult their own tax advisors
with respect to the particular tax consequences to them of an investment in the Fund.
Capital Loss Carry-forward
Under the Regulated Investment Company Modernization Act of 2010, net capital losses of the Fund incurred in taxable years beginning after December 22, 2010 may be carried forward indefinitely, and their character
is retained as short-term and/or long-term losses. To the extent that these loss carry-forwards are used to offset future capital gains, it is probable that the capital gains so offset will not be distributed to Fund
shareholders. The Fund intends to utilize provisions of the federal income tax laws, which allow the Fund to carry a realized capital loss forward indefinitely following the year of the loss and offset such loss
against any future realized capital gains. As of December 31, 2019, the Fund had no non-expiring capital loss carryforwards for federal income tax purposes. The Fund is subject to certain limitations, under U.S. tax
rules, on the use of capital loss carry-forwards and net unrealized built-in losses. These limitations generally apply when there has been a 50% change in ownership.
Other Taxation
Fund shareholders
may be subject to state, local and foreign taxes on their Fund distributions. Shareholders are advised to consult their own tax advisors with respect to the particular tax consequences to them of an investment in the
Fund.
Determination of Net Asset
Value
The following
information supplements and should be read in conjunction with the section in the Prospectus entitled “Net Asset Value.”
The per-share
net asset value of the Fund is determined by dividing the total value of the securities and other assets, less liabilities, by the total number of shares outstanding. Under normal circumstances, daily calculation of
the net asset value will utilize the last closing sale price of each security held by the Fund at the close of the market on which such security is principally listed. In determining net asset value, portfolio
securities for the Fund for which accurate market quotations are readily available will be valued by the Fund accounting agent as follows:
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(1)
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Common stocks and other equity securities listed on any national or foreign exchange other than Nasdaq and the London Stock Exchange Alternative Investment Market (“AIM”) will be valued at the last sale price on the exchange on which they are principally traded, or the official closing price for Nasdaq and AIM securities. Portfolio
securities traded on more than one securities exchange are valued at the last sale price or official closing price, as applicable, on the Business Day as of which such value is being determined at the close of the
exchange representing the principal market for such securities.
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(2)
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Shares of open-end funds are valued at fair value which is based on NAV per share.
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(3)
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Securities traded in the OTC market are fair valued at the mean of their most recent bid and asked price, if available, and otherwise at their closing bid price.
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(4)
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Exchange-traded options and futures contracts are valued at the closing price in the market where such contracts are principally traded. If no closing price is available, they will be fair valued at the mean of
their most recent bid and asked price, if available, and otherwise at their closing bid price. OTC options and futures contracts are fair valued at the mean of the most recent bid and asked price, if available, and
otherwise at their closing bid price.
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(5)
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Forward foreign currency contracts are fair valued at the current day’s interpolated foreign exchange rate, as calculated using the current day’s spot rate, and the 30,
60, 90 and 180-day forward rates provided by a pricing service or by certain independent dealers in such contracts.
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In addition, the
following types of securities will be fair valued by the Fund accounting agent as follows:
|
(1)
|
Fixed-income securities, convertible securities, interest rate swaps, credit default swaps, total return swaps, currency swaps, currency-linked notes, credit-linked notes and other similar instruments will be fair
valued using a pricing service.
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(2)
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Fixed income and other debt securities having a remaining maturity of 60 days or less when purchased are fair valued at cost adjusted for amortization of premiums and accretion of
discounts (amortized cost), provided the Advisor’s Pricing Committee has determined that the use of amortized cost is an appropriate reflection of fair value given market and issuer-specific conditions existing
at the time of the determination. Factors that may be considered in determining the appropriateness of the use of amortized cost include, but are not limited to, the following:
|
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(i)
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the credit conditions in the relevant market and changes thereto;
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(ii)
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the liquidity conditions in the relevant market and changes thereto;
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(iii)
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the interest rate conditions in the relevant market and changes thereto (such as significant changes in interest rates);
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(iv)
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issuer-specific conditions (such as significant credit deterioration); and
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(v)
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any other market-based data the Advisor’s Pricing Committee considers relevant. In this regard, the Advisor’s Pricing Committee may use last-obtained market-based data to
assist it when valuing portfolio securities using amortized cost.
|
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(3)
|
Repurchase agreements will be valued as follows. Overnight repurchase agreements will be fair valued at amortized cost when it represents the best estimate of fair value. Term repurchase agreements (i.e., those
whose maturity exceeds seven days) will be fair valued by the Advisor’s Pricing Committee at the average of the bid quotations obtained daily from at least two recognized dealers.
|
If the
Advisor’s Pricing Committee has reason to question the accuracy or reliability of a price supplied or the use of the amortized cost methodology, the Advisor’s Pricing Committee shall determine if “it
needs to fair value” such portfolio security pursuant to established valuation procedures. From time to time, the Advisor’s Pricing Committee will request that the Fund accounting agent submit price
challenges to a pricing service, usually in response to any updated broker prices received.
Certain
securities may not be able to be priced by pre-established pricing methods. Such securities may be valued by the Board of Trustees or its delegate, the Advisor’s Pricing Committee, at fair value. These
securities generally include but are not limited to, restricted securities (securities that may not be publicly sold without registration under the 1933 Act) for which a pricing service is unable to provide a market
price; securities whose trading has been formally suspended; a security whose market or fair value price is not available from a pre-established pricing source; a security with respect to which an event has occurred
that is likely to materially affect the value of the security after the market has closed but before the calculation of Fund net asset value (as may be the case in foreign markets on which the security is primarily
traded) or is likely to make it difficult or impossible to obtain a reliable market quotation; and a security whose price, as provided by the pricing service, does not reflect the security’s fair value. Fair
value prices represent any prices not considered market value prices and are either obtained from a pricing service or are determined by the Advisor’s Pricing Committee. Market value prices represent last sale
or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from pricing services. If no market price or official close price is available from either a pricing
service or no quotations are available from one or more brokers or if the Advisor’s Pricing Committee has reason to question the reliability or accuracy of a price supplied or the use of amortized cost, the
value of any portfolio security held by the Fund for which reliable market prices/quotations
are not readily available will be determined by
the Advisor’s Pricing Committee in a manner that most appropriately reflects fair market value of the security on the valuation date, based on a consideration of all available information. When fair value prices
are used, generally they will differ from market quotations or official closing prices on the applicable exchange.
Because
foreign markets may be open on different days than the days during which a shareholder may purchase the shares of the Fund, the value of the Fund’s investments may change on the days when shareholders are not
able to purchase the shares of the Fund. For foreign securities, if an extraordinary market event occurs between the time the last “current” market quotation is available for a security in the Fund’s
portfolio and the time the Fund’s net asset value is determined and calls into doubt whether that earlier market quotation represents fair value at the time the Fund’s net asset value is determined, the
Fund accounting agent will immediately notify the Advisor’s Pricing Committee and the Advisor’s Pricing Committee shall determine the fair valuation. For foreign securities, the Advisor’s Pricing
Committee may seek to determine the “fair value” of such securities by retaining a pricing service to determine the value of the securities.
Foreign
securities, currencies and other assets denominated in foreign currencies are translated into U.S. dollars at the exchange rate of such currencies against the U.S. dollar as provided by a pricing service. All assets
denominated in foreign currencies will be converted into U.S. dollars at the exchange rates in effect at the time of valuation.
Dividends and
Distributions
The following
information supplements and should be read in conjunction with the section in the Prospectus entitled “Dividends, Distributions and Taxes.”
General
Policies. Dividends from net investment income of the Fund, if any, are declared and paid quarterly. Distributions of net realized securities gains, if any, generally are declared and paid once a
year, but the Trust may make distributions on a more frequent basis. The Trust reserves the right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve
the status of the Fund as a regulated investment company or to avoid imposition of income or excise taxes on undistributed income.
Dividends and
other distributions of Fund 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 Fund.
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 for
reinvestment of their dividend distributions. Beneficial Owners should contact their brokers in order 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. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional
whole shares of the Fund purchased in the secondary market.
Miscellaneous Information
Counsel.
Chapman and Cutler LLP, 111 West Monroe Street, Chicago, Illinois 60603, is counsel to the Trust.
Independent
Registered Public Accounting Firm. Deloitte & Touche LLP, 111 South Wacker Drive, Chicago, Illinois 60606, serves as the Fund's independent registered public accounting firm. The firm audits the Fund's financial
statements and performs other related audit services.
Financial Statements
The audited financial statements and notes thereto for the Fund, contained in the Annual Report to Shareholders dated December 31, 2019, are incorporated by reference into this Statement of Additional Information
and have been audited by Deloitte & Touche LLP, independent registered public accounting firm, whose report also appears in the Annual Report and is also incorporated by reference herein. No other parts of the
Annual Report are incorporated by reference herein. The Annual Report is available without charge by calling (800) 621-1675 or by visiting the SEC's website at www.sec.gov.
Exhibit A—Principal Holders Table
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NAME OF BENEFICIAL OWNER
|
% OF
OUTSTANDING
SHARES OWNED
|
|
FIRST TRUST MANAGED FUTURES STRATEGY FUND
|
|
BOFA Securities, Inc.
|
24.46%
|
|
National Bank Financial Inc./CDS
|
21.60%
|
|
TD Ameritrade Clearing, Inc.
|
12.75%
|
|
Charles Schwab & Co., Inc.
|
9.78%
|
|
National Financial Services LLC
|
9.25%
|
|
Pershing LLC
|
7.58%
|
|
LPL Financial Corporation
|
5.38%
|
BOFA Securities, Inc.: 4804 Deer
Lake Dr E, Jacksonville, Florida 32246
Charles Schwab & Co., Inc.: 2423 E Lincoln
Drive, Phoenix, Arizona 85016
LPL Financial Corporation: 1055 LPL Way, Fort Mill,
South Carolina 29715
National Bank Financial Inc./CDS: 130 King Street
West, Suite 300, Toronto, Ontario M5X 1JP
National Financial Services LLC: 499 Washington
Boulevard, Jersey City, New Jersey 07310
Pershing LLC: One Pershing Plaza, Jersey City, New
Jersey 07399
TD Ameritrade Clearing, Inc.: 200 S. 108th Ave.,
Omaha, Nebraska 68154
Exhibit B—Proxy Voting Guidelines
UNITED STATES
Concise Proxy Voting Guidelines
Benchmark Policy
Recommendations
Effective for
Meetings on or after February 1, 2020
Published December 11, 2019
ISSGOVERNANCE.COM
© 2019 | Institutional Shareholder Services
and/or its affiliates
U.S. Concise Proxy Voting Guidelines
The policies contained herein are
a sampling only of selected key ISS U.S. proxy voting guidelines,
and are not intended to be exhaustive. The complete guidelines can be found at:
https://www.issgovernance.com/policy-gateway/voting-policies/
BOARD OF DIRECTORS
Voting on Director Nominees in
Uncontested Elections
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General Recommendation: Generally vote for director nominees, except under the following circumstances (with new nominees1 considered on case-by-case basis):
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Independence
Vote against2 or withhold from non-independent directors (Executive Directors and Non-Independent Non-Executive Directors per ISS’
Classification of Directors) when:
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Independent directors comprise 50 percent or less of the board;
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The non-independent director serves on the audit, compensation, or nominating committee;
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The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or
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The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee.
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Composition
Attendance at Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they
served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
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Medical issues/illness;
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Family emergencies; and
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Missing only one meeting (when the total of all meetings is three or fewer).
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In cases of
chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote against or withhold from appropriate members of the nominating/governance
committees or the full board.
If the proxy
disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold
from the director(s) in question.
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1
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A "new nominee" is a director who is being presented for election by shareholders for the first time. Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending
on the timing of their appointment and the problematic governance issue in question.
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2
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In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use
“Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
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3
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Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.
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U.S. Concise Proxy Voting Guidelines
Overboarded
Directors: Generally vote against or withhold from individual directors who:
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Sit on more than five public company boards; or
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Are CEOs of public companies who sit on the boards of more than two public companies besides their own— withhold only at their outside boards4.
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Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at
companies when there are no women on the company's board. Mitigating factors include:
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Until Feb. 1, 2021, a firm commitment, as stated in the proxy statement, to appoint at least one woman to the board within a year;
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The presence of a woman on the board at the preceding annual meeting and a firm commitment to appoint at least one woman to the board within a year; or
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Other relevant factors as applicable.
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Responsiveness
Vote
case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
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The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw
provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are:
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Disclosed outreach efforts by the board to shareholders in the wake of the vote;
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Rationale provided in the proxy statement for the level of implementation;
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The subject matter of the proposal;
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The level of support for and opposition to the resolution in past meetings;
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Actions taken by the board in response to the majority vote and its engagement with shareholders;
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The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals); and
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Other factors as appropriate.
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The board failed to act on takeover offers where the majority of shares are tendered;
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At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote.
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Vote case-by-case
on Compensation Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
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The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be considered are:
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The company's response, including:
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Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated);
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Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
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Disclosure of specific and meaningful actions taken to address shareholders' concerns;
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Other recent compensation actions taken by the company;
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Whether the issues raised are recurring or isolated;
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4
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Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the
controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.
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U.S. Concise Proxy Voting Guidelines
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The company's ownership structure; and
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Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
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The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received the plurality of votes cast.
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Accountability
Problematic
Takeover Defenses/Governance Structure
Poison Pills: Vote against or withhold from all nominees (except new nominees1, who should be considered case-by-case) if:
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The company has a poison pill that was not approved by shareholders5. However, vote case-by-case on nominees if the board adopts an initial pill with a term of one year or less, depending on
the disclosed rationale for the adoption, and other factors as relevant (such as a commitment to put any renewal to a shareholder vote).
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The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or lowering the trigger, without shareholder approval.
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Classified Board
Structure: The board is classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is
not up for election. All appropriate nominees (except new) may be held accountable.
Removal of
Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified board structure.
Director
Performance Evaluation: The board lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and
five-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other
factors as warranted. Problematic provisions include but are not limited to:
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A
classified board structure;
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A
supermajority vote requirement;
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Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;
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The inability of shareholders to call special meetings;
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The inability of shareholders to act by written consent;
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A
multi-class capital structure; and/or
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A
non-shareholder-approved poison pill.
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Unilateral Bylaw/Charter Amendments and Problematic Capital Structures: Generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if the board amends the
company's bylaws or charter without shareholder approval1 in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders, considering the
following factors:
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The board's rationale for adopting the bylaw/charter amendment without shareholder ratification;
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Disclosure by the company of any significant engagement with shareholders regarding the amendment;
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The level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter;
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The board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
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The company's ownership structure;
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5
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Public shareholders only, approval prior to a company’s becoming public is insufficient.
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U.S. Concise Proxy Voting Guidelines
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The company's existing governance provisions;
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The timing of the board's amendment to the bylaws/charter in connection with a significant business development; and,
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Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
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Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees. Generally vote against (except new nominees1, who should be considered case-by-case) if the directors:
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Classified the board;
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Adopted supermajority vote requirements to amend the bylaws or charter; or
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Eliminated shareholders' ability to amend bylaws.
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Problematic Capital Structure – Newly Public Companies: For newly public companies6 , generally vote against or withhold from the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the company or its
board implemented a multi-class capital structure in which the classes have unequal voting rights without subjecting the multi-class capital structure to a reasonable time-based sunset. In assessing the reasonableness
of a time-based sunset provision, consideration will be given to the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the sunset period selected. No sunset
period of more than seven years from the date of the IPO will be considered to be reasonable.
Continue to vote
against or withhold from incumbent directors in subsequent years, unless the problematic capital structure is reversed or removed.
Problematic
Governance Structure – Newly Public Companies: For newly public companies6, generally vote against or withhold from directors individually, committee members, or the entire board (except new
nominees1, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the company or its
board adopted the following bylaw or charter provisions that are considered to be materially adverse to shareholder rights:
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Supermajority vote requirements to amend the bylaws or charter;
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A
classified board structure; or
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Other egregious provisions.
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A reasonable
sunset provision will be considered a mitigating factor.
Unless the
adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.
Management
Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions
considering the following factors:
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The presence of a shareholder proposal addressing the same issue on the same ballot;
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The board's rationale for seeking ratification;
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Disclosure of actions to be taken by the board should the ratification proposal fail;
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Disclosure of shareholder engagement regarding the board’s ratification request;
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The level of impairment to shareholders' rights caused by the existing provision;
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The history of management and shareholder proposals on the provision at the company’s past meetings;
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Whether the current provision was adopted in response to the shareholder proposal;
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The company's ownership structure; and
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Previous use of ratification proposals to exclude shareholder proposals.
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6 Newly-public companies generally include companies that emerge from bankruptcy, spin-offs, direct listings, and those who complete a traditional initial public offering.
U.S. Concise Proxy Voting Guidelines
Restrictions on
Shareholders’ Rights
Restricting Binding
Shareholder Proposals: Generally vote against or withhold from the members of the governance committee if:
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The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such restrictions include but are not limited to: outright prohibition on the submission of
binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis.
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Submission of
management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders' rights.
Generally continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for
shareholder approval.
Problematic
Audit-Related Practices
Generally vote
against or withhold from the members of the Audit Committee if:
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The non-audit fees paid to the auditor are excessive;
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The company receives an adverse opinion on the company’s financial statements from its auditor; or
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There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal
recourse against the audit firm.
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Vote
case-by-case on members of the Audit Committee and potentially the full board if:
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Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth,
chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted.
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Problematic
Compensation Practices
In the absence of
an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:
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There is an unmitigated misalignment between CEO pay and company performance (pay for performance);
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The company maintains significant problematic pay practices; or
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The board exhibits a significant level of poor communication and responsiveness to shareholders.
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Generally vote
against or withhold from the Compensation Committee chair, other committee members, or potentially the full board if:
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The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared frequency of say on pay; or
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The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.
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Generally vote
against members of the board committee responsible for approving/setting non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation
without disclosing a compelling rationale or other mitigating factors.
Problematic
Pledging of Company Stock:
Vote against the
members of the committee that oversees risks related to pledging, or the full board, where a significant level of pledged company stock by executives or directors raises concerns. The following factors will be
considered:
U.S. Concise Proxy Voting Guidelines
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The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;
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The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume;
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Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
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Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged company stock; and
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Any other relevant factors.
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Governance
Failures
Under
extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
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Material failures of governance, stewardship, risk oversight7, or fiduciary responsibilities at the company;
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Failure to replace management as appropriate; or
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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.
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Voting on Director Nominees in
Contested Elections
Vote-No Campaigns
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General Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting
on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information.
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Proxy Contests/Proxy Access — Voting for Director Nominees in Contested Elections
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General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the following factors:
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Long-term financial performance of the company relative to its industry;
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Management’s track record;
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Background to the contested election;
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Nominee qualifications and any compensatory arrangements;
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Strategic plan of dissident slate and quality of the critique against management;
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Likelihood that the proposed goals and objectives can be achieved (both slates); and
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Stock ownership positions.
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In the case of
candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the
nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).
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7
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Examples of failure of risk oversight include but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlement; or hedging of company
stock.
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U.S. Concise Proxy Voting Guidelines
Independent Board Chair
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General Recommendation: Generally vote for shareholder proposals requiring that the chair position be filled by an independent director, taking into consideration the following:
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The scope and rationale of the proposal;
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The company's current board leadership structure;
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The company's governance structure and practices;
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Company performance; and
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Any other relevant factors that may be applicable.
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The following factors will increase the likelihood of a “for” recommendation:
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A
majority non-independent board and/or the presence of non-independent directors on key board committees;
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A
weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined CEO/chair role;
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The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and chair, and/or departure from a structure with an independent chair;
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Evidence that the board has failed to oversee and address material risks facing the company;
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A
material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the board has materially diminished shareholder rights; or
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Evidence that the board has failed to intervene when management’s interests are contrary to shareholders' interests.
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Proxy Access
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General Recommendation: Generally vote for management and shareholder proposals for proxy access with the following provisions:
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Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
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Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;
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Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group;
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Cap: cap on nominees of generally twenty-five percent (25%) of the board.
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Review for
reasonableness any other restrictions on the right of proxy access.
Generally vote
against proposals that are more restrictive than these guidelines.
Shareholder Rights &
Defenses
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
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General Recommendation: Generally vote against management proposals to ratify provisions of the company’s existing charter or bylaws, unless these governance provisions align with best
practice.
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In addition,
voting against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
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The presence of a shareholder proposal addressing the same issue on the same ballot;
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The board's rationale for seeking ratification;
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Disclosure of actions to be taken by the board should the ratification proposal fail;
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Disclosure of shareholder engagement regarding the board’s ratification request;
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U.S. Concise Proxy Voting Guidelines
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The level of impairment to shareholders' rights caused by the existing provision;
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The history of management and shareholder proposals on the provision at the company’s past meetings;
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Whether the current provision was adopted in response to the shareholder proposal;
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The company's ownership structure; and
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Previous use of ratification proposals to exclude shareholder proposals.
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CAPITAL/RESTRUCTURING
Common Stock Authorization
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General Recommendation: Vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the
same ballot that warrants support.
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Vote against
proposals at companies with more than one class of common stock to increase the number of authorized shares of the class of common stock that has superior voting rights.
Vote against
proposals to increase the number of authorized common shares if a vote for a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced proportionally.
Vote case-by-case
on all other proposals to increase the number of shares of common stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
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Past Board Performance:
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The company's use of authorized shares during the last three years
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Disclosure in the proxy statement of the specific purposes of the proposed increase;
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Disclosure in the proxy statement of specific and severe risks to shareholders of not approving the request; and
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The dilutive impact of the request as determined relative to an allowable increase calculated by ISS (typically 100 percent of existing authorized shares) that reflects the company's need for shares and total
shareholder returns.
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ISS will apply
the relevant allowable increase below to requests to increase common stock that are for general corporate purposes (or to the general corporate purposes portion of a request that also includes a specific need):
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A.
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Most companies: 100 percent of existing authorized shares.
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B.
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Companies with less than 50 percent of existing authorized shares either outstanding or reserved for issuance: 50 percent of existing authorized shares.
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C.
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Companies with one- and three-year total shareholder returns (TSRs) in the bottom 10 percent of the U.S. market as of the end of the calendar quarter that is closest to their most recent fiscal year end: 50 percent of existing authorized shares.
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D.
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Companies at which both conditions (B and C) above are both present: 25 percent of existing authorized shares.
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If there is an
acquisition, private placement, or similar transaction on the ballot (not including equity incentive plans) that ISS is recommending FOR, the allowable increase will be the greater of (i) twice the amount needed to
support the transactions on the ballot, and (ii) the allowable increase as calculated above.
U.S. Concise Proxy Voting Guidelines
Share Repurchase Programs
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General Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are traded solely on U.S. exchanges, vote for management proposals to institute
open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the absence of company-specific concerns
regarding:
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Greenmail,
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The use of buybacks to inappropriately manipulate incentive compensation metrics,
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Threats to the company's long-term viability, or
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Other company-specific factors as warranted.
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Vote
case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from
insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
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General Recommendation: Generally vote against shareholder proposals prohibiting executives from selling shares of company stock during periods in which the company has announced that it may or will
be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of share buybacks.
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Financial issues – company’s financial situation; degree of need of capital; use of proceeds; effect of the financing on the company’s cost of capital;
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Management efforts to pursue other alternatives;
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Control issues – change in management; change in control, guaranteed board and committee seats; standstill provisions; voting agreements; veto power over certain corporate actions; and
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Conflict of interest – arm’s length transaction, managerial incentives.
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Vote for the debt
restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
Mergers and Acquisitions
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General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing
factors including:
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Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation
reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale.
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Market reaction - How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.
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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.
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Negotiations and process - Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation
"wins" can also signify the deal makers' competency. The comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value.
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U.S. Concise Proxy Voting Guidelines
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Conflicts of interest - Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and
officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or
recommend the merger. The CIC figure presented in the "ISS Transaction Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from
shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
|
|
➤
|
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.
|
COMPENSATION
Executive Pay Evaluation
Underlying all
evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
|
1.
|
Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and
appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and
variable pay; performance goals; and equity-based plan costs;
|
|
2.
|
Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;
|
|
3.
|
Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for
compensation decision-making (e.g., including access to independent expertise and advice when needed);
|
|
4.
|
Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices
fully and fairly;
|
|
5.
|
Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors is reasonable and does
not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.
|
Advisory Votes on Executive Compensation—Management Proposals (Say-on-Pay)
|
➤
|
General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.
|
|
|
Vote against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”) if:
|
|
➤
|
There is an unmitigated misalignment between CEO pay and company performance (pay for performance);
|
|
➤
|
The company maintains significant problematic pay practices;
|
|
➤
|
The board exhibits a significant level of poor communication and responsiveness to shareholders.
|
U.S. Concise Proxy Voting Guidelines
Vote against or
withhold from the members of the Compensation Committee and potentially the full board if:
|
➤
|
There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation
issues raised previously, or a combination thereof;
|
|
➤
|
The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast;
|
|
➤
|
The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or
|
|
➤
|
The situation is egregious.
|
Primary Evaluation Factors for
Executive Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the S&P1500, Russell 3000, or
Russell 3000E Indices8, this analysis considers the following:
|
1.
|
Peer Group9 Alignment:
|
|
➤
|
The degree of alignment between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period.
|
|
➤
|
The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year period.
|
|
➤
|
The multiple of the CEO's total pay relative to the peer group median in the most recent fiscal year.
|
|
2.
|
Absolute Alignment10– the absolute alignment between the trend in CEO pay and company TSR over the prior five fiscal years – i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.
|
If the above
analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, a misalignment between pay and performance is otherwise suggested, our
analysis may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder
interests:
|
➤
|
The ratio of performance- to time-based incentive awards;
|
|
➤
|
The overall ratio of performance-based compensation to fixed or discretionary pay;
|
|
➤
|
The rigor of performance goals;
|
|
➤
|
The complexity and risks around pay program design;
|
|
➤
|
The transparency and clarity of disclosure;
|
|
➤
|
The company's peer group benchmarking practices;
|
|
➤
|
Financial/operational results, both absolute and relative to peers;
|
|
➤
|
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards);
|
|
8
|
The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.
|
|
9
|
The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company's selected peers' GICS industry
group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market-cap bucket that is reflective of the
company's. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
|
|
10
|
Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
|
U.S. Concise Proxy Voting Guidelines
|
➤
|
Realizable pay11 compared to grant pay; and
|
|
➤
|
Any other factors deemed relevant.
|
|
➤
|
Any other factors deemed relevant.
|
Problematic Pay Practices
The focus is on
executive compensation practices that contravene the global pay principles, including:
|
➤
|
Problematic practices related to non-performance-based compensation elements;
|
|
➤
|
Incentives that may motivate excessive risk-taking or present a windfall risk; and
|
|
➤
|
Pay decisions that circumvent pay-for-performance, such as options backdating or waiving performance requirements.
|
Problematic Pay Practices related to
Non-Performance-Based Compensation Elements
Pay elements
that are not directly based on performance are generally evaluated case-by-case considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS' U.S.
Compensation Policies FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or
unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse vote recommendations:
|
➤
|
Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
|
|
➤
|
Extraordinary perquisites or tax gross-ups;
|
|
➤
|
New or materially amended agreements that provide for:
|
|
➤
|
Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent bonus);
|
|
➤
|
CIC severance payments without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers) or in connection with a problematic Good Reason definition;
|
|
➤
|
CIC excise tax gross-up entitlements (including "modified" gross-ups);
|
|
➤
|
Multi-year guaranteed awards that are not at risk due to rigorous performance conditions;
|
|
➤
|
Liberal CIC definition combined with any single-trigger CIC benefits;
|
|
➤
|
Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible;
|
|
➤
|
Any other provision or practice deemed to be egregious and present a significant risk to investors.
|
Compensation Committee
Communications and Responsiveness
Consider the
following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
|
➤
|
Failure to respond to majority-supported shareholder proposals on executive pay topics; or
|
|
➤
|
Failure to adequately respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account:
|
|
➤
|
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and the company participants (including whether independent directors participated);
|
|
➤
|
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
|
|
➤
|
Disclosure of specific and meaningful actions taken to address shareholders’ concerns;
|
|
➤
|
Other recent compensation actions taken by the company;
|
|
11
|
ISS research reports include realizable pay for S&P1500 companies.
|
U.S. Concise Proxy Voting Guidelines
|
➤
|
Whether the issues raised are recurring or isolated;
|
|
➤
|
The company's ownership structure; and
|
|
➤
|
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Equity-Based and Other Incentive
Plans
Please refer to
ISS' U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
|
➤
|
General Recommendation: Vote case-by-case on certain equity-based compensation plans12 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance
negative factors, and vice versa, as evaluated using an "Equity Plan Scorecard" (EPSC) approach with three pillars:
|
|
➤
|
Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (SVT) in relation to
peers and considering both:
|
|
➤
|
SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and
|
|
➤
|
SVT based only on new shares requested plus shares remaining for future grants.
|
|
➤
|
Quality of disclosure around vesting upon a change in control (CIC);
|
|
➤
|
Discretionary vesting authority;
|
|
➤
|
Liberal share recycling on various award types;
|
|
➤
|
Lack of minimum vesting period for grants made under the plan;
|
|
➤
|
Dividends payable prior to award vesting.
|
|
➤
|
The company’s three-year burn rate relative to its industry/market cap peers;
|
|
➤
|
Vesting requirements in CEO's recent equity grants (3-year look-back);
|
|
➤
|
The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years);
|
|
➤
|
The proportion of the CEO's most recent equity grants/awards subject to performance conditions;
|
|
➤
|
Whether the company maintains a sufficient claw-back policy;
|
|
➤
|
Whether the company maintains sufficient post-exercise/vesting share-holding requirements.
|
Generally vote
against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders' interests, or if any of the following egregious factors ("overriding factors") apply:
|
➤
|
Awards may vest in connection with a liberal change-of-control definition;
|
|
➤
|
The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it—for NYSE and Nasdaq listed companies—or by not prohibiting it when the company has a history of repricing—for non-listed companies);
|
|
➤
|
The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances;
|
|
➤
|
The plan is excessively dilutive to shareholders' holdings;
|
|
➤
|
The plan contains an evergreen (automatic share replenishment) feature; or
|
|
➤
|
Any other plan features are determined to have a significant negative impact on shareholder interests.
|
|
21
|
Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees
and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated case-by-case.
|
U.S. Concise Proxy Voting Guidelines
SOCIAL AND ENVIRONMENTAL ISSUES
Global Approach
Issues covered
under the policy include a wide range of topics, including consumer and product safety, environment and energy, labor 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 or long term.
|
➤
|
General Recommendation: Generally vote case-by-case, examining primarily whether implementation of the proposal is likely to enhance or protect shareholder value. The following factors 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 or timeframe) or overly prescriptive;
|
|
➤
|
The company's approach compared with any industry standard practices for addressing the issue(s) raised by the proposal;
|
|
➤
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company's environmental or social practices;
|
|
➤
|
If the proposal requests increased disclosure or greater transparency, whether 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 implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage.
|
Climate Change/Greenhouse Gas (GHG) Emissions
|
➤
|
General Recommendation: Generally vote for resolutions requesting that a company disclose information on the financial, physical, or regulatory risks it faces related to climate change on its
operations and investments or on how the company identifies, measures, and manages such risks, considering:
|
|
➤
|
Whether the company already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks
and/or opportunities;
|
|
➤
|
The company’s level of disclosure compared to industry peers; and
|
|
➤
|
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate change-related performance.
|
Generally vote
for proposals requesting a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:
|
➤
|
The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or
opportunities;
|
|
➤
|
The company's level of disclosure is comparable to that of industry peers; and
|
|
➤
|
There are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions.
|
Vote case-by-case
on proposals that call for the adoption of GHG reduction goals from products and operations, taking into account:
|
➤
|
Whether the company provides disclosure of year-over-year GHG emissions performance data;
|
|
➤
|
Whether company disclosure lags behind industry peers;
|
U.S. Concise Proxy Voting Guidelines
|
➤
|
The company's actual GHG emissions performance;
|
|
➤
|
The company's current GHG emission policies, oversight mechanisms, and related initiatives; and
|
|
➤
|
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.
|
Board Diversity
|
➤
|
General Recommendation: Generally vote for requests for reports on a company's efforts to diversify the board, unless:
|
|
➤
|
The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and
|
|
➤
|
The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.
|
Vote case-by-case
on proposals asking a company to increase the gender and racial minority representation on its board, taking into account:
|
➤
|
The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
|
|
➤
|
The level of gender and racial minority representation that exists at the company’s industry peers;
|
|
➤
|
The company’s established process for addressing gender and racial minority board representation;
|
|
➤
|
Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
|
|
➤
|
The independence of the company’s nominating committee;
|
|
➤
|
Whether the company uses an outside search firm to identify potential director nominees; and
|
|
➤
|
Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.
|
Gender, Race, or Ethnicity Pay Gap
|
➤
|
General Recommendation: Generally vote case-by-case on requests for reports on a company's pay data by gender, race, or ethnicity, or a report on a company’s policies and goals to reduce any
gender, race, or ethnicity pay gap, taking into account:
|
|
➤
|
The company's current policies and disclosure related to both its diversity and inclusion policies and practices and its compensation philosophy and fair and equitable compensation practices;
|
|
➤
|
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race, or ethnicity pay gap issues; and
|
|
➤
|
Whether the company's reporting regarding gender, race, or ethnicity pay gap policies or initiatives is lagging its peers.
|
Sustainability Reporting
|
➤
|
General Recommendation: Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental
sustainability, unless:
|
|
➤
|
The company already discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report;
or
|
|
➤
|
The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame.
|
U.S. Concise Proxy Voting Guidelines
Lobbying
|
➤
|
General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures,
considering:
|
|
➤
|
The company’s current disclosure of relevant lobbying policies, and management and board oversight;
|
|
➤
|
The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage in lobbying activities; and
|
|
➤
|
Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities.
|
Political Contributions
|
➤
|
General Recommendation: Generally vote for proposals requesting greater disclosure of a company's political contributions and trade association spending policies and activities, considering:
|
|
➤
|
The company's policies, and management and board oversight related to its direct political contributions and payments to trade associations or other groups that may be used for political purposes;
|
|
➤
|
The company's disclosure regarding its support of, and participation in, trade associations or other groups that may make political contributions; and
|
|
➤
|
Recent significant controversies, fines, or litigation related to the company's political contributions or political activities.
|
Vote against
proposals barring a company from making political contributions. Businesses are affected by legislation at the federal, state, and local level; barring political contributions can put the company at a competitive
disadvantage.
Vote against
proposals to publish in newspapers and other media a company's political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
U.S. Concise Proxy Voting Guidelines
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Institutional Shareholder Services and/or its affiliates
Exhibit C—Credit Rating Definitions
Standard & Poor’s
A Standard & Poor’s
issue credit rating is a forward-looking opinion about the creditworthiness of an obligor with respect to a specific financial obligation, a specific class of financial obligations, or a specific financial program
(including ratings on medium-term note programs and commercial paper programs). It takes into consideration the creditworthiness of guarantors, insurers, or other forms of credit enhancement on the obligation and
takes into account the currency in which the obligation is denominated. The opinion reflects Standard & Poor’s view of the obligor’s capacity and willingness to meet its financial commitments as they
come due, and may assess terms, such as collateral security and subordination, which could affect ultimate payment in the event of default.
LONG-TERM ISSUE CREDIT
RATINGS
Issue credit ratings are based, in
varying degrees, on the following considerations:
|
1.
|
Likelihood of payment: capacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of the obligation;
|
|
2.
|
Nature of and provisions of the obligation and the promise S&P imputes;
|
|
3.
|
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of bankruptcy and other laws affecting
creditors’ rights.
|
The issue rating definitions are
an assessment of default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the
lower priority in bankruptcy, as noted above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company
obligations.)
|
AAA
|
An obligation rated “AAA” has the highest rating assigned by Standard & Poor’s. The obligor’s capacity to meet its
financial commitment on the obligation is extremely strong.
|
|
AA
|
An obligation rated “AA” differs from the highest rated obligations only in small degree. The obligor’s capacity to meet its
financial commitment on the obligation is very strong.
|
|
A
|
An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions
than obligations in higher rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
|
|
BBB
|
An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
|
Obligations rated
“BB,” “B,” “CCC,” “CC” and “C” are regarded as having significant speculative characteristics. “BB” indicates the least degree of speculation and
“C” the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
|
BB
|
An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
|
|
B
|
An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB,” but the obligor currently has
the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its financial commitment on
the obligation.
|
|
CCC
|
An obligation rated “CCC” is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial
commitment on the obligation.
|
|
CC
|
An obligation rated “CC” is currently highly vulnerable to nonpayment. The “CC” rating is used when a
default has not yet occurred but S&P expects default to be a virtual certainty regardless of the anticipated time to default.
|
|
C
|
An obligation rated “C” is currently highly vulnerable to nonpayment and the obligation is expected to have lower relative
seniority or lower ultimate recovery compared to obligations that are rated higher.
|
|
D
|
An obligation rated “D” is in default or in breach of an imputed promise. For non-hybrid capital instruments, the
“D” rating category is used when payments on an obligation are not made on the date due unless S&P believes that such payments will be made within five business days in the absence of a stated grace
period or within the earlier of the stated grace period or 30 calendar days. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default on
an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation’s rating is lowered to ‘D’ if it is subject to a distressed exchange offer.
|
Plus (+) or Minus (-): The ratings from “AA” to “CCC” may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
Moody’s Investors Service,
Inc.
A brief description of the
applicable Moody’s Investors Service, Inc. (“Moody’s”) rating symbols and their meanings (as published by Moody’s) follows.
Ratings assigned on
Moody’s global long-term and short-term rating scales are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured
finance vehicles, project finance vehicles, and public sector entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a
default on contractually promised payments and the expected financial loss suffered in the event of default. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and
reflect the likelihood of a default on contractually promised payments.
LONG-TERM OBLIGATION
RATINGS
|
Aaa
|
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
|
|
Aa
|
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
|
|
A
|
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
|
|
Baa
|
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative
characteristics.
|
|
Ba
|
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
|
|
B
|
Obligations rated B are considered speculative and are subject to high credit risk.
|
|
Caa
|
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
|
|
Ca
|
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and
interest.
|
|
C
|
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or
interest.
|
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end
of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Fitch Ratings
A brief description of the
applicable Fitch Ratings (“Fitch”) ratings symbols and meanings (as published by Fitch) follows:
Fitch’s credit ratings
provide an opinion on the relative ability of an entity to meet financial commitments, such as interest, preferred dividends, repayment of principal, insurance claims or counterparty obligations. Credit ratings are
used by investors as indications of the likelihood of receiving the money owed to them in accordance with the terms on which they invested. The agency’s credit ratings cover the global spectrum of corporate,
sovereign (including supranational and sub-national), financial, bank, insurance, municipal and other public finance entities and the securities or other obligations they issue, as well as structured finance
securities backed by receivables or other financial assets.
The terms “investment
grade” and “speculative grade” have established themselves over time as shorthand to describe the categories ‘AAA’ to ‘BBB’ (investment grade) and ‘BB’ to
‘D’ (speculative grade). The terms “investment grade” and “speculative grade” are market conventions, and do not imply any recommendation or endorsement of a specific security for
investment
purposes. “Investment grade”
categories indicate relatively low to moderate credit risk, while ratings in the “speculative” categories either signal a higher level of credit risk or that a default has already occurred.
A designation of “Not
Rated” or “NR” is used to denote securities not rated by Fitch where Fitch has rated some, but not all, securities comprising an issuance capital structure.
Credit ratings express risk in
relative rank order, which is to say they are ordinal measures of credit risk and are not predictive of a specific frequency of default or loss.
Fitch’s credit ratings do
not directly address any risk other than credit risk. In particular, ratings do not deal with the risk of a market value loss on a rated security due to changes in interest rates, liquidity and other market
considerations. However, in terms of payment obligation on the rated liability, market risk may be considered to the extent that it influences the ability of an issuer to pay upon a commitment. Ratings nonetheless do
not reflect market risk to the extent that they influence the size or other conditionality of the obligation to pay upon a commitment (for example, in the case of index-linked bonds).
In the default components of
ratings assigned to individual obligations or instruments, the agency typically rates to the likelihood of non-payment or default in accordance with the terms of that instrument’s documentation. In limited
cases, Fitch may include additional considerations (i.e. rate to a higher or lower standard than that implied in the obligation’s documentation). In such cases, the agency will make clear the assumptions underlying the
agency’s opinion in the accompanying rating commentary.
INTERNATIONAL LONG-TERM
RATINGS
Issuer Credit Rating Scales
|
AAA
|
Highest credit quality. ‘AAA’ ratings denote the lowest expectation of default risk. They are assigned only in cases of
exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
|
|
AA
|
Very high credit quality. ‘AA’ ratings denote expectations of very low default risk. They indicate very strong capacity for
payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
|
|
A
|
High credit quality. ‘A’ ratings denote expectations of low default risk. The capacity for payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
|
|
BBB
|
Good credit quality. ‘BBB’ ratings indicate that expectations of default risk are currently low. The capacity for payment of
financial commitments is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
|
|
BB
|
Speculative. ‘BB’ ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes in
business or economic conditions over time; however, business or financial flexibility exists which supports the servicing of financial commitments.
|
|
B
|
Highly speculative. ‘B’ ratings indicate that material default risk is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity for continued payment is vulnerable to deterioration in the business and economic environment.
|
|
CCC
|
Substantial credit risk. Default is a real possibility.
|
|
CC
|
Very high levels of credit risk. Default of some kind appears probable.
|
|
C
|
Exceptionally high levels of credit risk. Default is imminent or inevitable, or the issuer is in standstill. Conditions that
are indicative of a ‘C’ category rating for an issuer include:
• the issuer has entered into a grace or cure period following non-payment of a material financial obligation;
• the issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default on a material financial obligation; or
• Fitch otherwise believes a condition of ‘RD’ or ‘D’ to be imminent or inevitable, including through the formal announcement of a distressed debt exchange.
|
|
RD
|
Restricted default. ‘RD’ ratings indicate an issuer that in Fitch’s opinion has experienced an uncured payment default on a
bond, loan or other material financial obligation but which has not entered into bankruptcy filings, administration, receivership, liquidation or other formal winding-up procedure, and which has not otherwise ceased
operating. This would include:
• the selective payment default on a specific class or currency of debt;
• the uncured expiry of any applicable grace period, cure period or default forbearance period following a payment default on a bank loan, capital markets security or other material financial obligation;
• the extension of multiple waivers or forbearance periods upon a payment default on one or more material financial obligations, either in series or in parallel; or
• execution of a distressed debt exchange on one or more material financial obligations.
|
|
D
|
Default. ‘D’ ratings indicate an issuer that in Fitch’s opinion has entered into bankruptcy filings,
administration, receivership, liquidation or other formal winding-up procedure, or which has otherwise ceased business.
|
Default ratings are not assigned
prospectively to entities or their obligations; within this context, non-payment on an instrument that contains a deferral feature or grace period will generally not be considered a default until after the expiration
of the deferral or grace period, unless a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
“Imminent” default
typically refers to the occasion where a payment default has been intimated by the issuer, and is all but inevitable. This may, for example, be where an issuer has missed a scheduled payment, but (as is typical) has a
grace period during which it may cure the payment default. Another alternative would be where an issuer has formally announced a distressed debt exchange, but the date of the exchange still lies several days or weeks
in the immediate future.
In all cases, the assignment of
a default rating reflects the agency’s opinion as to the most appropriate rating category consistent with the rest of its universe of ratings, and may differ from the definition of default under the terms of an
issuer’s financial obligations or local commercial practice.
First
Trust Exchange-Traded Fund V
Part C – Other Information
Exhibit No. Description
(2)
Amended and Restated Declaration of
Trust of the Registrant, dated June 12, 2017, is incorporated by reference to the Post-Effective Amendment No. 10 filed on Form
N-1A (File No. 333-181507) for Registrant on April 27, 2018.
(2)
Amended and Restated Establishment
and Designation of Series is incorporated by reference to the Post-Effective Amendment No. 16 filed on Form N-1A (File No. 333-181507)
for Registrant on June 28, 2019.
(2)
Subsidiary Investment Management Agreement
is incorporated by reference to the Post-Effective Amendment No. 16 filed on Form N-1A (File No. 333-181507) for Registrant on
June 28, 2019.
(2)
Form of Subscription Agreement is
incorporated by reference to the Pre-Effective Amendment No. 4 filed on Form N-1A (File No. 333-181507) for Registrant on July
23, 2013.
(3)
Form of Participant Agreement is incorporated
by reference to the Pre-Effective Amendment No. 4 filed on Form N-1A (File No. 333-181507) for Registrant on July 23, 2013.
|
(j)
|
|
Consent of Independent Registered Public Accounting Firm is filed herewith.
|
(2)
12b-1 Plan Extension Letter, dated October 21, 2019, is filed herewith.
(2)
First Trust Funds Code of Ethics,
amended on October 30, 2013, is incorporated by reference to the Post-Effective Amendment No. 2 filed on Form N-1A (File No. 333-181507)
for Registrant on April 30, 2014.
|
|
Item 29.
|
Persons Controlled By or Under Common Control with Registrant
|
Not Applicable.
Section 9.5
of the Registrant’s Declaration of Trust provides as follows:
Section 9.5.
Indemnification and Advancement of Expenses. Subject to the exceptions and limitations contained in this Section 9.5, every person
who is, or has been, a Trustee, officer, or employee of the Trust, including persons who serve at the request of the Trust as directors,
trustees, officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or
otherwise (hereinafter referred to as a "Covered Person"), shall be indemnified by the Trust to the fullest extent
permitted by law against liability and against all expenses reasonably incurred or paid by him or in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been such a Trustee,
director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder
to a Covered Person to the extent such indemnification is prohibited by applicable federal law.
The rights of indemnification herein provided
may be insured against by policies maintained by the Trust, shall be severable, shall not affect any other rights to which any
Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be such a Covered Person and shall
inure to the benefit of the heirs, executors and administrators of such a person.
Subject to applicable federal law, expenses
of preparation and presentation of a defense to any claim, action, suit or proceeding subject to a claim for indemnification under
this Section 9.5 shall be advanced by the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf
of the recipient to repay such amount if it is ultimately determined that he is not entitled to indemnification under this Section
9.5.
To the extent that any determination is
required to be made as to whether a Covered Person engaged in conduct for which indemnification is not provided as described herein,
or as to whether there is reason to believe that a Covered Person ultimately will be found entitled to indemnification, the Person
or Persons making the determination shall afford the Covered Person a rebuttable presumption that the Covered Person has not engaged
in such conduct and that there is reason to believe that the Covered Person ultimately will be found entitled to indemnification.
As used in this Section 9.5, the words
"claim," "action," "suit" or "proceeding" shall apply to all claims, demands, actions,
suits, investigations, regulatory inquiries, proceedings or any other occurrence of a similar nature, whether actual or threatened
and whether civil, criminal, administrative or other, including appeals, and the words "liability" and "expenses"
shall include without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.
|
|
Item 31.
|
Business and Other Connections of the Investment Adviser
|
First Trust
Advisors L.P. (“First Trust”), investment adviser to the Registrant, serves as adviser or sub-adviser to various
other open-end and closed-end management investment companies and is the portfolio supervisor of certain unit investment trusts.
The principal business of certain of First Trust’s principal executive officers involves various activities in connection
with the family of unit investment trusts sponsored by First Trust Portfolios L.P. (“FTP”). The principal address
for all these investment companies, First Trust, FTP and the persons below is 120 East Liberty Drive, Suite 400, Wheaton, Illinois
60187.
A description
of any business, profession, vocation or employment of a substantial nature in which the officers of First Trust who serve as officers
or trustees of the Registrant have engaged during the last two years for his or her account or in the capacity of director, officer,
employee, partner or trustee appears under “Management of the Fund” in the Statement of Additional Information. Such
information for the remaining senior officers of First Trust appears below:
|
Name and Position with First Trust
|
Employment During Past Two Years
|
|
Andrew S. Roggensack, President
|
Managing Director and President, First Trust
|
|
R. Scott Hall, Managing Director
|
Managing Director, First Trust
|
|
Ronald D. McAlister, Managing Director
|
Managing Director, First Trust
|
|
David G. McGarel, Chief Investment Officer, Chief Operating Officer and Managing Director
|
Managing Director; Senior Vice President, First Trust
|
|
Kathleen Brown, Chief Compliance Officer and Senior Vice President
|
Chief Compliance Officer and Senior Vice President, First Trust
|
|
Brian Wesbury, Chief Economist and Senior Vice President
|
Chief Economist and Senior Vice President, First Trust
|
|
|
Item 32.
|
Principal Underwriter
|
(a) FTP serves as principal
underwriter of the shares of the Registrant, First Trust Exchange-Traded Fund, First Trust Exchange-Traded Fund II, First Trust
Exchange-Traded Fund III, First Trust Exchange-Traded Fund IV, First Trust Exchange Traded Fund VI, First Trust Exchange-Traded
Fund VII, First Trust Exchange-Traded Fund VIII, First Trust Exchange-Traded AlphaDEX® Fund, First Trust Exchange-Traded
AlphaDEX® Fund II, First Trust Variable Insurance Trust and First Trust Series Fund. FTP serves as principal underwriter
and depositor of the following investment companies registered as unit investment trusts: the First Trust Combined Series, FT Series
(formerly known as the First Trust Special Situations Trust), the First Trust Insured Corporate Trust, the First Trust of Insured
Municipal Bonds and the First Trust GNMA.
(b) Positions and Offices
with Underwriter
Name and Principal
Business Address*
|
Positions and Offices
with Underwriter
|
Positions and
Offices with Fund
|
|
The Charger Corporation
|
General Partner
|
None
|
|
Grace Partners of DuPage L.P.
|
Limited Partner
|
None
|
|
James A. Bowen
|
Chief Executive Officer and Managing Director
|
Trustee and Chairman of the Board
|
|
James M. Dykas
|
Chief Financial Officer
|
President and Chief Executive Officer
|
|
Frank L. Fichera
|
Managing Director
|
None
|
|
|
|
|
|
R. Scott Hall
|
Managing Director
|
None
|
|
W. Scott Jardine
|
General Counsel, Secretary and Managing Director
|
Secretary
|
|
Daniel J. Lindquist
|
Managing Director
|
Vice President
|
|
Ronald D. McAlister
|
Managing Director
|
None
|
|
David G. McGarel
|
Chief Investment Officer, Chief Operating Officer and Managing Director
|
None
|
|
Richard A. Olson
|
Managing Director
|
None
|
|
Marisa Bowen
|
Managing Director
|
None
|
|
Andrew S. Roggensack
|
President and Managing Director
|
None
|
|
Kristi A. Maher
|
Deputy General Counsel
|
Chief Compliance Officer and Assistant Secretary
|
|
* All addresses are
120 East Liberty Drive,
Wheaton, Illinois
60187.
|
|
|
(c) Not Applicable
|
|
Item 33.
|
Location of Accounts and Records
|
First Trust,
120 East Liberty Drive, Suite 400, Wheaton, Illinois 60187, maintains the Registrant’s organizational documents, minutes
of meetings, contracts of the Registrant and all advisory material of the investment adviser.
The Bank of
New York Mellon Corporation (“BNYM”) maintains all general and subsidiary ledgers, journals, trial balances,
records of all portfolio purchases and sales, and all other requirement records not maintained by First Trust.
BNYM also maintains
all the required records in its capacity as transfer, accounting, dividend payment and interest holder service agent for the Registrant.
|
|
Item 34.
|
Management Services
|
Not Applicable.
Insofar as
indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered,
the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
Signatures
Pursuant to
the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets
all of the requirements for effectiveness of this Registration Statement under Rule 485(b) under the Securities Act of 1933 and
has duly caused this Registration Statement to be signed on its behalf by the undersigned, duly authorized in the City of Wheaton,
and State of Illinois, on the 29th day of April, 2020.
|
|
First Trust Exchange-Traded Fund V
|
|
|
By:
|
/s/ James M. Dykas
|
|
|
|
James M. Dykas, President and
Chief Executive Officer
|
Pursuant to the
requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the
capacities and on the date indicated:
|
Signature
|
Title
|
|
Date
|
|
/s/ James M. Dykas
|
President and Chief Executive
Officer
|
April 29, 2020
|
|
James M. Dykas
|
|
|
|
|
/s/ Donald P. Swade
|
Treasurer, Chief Financial Officer
and Chief Accounting Officer
|
April 29, 2020
|
|
Donald P. Swade
|
|
|
|
|
James A. Bowen*
|
)
Trustee )
|
|
|
|
|
)
|
|
|
|
Richard E. Erickson*
|
)
Trustee )
|
|
|
|
|
)
|
|
|
|
Thomas R. Kadlec*
|
)
Trustee )
|
|
|
|
|
)
|
By:
|
/s/ W. Scott Jardine
|
|
Robert F. Keith*
|
)
Trustee )
|
|
W. Scott Jardine
Attorney-In-Fact
|
|
|
)
|
|
April 29, 2020
|
|
Niel B. Nielson *
|
)
Trustee )
|
|
|
|
|
)
|
|
|
|
|
*
|
Original powers of attorney authorizing James A. Bowen, W. Scott Jardine, James M. Dykas, Eric F. Fess and Kristi A. Maher to execute Registrant's Registration Statement, and Amendments thereto, for each of the trustees of the Registrant on whose behalf this Registration Statement is filed, were previously executed, and are filed herewith.
|
Index
to Exhibits
|
