EGA Emerging Global Shares Trust
Statement of Additional Information
June 10, 2011
as revised August 1, 2011
EGA Emerging Global Shares Trust (the “Trust”) is an open-end management investment company that currently offers shares in twenty nine separate and distinct series, representing separate portfolios of investments. This Statement of Additional Information (“SAI”) relates solely to the following portfolios (each individually referred to as a “Fund,” and collectively referred to as the “Funds”), each of which has its own investment objective:
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Cusip
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NYSE Arca
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EGShares India Consumer ETF
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268461761
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INCO
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EGShares India Financials ETF
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268461753
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INFS
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EGShares India Health Care ETF
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268461746
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INHK
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EGShares India Industrials ETF
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268461720
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INID
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EGShares India Technology ETF
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268461712
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INQQ
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EGShares India Basic Materials ETF
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268461688
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INBA
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EGShares India Energy ETF
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268461670
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INEN
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EGShares India High Income Low Beta ETF
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268461662
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INLH
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EGShares Emerging Markets High Income Low Beta ETF
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268461654
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HILO
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EGShares Emerging Markets Food and Agriculture ETF
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268461647
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EATS
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ALPS Advisors, Inc. (the “Adviser”) serves as the investment adviser to each Fund. Emerging Global Advisors, LLC (“EGA”) serves as the sub-adviser to each Fund. ALPS Distributors Inc. (the “Distributor” or “ALPS”) serves as principal underwriter for each Fund.
This SAI is not a prospectus and should be read only in conjunction with the Funds’ current Prospectus, dated June 10, 2011, as revised August 1, 2011. A copy of the Prospectus may be obtained by calling the Trust directly at 1-888-800-4347. The Prospectus contains more complete information about the Funds. You should read it carefully before investing.
Not FDIC Insured. May lose value. No bank guarantee.
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GENERAL INFORMATION ABOUT THE TRUST
The Trust is a Delaware statutory trust organized on September 12, 2008. The Trust is an open-end management investment company, registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust currently offers shares (“Shares”) of twenty nine separate non-diversified series, representing separate portfolios of investments. This SAI relates solely to the EGShares India Consumer ETF, EGShares India Financials ETF, EGShares India Health Care ETF, EGShares India Industrials ETF, EGShares India Technology ETF, EGShares India Basic Materials ETF, EGShares India Energy ETF, EGShares India High Income Low Beta ETF, EGShares Emerging Markets High Income Low Beta ETF and EGShares Emerging Markets Food and Agriculture ETF.
The Funds are exchange traded funds (“ETFs”) and issue Shares at net asset value (“NAV”) only in aggregations of a specified number of Shares (each a “Creation Unit” or a “Creation Unit Aggregation”), generally in exchange for (1) a portfolio of equity securities constituting a substantial replication, or representation, of the stocks included in the relevant Fund’s corresponding benchmark index (“Deposit Securities”) and (2) a small cash payment referred to as the “Cash Component.” Except when aggregated in Creation Units, Shares are not redeemable securities of the Funds. Retail investors, therefore, generally will not be able to purchase the Shares
directly. Rather, most retail investors will purchase Shares in the
secondary market with the assistance of a broker.
The Funds’ Shares have been approved for listing on the NYSE Arca, Inc. (the “Exchange”) subject to notice of issuance. Fund Shares will trade on the Exchange at market prices that may be below, at or above NAV. Shares are redeemable only in Creation Unit Aggregations and, generally, in exchange for portfolio securities and a specified cash payment. Creation Units are aggregations of 50,000 Shares or more. In the event of the liquidation of a Fund, the Trust may lower the number of Shares in a Creation Unit.
The Trust reserves the right to offer a “cash” option for creations and redemptions of Fund Shares, although it has no current intention of doing so. Fund Shares may be issued in advance of receipt of Deposit Securities subject to various conditions, including a requirement to maintain on deposit with the Trust cash at least equal to 105% of the market value of the missing Deposit Securities. See the “Creation and Redemption of Creation Unit Aggregations” section of this SAI. In each instance of such full cash creations or redemptions, the transaction fees imposed will be higher than the transaction fees associated with in-kind creations or redemptions.
Compliance with Mauritius Law
Each Fund (except the EGShares Emerging Markets High Income Low Beta ETF and EGShares Emerging Markets Food and Agriculture ETF) invests substantially all of its assets in wholly owned subsidiaries organized in the Republic of Mauritius (each, a “Subsidiary”), which in turn, invest at least 90% of their assets in Indian securities. The EGShares Emerging Markets High Income Low Beta ETF and EGShares Emerging Markets Food and Agriculture ETF may invest their assets in a Subsidiary, which in turn, invests at least 90% of its assets in Indian securities. Each Subsidiary has qualified as an “Expert Fund” under the Regulations of the Securities Act 2005 of the Republic of Mauritius. These Regulations provide that only “Expert Investors” may invest in the Expert Fund.
An “Expert Investor” is an investor such as a Fund who makes an initial investment for its own account, of not less than US$100,000 or is a sophisticated investor as defined in the Regulations of the Securities Act 2005 or any similarly defined investor in any other legislation.
The Subsidiaries have been incorporated as Global Business Companies and have been issued a category 1 license by the Financial Services Commission of Mauritius.
It must be distinctly understood that in issuing this license, the Mauritius Financial Services Commission does not vouch for the financial soundness of the Subsidiaries or for the correctness of any statements made or opinions expressed with regard to it.
Investors in the Subsidiaries are not protected by any statutory compensation arrangements in Mauritius in the event of a Subsidiary’s failure.
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Mauritius Anti-Money Laundering Regulations
To ensure compliance with the Financial Intelligence and Anti-Money Laundering Act 2002 and the Code on the Prevention of Money Laundering and Terrorist Financing (“Code”) issued by the Financial Services Commission of Mauritius, a Subsidiary or its agents will require every applicant for shares (such as a Fund) to provide certain information/documents for the purpose of verifying the identity of the applicant,
sources of funds and obtain confirmation that the application monies do not
represent, directly or indirectly, the proceeds of any crime. The
request for information may be reduced where an application is a regulated
financial services business based in the Republic of Mauritius or in an
equivalent jurisdiction (i.e
.,
subject to the supervision of a public authority) or in the
case of public companies listed on Recognized Stock/Investment Exchanges, as set
out in the Code.
In the event of delay or failure by the applicant to produce any information required for verification purposes, a Subsidiary may refuse to accept the application and the subscription monies relating thereto or may refuse to process a redemption request until proper information has been provided. Investors such as a Fund should note specifically that a Subsidiary reserves the right to request such information as may be necessary in order to verify the identity of the investor and the owner of the account to which the redemption proceeds will be paid. Redemption proceeds will not be paid to a third party account.
Each applicant for shares must acknowledge that a Subsidiary shall be held harmless against loss arising as a result of a failure to process an application for shares or redemption request if such information and documentation as requested by a Subsidiary has not been provided by the applicant.
Each Fund, as the sole shareholder of each Subsidiary, will satisfy all applicable requirements under the Code in order to purchase and redeem shares of a Subsidiary.
EXCHANGE LISTING AND TRADING
There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of each Fund will continue to be met. The Exchange may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period beginning upon the commencement of trading of a Fund, there are fewer than 50 beneficial holders of the Shares for 30 or more consecutive trading days, (ii) the value of the underlying index on which a Fund is based is no longer calculated or available, or (iii) any other event shall occur or condition shall exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares of a Fund from listing and trading upon termination of such Fund.
As in the case of other stocks traded on the Exchange, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels. Negotiated commission rates only apply to investors who will buy and sell shares of the Funds in secondary market transactions through brokers on the Exchange and does not apply to investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund.
In order to provide current Share pricing information, the Exchange disseminates an updated “Indicative Intra-Day Value” (“IIV”) for each Fund. The Trust is not involved in or responsible for any aspect of the calculation or dissemination of the IIVs and makes no warranty as to the accuracy of the IIVs. IIVs are expected to be disseminated on a per Fund basis every 15 seconds during regular trading hours of the Exchange.
The Exchange will calculate and disseminate the IIV throughout the trading day for each Fund by (i) calculating the current value of all equity securities held by the Fund; (ii) calculating the estimated amount of the value of cash and money market instruments held in the Fund’s portfolio (“Estimated Cash”); (iii) calculating the marked-to-market gains or losses of the futures contracts and other financial instruments held by the Fund, if any; (iv) adding the current value of equity securities, the Estimated Cash, the marked to market gains or losses of futures contracts and other financial instruments, to arrive at a value; and (v) dividing that value by the total Shares outstanding to obtain current IIV.
The Trust reserves the right to adjust the price levels of the Shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of each Fund.
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Continuous Offering
The method by which Creation Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of
Shares are issued and sold by the Trust on an ongoing basis, at any point a
“distribution,” as such term is used in the 1933 Act, may
occur. Broker-dealers and other persons are cautioned that some
activities on their part may, depending on the circumstances, result in their
being deemed participants in a distribution in a manner which could render them
statutory underwriters and subject them to the prospectus delivery and liability
provisions of the 1933 Act. For example, a broker-dealer firm or its client may
be deemed a statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent Shares and sells
some or all of the Shares comprising such Creation Units directly to its
customers; or if it chooses to couple the creation of a supply of new Shares
with an active selling effort involving solicitation of secondary market demand
for Shares. A determination of whether a person is an underwriter for
the purposes of the 1933 Act depends upon all the facts and circumstances
pertaining to that person’s activities. Thus, the examples mentioned above
should not be considered a complete description of all the activities that could
lead to a categorization as an underwriter. Broker-dealer firms
should also note that dealers who are effecting transactions in Shares, whether
or not participating in the distribution of Shares, are generally required to
deliver a prospectus. This is because the prospectus delivery
exemption in Section 4(3) of the 1933 Act is not available in respect of such
transactions as a result of Section 24(d) of the 1940
Act. Broker-dealer firms should note that dealers who are not
“underwriters” but are participating in a distribution (as contrasted
to ordinary secondary market transaction), and thus dealing with Shares that are
part of an “unsold allotment” within the meaning of section 4(3)(C) of
the 1933 Act, would be unable to take advantage of the prospectus delivery
exemption provided by section 4(3) of the 1933 Act. Firms that incur
a prospectus-delivery obligation with respect to Shares are reminded that under
1933 Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the
1933 Act owed to a national securities exchange member in connection with a sale
on the national securities exchange is satisfied by the fact that the
Fund’s prospectus is available at the national securities exchange on which
the Shares of such Fund trade upon request. The prospectus delivery
mechanism provided in Rule 153 is only available with respect to transactions on
a national securities exchange and not with respect to “upstairs”
transactions.
INVESTMENT STRATEGIES
In addition to the fundamental investment restrictions described below under “Investment Restrictions,” and the principal investment policies described in the Funds’ Prospectus, each Fund is subject to the following investment strategies, which are considered non-fundamental and may be changed by the Board of Trustees without shareholder approval. Not every Fund will invest in all of the types of securities and financial instruments that are listed.
Equity Securities
The market price of securities owned by a Fund may go up or down, sometimes rapidly or unpredictably. Securities may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions not specifically related to a
particular company, such as real or perceived adverse economic conditions,
changes in the general outlook for corporate earnings, changes in interest or
currency rates, or adverse investor sentiment generally. They may
also decline due to factors that affect a particular industry or industries,
such as labor shortages or increased production costs and competitive conditions
within an industry. The value of a security may also decline for a
number of reasons that directly relate to the issuer, such as management
performance, financial leverage and reduced demand for the issuer’s goods
or services. Equity securities generally have greater price
volatility than fixed income securities, and the Funds are particularly
sensitive to these market risks.
Depositary Receipts
The Funds may invest in American Depositary Receipts (“ADRs”). For many foreign securities, U.S. Dollar -denominated ADRs, which are traded in the United States on exchanges or over-the-counter, are issued by domestic banks. ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in ADRs rather than directly in foreign issuers’ stock, the Funds can avoid currency risks during the settlement period for either purchases or sales.
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In general, there is a large,
liquid market in the United States for many ADRs. The information
available for ADRs is subject to the accounting, auditing and financial
reporting standards of the domestic market or exchange on which they are traded,
which standards are more uniform and more exacting than those to which many
foreign issuers may be subject. Certain ADRs, typically those
denominated as unsponsored, require the holders thereof to bear most of the
costs of such facilities, while issuers of sponsored facilities normally pay
more of the costs thereof. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the issuer of the deposited securities or to pass through the
voting rights to facility holders with respect to the deposited securities,
whereas the depository of a sponsored facility typically distributes shareholder
communications and passes through the voting rights.
The Funds may invest in both sponsored and unsponsored ADRs. Unsponsored ADRs programs are organized independently and without the cooperation of the issuer of the underlying securities. As result, available information concerning the issuers may not be as current for unsponsored ADRs, and the prices of unsponsored depository receipts may be more volatile than if such instruments were sponsored by the issuer.
A Fund may also invest in Global Depositary Receipts (“GDRs”). GDRs are receipts for shares in a foreign-based corporation traded in capital markets around the world. While ADRs permit foreign corporations to offer shares to American citizens, GDRs allow companies in Europe, Asia, the United States and Latin American to offer shares in many markets around the world.
Foreign Securities Risk
The Funds will invest primarily in foreign securities of emerging markets companies. Investing in foreign securities typically involves more risks than investing in U.S. securities. These risks can increase the potential for losses in a Fund and affect its NAV.
Securities of foreign companies are often issued and traded in foreign currencies. As a result, their values may be affected by changes in exchange rates between foreign currencies and the U.S. dollar, as well as between currencies of countries other than the United States. For example, if the value of the U.S. dollar goes up compared to a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth fewer U.S. dollars. Restrictions on currency trading that may be imposed by emerging markets countries will have an adverse affect on the value of the securities of companies that trade or operate in such countries.
There may be less government supervision and regulation of foreign stock exchanges, currency markets, trading systems and brokers than in the U.S. Foreign companies may not be subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies. Thus, there may be less information publicly available about foreign companies than about most U.S. companies.
Certain foreign securities may be less liquid (harder to sell) and more volatile than many U.S. securities. This means a Fund may at times be unable to sell foreign securities at favorable prices. A previously established liquid foreign securities market may become illiquid (temporarily or for longer periods of time) due to economic or political conditions. Brokerage commissions and other fees generally are higher for foreign securities. The procedures and rules governing foreign transactions and custody (i.e., holding of a Fund’s assets) also may involve delays in payment, delivery or recovery of money or investments.
Sector Risk
To the extent a Fund invests a significant portion of its assets in one or more sectors or industries at any time, the Fund will face a greater risk of loss due to factors affecting a single sector or industry than if the Fund always maintained wide diversity among the sectors and industries in which it invests.
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Increased Volatility
The Funds may invest in securities of small and medium capitalization companies. To the extent that a Fund invests in these securities, it will be subject to certain risks associated with increased volatility in the price of small and medium capitalization companies. Increased volatility may result from increased cash flows to a Fund and other
funds in the market that continuously or systematically buy large holdings of
small and medium capitalization companies, which can drive prices up and down
more dramatically. Additionally, the announcement that a security has
been added to a widely followed index or benchmark may cause the price of that
security to increase. Conversely, the announcement that a security
has been deleted from a widely followed index or benchmark may cause the price
of that security to decrease. To the extent that an index or
benchmark’s methodology is rules-based and transparent, any price increase
or decrease generally would be expected to be smaller than the increase or
decrease resulting from a change to a non-transparent index or benchmark
(because the transparency of the index or benchmark likely would provide the
market with more notice of such change). Because it is impossible to
predict when and how market participants will react to announced changes in the
constituent securities of a Fund’s benchmark index, the Funds cannot
predict when and how these changes will impact the market price or NAV of a
Fund.
Cash and Short-Term Investments
A Fund may invest a portion of its assets, for cash management purposes, in liquid, high-quality short-term debt securities (including repurchase agreements) of corporations, the U.S. government and its agencies and instrumentalities, and banks and finance companies. To the extent a Fund is invested in these debt securities, it may be subject to the risk that if interest rates rise, the value of the debt securities may decline.
A Fund may invest a portion of its assets in shares issued by money market mutual funds for cash management purposes. A Fund also may invest in collective investment vehicles that are managed by an unaffiliated investment manager pending investment of the Fund’s assets in portfolio securities.
Borrowing
Pursuant to Section 18(f)(1) of the 1940 Act, a Fund may not issue any class of senior security or sell any senior security of which it is the issuer, except that a Fund shall be permitted to borrow from any bank so long as immediately after such borrowings, there is an asset coverage of at least 300% and that in the event such asset coverage falls below this percentage, the Fund shall reduce the amount of its borrowings, within 3 days, to an extent that the asset coverage shall be at least 300%.
Illiquid Securities
A Fund may not invest more than 15% of its net assets in securities which it cannot sell or dispose of in the ordinary course of business within seven days at approximately the value at which the Fund has valued the investment.
Repurchase Agreements
When a Fund enters into a repurchase agreement, it purchases securities from a bank or broker-dealer, which simultaneously agrees to repurchase the securities at a mutually agreed upon time and price, thereby determining the yield during the term of the agreement. As a result, a repurchase agreement provides a fixed rate of return insulated from market fluctuations during the term of the agreement. The
term of a repurchase agreement generally is short, possibly overnight or for a
few days, although it may extend over a number of months (up to one year) from
the date of delivery. Repurchase agreements are considered under the
1940 Act to be collateralized loans by a Fund to the seller secured by the
securities transferred to the Fund. Repurchase agreements will be
fully collateralized and the collateral will be marked-to-market
daily. A Fund may not enter into a repurchase agreement having more
than seven days remaining to maturity if, as a result, such agreement, together
with any other illiquid securities held by the Fund, would exceed 15% of the
value of the net assets of the Fund.
Segregated Assets
When engaging in (or purchasing) options, futures or other derivative transactions, a Fund will cause its custodian to earmark on the custodian’s books cash, U.S. government securities or other liquid portfolio securities, which shall be unencumbered and marked-to-market daily. (Any such assets and securities designated by the custodian on its records are referred to in this SAI as “Segregated Assets.”) Such Segregated Assets shall be maintained in accordance with pertinent positions of the SEC.
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Investment Company Securities
Securities of other investment companies, including closed-end funds and offshore funds, may be acquired by a Fund to the extent that such purchases are consistent with the Fund’s investment objective and restrictions and are permitted under the 1940 Act. The
1940 Act requires that, as determined immediately after a purchase is made, (i)
not more than 5% of the value of a Fund’s total assets will be invested in
the securities of any one investment company, (ii) not more than 10% of the
value of a Fund’s total assets will be invested in securities of investment
companies as a group and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by a Fund. Certain
exceptions to these limitations may apply, and the Funds may also rely on any
future applicable SEC rules or orders that provide exceptions to these
limitations. As a shareholder of another investment company, a Fund
would bear, along with other shareholders, the Fund’s pro rata portion of
the other investment company’s expenses, including advisory
fees. These expenses would be in addition to the expenses that a Fund
would bear in connection with its own operations.
Loans of Portfolio Securities
A Fund may lend its portfolio securities to qualified broker-dealers and financial institutions pursuant to agreements. A Fund will receive any interest or dividends paid on the loaned securities and the aggregate market value of securities loaned will not at any time exceed 33 1/3% of the total assets of the Fund. Collateral will consist of U.S. and non-U.S. securities, cash equivalents or irrevocable letters of credit. There is a risk that the Fund may not be able to recall securities while they are on loan in time to vote proxies related to those securities.
A Fund is authorized to lend Fund portfolio securities to qualified institutional investors that post appropriate collateral.
SPECIAL CONSIDERATIONS
Name Policies
The Funds have adopted non-fundamental investment policies obligating them to commit, under normal market conditions, at least 80% of their assets to equity securities or investments, such as ADRs or GDRs that, in combination, have economic characteristics similar to equity securities that are contained in the
Underlying Indices and generally expect to be substantially invested at such
times, with at least 95% of their net assets invested in these
securities. For purposes of each such investment policy,
“assets” includes a Fund’s net assets, plus the amount of any
borrowings for investment purposes. In addition, for purposes of such
an investment policy, “assets” includes not only the amount of a
Fund’s net assets attributable to investments directly providing investment
exposure to the type of investments suggested by its name (e.g., the value of
stocks, or the value of derivative instruments such as futures, options or
options on futures), but also the amount of the Fund’s net assets that are
segregated on the Fund’s books and records, as required by applicable
regulatory guidance, or otherwise used to cover such investment
exposure. The Board has adopted a policy to provide investors with at
least 60 days’ notice prior to changes in a Fund’s name
policy.
Tracking and Correlation
The Funds expect that their daily returns will approximate the daily returns of their respective Underlying Indices. Several factors may affect their ability to achieve this correlation, however. Among these factors are: (1) a Fund’s expenses, including brokerage (which may be increased by high portfolio turnover) and the cost of the investment techniques employed by that Fund; (2) a Fund’s
holding of less than all of the securities in the Underlying Index and holding
securities not included in the Underlying Index; (3) an imperfect correlation
between the performance of instruments held by a Fund, such as futures
contracts, and the performance of the Fund’s underlying index; (4) bid-ask
spreads (the effect of which may be increased by portfolio turnover); (5)
holding instruments traded in a market that has become illiquid or disrupted;
(6) a Fund’s Share prices being rounded to the nearest cent; (7) changes to
the benchmark index that are not disseminated in advance; (8) the need to
conform a Fund’s portfolio holdings to comply with investment restrictions
or policies or regulatory or tax law requirements; (9) early and unanticipated
closings of the markets on which the holdings of a Fund trade, resulting in the
inability of the Fund to execute intended portfolio transactions; (10) a
Fund’s holdings of cash or cash equivalents, or otherwise not being fully
invested in securities of its Underlying Index; and (11) a Fund’s use of a
“representative sampling” strategy rather than full replication of its
Underlying Index. While close tracking of any Fund to its benchmark
may be achieved on any single trading day, over time the cumulative percentage
increase or decrease in the NAV of the Shares of a Fund may diverge
significantly from the cumulative percentage decrease or increase in the
benchmark due to a compounding effect.
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Non-Diversified Status
Each Fund is a “non-diversified” series of the Trust. A Fund’s classification as a “non-diversified” investment company means that the proportion of the Fund’s assets that may be invested in the securities of a single issuer is not limited by the 1940 Act. Each Fund, however, intends to seek to qualify as a “regulated investment company” (“RIC”)
for purposes of the Code, which imposes diversification requirements on these
Funds that are less restrictive than the requirements applicable to the
“diversified” investment companies under the 1940 Act. With respect to
a “non-diversified” Fund, a relatively high percentage of such a
Fund’s assets may be invested in the securities of a limited number of
issuers, primarily within the same economic sector. That Fund’s
portfolio securities, therefore, may be more susceptible to any single economic,
political, or regulatory occurrence than the portfolio securities of a more
diversified investment company.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental policies and may not be changed as to a Fund without the approval of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Fund. Except with respect to borrowing, and unless otherwise indicated, all percentage limitations listed below apply to a Fund only at the time of the transaction. Accordingly, if a percentage restriction is adhered to at the time of investment, a later increase or decrease in the percentage that results from a relative change in values or from a change in a Fund’s total assets will not be considered a violation. Each Fund may not:
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(1)
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Borrow money, except to the extent permitted by the 1940 Act, or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC.
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(2)
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Act as an underwriter, except to the extent the Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares.
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(3)
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Make loans if, as a result, more than 33!S% of its total assets would be lent to other persons, including other investment companies to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder which may be adopted, granted or issued by the SEC. This limitation does not apply to (i) the lending of portfolio securities, (ii) the purchase of debt securities, other debt instruments, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies, and (iii) repurchase agreements to the extent the entry into a repurchase agreement is deemed to be a loan.
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(4)
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Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) purchasing or selling securities or instruments secured by real estate or interests therein, securities or instruments representing interests in real estate or securities or instruments of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein and (ii) making, purchasing or selling real estate mortgage loans.
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(5)
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Purchase or sell commodities, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) engaging in transactions involving currencies and futures contracts and options thereon, or (ii) investing in securities or other instruments that are secured by commodities.
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(6)
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Issue senior securities, except to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC.
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(7)
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Invest 25% or more of the Fund’s net assets in securities of issuers in any one industry or group of industries (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies), except that a Fund may invest 25% or more of its net assets in securities of issuers in the same industry to approximately the same extent that the Fund’s corresponding index concentrates in the securities of a particular industry or group of industries. Accordingly, if the Fund’s corresponding index stops concentrating in the securities of a particular industry or group of industries
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the Fund will also discontinue concentrating in such securities.
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MANAGEMENT OF THE TRUST
The Trust is a Delaware statutory trust. Under Delaware law, the Board has overall responsibility for managing the business and affairs of the Trust. The Trustees elect the officers of the Trust, who are responsible for administering the day-to-day operations of the Funds.
The Trustees and officers of the Trust, along with their principal occupations over the past five years and their affiliations, if any, with EGA, are listed below. Unless otherwise noted, the address of each Trustee of the Trust is 171 East Ridgewood Ave., Ridgewood, NJ 07450.
Board Leadership Structure
The Trust is a Delaware statutory trust. Under Delaware law, the Board has overall responsibility for managing the business and affairs of the Trust. The Trustees elect the officers of the Trust, who are responsible for administering the day-to-day operations of the Fund. To help facilitate the discharge of its managerial duties, the Board has established a Nominating Committee and an Audit Committee, as discussed in more detail under “Board Committees” below.
The Board is composed of five Trustees, three of whom are independent. The Chairman of the Board, Robert C. Holderith, is an “interested person” (as that term is defined in the 1940 Act). The Chairman presides over Board meetings and approves agendas for the Board meetings in consultation with counsel to the Funds and the independent Trustees, and the Trust’s various other service providers. Because of the ease of communication arising from the relatively small size of the Board and the small number of independent Trustees, as well as the relatively recent commencement of operations of the Trust, the Board has determined not to designate a lead independent Trustee at this time, although it will revisit this determination regularly.
The Board has determined that this leadership structure is appropriate given the size, function, and nature of the Fund, as well as the Board’s oversight responsibilities. The Board believes this structure will help ensure that proper consideration is given at Board meetings to matters deemed important to the Trust and its shareholders.
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Independent Trustees
|
Name and Age
|
Position(s) Held with
Trust
|
Term of
Office
(1)
and
Length of
Time
Served
|
Principal Occupation(s)
During Past 5 Years
|
Number of Portfolios in Fund Complex
(2)
Overseen
by Trustee
|
Other Directorships Held by
Trustee
|
|
|
|
|
|
|
|
|
Robert Willens
Age: 64
|
Trustee
|
Since 2009
|
Robert Willens, LLC (tax consulting), President, since January 2008; Lehman Brothers, Inc., Managing Director, Equity Research Department, January 2004 to January 2008.
|
29
|
Daxor Corp. (Medical Products and Biotechnology), since 2004.
|
|
|
|
|
|
|
|
|
Ron Safir
Age: 60
|
Trustee
|
Since 2009
|
Retired, since 2008; UBS Wealth Management, Chief Administrative Officer, February 1971 to December 2008.
|
29
|
None
|
|
|
|
|
|
|
|
|
Jeffrey D. Haroldson
Age: 54
|
Trustee
|
Since 2009
|
HDG Mansur Capital Group, LLC, President and Chief Operating Officer, since 2004; HSBC Securities (USA), Inc., Executive Managing Director, Head of Investment and Merchant Banking, 2000 to 2003.
|
29
|
None
|
|
|
|
|
|
|
|
Interested Trustees
|
Name and Age
|
Position(s) Held with
Trust
|
Term of
Office
(1)
and
Length of
Time
Served
|
Principal Occupation(s) During
Past 5 Years
|
Number of Portfolios in Fund Complex
(2)
Overseen
by Trustee
|
Other Directorships Held by
Trustee
|
|
|
|
|
|
|
|
|
Robert C. Holderith
(3)
Age: 50
|
Trustee and President
|
Since 2008
|
Emerging Global Advisors, LLC, Managing Member and Chief Executive Officer, since September 2008; ProFund Advisors, Managing Director, Institutional Sales & Investment Analytics, June 2006 to August 2008; UBS Financial Services, Inc., Director, January 2000 to May 2006.
|
29
|
None
|
- 11 -
|
Name and Age
|
Position(s) Held with
Trust
|
Term of
Office
(1)
and
Length of
Time
Served
|
Principal Occupation(s) During
Past 5 Years
|
Number of Portfolios in Fund Complex
(2)
Overseen
by Trustee
|
Other Directorships Held by
Trustee
|
|
|
|
|
|
|
|
|
James J. Valenti
(3)
Age: 63
|
Trustee and Secretary
|
Since 2008
|
Emerging Global Advisors, LLC, Member and Chief Administrative Officer, since September 2008; Private Investor and Independent Consultant, June 2007 to September 2008; Senior Loan Consultant, Bridgepoint Mortgage Company, June 2006 to June 2007; Mercedes Benz, North America, Sales Representative, November 2000 to June 2006.
|
29
|
None
|
|
(1)
|
Each Trustee holds office for an indefinite term.
|
|
(2)
|
The “Fund Complex” consists of the Trust, which consists of twenty nine Funds.
|
|
(3)
|
Mr. Holderith and Mr. Valenti are considered to be “interested persons” of the Trust as defined in the 1940 Act, due to their relationship with EGA, the Funds’ sub-adviser.
|
|
|
The officers of the Trust not named above are:
|
|
Name and Age
|
Position(s) Held with
the Trust
|
Term of Office
(1)
and Length of Time
Served
|
Principal Occupation(s) During Past 5 Years
|
|
|
|
|
|
|
Marten S. Hoekstra
Emerging Global
Advisors, LLC
171 East Ridgewood Ave.
Ridgewood, NJ 07450
Age: 50
|
Executive Vice President
|
Since 2011
|
Chief Executive Officer,
Emerging Global
Advisors, LLC, since January 2011;
Board of Directors, Securities Industry and Financial Markets Association, 2006 - 2011;
UBS (and its predecessor, PaineWebber),
1983 - 2009 (including various executive positions starting in 2001).
|
|
|
|
|
|
|
Thomas A. Carter
ALPS Fund Services, Inc.
1290 Broadway
Suite 1100
Denver, CO 80203
Age: 44
|
Treasurer
|
Since 2009
|
Mr. Carter joined ALPS Fund Services, Inc. (“ALPS Fund Services”) in 1994 and is currently President and Director of ALPS Advisors, Inc. (“AAI”), ALPS Distributors, Inc. (“ADI”) and FTAM Funds Distributor, Inc. and Executive Vice President and Director of ALPS Fund Services and ALPS Holdings, Inc.
|
- 12 -
|
Name and Age
|
Position(s) Held with
the Trust
|
Term of Office
(1)
and Length of Time
Served
|
Principal Occupation(s) During Past 5 Years
|
|
|
|
|
|
|
Melanie H. Zimdars
ALPS Fund Services, Inc.
1290 Broadway
Suite 1100
Denver, CO 80203
Age: 34
|
Chief Compliance Officer
|
Since 2010
|
ALPS Fund Services, Inc., Deputy Chief Compliance Officer, since September 2009; ALPS ETF Trust, Chief Compliance Officer, since December 2009; EGA Emerging Global Shares Trust, Chief Compliance Officer, since March 2010; Financial Investors Variable Insurance Trust, Chief Compliance Officer, since September 2009; Grail Advisors ETF Trust, Chief Compliance Officer, since September 2010; Liberty All-Star Growth Fund, Inc., Chief Compliance Officer, since December 2009; Liberty All-Star Equity Fund, Chief Compliance Officer, since December 2009; Wasatch Funds, Principal Financial Officer, Treasurer and Secretary, February 2007 to December 2008; Wasatch Funds, Assistant Treasurer, November 2006 to February 2007; Wasatch Funds, Senior Compliance Officer, 2005 to December 2008.
|
|
|
|
|
|
___________________
|
(1)
|
Officers of the Trust are elected by the Trustees and serve at the pleasure of the Board.
|
Share Ownership
As of December 31, 2010, the Independent Trustees did not own any securities issued by the Adviser, EGA, the Distributor, or any company controlling, controlled by, or under common control with the Adviser, EGA, or the Distributor. Information relating to each Trustee’s ownership (including the ownership of his or her immediate family) in the Funds in this SAI and in all registered investment companies in the EGA Fund Complex as of December 31, 2010 is set forth in the chart below.
|
Name
|
Dollar Range of Fund Shares Owned
|
Aggregate Dollar Range of Shares Owned in All Funds Overseen by Trustee in Family of Investment
Companies
|
|
Independent Trustees
:
|
|
|
|
Robert Willens
|
$0
|
$0
|
|
Ron Safir
|
$0
|
$0
|
|
Jeffrey D. Haroldson
|
$0
|
$0
|
|
Interested Trustees
:
|
|
|
|
Robert C. Holderith
|
$0
|
$0
|
|
James J. Valenti
|
$0
|
$0
|
As of December 31, 2010, the Trust’s Trustees and officers owned individually and as a group less than 1% of the outstanding Shares of any of the Funds.
- 13 -
Trustees’ Compensation
|
Name
|
Annual
Aggregate
Compensation
From the Trust
|
Pension or
Retirement
Benefits Accrued
As Part of Fund
Expenses
|
Total
Compensation
From the Trust and
Fund Complex
Paid to Trustees
|
|
|
|
|
|
|
Independent Trustees
|
|
|
|
|
Robert Willens
|
$10,000
|
$0
|
$10,000
|
|
Ron Safir
|
$10,000
|
$0
|
$10,000
|
|
Jeffrey D. Haroldson
|
$10,000
|
$0
|
$10,000
|
|
|
|
|
|
|
Interested Trustees
|
|
|
|
|
Robert C. Holderith, Trustee
|
$0
|
$0
|
$0
|
|
James J. Valenti, Trustee
|
$0
|
$0
|
$0
|
___________________
No officer of the Trust who is also an officer or employee of EGA receives any compensation from the Trust for services to the Trust. The Trust pays each Trustee who is not affiliated with EGA $2,500 for each in-person meeting attended and $500 for each special telephonic meeting attended. The Trust also reimburses each Trustee and officer for out-of-pocket expenses incurred in connection with travel to and attendance at Board meetings.
- 14 -
Trustee Qualifications
Information on the Trust’s officers and Trustees appears above. Such information includes business activities of the Trustees during the past five years and beyond. In addition to personal qualities – such as integrity, trustworthiness, and responsibility – the role of an effective Trustee also requires the ability to comprehend, discuss and critically analyze materials and issues presented in exercising judgments and reaching informed conclusions relevant to their duties and fiduciary obligations.
In particular, each Trustee has significant experience in the financial industry. Prior to founding EGA, Mr. Holderith held a senior management position with a prominent ETF advisory firm. Mr. Haroldson is President and COO of a global real estate fund management firm. Mr. Safir was until recently the Chief
Administrative Officer of UBS Wealth Management. Mr. Willens
currently runs his own tax consulting firm and was previously managing Director
of Equity Research at a major investment banking firm. Mr. Valenti
has held various positions in the financial and banking industry over the past
four decades. The Board therefore believes that the specific
background of each Trustee, combined with their abilities and personal
qualities, evidences these abilities and is appropriate to their service on the
Board of Trustees. The Board will regularly re-assess its
qualifications in their annual self-assessment.
Board Committees
Audit Committee.
The Audit Committee is composed of all of the Independent Trustees. Robert Willens is the Chairman of the Audit Committee. The Audit Committee has the responsibility, among other things, to: (i) select,
oversee and set the compensation of the Trust’s independent registered
public accounting firm; (ii) oversee the Trust’s accounting and financial
reporting policies and practices, its internal controls and, as appropriate, the
internal controls of certain service providers; (iii) oversee the quality and
objectivity of each Fund’s financial statements and the independent
audit(s) thereof; and (iv) act as a liaison between the Trust’s independent
registered public accounting firm and the full Board. There were two
Audit Committee meetings during the fiscal year ended March 31,
2011.
Nominating Committee.
The Nominating Committee is composed of all of the Independent Trustees. Ron Safir is the Chairman of the Nominating Committee. The Nominating Committee has the responsibility, among other things, to: (i) make recommendations and consider shareholder recommendations for nominations for Board members; and (ii) periodically review independent Board member compensation. There were no Nominating Committee meetings held during the fiscal year ended March 31, 2011.
While the Nominating Committee is solely responsible for the selection and nomination of Trustee candidates, the Nominating Committee may consider nominees recommended by Fund shareholders. The Nominating Committee will consider recommendations for nominees from shareholders sent to the Secretary of the Trust, c/o Emerging Global Advisors, LLC, 171 East Ridgewood Ave., Ridgewood,
NJ 07450. A nomination submission must include all information
relating to the recommended nominee that is required to be disclosed in
solicitations or proxy statements for the election of Trustees, as well as
information sufficient to evaluate the individual’s
qualifications. Nomination submissions must be accompanied by a
written consent of the individual to stand for election if nominated by the
Board and to serve if elected by the shareholders, and such additional
information must be provided regarding the recommended nominee as reasonably
requested by the Nominating Committee.
Oversight of Risk
The Board regularly supervises the risk management and oversight of the Trust as part of its general oversight responsibilities throughout the year at regular Board meetings and through regular reports from the Trust’s service providers. These reports address certain investment, valuation and compliance matters. The Board also may receive special written reports or presentations on a variety of risk issues.
The Board considers risk as part of its regular review of the activities of the Adviser and Sub-Adviser with respect to the Trust, including risks related to the duties and responsibilities of the day-to-day portfolio manager and his compensation, as well as risks related to the technology and other facilities used to manage the Funds. The Board receives regular written reports describing and analyzing the investment performance of the Funds. In addition, the portfolio manager of the Funds meets regularly with the Board to discuss portfolio performance, including risks inherent in tracking the applicable Underlying Indices.
- 15 -
The Board receives regular compliance reports from Ms. Zimdars, the Trust’s Chief Compliance Officer (“CCO”), and meets regularly with Ms. Zimdars to discuss compliance issues, including the alleviation of compliance-related risks. As required under SEC rules, the independent Trustees meet at least quarterly in executive session with the CCO, and the CCO prepares and presents an annual written compliance report to the Board. The Board adopts compliance policies and procedures for the Trust and approves such procedures for the Trust’s service providers. The compliance policies and procedures are specifically designed to detect and prevent violations of the federal securities laws.
The Fund’s administrator provides the Board with regular written reports that monitor fair valued securities, if any, the reasons for the fair valuation and the methodology used to arrive at the fair value. These reports also include information concerning illiquid securities, if any, within the Fund’s portfolio.
In addition, the Audit Committee, which is composed of the Independent Trustees, monitors, among other things, the Trust’s internal controls, accounting and financial reporting policies. In addition, the Trust’s Audit Committee reviews valuation procedures and pricing results with the Trust’s auditors in connection with the Committee’s review of the results of the audit of the Trust’s year-end financial statements.
Notwithstanding these oversight efforts, the Board recognizes that not all risks are capable of identification, control, and/or mitigation.
Control Persons and Principal Holders of Securities
Any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of the Fund is presumed to control that Fund under the provisions of the 1940 Act. Note that a controlling person may possess the ability to control the outcome of matters submitted for shareholder vote of that Fund. Because the Funds had not yet commenced operations as of the date of this SAI, no persons own 5% or more of the Shares of the Funds. As of the date of this SAI, the Trustees and officers of the Trust owned in the aggregate less than 1% of the shares of the Trust (all series taken together).
INVESTMENT ADVISORY, PRINCIPAL UNDERWRITING
AND OTHER SERVICE ARRANGEMENTS
Investment Adviser
The Adviser, a Colorado corporation with its principal offices located at 1290 Broadway, Suite 1100, Denver, Colorado 80203, serves as the investment adviser to the Funds. The Adviser provides investment advisory services to each Fund pursuant to an Investment Advisory Agreement dated May 19, 2011, between the Trust and the Adviser (the “Advisory Agreement”). Pursuant to the Advisory Agreement, the Adviser has overall supervisory responsibility for the general management and investment of each Fund’s securities portfolio, and has ultimate responsibility (subject to oversight by the Trust’s Board of Trustees) for oversight of the Trust’s sub-advisers.
As described in the formula below, the annual management fee paid by the Trust to the Adviser under the Advisory Agreement is based on total assets of the Trust. For the first twelve series of the Trust to offer shares to the public (the “Original Funds”), the annual management fee paid by the Trust to the Adviser is subject to both a minimum amount and a cap. For each additional series of the Trust offered to the public (the “Additional Funds”), including all of the Funds of this SAI, the minimum amount and the cap rise proportionately. The annual management fee paid by the Additional Funds is credited for the annual management fees paid by the Original Funds.
For its services, the Trust pays the Adviser
an annual management fee, accrued daily at the rate of 1/365th of the applicable
advisory fee rate and payable monthly as soon as practicable after the last day
of each month, in an amount calculated as follows: (a) For the
Original Funds, the greater of (i) $400,000.00 or (ii) 10 basis points of each
Original Fund’s daily net assets during the month, but in either event not
to exceed $1,000,000 per year; and (b) for the Additional Funds, the greater of
(i) $400,000.00 plus (x) $33,333.33 for each operating Additional Fund, minus
(y) any management fees paid to the Adviser by the Original Funds, or (ii) 10
basis points of each Additional Fund’s daily net assets during the month,
but in either event not to exceed annually $1,000,000 plus (x) $83,333.33 for
each operating Additional Fund, minus (y) any management fees paid to the
Adviser by the Original Funds.
- 16 -
Sub-Adviser
EGA, a Delaware limited liability company located at 171 East Ridgewood Ave., Ridgewood, NJ 07450, serves as the sub-adviser to the Funds. Marten S. Hoekstra is the Chief Executive Officer of EGA. Robert C. Holderith is the President of EGA. EGA is registered as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), with the SEC.
EGA provides investment advisory services to each Fund pursuant to the Investment Advisory Agreement dated April 17, 2009, between the Trust and EGA (the “Sub-Advisory Agreement”). Pursuant to the Sub-Advisory Agreement, EGA manages the day-to-day investment and reinvestment of the assets in each Fund and is responsible for the day-to-day portfolio management of the Funds, including designating the Deposit Securities and monitoring each Fund’s adherence to its investment mandate. Pursuant to the Sub-Advisory Agreement, each Fund pays EGA a fee equal to 0.89% of the average daily net assets of each Fund.
For
each Fund (except the EGShares Emerging Markets High Income Low Beta ETF and
the EGShares Emerging Markets Food and Agriculture ETF), the Trust and EGA have
entered into a written fee waiver and expense reimbursement agreement pursuant
to which EGA has agreed to waive a portion of its fees and/or reimburse
expenses to the extent necessary to keep the Fund’s Total Annual Fund Operating
Expenses (excluding any taxes, interest, brokerage fees and non-routine
expenses) from exceeding 0.89% of net assets. These agreements will remain in
effect and will be contractually binding through July 31, 2012. If Total Annual
Fund Operating Expenses would fall below the expense limit, EGA may cause the
Fund’s expenses to remain at the expense limit while it is reimbursed for fees
that it waived or expenses that it assumed during the previous three year
period. These agreements shall automatically terminate upon the termination of
the Sub-Advisory Agreement or, with respect to a Fund, in the event of merger
or liquidation of the Fund. For the EGShares Emerging Markets High Income Low
Beta ETF and the EGShares Emerging Markets Food and Agriculture ETF, the Trust
and EGA have entered into a written fee waiver and expense reimbursement
agreement pursuant to which EGA has agreed to waive a portion of its fees
and/or reimburse expenses to the extent necessary to keep the Fund’s Total
Annual Fund Operating Expenses (excluding any taxes, interest, brokerage fees
and non-routine expenses) from exceeding 0.85% of net assets. These agreements
will remain in effect and will be contractually binding through July 31, 2012. If
Total Annual Fund Operating Expenses would fall below the expense limit, EGA
may cause the Fund’s expenses to remain at the expense limit while it is
reimbursed for fees that it waived or expenses that it assumed during the
previous three year period. These agreements shall automatically terminate
upon the termination of the Sub-Advisory Agreement or, with respect to a Fund,
in the event of merger or liquidation of the Fund.
Portfolio Manager
Compensation of the Portfolio Manager and Other Accounts Managed
.
For his services as a portfolio manager of the Funds, Richard C. Kang receives an annual salary from EGA. As of March 31, 2011, Mr. Kang managed 9 other EGA funds that, like the Funds, are series of the Trust, and have investment strategies of replicating an underlying index. The 9 other EGA funds managed by Mr. Kang had, as of March 31, 2011 $524 million in total assets under management. None of the Funds are subject to a performance fee. Mr. Kang does not manage any other accounts.
Description of Material Conflicts of Interest.
Although the Funds in the Trust that are managed by Mr. Kang may have different investment strategies, each has a portfolio objective of replicating its underlying index. EGA does not believe that management of the different Funds of the Trust presents a material conflict of interest for Mr. Kang.
Portfolio Manager’s Ownership of Shares of the Funds.
As of March 31, 2011, Mr. Kang did not own any Shares of the Funds.
Administrator and Fund Accountant
The Bank of New York Mellon (“BNY Mellon”) serves as Administrator and Fund Accountant for the Funds. Its principal address is 101 Barclay Street, New York, New York 10286. Under the Fund Administration and Accounting Agreement with the Trust,
BNY Mellon provides necessary administrative, tax, accounting services and
financial reporting for the maintenance and operations of the Trust and each
Fund. In addition, BNY Mellon makes available the office space,
equipment, personnel and facilities required to provide such
services. As compensation for the foregoing services, BNY Mellon
receives certain out of pocket costs, transaction fees and asset based fees,
which are accrued daily and paid monthly by the Trust. The Trust made
payments to BNY Mellon in the amount of $92,248 for administrative services
during the fiscal year ended March 31, 2011.
Custodian and Transfer Agent
BNY Mellon also serves as custodian for the Funds pursuant to a Custody Agreement. Under the Custody Agreement with the Trust, BNY Mellon maintains in separate accounts cash, securities and other assets of the Trust and each Fund, keeps the accounts and records related to these services, and provides other services. BNY Mellon is required, upon the order of the Trust, to deliver securities held by BNY Mellon and to make payments for securities purchased by the Trust for each Fund. As compensation for the foregoing services, BNY Mellon receives certain out of pocket costs, transaction fees and asset based fees, which are accrued daily and paid monthly by the Trust.
- 17 -
Pursuant to a Transfer Agency and Services Agreement with the Trust, BNY Mellon acts as transfer agent for each Fund’s authorized and issued Shares, and as dividend disbursing agent of the Trust. As compensation for the foregoing services, BNY Mellon receives certain out of pocket costs, transaction fees and asset based fees, which are accrued daily and paid monthly by the Trust.
Distributor
ALPS, an affiliate of the Adviser, is the Distributor of each Fund’s Shares. Its principal address is 1290 Broadway, Suite 1100, Denver, Colorado 80203. The Distributor has entered into a Distribution Agreement with the Trust pursuant to which it distributes Fund Shares. Shares are continuously offered for sale by the Fund through the Distributor only in Creation Unit Aggregations, as described in the Prospectus and below under the heading “Creation and Redemption of Creation Unit Aggregations.”
Other Service Providers
ALPS Fund Services, Inc. (“AFS”), an affiliate of the Adviser and the Distributor, provides a Chief Compliance Officer and an Anti-Money Laundering Officer as well as certain additional compliance support functions under a Compliance Services Agreement. AFS also provides a Principal Financial Officer to the Trust under a PFO Services Agreement. As compensation for the foregoing services, the Funds pay AFS a flat fee plus certain out-of-pocket costs.
Independent Registered Public Accounting Firm
BBD, LLP, 1835 Market Street, 26th Floor, Philadelphia, PA 19103, the Trust’s independent registered public accounting firm, examines each Fund’s financial statements and may provide other audit, tax and related services, subject to approval by the Audit Committee when applicable.
Counsel
Stradley Ronon Stevens & Young, LLP, 2600 One Commerce Square, Philadelphia, Pennsylvania 19103, serves as counsel to the Trust.
Costs and Expenses
Each
Fund bears all expenses of its operations other than those assumed by EGA or the
Administrator. Fund expenses include: the investment
advisory fee; the sub-advisory fee paid to EGA; management services fee;
administrative fees, index receipt agent fees, transfer agency fees and
shareholder servicing fees; custodian and accounting fees and expenses; legal
and auditing fees; securities valuation expenses; fidelity bonds and other
insurance premiums; expenses of preparing and printing prospectuses, product
descriptions, confirmations, proxy statements, and shareholder reports and
notices; registration fees and expenses; proxy and annual meeting expenses, if
any; licensing fees; listing fees; all Federal, state, and local taxes
(including, without limitation, stamp, excise, income, and franchise taxes);
organizational costs; and Independent Trustees’ fees and
expenses.
Rule 12b-1 Plan
Shares will
be continuously offered for sale by the Trust through the Distributor only in
Creation Units, as described below under “Creation and Redemption of
Creation Unit Aggregations.” Shares in less than Creation Units are not
distributed by the Distributor. The Distributor also acts as agent
for the Trust. The Distributor will deliver a prospectus to persons purchasing
Shares in Creation Units and will maintain records of both orders placed with it
and confirmations of acceptance furnished by it. The Distributor is a
broker-dealer registered under the Securities Exchange Act of 1934, as amended
(the “1934 Act”) and a member of the Financial Industry Regulatory
Authority, Inc. (“FINRA”). The Distributor has no role in determining
the investment policies of the Funds or which securities are to be purchased or
sold by the Funds.
- 18 -
Pursuant to Rule 12b-1 under the 1940 Act, the Board has approved a Distribution and Service Plan under which each Fund may pay financial intermediaries such as broker-dealers and investment advisers (“Authorized Firms”) up to 0.25%, on an annualized basis, of average daily net assets of the Fund as reimbursement or compensation for distribution-related activities with respect to the Shares of the Fund and shareholder services. Under the Distribution and Service Plan, the Trust or the Distributor may enter into agreements (“Distribution and Service Agreements”) with Authorized Firms that purchase Shares on behalf of their clients. There are currently no plans to impose these distribution fees on the Funds.
The Distribution and
Service Plan and Distribution and Service Agreements will remain in effect for a
period of one year and will continue in effect thereafter only if such
continuance is specifically approved annually by a vote of the
Trustees. All material amendments of the Distribution and Service
Plan must also be approved by the Trustees in the manner described above. The
Distribution and Service Plan may be terminated at any time by a majority of the
Trustees as described above or by vote of a majority of the outstanding Shares
of the affected Fund. The Distribution and Service Agreements may be
terminated at any time, without payment of any penalty, by vote of a majority of
the Trustees as described above or by a vote of a majority of the outstanding
Shares of the affected Fund on not more than 60 days’ written notice to any
other party to the Distribution and Service Agreements. The Distribution and
Service Agreements shall terminate automatically if assigned. The
Trustees have determined that, in their judgment, there is a reasonable
likelihood that the Distribution and Service Plan will benefit the Funds and
holders of Shares of the Funds. In the Trustees’ quarterly
review of the Distribution and Service Plan and Distribution and Service
Agreements, they will consider their continued appropriateness and the level of
compensation and/or reimbursement provided therein.
The Distribution and Service Plan is intended to permit the financing of a broad array of distribution-related activities and services, as well as shareholder services, for the benefit of investors. These activities and services are intended to make the Shares an attractive investment alternative, which may lead to increased assets, increased investment opportunities and diversification, and reduced per share operating expenses.
PORTFOLIO TRANSACTIONS AND BROKERAGE COMMISSIONS
EGA has general
responsibility for placing orders on behalf of the Funds for the purchase or
sale of portfolio securities. Pursuant to the Sub-Advisory Agreement,
EGA is authorized to select the brokers or dealers that will execute the
purchases and sales of securities for the Funds and is directed to implement the
Trust’s policy of using best efforts to obtain the best available price and
most favorable execution. When securities transactions are effected
on a stock exchange, the Trust’s policy is to pay commissions that are
considered fair and reasonable without necessarily determining that the lowest
possible commissions are paid in all circumstances. In seeking to
determine the reasonableness of brokerage commissions paid in any transaction,
EGA relies upon its experience and knowledge regarding commissions generally
charged by various brokers. EGA effects transactions with those
brokers and dealers that it believes provide the most favorable prices and are
capable of providing efficient executions. The sale of Fund Shares by
a broker-dealer is not a factor in the selection of broker-dealers and EGA does
not currently participate in soft dollar transactions with respect to the
Funds.
Portfolio Holding Disclosure Policies and Procedures
The Trust has adopted a policy regarding the disclosure of information about the Trust’s portfolio holdings. The Board must approve all material amendments to this policy. The Funds’ portfolio holdings are publicly disseminated each day the Funds are open for business through financial reporting and news services, including publicly accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for Fund Shares, together with estimates and actual cash components, is publicly disseminated daily prior to the opening of the Exchange via the National Securities Clearing Corporation (“NSCC”). The basket represents one Creation Unit of each Fund.
- 19 -
Proxy Voting Policy
The Board has delegated to EGA the responsibility to vote proxies with respect to the portfolio securities held by the Funds. EGA has adopted policies and procedures with respect to voting proxies relating to securities held in client accounts for which it has discretionary authority. Information on how EGA voted proxies on behalf of the Funds relating to portfolio securities during the most recent 12-month (or shorter, as applicable) period ended June 30 may be obtained (i) without charge, upon request, through the Funds’ website at www.egshares.com; and (ii) on the SEC’s website at http://www.sec.gov or the EDGAR database on the SEC’s website. Proxy voting policies for EGA are included as Appendix A to this SAI.
Codes of Ethics
Pursuant to Rule 17j-1 under the 1940 Act, the Board of Trustees has adopted a Code of Ethics for the Trust and approved Codes of Ethics adopted by the Adviser, EGA and the Distributor (collectively the “Codes”). The Codes are intended to ensure that the interests of shareholders
and other clients are placed ahead of any personal interest, that no undue
personal benefit is obtained from any person’s employment activities and
that actual and potential conflicts of interest are avoided. The
Codes apply to the personal investing activities of certain individuals employed
by or associated with the Trust, the Adviser, EGA or the Distributor
(“Access Persons”). Rule 17j-1 and the Codes are designed
to prevent unlawful practices in connection with the purchase or sale of
securities by Access Persons. Under the Codes, Access Persons are
permitted to engage in personal securities transactions, but are required to
report their personal securities transactions for monitoring
purposes. The Codes permit personnel subject to the Codes to invest
in securities subject to certain limitations, including securities that may be
purchased or held by a Fund. In addition, certain Access Persons are
required to obtain approval before investing in initial public offerings or
private placements. The Codes are on file with the SEC, and are
available to the public.
ADDITIONAL INFORMATION CONCERNING SHARES
Description of Shares of Beneficial Interest
Each Fund is authorized to issue an unlimited number of Shares of beneficial interest without par value. Each Share of beneficial interest represents an equal proportionate interest in the assets and liabilities of the Fund and has identical voting, dividend, redemption, liquidation and other rights and preferences as the other Shares of the Fund.
Under Delaware law, the Trust is not required to, and the Trust does not presently intend to, hold regular annual meetings of shareholders. Meetings of the shareholders of one or more of the Funds may be held from time to time to consider certain matters, including changes to a Fund’s fundamental investment policies, changes to the Management Agreement and the election of Trustees when required by the 1940 Act.
When matters are submitted to shareholders for a vote, shareholders are entitled to one vote per Share with proportionate voting for fractional Shares. The Shares of a Fund do not have cumulative voting rights or any preemptive or conversion rights, and the Trustees have authority, from time to time, to divide or combine the Shares of the Fund into a greater or lesser number of Shares so affected. In the case of a liquidation of a Fund, each shareholder of the Fund will be entitled to share, based upon the shareholder’s percentage ownership, in the distribution of assets, net of liabilities, of the Fund. No shareholder is liable for further calls or assessment by a Fund.
On any matter submitted to a vote of the shareholders, all Shares shall vote in the aggregate without differentiation between the Shares of the separate Funds or separate classes, if any, provided that (i) with respect to any matter that affects only the interests of some
but not all Funds, then only the Shares of such affected Funds, voting
separately, shall be entitled to vote on the matter, (ii) with respect to any
matter that affects only the interests of some but not all classes, then only
the Shares of such affected classes, voting separately, shall be entitled to
vote on the matter; and (iii) notwithstanding the foregoing, with respect to any
matter as to which the 1940 Act or other applicable law or regulation requires
voting by Fund or by class, then the Shares of the Trust shall vote as
prescribed in that law or regulation.
- 20 -
Book Entry Only System
DTC acts as securities depositary for the Shares. The Shares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates will not be issued for Shares.
DTC has advised the Trust as follows: it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered
pursuant to the provisions of Section 17A of the 1934 Act. DTC was
created to hold securities of its participants (“DTC Participants”)
and to facilitate the clearance and settlement of securities transactions among
the DTC Participants in such securities through electronic book-entry changes in
accounts of the DTC Participants, thereby eliminating the need for physical
movement of securities certificates. DTC Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, some of whom (and/or their representatives) own
DTC. More specifically, DTC is owned by a number of its DTC
Participants and by the NYSE, the NYSE Amex and the FINRA. Access to the DTC
system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly (“Indirect
Participants”). DTC agrees with and represents to DTC
Participants that it will administer its book-entry system in accordance with
its rules and by-laws and requirements of law. Beneficial ownership
of Shares is limited to DTC Participants, Indirect Participants and persons
holding interests through DTC Participants and Indirect Participants. Ownership
of beneficial interests in Shares (owners of such beneficial interests are
referred to herein as “Beneficial Owners”) is shown on, and the
transfer of ownership is effected only through, records maintained by DTC (with
respect to DTC Participants) and on the records of DTC Participants (with
respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of
Shares. The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive
form. Such laws may impair the ability of certain investors to acquire
beneficial interests in Shares.
Beneficial Owners of Shares are not entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial Owner must
rely on the procedures of DTC, the DTC Participant and any Indirect Participant
through which such Beneficial Owner holds its interests, to exercise any rights
of a holder of Shares. The Trust understands that under existing
industry practice, in the event the Trust requests any action of holders of
Shares, or a Beneficial Owner desires to take any action that DTC, as the record
owner of all outstanding Shares, is entitled to take, DTC would authorize the
DTC Participants to take such action and that the DTC Participants would
authorize the Indirect Participants and Beneficial Owners acting through such
DTC Participants to take such action and would otherwise act upon the
instructions of Beneficial Owners owning through them. As described
above, the Trust recognizes DTC or its nominee as the owner of all Shares for
all purposes. Conveyance of all notices, statements and other
communications to Beneficial Owners is effected as follows. Pursuant
to the Depositary Agreement between the Trust and DTC, DTC is required to make
available to the Trust upon request and for a fee to be charged to the Trust a
listing of Shares holdings of each DTC Participant. The Trust shall
inquire of each such DTC Participant as to the number of Beneficial Owners
holding Shares, directly or indirectly, through such DTC
Participant. The Trust shall provide each such DTC Participant with
copies of such notice, statement or other communication, in such form, number
and at such place as such DTC Participant may reasonably request, in order that
such notice, statement or communication may be transmitted by such DTC
Participant, directly or indirectly, to such Beneficial Owners. In
addition, the Trust shall pay to each such DTC Participant a fair and reasonable
amount as reimbursement for the expenses attendant to such transmittal, all
subject to applicable statutory and regulatory requirements.
Distributions
of Shares shall be made to DTC or its nominee, Cede & Co., as the registered
holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts with
payments in amounts proportionate to their respective beneficial interests in
Shares as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a “street name,” and will be
the responsibility of such DTC Participants. The Trust has no
responsibility or liability for any aspects of the records relating to or
notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in such Shares, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests or for any other
aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
- 21 -
DTC may determine to
discontinue providing its service with respect to Shares at any time by giving
reasonable notice to the Trust and discharging its responsibilities with respect
thereto under applicable law. Under such circumstances, the Trust
shall take action either to find a replacement for DTC to perform its functions
at a comparable cost or, if such a replacement is unavailable, to issue and
deliver printed certificates representing ownership of Shares, unless the Trust
makes other arrangements with respect thereto satisfactory to the
Exchange. In addition, certain brokers may make a dividend
reinvestment service available to their clients. Brokers offering
such services may require investors to adhere to specific procedures and
timetables in order to participate. Investors interested in such a
service should contact their broker for availability and other necessary
details.
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS
Creation
The Trust issues and sells Shares of a Fund only in Creation Unit Aggregations on a continuous basis through the Distributor, without a sales load, at their NAVs next determined after receipt, on any Business Day (as defined below), of an order in proper form.
A “Business Day” is any day on which the NYSE is open for business. As of the date of this SAI, the NYSE observes the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of Securities and Deposit or Delivery of Cash
The consideration for purchase of Creation Unit Aggregations of a Fund generally consists of the in-kind deposit of a designated portfolio of equity securities — the “Deposit Securities” — per each Creation Unit Aggregation constituting a substantial replication of the stocks included in the Underlying Index (“Fund Securities”) and an amount of cash — the “Cash Component” — computed as described below. Together, the Deposit Securities and the Cash Component constitute the “Fund Deposit,” which represents the minimum initial and subsequent investment amount for a Creation Unit Aggregation of a Fund.
The Cash Component is sometimes also referred to as the Balancing Amount. The Cash Component serves the function of compensating for any differences between the NAV per Creation Unit Aggregation and the Deposit Amount (as defined below). The Cash Component is an amount equal to the difference between the NAV of the Fund Shares (per Creation Unit Aggregation) and the “Deposit Amount” — an amount equal to the market value of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per Creation Unit Aggregation exceeds the Deposit Amount), the creator will deliver the Cash Component. If the Cash Component is a negative number (i.e., the NAV per Creation Unit Aggregation is less than the Deposit Amount), the creator will receive the Cash Component.
The Custodian, through the NSCC (discussed below), makes available on each Business Day, prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern time), the list of the names and the required number of shares of each Deposit Security to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for each Fund. Such Fund Deposit is applicable, subject to any adjustments as described below, in order to effect creations of Creation Unit Aggregations of the Fund until such time as the next-announced composition of the Deposit Securities is made available.
The identity and number of shares of the Deposit Securities required for a Fund Deposit for a Fund changes as rebalancing adjustments and corporate action events are reflected within the Fund from time to time by EGA with a view to the investment objective of the Fund. The composition of the Deposit Securities may also change in response to adjustments to the
weighting or composition of the Component Stocks of the Underlying
Index. In recognition of longer settlement periods for emerging
market securities, EGA may at times engage in rebalancing trades, or the
composition of the Deposit Securities may at times change, in advance of
anticipated adjustments to the weighting or composition of the Component Stocks
of the Underlying Index. In addition, the Trust reserves the right to
permit or require the substitution of an amount of cash — i.e., a
“cash in lieu” amount — to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient quantity
for delivery or that may not be eligible for transfer through the systems of
DTC, or which might not be eligible for trading by an Authorized Participant (as
defined below) or the investor for which it is acting or other relevant reason.
Brokerage commissions incurred in connection with the acquisition of Deposit
Securities not eligible for transfer through the systems of DTC will be at the
expense of a Fund and will affect the value of all Shares; but the Adviser or
EGA, subject to the approval of the Board of Trustees, may adjust the
transaction fee within the parameters described above to protect ongoing
shareholders. The adjustments described above will reflect changes known to the
Adviser or EGA on the date of announcement to be in effect by the time of
delivery of the Fund Deposit, in the composition of the Underlying Index or
resulting from certain corporate actions.
- 22 -
In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC, also makes available on each Business Day, the estimated Cash Component, effective through and including the previous Business Day, per outstanding Creation Unit Aggregation of the Fund.
Procedures for Creation of Creation Unit Aggregations
To be eligible to place orders with the Distributor and to create a Creation Unit Aggregation of a Fund, an entity must be a DTC Participant (see the Book Entry Only System section), and, in each case, must have executed an agreement with the Distributor, with respect to creations and redemptions of Creation Unit Aggregations (“Participant Agreement”) (discussed below). A DTC Participant is also referred to as an “Authorized Participant.” Investors should contact the Distributor for the names of Authorized Participants that have signed a Participant Agreement. All Fund Shares, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant.
All orders
to create Creation Unit Aggregations, (through an Authorized Participant), must
be received by the Distributor no later than the closing time of the regular
trading session on the Exchange (“Closing Time”) (ordinarily 4:00
p.m., Eastern time) in each case on the date such order is placed in order for
creation of Creation Unit Aggregations to be effected based on the NAV of Shares
of each Fund as next determined on such date after receipt of the order in
proper form. The Distributor will not accept cash orders received after 3:00
p.m. Eastern time on the trade date. A cash order may be placed by an Authorized
Participant in the event that the Trust permits or requires the substitution of
an amount of cash to be added to the Cash Component to replace any Deposit
Security which may not be available in sufficient quantity for delivery or which
may not be eligible for trading by such Authorized Participant or the investor
for which it is acting or other relevant reason. The date on which an order to
create Creation Unit Aggregations (or an order to redeem Creation Unit
Aggregations, as discussed below) is placed is referred to as the
“Transmittal Date.” Orders must be transmitted by an Authorized
Participant by telephone or other transmission method acceptable to the
Distributor pursuant to procedures set forth in the Participant Agreement, as
described below (see the “Placement of Creation Orders” section).
Severe economic or market disruptions or changes, or telephone or other
communication failure may impede the ability to reach the Distributor or an
Authorized Participant.
All orders from
investors who are not Authorized Participants to create Creation Unit
Aggregations shall be placed with an Authorized Participant, as applicable, in
the form required by such Authorized Participant. In addition, the Authorized
Participant may request the investor to make certain representations or enter
into agreements with respect to the order, e.g., to provide for payments of
cash, when required. Investors should be aware that their particular broker may
not have executed a Participant Agreement and that, therefore, orders to create
Creation Unit Aggregations of a Fund have to be placed by the investor’s
broker through an Authorized Participant that has executed a Participant
Agreement. In such cases there may be additional charges to such investor. At
any given time, there may be only a limited number of broker-dealers that have
executed a Participant Agreement. Those placing orders for Creation Unit
Aggregations should afford sufficient time to permit proper submission of the
order to the
Distributor prior to the Closing Time on the Transmittal Date.
- 23 -
Orders for Creation Unit Aggregations
Those placing orders should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component.
Placement of Creation Orders
For each Fund, the Custodian shall cause the sub-custodian of the Fund to
maintain an account into which the Authorized Participant shall deliver, on
behalf of itself or the party on whose behalf it is acting, the securities
included in the designated Fund Deposit (or the cash value of all or part of
such of such securities, in the case of a permitted or required cash purchase or
“cash in lieu” amount), with any appropriate adjustments as advised by
the Trust. Deposit Securities must be delivered to an account maintained at the
applicable local sub-custodian(s). Orders to purchase Creation Unit Aggregations
must be received by the Distributor from an Authorized Participant on its own or
another investor’s behalf by the closing time of the regular trading
session on the Exchange on the relevant Business Day. However, when a relevant
local market is closed due to local market holidays, the local market settlement
process will not commence until the end of the local holiday period. Settlement
must occur by 2:00 p.m., Eastern time, on the date by which an executed creation
order must be settled (the “Contractual Settlement
Date”).
The Authorized Participant must also make available no later than 2:00 p.m., Eastern time, on the Contractual Settlement Date, by means satisfactory to the Trust, immediately-available or same-day funds estimated by the Trust to be sufficient to pay the Cash Component next determined after acceptance of the purchase order, together with the applicable purchase transaction fee. Any excess funds will be returned following settlement of the issue of the Creation Unit Aggregation.
To the extent
contemplated by the applicable Participant Agreement, Creation Unit Aggregations
of a Fund will be issued to such Authorized Participant notwithstanding the fact
that the corresponding Fund Deposits have not been received in part or in whole,
in reliance on the undertaking of the Authorized Participant to deliver the
missing Deposit Securities as soon as possible, which undertaking shall be
secured by such Authorized Participant’s delivery and maintenance of
collateral consisting of cash in the form of U.S. dollars in immediately
available funds having a value (marked to market daily) at least equal to 115%,
which the Adviser or EGA may change from time to time of the value of the
missing Deposit Securities. Such cash collateral must be delivered no later than
2:00 p.m., Eastern time, on the Contractual Settlement Date. The Participant
Agreement will permit the Fund to buy the missing Deposit Securities at any time
and will subject the Authorized Participant to liability for any shortfall
between the cost to the Trust of purchasing such securities and the value of the
collateral.
Creation Unit Aggregations may be created in advance of
receipt by the Trust of all or a portion of the applicable Deposit Securities as
described below. In these circumstances, the initial deposit will have a value
greater than the NAV of the Fund Shares on the date the order is placed in
proper form since, in addition to available Deposit Securities, cash must be
deposited in an amount equal to the sum of (i) the Cash Component, plus (ii)
115% of the market value of the undelivered Deposit Securities (the
“Additional Cash Deposit”). The order shall be deemed to be received
on the Business Day on which the order is placed provided that the order is
placed in proper form prior to 4:00 p.m., Eastern time, on such date, and
federal funds in the appropriate amount are deposited with the Custodian by
11:00 a.m., Eastern time, the following Business Day. If the order is not placed
in proper form by 4:00 p.m. or federal funds in the appropriate amount are not
received by 11:00 a.m. the next Business Day, then the order may be
deemed to be canceled and the Authorized Participant shall be
liable to a Fund for losses, if any, resulting therefrom. An additional amount
of cash shall be required to be deposited with the Trust, pending delivery of
the missing Deposit Securities to the extent necessary to maintain the
Additional Cash Deposit with the Trust in an amount at least equal to 115% of
the daily marked to market value of the missing Deposit Securities. To the
extent that missing Deposit Securities are not received by 1:00 p.m., Eastern
time, on the third Business Day following the day on which the purchase order is
deemed received by the Distributor or in the event a marked-to-market payment is
not made within one Business Day following notification by the Distributor that
such a payment is required, the Trust may use the cash on deposit to purchase
the missing Deposit Securities. Authorized Participants will be liable to the
Trust and a Fund for the costs incurred by the Trust in connection with any such
purchases. These costs will be deemed to include the amount by which the actual
purchase price of the Deposit Securities exceeds the market value of such
Deposit Securities on the day the purchase order was deemed received by the
Distributor plus the brokerage and related transaction costs associated with
such purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received
by the Custodian or purchased by the Trust and deposited into the Trust. In
addition, a transaction fee, as listed below, will be charged in all cases. The
delivery of Creation Unit Aggregations so created will occur no later than the
third Business Day following the day on which the purchase order is deemed
received by the Distributor.
- 24 -
Acceptance of Orders for Creation Unit Aggregations
The Trust reserves the absolute right to reject a creation order transmitted to it by the Distributor in respect of a Fund if: (i) the order is not in proper form; (ii) the investor(s), upon obtaining the
Fund Shares ordered, would own 80% or more of the currently outstanding shares
of any Fund; (iii) the Deposit Securities delivered are not as disseminated for
that date by the Custodian, as described above; (iv) acceptance of the Deposit
Securities would have certain adverse tax consequences to the Fund; (v)
acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful;
(vi) acceptance of the Fund Deposit would otherwise, in the discretion of the
Trust, the Adviser or EGA, have an adverse effect on the Trust or the rights of
beneficial owners; or (vii) in the event that circumstances outside the control
of the Trust, the Custodian, the Distributor, Adviser or EGA make it for all
practical purposes impossible to process creation orders. Examples of such
circumstances include acts of God; public service or utility problems such as
fires, floods, extreme weather conditions and power outages resulting in
telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information
systems affecting the Trust, the Adviser, EGA, the Distributor, the Custodian or
sub-custodian or any other participant in the creation process, and similar
extraordinary events. The Distributor shall notify a prospective creator of a
Creation Unit and/or the Authorized Participant acting on behalf of such
prospective creator of its rejection of the order of such person. The Trust, the
Custodian, any sub-custodian and the Distributor are under no duty, however, to
give notification of any defects or irregularities in the delivery of Fund
Deposits nor shall any of them incur any liability for the failure to give any
such notification. All questions as to the number of shares of each security in
the Deposit Securities and the validity, form, eligibility, and acceptance for
deposit of any securities to be delivered shall be determined by the Trust, and
the Trust’s determination shall be final and binding.
Creation Transaction Fee
Investors will be required to pay a fixed creation transaction fee, described below, payable to BNY Mellon regardless of the number of creations made each day. An additional charge of up to four times the fixed transaction fee (expressed as a percentage of the value of the Deposit Securities) may be imposed for cash creations (to offset the Trust’s brokerage and other transaction costs associated with using cash to purchase the requisite Deposit Securities). Investors are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust.
The Standard Creation/Redemption Transaction Fee and the Maximum Creation/Redemption Transaction Fee for each Fund is described in the following table:
|
Fund
|
Standard Creation/Redemption
Transaction Fee
|
Maximum Creation/Redemption
Transaction Fee
|
|
EGShares India Consumer ETF
|
$1,000
|
$1,500
|
|
EGShares India Financials ETF
|
$1,000
|
$1,500
|
|
EGShares India Health Care ETF
|
$1,000
|
$1,500
|
|
EGShares India Industrials ETF
|
$1,000
|
$1,500
|
|
EGShares India Technology ETF
|
$1,000
|
$1,500
|
|
EGShares India Basic Materials ETF
|
$1,000
|
$1,500
|
|
EGShares India Energy ETF
|
$1,000
|
$1,500
|
|
EGShares India High Income Low Beta ETF
|
$1,000
|
$1,500
|
|
EGShares Emerging Markets High Income Low Beta ETF
|
$1,000
|
$1,500
|
|
EGShares Emerging Market Food and Agriculture ETF
|
$1,000
|
$1,500
|
Redemption of Fund Shares in Creation Units Aggregations
Fund Shares may be redeemed only in Creation Unit Aggregations at their NAV next determined after receipt of a redemption request in proper form by the Fund through the Transfer Agent and only on a Business Day. A Fund will not redeem Shares in amounts less than Creation Unit Aggregations. Beneficial Owners must accumulate enough Shares in the secondary market to constitute a Creation Unit Aggregation in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit Aggregation. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Fund Shares to constitute a redeemable Creation Unit Aggregation.
- 25 -
With respect to each Fund, the Custodian, through the NSCC, makes available prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern time) on each Business Day, the identity of the Fund Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as described below) on that day. Fund Securities received on redemption may not be identical to Deposit Securities that are applicable to creations of Creation Unit Aggregations.
Unless cash redemptions are available or specified for a Fund, the redemption proceeds for a Creation Unit Aggregation generally consist of Fund Securities — as announced on the Business Day of the request for redemption received in proper form — plus or minus cash in an amount equal to the difference between the NAV of the Fund Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Fund Securities (the “Cash Redemption Amount”), less a redemption transaction fee as listed below. In the event that the Fund Securities have a value greater than the NAV of the Fund Shares, a compensating cash payment equal to the difference is required to be made by or through an Authorized Participant by the redeeming shareholder.
The right of redemption may be suspended or the date of payment postponed (i) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (ii) for any period during which trading on the NYSE is suspended or restricted; (iii) for any period during which an emergency exists as a result of which disposal of the Shares of a Fund or determination of a Fund’s NAV is not reasonably practicable; or (iv) in such other circumstances as is permitted by the SEC.
Redemption Transaction Fee
A redemption transaction fee is imposed to offset transfer and other transaction costs that may be incurred by a Fund. An additional variable charge for cash redemptions (when cash redemptions are available or specified) for a Fund may be imposed. Investors will also bear the costs of transferring the Fund Securities from the Trust to their account or on their order. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit Aggregation may be charged an additional fee of up
to four times the fixed transaction fee for such services. The redemption transaction fees for each Fund are the same as the creation fees set forth above.
Placement of Redemption Orders
Orders to redeem Creation Unit Aggregations must be delivered through an Authorized Participant that has executed a Participant Agreement. Investors other than Authorized Participants are responsible for making arrangements for a redemption request to be made through an Authorized Participant. An
order to redeem Creation Unit Aggregations is deemed received by the Trust on
the Transmittal Date if: (i) such order is received by the Custodian not later
than the Closing Time on the Transmittal Date; (ii) such order is accompanied or
followed by the requisite number of shares of the Fund specified in such order,
which delivery must be made through DTC to the Custodian no later than 10:00
a.m., Eastern time, on the next Business Day following the Transmittal Date (the
“DTC Cut-Off-Time”); and (iii) all other procedures set forth in the
Participant Agreement are properly followed. Deliveries of Fund Securities to
redeeming investors generally will be made within three Business Days. Due to
the schedule of holidays in certain countries, however, the delivery of in-kind
redemption proceeds may take longer than three Business Days after the day on
which the redemption request is received in proper form. In such cases, the
local market settlement procedures will not commence until the end of the local
holiday periods. See below for a list of the local holidays in the foreign
countries relevant to the Fund.
In connection with taking delivery of shares of Fund Securities upon redemption of shares of a Fund, a redeeming Beneficial Owner, or Authorized Participant action on behalf of such Beneficial Owner must maintain appropriate security arrangements with a qualified broker-dealer, bank or other custody provider in each jurisdiction in which any of the Fund Securities are customarily traded, to which account such Fund Securities will be delivered.
- 26 -
To the extent contemplated by an Authorized Participant’s agreement, in the event the Authorized Participant has submitted a redemption request in proper form but is unable to transfer all or part of the Creation Unit Aggregation to be redeemed to the Funds’ Transfer Agent, the Distributor will nonetheless accept the redemption request in reliance on the undertaking by the Authorized Participant to deliver the missing shares as soon as possible. Such understanding shall be secured by the Authorized Participant’s delivery and maintenance of collateral consisting of cash having a value (marked to market daily) at least equal to 115%, which the Adviser or EGA may change from time to time, of the value of the missing shares.
The current procedures for collateralization of missing shares require, among other things, that any cash collateral shall be in the form of U.S. dollars in immediately-available funds and shall be held by Investors Bank and marked to market daily, and that the fees of the Custodian and any sub-custodians in respect of the delivery, maintenance and redelivery of the cash
collateral shall be payable by the Authorized Participant. The Authorized
Participant’s agreement will permit the Trust, on behalf of the affected
Fund, to purchase the missing shares or acquire the Deposit Securities and the
Cash Component underlying such shares at any time and will subject the
Authorized Participant to liability for any shortfall between the cost to the
Trust of purchasing such shares, Deposit Securities or Cash Component and the
value of the collateral.
The calculation of the value of Fund
Securities and the Cash Redemption Amount to be delivered upon redemption will
be made by the Custodian according to the procedures set forth under
Determination of NAV computed on the Business Day on which a redemption order is
deemed received by the Trust. Therefore, if a redemption order in proper form is
submitted to the Custodian by a DTC Participant not later than Closing Time on
the Transmittal Date, and the requisite number of shares of the relevant Fund
are delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of
the Fund Securities and the Cash Redemption Amount to be delivered will be
determined by the Custodian on such Transmittal Date. If, however, a redemption
order is submitted to the Custodian by a DTC Participant not later than the
Closing Time on the Transmittal Date but either (i) the requisite number of
shares of the relevant Fund are not delivered by the DTC Cut-Off-Time, as
described above, or (ii) the redemption order is not submitted in proper form,
then the redemption order will not be deemed received as of the Transmittal
Date. In such case, the value of the Fund Securities and the Cash Redemption
Amount to be delivered will be computed on the Business Day that such order is
deemed received by the Trust, i.e., the Business Day on which the shares of the
relevant Fund are delivered through DTC to the Custodian by the DTC Cut-Off-Time
pursuant to a properly submitted redemption order.
If it is
not possible to effect deliveries of the Fund Securities, the Trust may in its
discretion exercise its option to redeem such shares in cash, and the redeeming
Beneficial Owner will be required to receive its redemption proceeds in cash. In
addition, an investor may request a redemption in cash that a Fund may, in its
sole discretion, permit. In either case, the investor will receive a cash
payment equal to the NAV of its shares based on the NAV of shares of the
relevant Fund next determined after the redemption request is received in proper
form (minus a redemption transaction fee and additional charge for requested
cash redemptions specified above, to offset the Trust’s brokerage and other
transaction costs associated with the disposition of Fund Securities). A Fund
may also, in its sole discretion, upon request of a shareholder, provide such
redeemer a portfolio of securities that differs from the exact composition of
the Fund Securities but does not differ in NAV.
Redemptions of shares for Fund
Securities will be subject to compliance with applicable federal and state
securities laws and each Fund (whether or not it otherwise permits cash
redemptions) reserves the right to redeem Creation Unit Aggregations for cash to
the extent that the Trust could not lawfully deliver specific Fund Securities
upon redemptions or could not do so without first registering the Fund
Securities under such laws. An Authorized Participant or an investor for which
it is acting subject to a legal restriction with respect to a particular stock
included in the Fund Securities applicable to the redemption of a Creation Unit
Aggregation may be paid an equivalent amount of cash. The Authorized Participant
may request the redeeming Beneficial Owner of the shares to complete an order
form or to enter into agreements with respect to such matters as compensating
cash payment. Because the Portfolio Securities of each Fund may trade
on the relevant exchange(s) on days that the Exchange is closed or are otherwise
not Business Days for the Funds, shareholders may not be able to redeem their
shares of a Fund, or to purchase and sell shares of a Fund on the Exchange on
days when the NAV of the Fund could be significantly affected by events in the
relevant foreign markets.
- 27 -
Regular Holidays
Each Fund generally intends to effect deliveries of Creation Units and Portfolio Securities on a basis of “T” plus three Business Days (i.e
.
, days on which the national securities exchange is
open). A Fund may effect deliveries of Creation Units and Portfolio Securities
on a basis other than T plus three or T plus two in order to accommodate local
holiday schedules, to account for different treatment among foreign and U.S.
markets of dividend record dates and ex-dividend dates, or under certain other
circumstances. The ability of the Trust to effect in-kind creations and
redemptions within three Business Days of receipt of an order in good form is
subject, among other things, to the condition that, within the time period from
the date of the order to the date of delivery of the securities, there are no
days that are holidays in the applicable foreign market. For every occurrence of
one or more intervening holidays in the applicable foreign market that are not
holidays observed in the U.S. equity market, the redemption settlement cycle
will be extended by the number of such intervening holidays. In addition to
holidays, other unforeseeable closings in a foreign market due to emergencies
may also prevent the Trust from delivering securities within normal settlement
period.
The securities delivery cycles currently practicable for
transferring Portfolio Securities to redeeming investors, coupled with foreign
market holiday schedules, will require a delivery process longer than seven
calendar days for a Fund, in certain circumstances. The holidays applicable to
the Funds during such periods are listed below, as are instances where more than
seven days will be needed to deliver redemption proceeds. Pursuant to an
exemptive order issued to the Adviser, each Fund will be required to deliver
redemption proceeds in not more than fourteen days. Although certain
holidays may occur on different dates in subsequent years, the number of days
required to deliver redemption proceeds in any given year is not expected to
exceed fourteen days. The proclamation of new holidays, the treatment
by market participants of certain days as “informal holidays” (
e.g.
, days on which no or
limited securities transactions occur, as a result of substantially shortened
trading hours), the elimination of existing
holidays, or changes in local securities delivery practices, could affect the information set forth herein at some time in the future.
The dates in calendar year 2011 in which the regular holidays affecting the relevant securities markets of the below listed countries are as follows:
|
Argentina
Mar. 7 Apr. 21 Aug. 15 Dec. 9
Mar. 8 Apr. 22 Oct. 10
Mar. 24 May 25 Nov. 28
Mar. 25 June 20 Dec. 8
|
Bahrain
Jan. 2 Aug. 31 Nov. 8 Dec. 18
Feb. 15 Sept. 1 Nov. 27 Dec. 19
May 1 Nov. 6 Dec. 4
Aug. 30 Nov. 7 Dec. 5
|
|
Brazil
Jan. 20 Mar. 9 Sept. 7
Jan. 25 Apr. 21 Oct. 12
Mar. 7 Apr. 22 Nov. 2
Mar. 8 June 23 Nov. 15
|
Bulgaria
Mar. 3 Apr. 25 Sept. 22
Mar. 4 May 6 Dec. 26
Mar. 19 May 24
Apr. 22 Sept. 6
|
|
Chile
Apr. 22 Oct. 10
June 27 Oct. 31
Aug. 15 Nov. 1
Sept. 19 Dec. 8
|
Colombia
Jan. 10 June 6 Aug. 15 Dec. 8
Mar. 21 June 27 Oct. 17
Apr. 21 July 4 Nov. 7
Apr. 22 July 20 Nov. 14
|
|
Czech Republic
Apr. 25 Oct. 28
July 5 Nov. 17
July 6 Dec. 26
Sept. 28
|
Egypt
Jan. 9 Feb. 16 Sept. 1
Jan. 25 Feb. 17 Oct. 6
Jan. 27 Feb. 20 Nov. 6
Jan. 30 Feb. 21 Nov. 7
Jan. 31 Feb. 22 Nov. 8
Feb. 1 Feb. 23
Feb. 2 Feb. 24
Feb. 3 Feb. 28
Feb. 6 Mar. 1
Feb. 7 Mar. 2
Feb. 8 Mar. 3
Feb. 9 Mar. 6
Feb. 10 Apr. 24
Feb. 13 Apr. 25
Feb. 14 May 1
Feb. 15 Aug. 31
|
- 28 -
|
Estonia
Feb. 23 May 2 Dec. 23
Feb. 24 June 22 Dec. 26
Apr. 22 June 23
Apr. 25 June 24
|
Hong Kong
Feb. 3 May 2 Sep. 13
Feb. 4 May 10 Oct. 5
Apr. 22 Jun 6 Dec 26
Apr. 25 Jul. 1 Dec. 27
|
|
Hungary
Mar. 14 Apr. 22 Oct. 6 Nov. 10
Mar. 15 Aug. 15 Oct. 26 Dec. 6
Mar. 19 Aug. 31 Oct. 27
Apr. 14 Sep. 1 Nov. 7
May 24 Dec. 24
|
India
Jan. 26 Apr. 14 Aug. 31 Oct. 27
Feb. 16 Apr. 22 Sep. 1 Nov. 7
Mar. 2 May 17 Sep. 30 Nov. 10
Apr. 1 Aug. 15 Oct. 6 Dec. 6
Apr. 12 Aug. 19 Oct. 26
|
|
Indonesia
Feb. 3 Jun. 2 Aug. 30 Dec. 26
Feb. 15 Jun. 29 Aug. 31
Apr. 22 Aug. 17 Sep. 1
May 11 Aug. 29 Sep. 2
|
Jordan
Feb. 15 Aug. 31 Nov. 8
May 1 Sep. 1 Nov. 9
May 25 Nov. 25 Dec. 25
Aug. 30 Nov. 7 Dec. 27
|
|
Kuwait
Jan. 2 Feb. 28 Nov. 7
Feb. 15 Jun. 28 Nov. 8
Feb. 17 Aug. 31 Nov. 9
Feb. 27 Sep. 1 Nov. 10
|
Latvia
Apr. 21 Jun. 2 Nov. 18
Apr. 22 Jun. 22 Dec. 23
Apr. 25 Jun. 23 Dec. 26
May 3 Jun. 24 Dec. 30
May 4 Nov. 17
|
|
Lithuania
Feb. 16 Jun. 2 Nov. 11
Mar. 11 Jun. 24 Dec. 26
Apr. 22 Jul. 6
Apr. 25 Aug 15
|
Malaysia
Jan. 20 Feb. 4 Aug. 30 Oct. 26
Feb. 1 Feb 15 Aug. 31 Nov. 7
Feb. 2 May 2 Sep. 1 Nov. 28
Feb. 3 May 17 Sep. 16 Dec. 26
|
|
Malta
Feb. 10 Jun. 7 Sep. 21
Mar. 31 Jun. 29 Dec. 8
Apr. 22 Aug. 15 Dec. 13
Apr. 25 Sep. 8 Dec. 26
|
Mauritius
Jan. 3 Mar. 2 Oct. 26
Jan. 20 Apr. 4 Nov. 1
Feb. 1 Aug. 31 Nov. 2
Feb. 3 Sep. 2
|
|
Mexico
Feb. 7 Sep. 16 Dec. 12
Mar. 21 Nov. 2
Apr. 21 Nov. 21
Apr. 22 Nov. 15
|
Morocco
Jan. 11 Nov. 7
Feb. 16 Nov. 18
Feb. 17
Aug. 31
|
- 29 -
|
Oman
Feb. 16 Aug. 31 Nov. 27
Feb. 17 Nov. 6
Jun. 29 Nov. 18
Jul. 23 Nov. 19
|
Pakistan
Jan. 1 Feb. 18 Sep. 1 Dec. 6
Feb. 5 Jul. 1 Nov. 7 Dec. 7
Feb. 16 Aug. 2 Nov. 8
Feb. 17 Aug. 30 Nov. 9
|
|
Peru
Feb. 16 Jul. 28 Dec. 8
Apr. 21 Jul. 29
Apr. 22 Aug. 30
Jun. 29 Nov. 1
|
Philippines
Apr. 21 Nov. 30
Apr. 22 Dec. 30
Aug. 29
Nov. 1
|
|
Poland
Jan. 6 Jun. 23 Dec. 26
Apr. 22 Aug. 15 Dec. 30
Apr. 25 Nov. 11
May 3 Nov. 11
|
Qatar
Mar. 6 Nov. 6 Dec. 18
Aug. 30 Nov. 7
Aug. 31 Nov. 8
Sep. 1
|
|
Romania
Apr. 25 Dec. 26
June 13
Aug. 15
Dec. 1
|
Russia
Jan. 3 Jan. 7 Mar. 7 June 13
Jan. 4 Jan. 10 Mar. 8 Nov. 4
Jan. 5 Feb. 23 May 2
Jan. 6 Mar. 5 May 9
|
|
Slovakia
Jan. 6 Aug. 29 Nov. 17
Apr. 22 Sep. 1 Dec. 26
Apr. 25 Sep. 15
July 5 Nov. 1
|
Slovenia
Feb. 8 Apr. 27 Oct. 31
Apr. 22 May 2 Nov. 1
Apr. 25 Aug. 15 Dec. 26
|
|
South Africa
Mar. 21 May 2 Dec. 26
Apr. 22 June 16
Apr. 25 Aug. 9
Apr. 27 Dec. 16
|
Sri Lanka
Jan. 14 Mar. 2 May 17 Oct. 11
Jan. 19 Apr. 13 May 18 Oct. 26
Feb. 4 Apr. 14 June 15 Nov. 10
Feb. 16 Apr. 22 July 14 Dec. 26
Feb. 17 May 2 Aug. 31
|
|
Thailand
Jan. 3 Apr. 14 May 16 Aug. 12
Feb. 18 Apr. 15 May 17 Oct. 24
Apr. 6 May 2 July 1 Dec. 5
Apr. 13 May 5 July 15 Dec. 12
|
Turkey
May 19 Aug. 31 Nov. 7
Aug. 29 Sep. 1 Nov. 8
Aug. 30 Oct. 28 Nov. 9
|
|
UAE
Feb. 15 Aug. 29 Nov. 6
Feb. 17 Aug. 30 Nov. 7
June 28 Aug. 31 Nov. 8
June 29 Sep. 1 Dec. 2
|
United Kingdom
Jan. 3 Apr. 25 July 4 Nov. 11
Jan. 17 Apr. 29 Aug. 29 Nov. 24
Feb. 21 May 2 Sep. 5 Dec. 26
Apr. 22 May 30 Oct. 10 Dec. 27
|
- 30 -
|
United States
Jan. 17 May 30 Oct. 10 Dec. 26
Feb. 21 July 4 Nov. 11
Apr. 22 Sep. 5 Nov. 24
|
|
TAXES
Taxation of the Funds
Each Fund a Separate Corporation
. Each Fund is treated as a separate corporation for federal income tax purposes. Losses in one Fund do not offset gains in another Fund and the requirements (other than certain organizational requirements) for qualifying for regulated investment company status as described below are determined at the Fund level rather than the Trust level.
Election to be
Taxed as a Regulated Investment Company
. Each Fund intends to
elect to be treated as a RIC under Subchapter M of the Internal Revenue Code
(“Code”) and intends to so qualify during the current fiscal
year. As a regulated investment company, a Fund generally will not be
subject to entity level federal income tax on the income and gains it
distributes to you. The Board of Trustees reserves the right not to
distribute a Fund’s net long-term capital gain or not to maintain the
qualification of a Fund as a regulated investment company if it determines such
a course of action to be beneficial to shareholders. If net long-term
capital gain is retained, a Fund would be taxed on the gain at the highest
corporate tax rate, and shareholders would be notified that they are entitled to
a credit or refund for the tax paid by the Fund. If a Fund fails to qualify as a
regulated investment company, the Fund would be subject to federal, and possibly
state, corporate taxes on its taxable income and gains, and distributions to you
will be treated as taxable dividend income to the extent of such Fund’s
earnings and profits.
In order to qualify for taxation as a regulated investment company for federal income tax purposes, each Fund must meet certain asset diversification, income and distribution specific requirements, including:
(i) A Fund must maintain a diversified portfolio of securities, wherein no security, including the securities of a qualified publicly traded partnership (other than U.S. government securities and securities of other regulated investment companies) can exceed 25% of the Fund’s total assets, and, with respect to 50% of the Fund’s total assets, no investment (other than cash and cash items, U.S. government securities and securities of other regulated investment companies) can exceed 5% of the Fund’s total assets or 10% of the outstanding voting securities of the issuer (“Asset Diversification Test”);
(ii) A Fund must derive at least 90% of its gross income from dividends, interest, payments with respect to securities loans, gains from the sale or disposition of stock, securities or foreign currencies, or other income derived with respect to its business of investing in such stock, securities, or currencies, and net income derived from an interest in a qualified publicly traded partnership (“Income Requirement”); and
(iii) A Fund must distribute to its shareholders at least 90% of its investment company taxable income and net tax-exempt income for each of its fiscal years (“Distribution Requirement”)
In some circumstances, the character and timing of income realized by a Fund for purposes of the Income Requirement or the identification of the issuer for purposes of the Asset Diversification Test is uncertain under current law with respect to a particular investment, and an adverse determination or future guidance by IRS with respect to such type of investment may adversely affect the
Fund’s ability to satisfy these requirements. See, “Tax
Treatment of Portfolio Transactions” below with respect to the application
of these requirements to certain types of investments. In other
circumstances, a Fund may be required to sell portfolio holdings in order to
meet the Income Requirement, Distribution Requirement, or Asset Diversification
Test which may have a negative impact on a Fund’s income and
performance.
A Fund may use "equalization accounting" (in lieu of making some cash distributions) in determining
the portion of its income and gains that has been distributed. If a
Fund uses equalization accounting, it will allocate a portion of its
undistributed investment company taxable income and net capital gain to
redemptions of Fund shares and will correspondingly reduce the amount of such
income and gains that it distributes in cash. If the IRS determines that a
Fund’s allocation is improper and that a Fund has under-distributed its
income and gain for any taxable year, a Fund may be liable for federal income
and/or excise tax. If, as a result of such adjustment, a Fund fails to satisfy
the Distribution Requirement, the Fund will not qualify that year as a regulated
investment company the effect of which is described in the following
paragraph.
- 31 -
If for any taxable year a Fund does not qualify as a regulated investment company, all of its taxable income (including
its net capital gain) would be subject to tax at regular corporate rates without
any deduction for dividends paid to shareholders, and the dividends would be
taxable to the shareholders as ordinary income (or possibly as qualified
dividend income) to the extent of the Fund’s current and accumulated
earnings and profits. Failure to qualify as a regulated investment company would
thus have a negative impact on a Fund’s income and performance. Subject to
savings provisions for certain failures to satisfy the Income Requirement or
Asset Diversification Test which, in general, are limited to those due to
reasonable cause and not willful neglect, it is possible that a Fund will not
qualify as a regulated investment company in any given tax year. Even
if such savings provisions apply, the Fund may be subject to a monetary sanction
of $50,000 or more. Moreover, the Board reserves the right not to
maintain the qualification of a Fund as a regulated investment company if it
determines such a course of action to be beneficial to
shareholders.
Portfolio Turnover
. For investors that hold their Fund shares in a taxable account, a high portfolio turnover rate may result in higher taxes. This is because a fund with a high turnover rate is likely to accelerate the recognition of capital gains and more of such gains are likely to be taxable as short-term rather than long-term capital gains in contrast to a comparable fund with a low turnover rate. Any such higher taxes would reduce the Fund’s after-tax performance. See, “Taxation of Shareholders - Distributions of Capital Gains” below.
Capital Loss Carryovers.
The capital losses of a Fund,
if any, do not flow through to shareholders. Rather, a Fund may use its capital
losses, subject to applicable limitations, to offset its capital gains without
being required to pay taxes on or distribute to shareholders such gains that are
offset by the losses. Under the Regulated Investment Company Modernization Act
of 2010 (“RIC Mod Act”), rules similar to those that apply to capital
loss carryovers of individuals are made applicable to RICs. Thus, if a Fund has
a "net capital loss" (that is, capital losses in excess of capital gains) for a
taxable year beginning after December 22, 2010 (the date of enactment of the RIC
Mod Act), the excess (if any) of the Fund's net short-term capital losses over
its net long-term capital gains is treated as a short-term capital loss arising
on the first day of the Fund's next taxable year, and the excess (if any) of the
Fund's net long-term capital losses over its net short-term capital gains is
treated as a long-term capital loss arising on the first day of the Fund's next
taxable year. Any such net capital losses of a Fund that are not used
to offset capital gains may be carried forward indefinitely to reduce any future
capital gains realized by the Fund in succeeding taxable
years. However, for any net capital losses realized in taxable years
of a Fund beginning on or before December 22, 2010, a Fund is only permitted to
carry forward such capital losses for eight years as a short-term capital
loss. Under a transition rule, capital losses arising in a taxable
year beginning after December 22, 2010 must be used before capital losses
realized in a prior taxable year. The amount of capital losses that
can be carried forward and used in any single year is subject to an annual
limitation if there is a more than 50% “change in ownership” of the
Fund. An ownership change generally results when shareholders owning
5% or more of a Fund increase their aggregate holdings by more than 50% over a
three-year look-back period. An ownership change could result in capital loss
carryovers being used at a slower rate (or, in the case of those realized in
taxable years of a Fund beginning on or before December 22, 2010, to expire
unutilized), thereby reducing the Fund’s ability to offset capital gains
with those losses. An increase in the amount of taxable gains distributed to a
Fund’s shareholders could result from an ownership change. The Funds
undertake no obligation to avoid or prevent an ownership change, which can occur
in the normal course of shareholder purchases and redemptions or as a result of
engaging in a tax-free reorganization with another fund. Moreover, because of
circumstances beyond a Fund’s control, there can be no assurance that a
Fund will not experience, or has not already experienced, an ownership
change. Additionally, if a Fund engages in a tax-free reorganization
with another Fund, the effect of these and other rules not discussed herein may
be to disallow or postpone the use by a Fund of its capital loss carryovers
(including any current year losses and built-in losses when realized) to offset
its own gains or those of the other Fund, or vice versa, thereby reducing the
tax benefits Fund shareholders would otherwise have enjoyed from use of such
capital loss carryovers.
- 32 -
Excise Tax Distribution Requirements
. As a regulated investment company, each Fund is required to distribute its income and gains on a calendar year basis, regardless of the Fund’s fiscal year end as follows:
Required distributions.
To avoid a 4% federal excise tax, the Code requires a Fund to distribute to you by December 31 of each year, at a minimum, the following amounts: 98% of its taxable ordinary income earned during the calendar year; 98% (or 98.2% beginning January 1, 2011) of its capital gain net income earned during the twelve-month period ending October 31; and 100% of any undistributed amounts from the prior year. The Funds intend to declare and pay these distributions in December (or to pay them in January, in which case you must treat them as received in December) but can give no assurances that its distributions will be sufficient to eliminate all taxes.
Deferral of late year losses
. For taxable years of a Fund beginning after December 22, 2010, a Fund may elect to treat part or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in determining the Fund’s taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such “qualified late year loss” as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any calendar year (see, “Taxation of Shareholders - Distributions of Capital Gains” below). A "qualified late year loss" includes:
(i) any net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (“post-October losses”), and
(ii) the excess, if any, of (1) the sum of (a) specified losses incurred after October 31 of the current taxable year, and (b) other ordinary losses incurred after December 31 of the current taxable year, over (2) the sum of (a) specified gains incurred after October 31 of the current taxable year, and (b) other ordinary gains incurred after December 31 of the current taxable year.
The terms “specified losses” and “specified gains” mean ordinary losses and gains from the sale, exchange, or other disposition of property (including the termination of a position with respect to such property), foreign currency losses, and losses resulting from holding stock in a passive foreign investment company (“PFIC”) for which a mark-to-market
election is in effect. The terms “ordinary losses” and “ordinary
gains” mean other ordinary losses and gains that are not described in the
preceding sentence. For taxable years of the Fund beginning on or
before December 22, 2010, a Fund may only elect to treat any post-October loss
and net foreign currency loss incurred after October 31 as if it had been
incurred in the succeeding year in determining its taxable income for the
current year.
Undistributed Capital Gains
. A Fund may retain or distribute to shareholders its net capital gain for each taxable year. Each Fund currently intends to distribute net capital gains. If a Fund elects to retain its net capital gain, the Fund will be taxed thereon (except to the extent of any available capital loss carryovers) at the highest corporate tax rate (currently 35%). If a Fund elects to
retain its net capital gain, it is expected that the Fund also will elect to
have shareholders treated as if each received a distribution of its pro rata
share of such gain, with the result that each shareholder will be required to
report its pro rata share of such gain on its tax return as long-term capital
gain, will receive a refundable tax credit for its pro rata share of tax paid by
the Fund on the gain, and will increase the tax basis for its shares by an
amount equal to the deemed distribution less the tax credit.
Foreign Income Tax
. Investment income received by a Fund from sources within foreign countries may be subject to foreign income tax withheld at the source and the amount of tax withheld generally will be treated as an expense of the Fund. The United States has entered into tax treaties with many foreign countries which entitle a Fund to a reduced rate of, or exemption from, tax on such income. It is impossible to determine the effective rate of foreign tax in advance since the amount of the Fund's assets to be invested in various countries is not known. Under certain circumstances, a Fund may elect to pass-through foreign tax credits to shareholders, although it reserves the right not to do so.
Investment in Complex Securities
. The Funds may invest in complex securities (e.g., futures, options, etc.) that could be subject to numerous special and complex tax rules. These rules could affect whether gain or loss recognized by a Fund is treated as ordinary or capital, accelerate the recognition of income to a Fund (possibly causing the Fund to sell securities to raise the cash for necessary distributions) and defer a Fund’s ability to recognize a loss. In turn, these rules could affect the amount, timing, or character of the income distributed to you by a Fund. For example:
- 33 -
Investment in futures and option contracts
. A Fund is permitted to invest in certain options and futures contracts. If a Fund makes these investments, under certain provisions of the Code, it may be required to mark-to-market these contracts and recognize for federal income tax purposes any
unrealized gains and losses at its fiscal year end even though it continues to
hold the contracts. Under these rules, gains or losses on the
contracts generally would be treated as 60% long-term and 40% short-term gains
or losses, but gains or losses on certain foreign currency contracts would be
treated as ordinary income or losses. In determining its net income for excise
tax purposes, a Fund also would be required to mark-to-market these contracts
annually as of October 31 (for capital gain net income and ordinary income
arising from certain foreign currency contracts), and to realize and distribute
any resulting income and gains.
Tax straddles
. A Fund’s investment in options and futures contracts (or in substantially similar or related property) in connection with certain hedging transactions could cause it to hold offsetting positions in securities. If a Fund’s risk of loss with respect to specific securities in its portfolio is substantially diminished by the fact that it holds other securities, the Fund could be deemed to have entered into a tax “straddle” or to hold a “successor position” that would require any loss realized by it to be deferred for tax purposes.
Short sales and securities lending transactions
. A Fund’s entry into a short sale transaction or an option or other contract could be treated as the “constructive sale” of an “appreciated financial position”, causing it to realize gain, but not loss, on the position. Additionally, a Fund’s entry into securities lending transactions may
cause the replacement income earned on the loaned securities to fall outside of
the definition of qualified dividend income. This replacement income generally
will not be eligible for reduced rates of taxation on qualified dividend income,
and, to the extent that debt securities are loaned, will generally not qualify
as qualified interest income for foreign withholding tax purposes.
Investment in taxable
mortgage pools (excess inclusion income)
. The Funds may invest
in U.S. real estate investment trusts (“REITs”) that hold residual
interests in real estate mortgage investment conduits (“REMICs”) or
which are, or have certain wholly-owned subsidiaries that are, “taxable
mortgage pools.” Under a Notice issued by the IRS, the Code and Treasury
regulations to be issued, a portion of a Fund’s income from a U.S. REIT
that is attributable to the REIT’s residual interest in a REMIC or equity
interests in a taxable mortgage pool (referred to in the Code as an excess
inclusion) will be subject to federal income tax in all events. The excess
inclusion income of a regulated investment company, such as a Fund, will be
allocated to shareholders of the regulated investment company in proportion to
the dividends received by such shareholders, with the same consequences as if
the shareholders held the related REMIC residual interest or, if applicable,
taxable mortgage pool directly. In general, excess inclusion income allocated to
shareholders (i) cannot be offset by net operating losses (subject to a limited
exception for certain thrift institutions), (ii) will constitute unrelated
business taxable income (“UBTI”) to entities (including qualified
pension plans, individual retirement accounts, 401(k) plans, Keogh plans or
other tax-exempt entities) subject to tax on UBTI, thereby potentially requiring
such an entity that is allocated excess inclusion income, and otherwise might
not be required to file a tax return, to file a tax return and pay tax on such
income, and (iii) in the case of a non-U.S. shareholder, will not qualify for
any reduction in U.S. federal withholding tax. In addition, if at any time
during any taxable year a “disqualified organization” (which generally
includes certain cooperatives, governmental entities and tax-exempt
organizations that are not subject to tax on UBTI) is a record holder of a share
in a regulated investment company, then the regulated investment company will be
subject to a tax equal to that portion of its excess inclusion income for the
taxable year that is allocable to the disqualified organization, multiplied by
the highest federal income tax rate imposed on corporations. The Notice imposes
certain reporting requirements upon regulated investment companies that have
excess inclusion income. While the Funds do not intend to invest in
U.S. REITs, a substantial portion of the assets of which generates excess
inclusion income, there can be no assurance that a Fund will not allocate to
shareholders excess inclusion income.
Effect of
foreign debt investments on distributions
. Most foreign
exchange gains realized on the sale of debt securities are treated as ordinary
income for federal income tax purposes by a Fund. Similarly, foreign
exchange losses realized on the sale of debt securities generally are treated as
ordinary losses. These gains when distributed are taxable to you as
ordinary income, and any losses reduce the Fund’s ordinary income otherwise
available for distribution to you. This treatment could increase or
decrease a Fund’s ordinary income distributions to you, and may cause some
or all of a Fund’s previously distributed income to be classified as a
return of capital.
- 34 -
PFIC securities
. The Funds may
invest in securities of foreign entities that could be deemed for federal income
tax purposes to be PFICs. In general, a PFIC is any foreign
corporation if 75% or more of its gross income for its taxable year is passive
income, or 50% or more of its average assets (by value) are held for the
production of passive income. When investing in PFIC securities, each Fund
intends to mark-to-market these securities under certain provisions of the Code
and recognize any unrealized gains as ordinary income at the end of the
Fund’s fiscal and excise (described below) tax years. Deductions
for losses are allowable only to the extent of any current or previously
recognized gains. These gains (reduced by allowable losses) are
treated as ordinary income that a Fund is required to distribute, even though it
has not sold or received dividends from these securities. You should also be
aware that the designation of a foreign security as a PFIC security will cause
its income dividends to fall outside of the definition of qualified foreign
corporation dividends. These dividends generally will not qualify for
the reduced rate of taxation on qualified dividends when distributed to you by a
Fund. In addition, if a Fund is unable to identify an investment as a
PFIC and thus does not make a mark-to-market election, the Fund may be subject
to U.S. federal income tax (the effect of which might be mitigated by making a
mark-to-market election in a year prior to the sale) on a portion of any
“excess distribution” or gain from the disposition of such shares even
if such income is distributed as a taxable dividend by the Fund to its
shareholders. Additional charges in the nature of interest may be
imposed on a Fund in respect of deferred taxes arising from such distributions
or gains.
Investments in securities of uncertain tax character
. A Fund may invest in securities the U.S. federal income tax treatment of which may not be clear or may be subject to recharacterization by the IRS. To the extent the tax treatment of such securities or the income from such securities differs from the tax treatment expected by a Fund, it could affect the timing or character of income recognized by the Fund, requiring the Fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable to regulated investment companies under the Code.
Taxation of Shareholders
Distributions
of Net Investment Income
. Each Fund receives income generally
in the form of dividends and/or interest on its
investments. A Fund may also recognize ordinary income from other
sources, including, but not limited to, certain gains on foreign
currency-related transactions. This income, less expenses incurred in the
operation of a Fund, constitutes its net investment income from which income
dividends may be paid to you. If you are a taxable investor,
distributions of net investment income generally are taxable as ordinary income
to the extent of the Fund’s earnings and profits. In the case of
a Fund whose strategy includes investing in stocks of corporations, a portion of
the income dividends paid to you may be qualified dividends eligible to be taxed
at reduced rates. See the discussion below under the headings,
“
¾
Qualified Dividend Income for individuals” and “
¾
Dividends-Received Deduction for
Corporations”
Distributions of
Capital Gains
. Each Fund may derive capital gain and loss in
connection with sales or other dispositions of its portfolio
securities. Distributions derived from the excess of net short-term
capital gain over net long-term capital loss will be taxable to you as ordinary
income. Distributions paid from the excess of net long-term capital
gain over net short-term capital loss will be taxable to you as long-term
capital gain, regardless of how long you have held your Shares in a
Fund. Any net short-term or long-term capital gain realized by a Fund
(net of any capital loss carryovers) generally will be distributed once each
year and may be distributed more frequently, if necessary, in order to reduce or
eliminate federal excise or income taxes on the Fund.
Returns of Capital
.
Distributions by a Fund that are not paid from earnings and profits will be treated as a return of capital to the extent of (and in reduction of) the shareholder's tax basis in his shares; any excess will be treated as gain from the sale of his shares. Thus, the portion of a distribution that constitutes a return of
capital will decrease the shareholder’s tax basis in his Fund shares (but
not below zero), and will result in an increase in the amount of gain (or
decrease in the amount of loss) that will be recognized by the shareholder for
tax purposes on the later sale of such Fund shares. Return of capital
distributions can occur for a number of reasons.
Qualified Dividend Income for
Individuals
. With respect to taxable years of a Fund beginning
before January 1, 2013 (unless such provision is extended or made permanent),
ordinary income dividends reported by a Fund to shareholders as derived from
qualified dividend income will be taxed in the hands of individuals and other
noncorporate shareholders at the rates applicable to long-term capital
gain. “Qualified dividend income” means dividends paid to a
Fund (a) by domestic corporations, (b) by foreign corporations that are either
(i) incorporated in a possession of the United States, or (ii) are eligible for
benefits under certain income tax treaties with the United States that include
an exchange of information program, or (c) with respect to stock of a foreign
corporation that is readily tradable on an established securities market in the
United States. Both a Fund and the investor must meet certain holding
period requirements to qualify Fund dividends for this treatment. Specifically,
a Fund must hold the stock for at least 61 days during the 121-day period
beginning 60 days before the stock becomes ex-dividend. Similarly,
investors must hold their Fund shares for at least 61 days during the 121-day
period beginning 60 days before the Fund distribution goes ex-dividend. Income
derived from investments in derivatives, fixed-income securities, U.S. REITs,
PFICs, and income received “in lieu of” dividends in a securities
lending transaction generally is not eligible for treatment as qualified
dividend income. If the qualifying dividend income received by a Fund
is equal to or greater than 95% of the Fund's gross income (exclusive of net
capital gain) in any taxable year, all of the ordinary income dividends paid by
the Fund will be qualifying dividend income.
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Dividends-Received Deduction for Corporations
. For corporate shareholders, a portion of the
dividends paid by a Fund may qualify for the 70% corporate dividends-received
deduction. The portion of dividends paid by a Fund that so qualifies
will be reported by a Fund to shareholders each year and cannot exceed the gross
amount of dividends received by a Fund from domestic (U.S.)
corporations. The availability of the dividends-received deduction is
subject to certain holding period and debt financing restrictions that apply to
both the Fund and the investor. Specifically, the amount that a Fund
may report as eligible for the dividends-received deduction will be reduced or
eliminated if the shares on which the dividends earned by the Fund were
debt-financed or held by the Fund for less than a minimum period of time,
generally 46 days during a 91-day period beginning 45 days before the stock
becomes ex-dividend. Similarly, if your Fund shares are debt-financed
or held by you for less than a 46-day period then the dividends-received
deduction for Fund dividends on your shares may also be reduced or
eliminated. Even if reported as dividends eligible for the
dividends-received deduction, all dividends (including any deducted portion)
must be included in your alternative minimum taxable income
calculation. Income derived by a Fund from investments in
derivatives, fixed-income and foreign securities generally is not eligible for
this treatment.
Pass-Through of
Foreign Tax Credits
. If more than 50% of a Fund’s total
assets at the end of a fiscal year is invested in foreign securities, the Fund
may elect to pass through to you your pro rata share of foreign taxes paid by
the Fund. If this election is made, a Fund may report more taxable
income to you than it actually distributes. You will then be entitled
either to deduct your share of these taxes in computing your taxable income, or
to claim a foreign tax credit for these taxes against your U.S. federal income
tax (subject to limitations for certain shareholders). A Fund will
provide you with the information necessary to claim this deduction or credit on
your personal income tax return if it makes this election. No
deduction for foreign tax may be claimed by a noncorporate shareholder who does
not itemize deductions or who is subject to the alternative minimum
tax. Shareholders may be unable to claim a credit for the full amount
of their proportionate shares of the foreign income tax paid by a Fund due to
certain limitations that may apply. Each Fund reserves the right not
to pass through to its shareholders the amount of foreign income taxes paid by
the Fund.
Purchase of Shares
. As a result of tax requirements, the Trust on behalf of each Fund has the right to reject an order to purchase Shares if the purchaser (or group of purchasers acting in concert with each other) would, upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares of the Fund and if, pursuant to section 351 of the Internal Revenue Code, the Fund would have a basis in the Deposit Securities different from the market value of such securities on the date of deposit. The Trust also has the right to require information necessary to determine beneficial Share ownership for purposes of the 80% determination.
U.S.
Government Securities
. Income earned on certain U.S.
government obligations is exempt from state and local personal income taxes if
earned directly by you. States also grant tax-free status to
dividends paid to you from interest earned on direct obligations of the U.S.
government, subject in some states to minimum investment or reporting
requirements that must be met by a Fund. Income on investments by a
Fund in certain other obligations, such as repurchase agreements collateralized
by U.S. government obligations, commercial paper and federal agency-backed
obligations (e.g., Government National Mortgage Association (“GNMA”)
or Federal National Mortgage Association (“FNMA”) obligations)
generally does not qualify for tax-free treatment. The rules on
exclusion of this income are different for corporations.
Dividends
declared in December and paid in January
.
Ordinarily, shareholders are required to
take distributions by a Fund into account in the year in which the distributions
are made. However, dividends declared in October, November or December of any
year and payable to shareholders of record on a specified date in such a month
will be deemed to have been received by the shareholders (and made by the Fund)
on December 31 of such calendar year if such dividends are actually paid in
January of the following year. Shareholders will be advised annually as to the
U.S. federal income tax consequences of distributions made (or deemed made)
during the year in accordance with the guidance that has been provided by the
IRS.
- 36 -
Sales, Exchanges and Redemption of Fund Shares
Sales, exchanges and redemptions (including redemptions in kind) of Fund shares are taxable transactions for federal and state income tax purposes. If you redeem your Fund shares, the Internal Revenue Service requires you to report any gain or loss on your redemption. If you held your shares as a capital asset, the gain or loss that you realize will be a capital gain or loss and will be long-term or short-term, generally depending on how long you have held your shares. Any redemption fees you incur on shares redeemed will decrease the amount of any capital gain (or increase any capital loss) you realize on the sale. Capital losses in any year are deductible only to the extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Redemptions at a Loss Within Six Months of Purchase
. Any loss incurred on a redemption or exchange of Shares held for six months or less will be treated as long-term capital loss to the extent of any long-term capital gain distributed to you by the Fund on those Shares.
Wash Sales
. All or a portion of any loss that you realize on a redemption of your Fund Shares will be disallowed to the extent that you buy other Shares in the Fund (through reinvestment of dividends or otherwise) within 30 days before or after your share redemption. Any loss disallowed under these rules will be added to your tax basis in the new Shares.
Tax Basis Information
. Under Energy Improvement and Extension Act of 2008, a Fund’s administrative agent will be required to provide you with cost basis information on the sale of any of your Shares in the Fund, subject to certain exceptions. This cost basis reporting requirement is effective for Shares purchased in the Fund on or after January 1, 2012.
Tax Shelter Reporting
. Under Treasury regulations, if a shareholder recognizes a loss with respect to a Fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on Form 8886.
Taxes on
Purchase and Redemption of Creation Units
. An Authorized
Participant who exchanges equity securities for Creation Units generally will
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 of purchase and the
exchanger's aggregate basis in the securities surrendered and the Cash Component
paid. A person who exchanges Creation Units for equity securities will generally
recognize a gain or loss equal to the difference between the exchanger'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
cannot be deducted currently under the rules governing “wash sales,”
or on the basis that there has been no significant change in economic position.
Persons exchanging securities should consult their own tax advisor with respect
to whether wash sale rules apply and when a loss might be
deductible.
Backup Withholding
By law, a Fund must generally withhold a portion of your taxable dividends and sales proceeds unless you:
• provide your correct social security or taxpayer identification number,
• certify that this number is correct,
• certify that you are not subject to backup withholding, and
• certify that you are a U.S. person (including a U.S. resident alien).
A Fund also must withhold if the IRS instructs it to do so. When withholding is required, the amount will be 28% of any dividends or proceeds paid. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability, provided the appropriate information is furnished to the IRS. Certain payees and payments are exempt from backup withholding and information reporting. The special U.S. tax certification requirements applicable to non-U.S. investors to avoid backup withholding are described under the “Non-U.S. Investors” heading below.
- 37 -
Non-U.S. Investors
Non-U.S. investors (shareholders who, as to the United States, are nonresident alien individuals, foreign trusts or estates, foreign corporations, or foreign partnerships) may be subject to U.S. withholding and estate tax and are subject to special U.S. tax certification requirements. Non-U.S. investors should consult their tax advisors about the applicability of U.S. tax withholding and the use of the appropriate forms to certify their status.
In General
. The United
States imposes a flat 30% withholding tax (or a withholding tax at a lower
treaty rate) on U.S. source dividends, including on income dividends paid to you
by a Fund. Exemptions from this U.S. withholding tax are provided for
capital gain dividends paid by a Fund from its net long-term capital gains and,
with respect to taxable years of a Fund beginning before January 1, 2012 (unless
such sunset date is extended or made permanent), interest-related dividends paid
by a Fund from its qualified net interest income from U.S. sources and
short-term capital gain dividends. However, notwithstanding such exemptions from
U.S. withholding at the source, any dividends and distributions of income and
capital gains, including the proceeds from the sale of your Fund Shares, will be
subject to backup withholding at a rate of 28% if you fail to properly certify
that you are not a U.S. person.
Capital Gain Dividends and Short-Term Capital Gain Dividends
. In general, (i) a capital gain dividend reported by a Fund to shareholders as paid from its net long-term capital gains, or (ii) with respect to taxable years of a Fund beginning before January 1, 2012 (unless such sunset date is extended or made permanent), a short-term capital gain dividend reported by a Fund to shareholders as paid from its net short-term capital gains, other than long- or short-term capital gains realized on disposition of U.S. real property interests (see the discussion below) are not subject to U.S. withholding tax unless you are a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the calendar year.
Interest-Related Dividends.
With respect to taxable years of a Fund beginning before
January 1, 2012 (unless such sunset date is extended or made permanent),
dividends reported by a Fund to shareholders as interest-related dividends and
paid from its qualified net interest income from U.S. sources are not subject to
U.S. withholding tax. “Qualified interest income” includes, in
general, U.S. source (1) bank deposit interest, (2) short-term original
discount, (3) interest (including original issue discount, market discount, or
acquisition discount) on an obligation which is in registered form, unless it is
earned on an obligation issued by a corporation or partnership in which the Fund
is a 10-percent shareholder or is contingent interest, and (4) any
interest-related dividend from another regulated investment
company. On any payment date, the amount of an income dividend that
is reported by a Fund to shareholders as an interest-related dividend may be
more or less than the amount that is so qualified. This is because the
designation is based on an estimate of a Fund’s qualified net interest
income for its entire fiscal year, which can only be determined with exactness
at fiscal year end. As a consequence, a Fund may over withhold a small amount of
U.S. tax from a dividend payment. In this case, the non-U.S. investor’s
only recourse may be to either forgo recovery of the excess withholding, or to
file a United States nonresident income tax return to recover the excess
withholding.
Further Limitations on Tax Reporting for Interest-Related Dividends and Short-Term Capital Gain Dividends for Non-U.S. Investors
. It may not be practical in every case for a Fund to designate, and each Fund reserves the right in these cases to not designate, small amounts of interest-related or short-term capital gain dividends. Additionally, a Fund’s designation of interest-related or short-term capital gain dividends may not be passed through to shareholders by intermediaries who have assumed tax reporting responsibilities for this income in managed or omnibus accounts due to systems limitations or operational constraints.
Net Investment Income from Dividends on Stock and Foreign Source Interest Income Continue to be Subject to Withholding Tax; Foreign Tax Credits.
Ordinary dividends paid by a Fund to non-U.S. investors on the income earned on portfolio investments in (i) the stock of domestic and foreign corporations and (ii) the debt of foreign issuers continue to be subject to U.S. withholding tax. Foreign shareholders may be subject to U.S. withholding tax at a rate of 30% on the income resulting from an election to pass-through foreign tax credits to shareholders, but may not be able to claim a credit or deduction with respect to the withholding tax for the foreign tax treated as having been paid by them.
- 38 -
Income Effectively Connected with a U.S. Trade or Business.
If the income from a Fund is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then ordinary income dividends, capital gain dividends and any gains realized upon the sale or redemption of shares of a Fund will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations and require the filing of a nonresident U.S. income tax return.
Investment in U.S. Real Property
. A Fund may invest in equity securities of corporations that invest in U.S. real property, including U.S. REITs. The sale of a U.S. real property interest (“USRPI”) by a Fund or by a U.S. REIT or U.S. real property holding corporation in which the Fund invests may trigger special tax consequences to the Fund’s non-U.S. shareholders.
The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) makes non-U.S. persons subject to U.S. tax on disposition of a USRPI as if he or she were a U.S. person. Such gain is sometimes referred to as FIRPTA gain. The Code provides a look-through rule for distributions of FIRPTA gain by a RIC received from a U.S. REIT or another RIC classified as a U.S. real property holding corporation or realized by the RIC on a sale of a USRPI (other than a domestically controlled U.S. REIT or RIC that is classified as a qualified investment entity) as follows:
The RIC is classified as a qualified investment entity. A RIC is classified as a “qualified investment entity” with respect to a distribution to a non-U.S. person which is attributable directly or indirectly to a distribution from a U.S. REIT if, in general, 50% or more of the RIC’s assets consists of interests in U.S. REITs and U.S. real property holding corporations, and
|
·
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You are a non-U.S. shareholder that owns more than 5% of a class of Fund Shares at any time during the one-year period ending on the date of the distribution.
|
|
·
|
If these conditions are met, such Fund distributions to you are treated as gain from the disposition of a USRPI, causing the distributions to be subject to U.S. withholding tax at a rate of 35% (unless reduced by future regulations), and requiring that you file a nonresident U.S. income tax return.
|
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·
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In addition, even if you do not own more than 5% of a class of Fund Shares, but the Fund is a qualified investment entity, such Fund distributions to you will be taxable as ordinary dividends (rather than as a capital gain or short-term capital gain dividend) subject to withholding at 30% or lower treaty rate.
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These rules apply to dividends paid by a Fund before January 1, 2012 (unless such sunset date is extended or made permanent), except that after such sunset date, Fund distributions from a U.S. REIT (whether or not domestically controlled) attributable to FIRPTA gain will continue to be subject to the withholding rules described above provided the Fund would otherwise be classified as a qualified investment entity
Because each Fund expects to invest less than 50% of its assets at all times, directly or indirectly in U.S. real property interests, the Funds expect that neither gain on the sale or redemption of Fund Shares nor Fund dividends and distributions would be subject to FIRPTA reporting and tax withholding.
U.S. Estate Tax
. Transfers by gift of shares of a Fund by a foreign shareholder who is a nonresident alien individual will not be subject to U.S. federal gift tax. For
decedents dying during 2010, the U.S. federal estate tax was reinstated
retroactively, except where the executor of the estate of a decedent makes an
election to opt out of the estate tax and instead be subject to modified
carryover basis rules. For decedents dying after 2010, an individual
who, at the time of death, is a non-U.S. shareholder will nevertheless be
subject to U.S. federal estate tax with respect to Fund Shares at the graduated
rates applicable to U.S. citizens and residents, unless a treaty exemption
applies. If a treaty exemption is available, a decedent’s estate may
nonetheless need to file a U.S. estate tax return to claim the exemption in
order to obtain a U.S. federal transfer certificate. The transfer certificate
will identify the property (i.e., Fund Shares) as to which the U.S. federal
estate tax lien has been released. In the absence of a treaty, there
is a $13,000 statutory estate tax credit (equivalent to U.S. situs assets with a
value of $60,000). For estates with U.S. situs assets of not more
than $60,000, the Fund may accept, in lieu of a transfer certificate, an
affidavit from an appropriate individual evidencing that decedent’s U.S.
situs assets are below this threshold amount. In addition, a partial exemption
from U.S estate tax may apply to Fund Shares held by the estate of a nonresident
decedent. The amount treated as exempt is based upon the proportion
of the assets held by a Fund at the end of the quarter immediately preceding the
decedent's death that are debt obligations, deposits, or other property that
generally would be treated as situated outside the United States if held
directly by the estate. This provision applies to decedents dying
after December 31, 2004 and before January 1, 2012, unless such provision is
extended or made permanent.
- 39 -
U.S. Tax
Certification Rules
. Special U.S. tax certification
requirements may apply to non-U.S. shareholders both to avoid U.S. back up
withholding imposed at a rate of 28% and to obtain the benefits of any treaty
between the United States and the shareholder’s country of
residence. In general, a non-U.S. shareholder must provide a Form W-8
BEN (or other applicable Form W-8) to establish that you are not a U.S. person,
to claim that you are the beneficial owner of the income and, if applicable, to
claim a reduced rate of, or exemption from, withholding as a resident of a
country with which the United States has an income tax treaty. A Form
W-8 BEN provided without a U.S. taxpayer identification number will remain in
effect for a period beginning on the date signed and ending on the last day of
the third succeeding calendar year unless an earlier change of circumstances
makes the information on the form incorrect. Certain payees and
payments are exempt from back-up withholding.
The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders are urged to consult their own tax advisors with respect to the particular tax consequences to them of an investment in a Fund, including the applicability of foreign tax.
Effect of Future Legislation; Local Tax Considerations.
The foregoing general
discussion of U.S. federal income tax consequences is based on the Code and the
regulations issued thereunder as in effect on the date of this Statement of
Additional Information. Future legislative or administrative changes or court
decisions may significantly change the conclusions expressed herein, and any
such changes or decisions may have a retroactive effect with respect to the
transactions contemplated herein. Rules of state and local taxation of ordinary
income, qualified dividend income and capital gain dividends may differ from the
rules for U.S. federal income taxation described above. Distributions may also
be subject to additional state, local and foreign taxes depending on each
shareholder's particular situation. Non-U.S. shareholders may be subject to U.S.
tax rules that differ significantly from those summarized above. Shareholders
are urged to consult their tax advisors as to the consequences of these and
other state and local tax rules affecting investment in a Fund.
This discussion of “TAXES” is not intended or written to be used as tax advice and does not purport to deal with all federal tax consequences applicable to all categories of investors, some of which may be subject to special rules. You should consult your own tax advisor regarding your particular circumstances before making an investment in a 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 NAV per Share of each Fund is computed by dividing the value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by the total number of Shares of the Fund outstanding, rounded to the nearest cent. Expenses and fees including, without limitation, the management and administration fees, are accrued daily and taken into account for purposes of determining NAV. The NAV per Share is calculated by the Funds’ custodian and determined as of the close of the regular trading session on the NYSE (ordinarily 4:00 p.m., Eastern time) on each day that such exchange is open.
In computing each Fund’s NAV, the Fund’s securities holdings traded on a national securities exchange are valued based on their last sale price. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities regularly traded in an over-the-counter market are valued at the latest quoted sale price in such market or, in the case of the NASDAQ, at the NASDAQ official closing price. Other portfolio securities and assets for which market quotations are not readily available are valued based on fair value as determined in good faith in accordance with procedures adopted by the Board.
- 40 -
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.
The
officers of the Trust are authorized in their discretion not to pay a dividend
for a Fund if such officers determine that the cost of paying the dividend
(including costs borne by the Fund for printing and mailing dividend checks)
exceeds the amount of income or excise tax that is payable by the Fund as a
result of not paying the dividend. Subject to the foregoing, each
Fund, except the EGShares India High Income Low Beta ETF and the EGShares
Emerging Markets High Income Low Beta ETF, expects to declare and pay all of its
net investment income, if any, to shareholders as dividends
annually. Each of the EGShares India High Income Low Beta ETF and the
EGShares Emerging Markets High Income Low Beta ETF expect to declare and pay all
of its net investment income, if any, to shareholders as dividends
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 each Fund as a regulated investment
company under the Tax Code, or to avoid imposition of income or excise taxes on
undistributed income.
Dividends and other distributions on Fund Shares are distributed, as described below, on a pro rata basis to Beneficial Owners of the Shares. Dividend payments are made through DTC Participants and Indirect Participants to Beneficial Owners with proceeds received from a Fund.
DISCLAIMER
The Underlying Indices are
a product of Dow Jones Indexes, the marketing name and a licensed trademark of CME Group Index
Services LLC (“CME Indexes”, and has been licensed for use. “Dow Jones
®
”,
the Underlying Indices and “Dow Jones Indexes” are service marks of Dow Jones
Trademark Holdings, LLC (“Dow Jones”), and have been licensed to CME Indexes and
sublicensed for use for certain purposes by EGA.
EGA’s Funds
based on the Underlying Indices are
not sponsored, endorsed, sold or promoted by CME Indexes, Dow Jones or their
respective affiliates, and CME Indexes, Dow Jones and their respective affiliates
make no representation regarding the advisability of trading in such
product(s). CME Indexes, Except as set forth below, Dow Jones’, CME Indexes’
and their respective affiliates’ only relationship to the Licensee is the
licensing of certain trademarks and trade names of Dow Jones and of the
Underlying Indices which is determined, composed and calculated by CME Indexes
without regard to EGA or the Funds. CME Indexes calculates the intraday indicative value with
respect to the Funds as a calculation service provider to EGA. The intraday
indicative value with respect to the Funds is calculated based on a formula and
CME
Indexes exercises no discretion and otherwise has no input as to the pricing of
the Funds. CME Indexes is not responsible for and (except as
expressly provided in the preceding sentence) has not participated in the
determination of the timing of, prices at, or quantities of the Funds to be
listed or in the determination or calculation of the equation by which the
Funds are to be converted into cash. Dow Jones and CME Indexes
have no obligation to take the needs of EGA or the owners of the Funds into
consideration in determining, composing or calculating Underlying Indices. Dow
Jones, CME Indexes and their respective affiliates are not responsible for and
have not participated in the determination of the timing of, prices at, or
quantities of the Funds to be sold or in the determination or calculation of
the equation by which the Funds are to be converted into cash. Dow Jones, CME Indexes and
their respective affiliates have no obligation or liability in connection with
the administration, marketing or trading of the Funds. Notwithstanding the
foregoing, CME Group Inc. and its affiliates may independently issue
and/or sponsor financial products unrelated to the Funds currently being issued
by EGA, but which may be similar to and competitive with the Funds. In
addition, CME Group Inc. and its affiliates may trade financial
products which are linked to the performance of the Underlying Indices. It is
possible that this trading activity will affect the value of the Underlying
Indices and the Funds.
DOW JONES, CME INDEXES AND THEIR
RESPECTIVE AFFILIATES DO NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE UNDERLYING INDICES OR ANY DATA INCLUDED THEREIN AND DOW JONES, CME INDEXES AND
THEIR RESPECTIVE AFFILIATES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS,
OR INTERRUPTIONS THEREIN. DOW JONES, CME INDEXES AND THEIR RESPECTIVE
AFFILIATES MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED
BY EGA, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE
UNDERLYING INDICES OR ANY DATA INCLUDED THEREIN. DOW JONES, CME INDEXES AND THEIR
RESPECTIVE AFFILIATES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
DISCLAIM ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE WITH RESPECT TO THE UNDERLYING INDICES OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW JONES, CME INDEXES
OR THEIR RESPECTIVE AFFILIATES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR
INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY
BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN CME INDEXES AND EGA,
OTHER THAN THE LICENSORS OF CME INDEXES.
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 broker to determine the availability and costs of the service and the details of participation therein. Brokers may require Beneficial Owners to adhere to specific procedures and timetables.
FINANCIAL STATEMENTS
As of the date of this SAI, the Funds have not commenced operations. Accordingly, no financial statements are provided.
- 41 -
APPENDIX A
The Trust has delegated to EGA (the “Adviser”) the authority and responsibility for voting proxies on the portfolio securities held by each Fund. EGA understands that proxy voting is an integral aspect of investment management. Accordingly, proxy voting must be conducted with the same degree of prudence and loyalty accorded any fiduciary or other obligation of an investment manager.
Emerging Global Advisors, LLC
PROXY VOTING POLICY
INTRODUCTION
An investment adviser generally has the authority to vote proxies relating to such securities on behalf of its clients. Pursuant to Rule 206(4)-6 under the Advisers Act, registered investment advisers that exercise voting authority over securities held in client portfolios are required to implement proxy voting policies and describe those policies to their clients. The policies and procedures must be reasonably designed to ensure that the adviser votes client securities in a manner consistent with the best interests of such client.
POLICIES
As a general policy, the Adviser will vote proxy proposals, consents or resolutions relating to client securities (collectively, “proxies”), in a manner that serves the best interests of the client accounts it manages. Best interest will be determined by the Adviser in its discretion, taking into account relevant factors, including, but not limited to:
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the impact on the value of the securities;
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the anticipated costs and benefits associated with the proposal;
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the effect on liquidity; and
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customary industry and business practices.
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In voting proxies, the Adviser will not consider the interests that the Adviser, its management or its affiliates might have in a particular voting matter.
Investment company clients are subject to further requirements under the 1940 Act regarding the disclosure of actual proxy voting records to shareholders, and the process by which proxies are voted on shareholder’s behalf. As a general matter of policy, the Adviser will assist its investment company clients and their respective fund administration agents with respect to the fund clients’ annual Form N-PX filings.
A.
Routine Matters
Routine matters are typically proposed by management (as defined below) of a company and meet the following criteria: (i) they do not measurably change the structure, management, control or operation of the company; (ii) they do not measurably change the terms of, or fees or expenses associated with, an investment in the company; and (iii) they are consistent with customary industry standards and practices, as well as the laws of the state of incorporation applicable to the company.
For routine matters, the Adviser will vote in accordance with the recommendation of the company’s management or directors (collectively, the “Management”), as applicable, unless, in the Adviser’s opinion, such recommendation is not in the best interests of the client.
Examples of routine matters are set forth below:
General Matters
The Adviser will generally vote
for
the following proposals:
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to set time and location of annual meeting;
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to change the fiscal year of the company; and
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to change the name of a company.
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Board Members
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The Adviser will generally vote
for
Management proposals to elect or re-elect board members.
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The Adviser will generally vote
for
proposals to increase fees paid to board members, unless it determines that the compensation exceeds market standards
Capital Structure
The Adviser will generally vote
for
proposals to
change capitalization, including to increase authorized common shares or to increase authorized preferred shares, as long as the proposal does not either: (i) establish a class or classes of shares or interests with terms that may disadvantage the class held by any of the Adviser’s clients or (ii) result in disproportionate voting rights for preferred shares or other classes of shares or interests.
Appointment of Auditors
The Adviser will generally vote for the approval of auditors and proposals authorizing the board to fix auditor fees, unless the Adviser has serious concerns about the audit procedures used, or feels that the auditors are being charged without explanation.
B.
Non- Routine Matters
Non-routine matters involve a variety of issues and may be proposed by a company’s management or beneficial owners (i.e.,
shareholders, members, partners, etc. (collectively, the “Owners”)). These proxies may involve one or more of the following: (i) a measurable change in the structure, management, control or operation of the company; (ii) a measurable change in the terms of, or fees or expenses associated with, an investment in the company; or (iii) a change that is inconsistent with industry standards and/or the laws of the state of incorporation applicable to the company.
Examples of routine matters are set forth below:
1.
Board Members
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a.
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Term Limits.
The Adviser will generally vote for proposals to require a reasonable retirement age
(
e.g., 72) for board members, and will vote on a
case-by-case
basis on proposals to attempt to limit tenure.
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b.
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Replacement.
The Adviser will generally vote
against
proposals that make it more difficult to replace board members, including the following proposals:
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To overweight company Management on the board;
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To introduce cumulative voting (cumulative voting allows the owners to “stack” votes behind one or a few individuals for a position on the board, thereby giving minority owners a greater chance of electing the board member(s));
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To introduce unequal voting rights;
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To create supermajority voting; or
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To establish pre-emptive rights.
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c.
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Liability and Indemnification.
In order to promote accountability, the Adviser will generally vote
against
proposals to limit the personal liability of board members for any breach of fiduciary duty or failure to act in good faith.
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d.
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Ownership Issues.
The Adviser will generally vote for proposals that require Management to own a minimum interest in the company. The purpose of this policy is to encourage the alignment of Management’s interests with the interests of the company’s owners. However, the Adviser will generally vote
against
proposals for stock options or other compensation that grant an ownership interest for Management if such proposals offer greater than 15% of the outstanding securities of a company because such options may dilute the voting rights of other owners of the company.
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2.
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Compensation, Fees and Expenses
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In general, the Adviser will vote
against
proposals to increase compensation, fees or expenses applicable to the company’s owners, unless the Adviser determines that the benefits resulting to the company and its owners justifies the increased compensation, fees or expenses.
3.
Voting Rights
The Adviser will generally vote
against
the following proposals:
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To introduce unequal voting or dividend rights among the classes;
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To change the amendment provisions of a company’s charter documents by removing owner approval requirements;
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To require supermajority (two-thirds of outstanding votes) approval for votes rather than a simple majority (half of outstanding votes);
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To restrict the owners’ right to act by written consent; or
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To restrict the owners’ right to call meetings, propose amendments to the articles of incorporation or other governing documents of the company or nominate board members.
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The Adviser will generally vote
for
proposals that eliminate any of the foregoing rights or requirements.
4.
Takeover Defenses and Related Actions
The Adviser will generally vote
against
any proposal to create any plan or procedure designed primarily to discourage a takeover or other similar action, including “poison pills.” Examples of “poison pills” include:
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Large increases in the amount of stock authorized but not issued;
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Blank check preferred stock (stock with a fixed dividend and a preferential claim on company assets relative to common shares, the terms of which are set by the board at a future date without further action by the owners);
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Compensation that would act to reward Management as a result of a takeover attempt, whether successful or not, such as revaluing purchase price of stock options, or “golden parachutes”;
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Fixed price amendments that require a certain price to be offered to all owners based on a fixed formula; and
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Greenmail provisions that allow a company to make payments to a bidder in order to persuade the bidder to abandon its takeover plans.
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The Adviser will generally vote
for
proposals that eliminate any of the foregoing rights or requirements, as well as proposals to:
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Require that golden parachutes or golden handcuffs be submitted for ratification by the owners;
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To opt out of state anti-takeover laws deemed by the Adviser to be detrimental.
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The Adviser will generally vote on a
case-by-case
basis regarding other proposals that may be used to prevent takeovers, such as the establishment of employee stock purchase or ownership plans.
5.
Reincorporation
The Adviser will generally vote
for
a change in the state of incorporation if the change is for valid business reasons (such as reincorporating in the same state as the headquarters of the controlling company).
A-3
6.
Debt Issuance and Pledging of Assets for Debt
The Adviser will generally vote proxies relating to the issuance of debt, the pledging of assets for debt, and an increase in borrowing powers on a
case-by-case
basis, taking into consideration relevant factors, including, for example:
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The potential increase in the company’s outstanding interests or shares, if any (e.g., convertible bonds).
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The potential increase in the company’s capital, if any, over the current outstanding capital.
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7.
Mergers or Acquisitions
The Adviser will vote proxies relating to mergers or acquisitions on a
case-by-case
basis, but will generally vote
for
any proposals that the Adviser believes will offer fair value to its clients.
8.
Termination or Liquidation of the Company
The Adviser will vote proxies relating to the termination or liquidation of a company on a
case-by-case
basis, taking into consideration one or more of the following factors:
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Past performance of the company; and
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Strategies employed to save the company.
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9.
Social & Environmental Issues and Corporate Responsibility
The Adviser will vote proxies relating to social and environmental issues on a
case-by-case
basis, but will generally vote
for
any proposals that will reduce discrimination and pollution, improve protections to minorities and disadvantaged classes, and increase conservation of resources and wildlife.
The Adviser will generally vote
against
any proposals that place arbitrary restrictions on the company’s ability to invest, market, enter into contractual arrangements or conduct other activities. The Adviser will also generally vote
against
proposals:
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To bar or restrict charitable contributions; or
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To limit corporate political activities.
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10.
All Other Matters
All other decisions regarding proxies will be determined on a
case-by-case
basis taking into account the general policy, as set forth above.
C.
Abstaining
from
Voting
or
Affirmatively
Not
Voting
The Adviser may abstain from voting (which generally requires submission of a proxy voting card) or affirmatively decide not to vote if it determines that abstaining or not voting is in the best interests of its clients. In making such a determination, the Adviser will consider various factors, including, but not limited to; (i) the costs associated with exercising the proxy (e.g.,
translation or travel costs); and (ii) any legal restrictions on trading resulting from the exercise of a proxy. Furthermore, the Adviser will not abstain from voting or affirmatively decide not to vote merely to avoid a conflict of interest.
A-4
PROCEDURES
The Adviser’s CCO or designee is responsible for the implementation, monitoring and review of the Adviser’s proxy voting policies and procedures.
To implement its policies, the Adviser has adopted the following procedures:
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Designated Adviser personnel (e.g., analysts), will be responsible for voting each proxy. Such personnel will obtain a determination from Adviser management as to how to vote the proxies in accordance with the policies. Upon making a decision, the proxy will be executed and returned to the analyst for submission to the company. The analysts are responsible for the actual voting of all proxies in a timely manner.
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In the event the Adviser determines that the client should rely on the advice of an independent third party or a committee regarding the voting of a proxy, the Adviser will submit the proxy to such third party or committee for a decision. The proxy will be executed in accordance with such third party’s or committee’s decision.
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Upon receipt of an executed proxy, the analyst will update the clients’ proxy voting record.
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The Adviser shall retain written or electronic copies of each proxy statement received and of each executed proxy. Records relating to each proxy must include (i) the voting decision with regard to each proxy; and (ii) any documents created by the analyst, management or third party, that were material to making the voting decision. These records will be reviewed by the Adviser’s CCO.
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Such records shall be retained in the Adviser’s offices for two years from the end of the fiscal year during which the record was created, and for an additional three years in an easily accessible place.
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The Adviser will maintain a record of each written request from a client for proxy voting information and the Adviser’s written response to any request (oral or written) from a client for proxy voting information. All such communications will be reviewed by the Adviser’s CCO.
Conflicts of Interest
:
At times, conflicts may arise between the interests of one or more of the Adviser’s clients, on the one hand, and the interests of the Adviser or its affiliates, on the other hand. If the Adviser determines that it has, or may be perceived to have, a conflict of interest when voting a proxy, the Adviser will address matters involving such conflicts of interest as follows:
If a proposal is addressed by the specific policies herein, the Adviser will vote in accordance with such policies.
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If the Adviser believes it is in the best interest of its clients to depart from the specific policies provided for herein, the Adviser will be subject to the requirements of C or D below, as applicable;
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B.
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If the proxy proposal is (1) not addressed by the specific policies or (2) requires a case-by-case determination by the Adviser, the Adviser may vote such proxy as it determines to be in the best interest of the clients, without taking any action described in D below, provided that such vote would be against the Adviser’s own interest in the matter (i.e.,
against the perceived or actual conflict). The Adviser will memorialize the rationale of such vote in writing;
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C.
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If the proxy proposal is (1) not addressed by the specific policies or (2) requires a case-by-case determination by the Adviser, and the Adviser believes it should vote in a way that may also benefit, or be perceived to benefit, its own interest, then the Adviser must take one of the following actions in voting such proxy: (a) delegate the voting decision for such proxy proposal to an independent third party; or (b) obtain approval of the decision from the Adviser’s senior management or the CCO; and
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D.
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If the Adviser determines that it has a conflict of interest with respect to voting proxies on behalf of a fund, then the Adviser shall contact the chairman of the fund’s Board of Trustees and the fund’s CCO. In the event that such parties determine that a conflict of interest exists, the chairman shall submit the matter for determination to another member of the board who is not an “interested person” of the fund, as defined in the 1940 Act, as amended. In making a determination, the chairman will consider the best interests of the fund’s shareholders and may consider the recommendations of the adviser or independent third parties that evaluate proxy proposals. The Adviser will vote the proposal according to the determination and maintain records relating to this process.
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Egshares Dow Jones Emerging Markets Titans Composite Index Fund (NYSE:EEG)
Historical Stock Chart
From Jan 2025 to Feb 2025
Egshares Dow Jones Emerging Markets Titans Composite Index Fund (NYSE:EEG)
Historical Stock Chart
From Feb 2024 to Feb 2025
