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Administrator and Eim April 2022
Registrant’s Telephone Number, including area code: (212)
554-1234
William T. MacGregor, Esq. Executive Vice
President, General Counsel and Secretary Equitable Investment Management Group, LLC 1290 Avenue of the Americas New York, New York10104
(Name and address of agent for service)
Please send copies of all communications to:
Mark C. Amorosi, Esq. K&L Gates LLP 1601 K Street N.W. Washington, D.C.20006
Approximate Date of Proposed Public Offering: Effective Date of this Post-Effective
Amendment
Title of Securities Being Registered: Class A, Class I, Class R and Class T Shares of
Beneficial Interest
It is proposed that this filing will become effective:
☐
immediately upon filing pursuant to paragraph (b)
☐
on pursuant to paragraph (b)
☐
60 days after filing pursuant to paragraph (a)
☒
on July 11, 2022 pursuant to paragraph (a) of Rule 485
☐
75 days after filing pursuant to paragraph (a)
if appropriate, check the following box:
☐
This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
CONTENTS OF REGISTRATION STATEMENT
This registration statement is comprised of the following:
Cover Sheet
Contents of Registration Statement
Part A – Prospectus for 1290 Essex Small Cap Growth Fund
Part B – Statement of Additional Information for the 1290 Essex Small Cap Growth Fund
Part C – Other Information
Signature Page
Exhibits
This filing is not intended to affect the prospectus or statement of additional information of any previously registered series (or any class of such series) of the Registrant.
Prospectus
The information in this Prospectus is not
complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is
not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
This Prospectus describes the Fund listed below. The Fund has its own investment objective and
strategies that are designed to meet different investment goals. This Prospectus contains information you should know before investing. Please read this Prospectus carefully before
investing and keep it for future reference.
Fund+
Share Class (Ticker)
1290 Essex Small Cap Growth Fund
Class A ( ); Class T ( )*; Class I ( ); Class R ( )
+
The Fund’s shares are not offered for sale in all states.
*
Class T shares currently are not offered for sale.
July __,
2022
The Securities and Exchange Commission and the Commodity Futures Trading Commission have not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
1290 Funds® is a
registered service mark of Equitable Investment Management Group, LLC, New York, NY10104.
1290 Essex Small Cap Growth Fund — Class A ( ), Class T ( ), Class I
( ) and Class R ( ) Shares
Investment Objective: Seeks long-term growth of capital.
Fees and Expenses of the Fund
The following table describes the fees and expenses that you may pay if you buy, hold, and sell shares of the Fund. You may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and example below. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least
$50,000 in 1290 Funds’ funds. More
information about these and other discounts is available from your financial professional and in the “How Sales Charges are Calculated” and “Ways to Reduce or
Eliminate Sales Charges” sections of the Fund’s Prospectus, and the “Purchase, Redemption and Pricing of Shares” section of the Fund’s Statement of Additional Information.
Shareholder Fees (fees paid directly from your investment)
1290 Essex Small Cap Growth Fund
Class A
Shares
Class T
Shares
Class I
Shares
Class R
Shares
Maximum sales charge (load) imposed on purchases (as a percentage of offering
price)
5.50%
2.50%
None
None
Maximum contingent deferred sales charge (load) (as a percentage of original purchase
price or redemption
proceeds, whichever is lower)
1.00%1
None
None
None
Maximum account fee (deducted from accounts with a balance of less than $1,000)
$25
$25
$25
$25
1 On shares purchased
without an initial sales charge and redeemed within 12 months of purchase.
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
1290 Essex Small Cap Growth Fund
Class A
Shares
Class T
Shares
Class I
Shares
Class R
Shares
Management Fee
%
%
%
%
Distribution and/or Service Fees (12b-1 fees)
%
%
%
%
Other Expenses1
%
%
%
%
Total Annual Fund Operating Expenses
%
%
%
%
Fee Waiver and/or Expense Reimbursement2
%
%
%
%
Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement
%
%
%
%
1
Based on estimated amounts for the current fiscal year.
2
Pursuant to a contract, Equitable Investment Management Group, LLC (the “Adviser”) has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of the Fund through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of this arrangement) (“Expense Limitation
Arrangement”) so that the annual operating expenses of the Fund (exclusive of taxes, interest, brokerage commissions, capitalized expenses (other than offering costs), fees
and expenses of other investment companies in which the Fund invests, 12b-1 fees, dividend and interest expenses on securities sold short, and extraordinary expenses not incurred in
the ordinary course of the Fund’s business) do not exceed an annual rate of average daily net assets of ___% for Class A shares, Class T shares, Class I shares, and Class R shares of the Fund. The Expense Limitation Arrangement may be terminated by the Adviser at any time after April 30, 2024. The Adviser may be reimbursed the amount of any such payments or waivers in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Fund’s expense ratio, after the reimbursement is taken into account, does not exceed the Fund’s expense cap at the time of the waiver or the Fund’s expense cap at the time of the reimbursement, whichever is lower. The total annual fund operating expense ratios after fee waiver and/or
expense reimbursement for Class A shares, Class T shares, and Class R shares, as shown in the table, are higher than the Fund’s expense cap because these ratios include 12b-1 fees and certain other expenses, as noted above, that are excluded from the Expense Limitation Arrangement.
Example
This
Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. The Example assumes that you invest $10,000 in the Fund for the
periods indicated, that your investment has a 5% return each year, that the Fund's operating expenses remain the same and that the Expense Limitation Arrangement is not renewed.
2 1290 Essex Small Cap Growth Fund
Although your actual costs may be higher or lower,
based on these assumptions, whether you redeem or hold your shares, your costs would be:
1 Year
3 Years
Class A Shares
$
$
Class T Shares
$
$
Class I Shares
$
$
Class R Shares
$
$
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when shares are held in a taxable account. These costs, which are not reflected in annual fund operating expenses or in the Example, affect the Fund's
performance. The Fund had not commenced operations as of the date of this Prospectus, and therefore, its portfolio turnover rate during the most recent fiscal year is not available.
Investments, Risks, and Performance
Principal Investment Strategy
Under normal circumstances, the Fund invests at least 80% of its net assets, plus borrowings for investment purposes, in equity securities of small- and micro-capitalization companies (or other financial instruments that derive their value from the securities of such companies). For the Fund, a company is considered to be a “small-capitalization” company if, at the time of purchase, its market capitalization is less than or equal to the market capitalization of the
largest company included within
the Fund’s benchmark index. As of February 28, 2022, the market capitalization of the largest company included in the Fund’s benchmark index was approximately $11.9 billion. This capitalization range will change over time. The Fund’s investments
include U.S. micro-cap companies, which, at the time of purchase, have capitalizations that place them among the smallest 5% of companies listed on U.S. exchanges or in over the counter (“OTC”) markets. Although the Sub-Adviser seeks to
diversify the Fund’s investments across industries and sectors, the Fund’s assets may, from time to time, be over-weighted or under-weighted to certain industries and sectors relative to its benchmark index, and the Fund may from time to time invest
a substantial portion of its assets in one or a limited number of sectors. The Fund’s investments may include common and preferred stocks, rights and warrants to purchase common stocks, convertible securities, exchange-traded funds (“ETFs”), or real estate investment trusts. The Fund may invest up to 15% of its assets in foreign securities, including securities of
companies based in developing countries and depositary receipts of foreign-based companies.
The Sub-Adviser applies fundamental investment research techniques when deciding which stocks to buy or sell for the Fund, and typically:
• Selects companies that demonstrate accelerating growth in earnings and revenues that
the Sub-Adviser believes are undervalued given their financial strength.
• Invests in companies from any sector of the market based on fundamental research and
analysis of various characteristics.
• Reviews and evaluates a company’s financial statements, sales and expense
trends, earnings estimates, market position, and industry outlook.
• Values a company against its history, industry, and the market to identify a
relatively undervalued stock as compared to its potential growth.
• Seeks to diversify investments across companies in different phases of growth and
that have a variety of catalysts for growth, to help manage risk. Such catalysts may include a new technology, product or service, an increase in market share, an improving industry, a change in management or a corporate restructuring.
The Fund may engage in active and frequent trading to achieve its investment objective. The Fund may sell all or a portion of a position in a security when the Sub-Adviser believes that a catalyst for growth is realized or adequate value is achieved, when the Sub-Adviser identifies a better investment opportunity, to minimize potential risks, to address a deterioration of
fundamentals, a change in management or operating strategy or the failure of a catalyst to develop, or for other investment reasons which the Sub-Adviser deems appropriate.
1290 Essex Small Cap Growth Fund 3
While the Fund’s overall portfolio will focus on small- and micro-capitalization companies, the Sub-Adviser may
decide to keep a company’s stock if it has appreciated beyond the market capitalization of the largest company included in the Fund’s benchmark index, as described above. Because of this, the Fund may have less than 80% of its net assets in securities of small
capitalization companies at any given time.
Principal Risks
An
investment in the Fund is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The value of your investment may fall, sometimes sharply, and you could lose money by investing in the Fund. There can be no assurance that the Fund will achieve its investment objective.
The following risks can negatively affect the Fund’s performance. The most significant risks as of
the date of this Prospectus are presented first, followed by additional principal risks in alphabetical order.
Market Risk —
The Fund is subject to the risk that the securities markets will move down, sometimes rapidly and unpredictably, based
on overall economic conditions and other factors, which may negatively affect Fund performance. Securities markets also may experience long periods of decline in value. The value
of a security may decline due to factors that are specifically related to a particular company, as well as general market conditions, such as real or perceived adverse economic or
political conditions, inflation rates and/or investor expectations concerning such rates, changes in interest rates, or adverse investor sentiment generally. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. Changes in the financial condition of a single issuer can impact a market as a whole.
Geopolitical events, including terrorism, tensions, war or other open conflicts between nations, or political or economic dysfunction within some nations that are global economic powers or major producers of oil, may lead to instability in world economies and markets, may lead to increased market volatility, and may have adverse long-term effects. World markets, or those in a particular region, may all react in similar fashion to
important economic, political or other developments. Events such as environmental and natural disasters or other catastrophes, public health crises (such as epidemics and pandemics), social unrest, and cybersecurity incidents, and governments’ reactions to such events, could cause uncertainty in the markets and may adversely affect the performance of the global economy. Impacts from climate change may include significant risks to global financial assets and economic growth. The extent and duration of such events and resulting market disruptions cannot be predicted, but could be substantial and could magnify the impact of other risks to the Fund. Whether or not the Fund invests in securities of issuers located in or with significant exposure to the countries or regions directly affected, the value and liquidity of the Fund’s investments
may be negatively affected by developments in other countries and regions.
Markets and market participants are increasingly reliant on information data systems. Inaccurate data, software or other technology malfunctions, programming inaccuracies, unauthorized use or access, and similar circumstances may impair the performance of
these systems and may have an adverse impact upon a single issuer, a group of issuers, or the market at large.
In addition, the U.S. Federal Reserve has invested or otherwise made available substantial amounts of
money to keep credit flowing through short-term money markets and has signaled that it will continue to adjust its operations as appropriate to support short-term money markets. Amid these efforts, concerns about the markets’ dependence on the Fed’s provision of liquidity have grown.
Equity Risk —
In general, the values of stocks and other equity securities fluctuate, and sometimes widely fluctuate, in response to
changes in a company’s financial condition as well as general market, economic and political conditions and other factors. The Fund may experience a significant or complete
loss on its investment in an equity security. In addition, common stock prices may be particularly sensitive to rising interest rates, which increase borrowing costs and the costs
of capital.
Small-Cap and Micro-Cap Company Risk —
Small-cap and micro-cap companies carry additional risks because the operating histories of these companies tend to be
more limited, their earnings and revenues less predictable (and some companies may be experiencing significant losses), and their share prices more volatile than those of larger,
more established companies. The shares of smaller companies tend to trade less frequently than those of larger, more established companies, which can adversely affect the pricing of these securities and the Fund’s ability to purchase or sell these securities. In general, these risks are greater for micro-cap companies than for small-cap companies.
Investment Style Risk — The Fund may use a
particular style or set of styles — in this case, a “growth” style — to select investments. A particular style may be out of favor or may not produce the
best results over short or longer time periods. Growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. Growth investing
also is subject to the risk that the stock price of one or more companies will fall or will fail to appreciate as anticipated by the Fund, regardless of movements in the securities market. Growth stocks also tend to be more volatile than value stocks, so in a declining market their prices may decrease more than value stocks in general. Growth stocks also may increase the volatility of the Fund’s share price.
4 1290 Essex
Small Cap Growth Fund
Sector Risk — From time to time, based
on market or economic conditions, the Fund may have significant positions in one or more sectors of the market. To the extent the Fund invests more heavily in particular sectors,
its performance will be especially sensitive to developments that significantly affect those sectors. Individual sectors may be more volatile, and may perform differently, than
the broader market. The industries that constitute a sector may all react in the same way to economic, political or regulatory events.
Portfolio Management Risk —
The Fund is subject to the risk that strategies used by an investment manager and its securities selections fail to
produce the intended results. An investment manager’s judgments or decisions about the quality, relative yield or value of, or market trends affecting, a particular security
or issuer, industry, sector, region or market segment, or about the economy or interest rates, may be incorrect or otherwise may not produce the intended results, which may result
in losses to the Fund. In addition, many processes used in Fund management, including security selection, rely, in whole or in part, on the use of various technologies. The Fund may suffer losses if there are imperfections, errors or limitations in the quantitative, analytic or other tools, resources, information and data used, or the analyses employed or relied on, by an investment manager, or if such tools, resources, information or data are used incorrectly, fail to produce the desired results, or otherwise do not work as intended. There can be no assurance that the use of these technologies will result in effective investment decisions for the Fund.
New Fund Risk — The Fund is newly or
recently established and has limited operating history. The Fund may not be successful in implementing its investment strategy, and there can be no assurance that the Fund will
grow to or maintain an economically viable size, which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable
for all shareholders. Until the Fund is fully capitalized, it may be unable to pursue its investment objective or execute its principal investment strategies.
Convertible Securities Risk — A convertible security
is a form of hybrid security; that is, a security with both debt and equity characteristics. The value of a convertible security fluctuates in relation to changes in interest rates
and the credit quality of the issuer and also fluctuates in relation to changes in the price of the underlying common stock. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument, which may be less than the current market price of the security. If a convertible security held by the Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert it into underlying common stock or sell it to a third party. Convertible securities are subject to equity risk, interest rate risk and credit risk and are often lower-quality securities. Lower quality may lead to greater volatility in the price of a security and may negatively affect a security’s liquidity. Since it derives a portion of its value
from the common stock into which it may be converted, a convertible security is also subject to the same types of market and issuer-specific risks that apply to the underlying common stock.
Derivatives Risk — The Fund’s
investments in derivatives may rise or fall in value more rapidly than other investments and may reduce the Fund’s returns and increase the volatility of the Fund’s net
asset value. Investing in derivatives involves investment techniques and risk analyses different from, and risks in some respects greater than, those associated with investing in
more traditional investments, such as stocks and bonds. Derivatives may be leveraged such that a small investment can have a significant impact on the Fund’s exposure to stock market values, interest rates, or other investments. As a result, a relatively small price movement in a derivatives contract may cause an immediate and substantial loss, and the Fund could lose more than the amount it invested. Some derivatives can have the potential for unlimited losses. In addition, it may be difficult or impossible for the Fund to purchase or sell certain derivatives in sufficient amounts to achieve the desired level of exposure, or to terminate or offset existing arrangements, which may result in a loss or may be costly to the Fund. Some derivatives are more sensitive to market price fluctuations and to interest rate changes than
other investments. Derivatives may not behave as anticipated by the Fund, and derivatives strategies that are successful under certain market conditions may be less successful or unsuccessful under other market conditions. The Fund also may be exposed
to losses if the counterparty in the transaction is unable or unwilling to fulfill its contractual obligation. In certain cases, the Fund may be hindered or delayed in exercising remedies against or closing out derivatives with a counterparty, resulting in additional losses. Derivatives also may be subject to the risk of mispricing or improper valuation, and valuation may be more difficult in times of market turmoil. Changing regulation may make derivatives more costly, limit their availability, impact the Fund’s ability to maintain its investments in derivatives, disrupt markets, or otherwise adversely affect their value or performance.
ETFs Risk — The Fund’s
shareholders will indirectly bear fees and expenses paid by the ETFs in which it invests, in addition to the Fund’s direct fees and expenses. The cost of investing in the
Fund, therefore, may be higher than the cost of investing in a mutual fund that invests directly in individual stocks and bonds. In addition, the Fund’s net asset value will
be subject to fluctuations in the market values of the ETFs in which it invests. The Fund is also subject to the risks associated with the securities or other investments in which the ETFs invest, and the ability of the Fund to meet its investment objective will directly depend on the ability of the ETFs to meet their investment objectives. An index-based ETF’s performance may not match that of the index it seeks to track. An actively managed ETF’s performance will reflect its adviser’s ability to make investment decisions that are suited to achieving the ETF’s investment objective. It is also possible that an active trading market for an ETF may not develop or be maintained, in which case the liquidity and value of the Fund’s investment in the ETF could be substantially and adversely affected. The extent to which the investment
1290 Essex Small
Cap Growth Fund 5
performance and risks associated with the Fund correlate to those of a particular ETF will depend upon the extent to
which the Fund’s assets are allocated from time to time for investment in the ETF, which will vary.
Foreign Securities Risk —
Investments in foreign securities, including depositary receipts, involve risks in addition to those associated with
investments in U.S. securities. Foreign markets may be less liquid, more volatile and subject to less government supervision and regulation than U.S. markets, and it may take more
time to clear and settle trades involving foreign securities, which could negatively impact the Fund's investments and cause it to lose money. Security values also may be
negatively affected by changes in the exchange rates between the U.S. dollar and foreign currencies. Differences between U.S. and foreign legal, political and economic systems,
regulatory regimes and market practices, as well as trade barriers and other protectionist trade policies (including those of the U.S.), governmental instability, war, or other political or economic actions, also may adversely impact security values. Foreign securities are also subject to the risks associated with the potential imposition of economic or other sanctions against a particular foreign country, its nationals, businesses or industries. World markets, or those in a particular region, may all react in similar fashion to important economic, political or other developments. Events and evolving conditions in certain economies or markets may alter the risks
associated with investments tied to countries or regions that historically were perceived as comparatively stable and make such investments riskier and more volatile. Regardless of where a company is organized or its stock is traded, its performance may be significantly affected by events in regions from which it derives its profits or in which it conducts significant operations.
Emerging Markets Risk — The risks associated with investments in emerging market countries often are significant, and vary from jurisdiction to
jurisdiction and company to company. Investments in emerging market countries are more susceptible to loss than investments in more developed foreign countries and may present
market, credit, currency, liquidity, legal, political, technical and other risks different from, or greater than, the risks of investing in more developed foreign countries.
Emerging market countries may be more likely to experience rapid and significant adverse developments in their political or economic structures, intervene in financial markets, restrict foreign investments, impose high withholding or other taxes on foreign
investments, impose restrictive exchange control regulations, or nationalize or expropriate the assets of private companies, which may have negative impacts on transaction costs, market price, investment returns and the legal rights and remedies
available to the Fund. In addition, the securities markets of emerging market countries generally are smaller, less liquid and more volatile than those of more developed foreign countries, and emerging market countries often have less uniformity in
regulatory, accounting, auditing and financial reporting requirements or standards, which may impact the availability and quality of information about issuers, and less reliable clearance and settlement, registration and custodial procedures. Emerging market countries also may be subject to high inflation and rapid currency devaluations, and currency-hedging techniques may
be unavailable in certain emerging market countries. In addition, some emerging market countries may be heavily dependent on international trade, which can materially affect their
securities markets. Securities of issuers traded on foreign exchanges may be suspended. The likelihood of such suspensions may be higher for securities of issuers in emerging
market countries than in countries with more developed markets.
Large Transaction Risk — A significant percentage
of the Fund’s shares may be owned or controlled by the Adviser and its affiliates, other funds advised by the Adviser (including funds of funds), or other large shareholders.
Accordingly, the Fund is subject to the potential for large-scale inflows and outflows as a result of purchases and redemptions of its shares by such shareholders. These inflows and outflows could negatively affect the Fund’s net asset value and performance.
Portfolio Turnover Risk — High portfolio turnover
(generally, turnover in excess of 100% in any given fiscal year) may result in increased transaction costs to the Fund, which may result in higher fund expenses and lower total
return.
Preferred Stock Risk —
Preferred stock is subject to many of the risks associated with debt securities, including interest rate risk. Unlike
interest payments on debt securities, dividends on preferred stock are generally payable at the discretion of the issuer’s board of directors. Preferred shareholders may have
certain rights if dividends are not paid but generally have no legal recourse against the issuer. Shareholders may suffer a loss of value if dividends are not paid. In certain
situations an issuer may call or redeem its preferred stock or convert it to common stock. The market prices of preferred stocks are generally more sensitive to actual or perceived
changes in the issuer’s financial condition or prospects than are the prices of debt securities.
Real Estate Investing Risk —
Real estate-related investments may decline in value as a result of factors affecting the overall real estate
industry. Real estate is a cyclical business, highly sensitive to supply and demand, general and local economic developments and characterized by intense competition and periodic
overbuilding. Real estate income and values also may be greatly affected by demographic trends, such as population shifts or changing tastes and values. Losses may occur from
casualty or condemnation, and government actions, such as tax law changes, zoning law changes, regulatory limitations on rents, or environmental regulations, also may have a major impact on real estate. The availability of mortgages and changes in interest rates may also affect real estate values. Changing interest rates and credit quality requirements also will affect the cash flow of real estate companies and their ability to meet capital needs. In addition, global climate change may have an adverse effect on property and security values.
6 1290 Essex
Small Cap Growth Fund
Real
estate investment trusts (“REITs”) generally invest directly in real estate (equity REITs), in mortgages secured by interests in real estate (mortgage REITs) or in some
combination of the two (hybrid REITs). Investing in REITs exposes investors to the risks of owning real estate directly, as well as to risks that relate specifically to the way in
which REITs are organized and operated. Equity REITs may be affected by changes in the value of the underlying property owned by the REIT, while mortgage REITs may be affected by
the quality of any credit extended. Equity and mortgage REITs are also subject to heavy cash flow dependency, defaults by borrowers, and self-liquidations. The risk of defaults is generally higher in the case of mortgage pools that include subprime mortgages involving borrowers with blemished credit histories.
Operating REITs requires specialized management skills, and a portfolio that invests in REITs indirectly bears REIT management and administration expenses along with the direct expenses of the portfolio. Individual REITs may own a limited number of properties and may concentrate in a particular region or property type. Domestic REITs also must satisfy specific Internal Revenue Code
requirements to qualify for the tax-free pass-through of net investment income and net realized gains distributed to shareholders. Failure to meet these requirements may have adverse consequences on the Fund. In addition, even the larger REITs in the industry tend to be small- to medium-sized companies in relation to the equity markets as a whole. Moreover, shares of REITs may trade
less frequently and, therefore, are subject to more erratic price movements than securities of larger issuers.
Risk/Return Bar Chart and Table
The Fund is newly offered. Performance information will be available in the Prospectus after the Fund has
been in operation for one full calendar year.
Who Manages the Fund
Investment Adviser: Equitable Investment Management Group, LLC (“EIM” or the “Adviser”)
Portfolio
Managers: The members of the team that are jointly and primarily responsible for the selection,
monitoring and oversight of the Fund’s Sub-Adviser
are:
Portfolio
Manager: The individual primarily responsible for the securities selection, research and trading for the
Fund is:
Name
Title
Date Began
Managing
the Fund
Nancy Prial, CFA®
Co-Chief Executive Officer and Senior Portfolio
Manager of Essex
[DATE]
The Adviser has been granted relief by the Securities and Exchange Commission to hire, terminate and replace Sub-Advisers and amend sub-advisory agreements subject to the approval of the Board of Trustees and without obtaining shareholder
approval. However, the Adviser may not enter into a sub-advisory agreement on behalf of the Fund with an “affiliated person” of the Adviser unless the sub-advisory agreement is approved by the Fund's shareholders. The Adviser is responsible for overseeing Sub-Advisers and recommending their hiring, termination and replacement to the Board of Trustees. The relief
does not extend to any increase in the advisory fee paid by the Fund to the Adviser; any such increase would be subject to shareholder approval.
Purchase and Redemption of Fund Shares
You may purchase and redeem shares of the Fund each day the New York Stock Exchange is open for trading
at the Fund’s net asset value determined after receipt of your request in good order, subject to any applicable sales charge. All share classes are currently not offered for sale in all states. Initial purchases must be effected through your financial intermediary.
1290 Essex Small
Cap Growth Fund 7
Subsequently, you may purchase or redeem shares either by having your financial intermediary process your purchase or
redemption, or by telephone (1-888-310-0416), by overnight mail (1290 Funds, c/o DST Asset Manager Solutions, Inc., 430 W. 7th Street, Suite 219166, Kansas City, MO64105-1407), or by mail (1290 Funds, PO Box 219166, Kansas City, MO64121-9166). All redemption requests will be processed and payment with respect thereto will normally be made within seven days after receipt of your request in good order.
The initial and subsequent minimums for purchasing shares of the Fund generally are as follows, although the Fund may reduce or waive the minimums in some cases:
Class A
Class T
Class I
Class R
Minimum Initial Investment
$1,000 for all accounts
except:
• $500 for certain fee-based
programs.
• $500, if establishing an
Automatic Bank Draft Plan.
• $250 minimum for
purchases by accounts
through eligible financial
intermediary platforms
that have entered into
selling or service
agreements with the
Distributor and that are
eligible to purchase
Class A shares without a
sales charge.
• No minimum for certain
employer-sponsored
retirement plans and
certain wrap fee based
programs.
$1,000 for all accounts
except:
• $500 for certain fee-based
programs.
• $500, if establishing an
Automatic Bank Draft Plan.
• No minimum for certain
employer-sponsored
retirement plans and
certain wrap fee based
programs.
• $1,000,000 for certain
institutions and individuals.
• $1,000 for certain
employees (or their
immediate family
members) of Equitable
Holdings, Inc. or its
subsidiaries.
• Class I shares are available
to clients of registered
investment advisers who
have $250,000 invested in
the Fund.
• No minimum investment
for a wrap account client
of an eligible broker-dealer
or a client of a fee-based
planner that is unaffiliated
with a broker-dealer, or a
client of an investment
adviser, trustee,
administrator or institution
acting in a similar capacity
that invests in the Fund
through a retirement plan
where the administrator or
service provider of such
retirement plan has
entered into a services
agreement with the Fund’s
distributor and/or
investment adviser.
No minimum
Minimum Additional
Investment
$50 for all accounts
$50 for all accounts
No subsequent minimum
No subsequent minimum
Your financial intermediary may impose different investment minimums.
Tax Information
The Fund’s dividends and other distributions generally will be subject to federal income tax as ordinary income or long-term capital gains, unless you are a tax-exempt investor or are investing through a retirement plan or account; in the latter case,
you may be subject to that tax upon withdrawal from the plan or account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund and its related companies may pay the intermediary for the sale of Fund shares, shareholder services and other purposes. These
payments create a conflict of interest by influencing the broker-dealer or other intermediary and your investment
professional to recommend the Fund over another investment. Ask your financial adviser or visit your financial intermediary’s website for more information.
8 1290 Essex Small Cap Growth Fund
2. More information on fees and expenses
Advisory Fees
The Fund pays a fee to Equitable Investment Management Group, LLC (“EIM” or the
“Adviser”) for advisory services. The contractual rate of the advisory fee (as an annual percentage of the Fund’s average daily net assets) payable by the Fund
is:
Fund
First
$1 Billion
Next
$1 Billion
Next
$3 Billion
Next
$5 Billion
Thereafter
1290 Essex Small Cap Growth Fund
__%
__%
__%
__%
__%
The Sub-Adviser is paid by the Adviser. Changes to the sub-advisory fee may be negotiated, which could result in an increase or decrease in the amount of the advisory fee retained by the Adviser, without shareholder approval.
A discussion of the basis for the decision by the Board of Trustees to approve the investment advisory
and sub-advisory agreements with respect to the Fund will be available in the 1290 Funds' Annual Report to Shareholders for the period ending October 31, 2022.
Administration Fees
Equitable Investment Management, LLC (the “Administrator”), 1290 Avenue of the Americas, New York, New York10104, serves as the Administrator of the Fund. The administrative services provided to the Fund by the Administrator include,
among others, coordination of 1290 Funds’ audit, financial statements and tax returns; expense management and budgeting; legal administrative services and compliance monitoring; portfolio accounting services, including daily net asset value
accounting; operational risk management; and assistance with the administration of 1290 Funds’ proxy voting policies and procedures and anti-money laundering program. For administrative services, the Fund pays the Administrator an asset-based
administration fee of 0.15% of the average daily net assets of the Fund. The asset-based administration fee is calculated and billed monthly, and subject to an annual minimum of
$30,000 per Fund or $30,000 for each allocated portion (or sleeve) of the Fund, as applicable.
Expense Limitation Agreement
In the interest of limiting the expenses of the Fund through April 30, 2024 (unless the Board of Trustees consents to an earlier revision or termination of this arrangement), the Adviser has entered into an expense limitation agreement with 1290 Funds
with respect to the Fund (“Expense Limitation Agreement”). Pursuant to the Expense Limitation Agreement, the Adviser has agreed to make payments or waive its and its affiliates’ management, administrative and other fees to limit the expenses of the Fund so that the annual operating expenses of the Fund (other than interest, taxes, brokerage commissions, 12b-1 fees,
dividend and interest expenses on securities sold short, other expenditures that are capitalized in accordance with generally accepted accounting principles (other than offering costs), other extraordinary expenses not incurred in the ordinary course
of the Fund’s business and fees and expenses of other investment companies in which the Fund may invest), as a percentage of average daily net assets, do not exceed the respective expense ratios in the following table. The expense ratios in the table do not include 12b-1 fees and certain other expenses noted above. Accordingly, the effective expense limits are higher for
Class A, Class T and Class R shares, as shown in the Fund’s fee table.
Expense Limitation Provisions
Total Annual Operating Expenses Limited to
(% of average daily net assets, excluding 12b-1
fees and certain other expenses noted above)
Fund
Class A
Class T
Class I
Class R
1290 Essex Small Cap Growth Fund
__%
__%
__%
__%
The Adviser may be reimbursed the amount of any such payments or waivers in the future provided that the payments or waivers are reimbursed within three years of the payments or waivers being recorded and the Fund’s expense ratio, after the reimbursement is taken into account, does not exceed the Fund’s expense cap at the time of the waiver or the Fund’s expense cap at the time of the reimbursement, whichever is lower. If the actual expense ratio is less than the expense cap and
the Adviser has recouped any eligible previous payments or waivers made, the Fund will be charged such lower expenses.
More information
on fees and expenses 9
Payments
or waivers will increase returns and yield, and reimbursement of payments or waivers will decrease returns and yields.
The annual operating expenses of the Fund, as disclosed in this Prospectus, do not reflect any fees and
expenses that are imposed by sponsors of products that offer the Fund as an underlying investment option, such as retirement plans and/or variable life insurance contracts and variable annuity certificates and contracts. Such fees and expenses would increase the
Fund’s overall fees and expenses, and would not be subject to the expense caps described above, thereby reducing the Fund’s returns.
10 More information on fees and expenses
3. More information on strategies and risks
Strategies
Changes in Investment Objectives and Principal Investment Strategies
There is no assurance that the Fund will achieve its investment objective. The investment objective of
the Fund may be changed without shareholder approval. Except as otherwise noted, the investment policies and strategies of the Fund are not fundamental policies and may be changed without a shareholder vote. In addition, because the Fund is new or to the extent the Fund is undergoing a transition (such as a reorganization or rebalancing, or experiences large inflows or outflows) or takes a temporary defensive position, it may not be pursuing its investment objective or executing its principal investment strategies.
The Fund seeks long-term growth of capital.
80% Policies
The
Fund has a non-fundamental investment policy that, under normal circumstances, it will invest at least 80% of its net assets, plus borrowings for investment purposes, in equity
securities of small- and micro-capitalization companies (or other financial instruments that derive their value from the securities of such companies). The policy is subject to
change only upon at least sixty (60) days’ prior notice to shareholders of the Fund. To the extent the Fund invests in securities of other investment companies or investment vehicles (such as exchange-traded funds), it takes into consideration the investment policies of such investment companies and investment vehicles at the time of investment in determining compliance with its 80% policy. The 80% investment requirement is applied at the time the Fund invests its assets. If, subsequent to an investment by the Fund, this requirement is no longer met, the Fund’s future investments will be made in a manner consistent with bringing the Fund into compliance with this requirement. In addition, in appropriate circumstances, synthetic investments may count toward the 80% minimum if they have economic characteristics
similar to the other investments included in the 80% policy. In addition, the Fund may specify a market capitalization range for acquiring portfolio securities. If a security that is within the range at the time of purchase later appreciates or depreciates in value outside the range, which may happen due to market fluctuation, the Fund may continue to hold the security. However, this change in market
capitalization could affect the Fund’s flexibility in making additional investments in securities of the applicable issuer, and the continued investment in securities of the issuer could cause the Fund to be subject to additional risks, such as those associated with holding securities of larger or smaller capitalization companies, as the case may be.
The Sub-Adviser has complete discretion to select portfolio securities for the Fund’s assets (or portion thereof), subject to the Fund’s investment objective, restrictions and policies and other parameters that may be developed from time to time by the Adviser. In selecting investments, the Sub-Adviser uses its proprietary investment strategies, which are summarized above in the section “About the Fund — Investments, Risks, and Performance”
for the Fund.
Additional Information about the Investment Strategies
The following provides additional information regarding the principal investment strategies discussed in the “About the Fund — Investments, Risks, and Performance — Principal Investment Strategy” section for the Fund, and information about additional investment strategies that the Fund may employ in pursuing its investment objective. The Fund also may make other types of
investments to the extent permitted by applicable law. For further information about investment strategies, please see the 1290 Funds' Statement of Additional Information (“SAI”).
Convertible Securities — The Fund may invest in
convertible securities, including both convertible debt and convertible preferred stock. A convertible security is generally a bond, preferred stock or other security that may be
converted within a specified period of time and at a pre-stated price or formula into the common stock of the same or a different issuer. A convertible security entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Convertible securities have unique investment characteristics in that they generally: (1) have higher yields than common stocks, but lower yields than comparable nonconvertible securities; (2) are less subject to fluctuation in value than the underlying stock because they have fixed income characteristics; and (3) provide the potential for capital appreciation if the market price of the underlying common stock increases.
Derivatives — The
Fund may use
“derivative” instruments to hedge its portfolio against market, economic, currency, issuer and other risks, to gain or manage exposure to the markets, sectors and
securities in which the Fund may invest and to other economic factors that affect the Fund's performance (such as interest rate movements), to increase total return or income, to
reduce transaction costs, to manage cash, and for other fund management purposes. In general terms, a derivative instrument is an investment contract
More information
on strategies and risks 11
the value of which is linked to (or is derived from), in whole or in part, the value of an underlying asset, reference rate or index (e.g., stocks, bonds, commodities, currencies, interest rates and market indexes). Futures and options contracts (including futures and options on individual securities and equity and bond market indexes and options on futures contracts), swaps (including interest rate swaps, total return swaps, currency swaps and credit default swaps) and forward contracts, and structured securities, including forward currency contracts, are examples of derivatives in which the Fund may invest. To the extent the Fund engages in derivatives transactions, it may maintain a significant percentage of its
assets in cash and cash equivalent instruments, which may serve as margin or collateral for the Fund's obligations under derivative transactions.
Equity Securities — The Fund may invest in
equity securities. Equity securities may be bought on stock exchanges or in the over-the-counter market. Equity securities generally include common stock, preferred stock,
warrants, securities convertible into common stock, securities of other investment companies and securities of real estate investment trusts.
Exchange Traded Funds (“ETFs”) — The Fund may invest in ETFs. ETFs are investment companies or other investment vehicles whose shares are listed and traded on U.S. stock exchanges or otherwise traded in the over-the-counter market and may be purchased and sold throughout the trading day based on their market price. Generally, an index-based ETF seeks to track a securities index or a basket of securities that an “index provider” (such as Standard & Poor’s, Dow Jones, Russell or Morgan Stanley Capital International) selects as representative of a market, market segment, industry sector, country or geographic region. An index-based ETF generally holds the same stocks or bonds as the index it seeks to track (or it may hold a representative sample of
such securities). Accordingly, an index-based ETF is designed so that its performance, before fees and expenses, will correspond with that of the index it seeks to track. ETFs also may be actively managed. By investing in the Fund, you will indirectly bear fees and expenses charged by the ETFs in which the Fund invests in addition to the Fund's direct fees and expenses.
Generally, the Fund's investments in other investment companies are subject to statutory limitations in the Investment Company Act of 1940, as amended (“1940 Act”), including in certain circumstances a prohibition against acquiring shares of another investment company if, immediately after such acquisition, the Fund and its affiliated persons (i) would hold more than 3% of such other investment company’s total
outstanding shares, (ii) would have invested more than 5% of its total assets in such other investment company, or (iii) would have invested more than 10% of its total assets in investment companies. However, there are regulatory exemptions from these restrictions under the 1940 Act on which the Fund may rely to invest in ETFs in excess of these limits, subject to
certain conditions.
Foreign Securities — The Fund may invest in
foreign securities. Generally, foreign securities are issued by companies organized outside the U.S. or by foreign governments or international organizations, are traded primarily
in markets outside the U.S., and are denominated in a foreign currency.
Foreign securities may include securities of issuers in developing countries or emerging markets. In addition, foreign securities may include depositary receipts of foreign companies. American Depositary Receipts are receipts typically issued by an American bank or trust company that evidence underlying securities issued by a foreign corporation. European Depositary Receipts (issued in Europe) and Global Depositary Receipts (issued throughout the world) each evidence a similar ownership arrangement. Depositary receipts also may be convertible into securities of foreign issuers. These securities may not necessarily be denominated in the same currency as the securities into which they may be converted.
Illiquid Investments — The Fund may invest up
to 15% of its net assets in illiquid investments. Illiquid investment means any investment the Fund reasonably expects cannot be sold or disposed of in current market conditions in
seven calendar days or less without the sale or disposition significantly changing the market value of the investment.
Portfolio Turnover —
The Fund does not restrict the frequency of trading to limit expenses. The Fund may engage in active and frequent
trading of portfolio securities to achieve its investment objective. A portfolio turnover rate of 100%, for example, is equivalent to the Fund buying and selling all of its
portfolio securities once during the course of a given fiscal year. Sales of securities through frequent trading may result in realization of taxable capital gain, including
short-term capital gain that will generally be taxable to shareholders as ordinary income and may adversely affect the Fund’s after-tax returns and its
performance.
Preferred Stocks —
The Fund may invest in preferred stocks. Although preferred stocks represent a partial ownership interest in a
company, preferred stocks generally do not carry voting rights and have economic characteristics similar to fixed-income securities. Preferred stocks generally are issued with a
fixed par value and pay dividends based on a percentage of that par value at a fixed or variable rate. Preferred stocks often have a liquidation value that generally equals the
original purchase price of the preferred stock at the date of issuance.
Real Estate Investment Trusts (REITs) — The Fund may invest in REITs, which are pooled vehicles that invest primarily in income-producing real estate or loans
related to real estate.
12 More information on strategies and risks
Securities of Other Investment
Companies — The Fund may invest in the securities of other investment companies to the extent permitted by applicable law. Generally, the Fund's investments in other investment companies are subject to statutory limitations in the 1940 Act, including in certain circumstances a prohibition against acquiring shares of another investment company if, immediately after such acquisition, the Fund and its affiliated persons (i) would hold more than 3% of such other investment company’s total outstanding shares, (ii) would have invested more than 5% of its total assets in such other investment company, or (iii) would have invested more than 10% of its total assets in investment companies. However, there are statutory and regulatory exemptions from these
restrictions under the 1940 Act on which the Fund may rely to invest in other investment companies in excess of these limits, subject to certain conditions. Other investment companies in which the Fund may invest include ETFs, as discussed in “Exchange-Traded Funds (“ETFs”)”.
Temporary Defensive Investments — For temporary defensive
purposes in response to adverse market, economic, political or other conditions, the Fund may invest, without limit, in cash, money market instruments or high quality, short-term
debt securities, including repurchase agreements. To the extent the Fund is invested in these instruments, the Fund will not be pursuing its investment goal.
Risks
Risk is the chance that you will lose money on your investment or that it will not earn as much as you
expect. In general, the greater the risk, the more money your investment can earn for you and the more you can lose. Like other investment companies, the value of the Fund's shares may be affected by the Fund's investment objective, principal investment strategies and particular risk factors. Consequently, the Fund may be subject to different risks than another investment company. Some of the risks of investing in the Fund are discussed below, including the principal risks of the Fund as discussed in “About the Fund — Investments, Risks, and Performance — Principal Risks.” However, other factors may also affect the Fund's investment results. There is no assurance that the Fund will achieve its investment objective or that it will not lose value. For further information about investment risks, please see
the 1290 Funds’ SAI.
Principal Investment Risks — As indicated in
“About the Fund — Investments, Risks, and Performance — Principal Risks,” the Fund may be subject to the following principal risks. The risks, which
are described in alphabetical order and not in order of perceived importance or potential exposure, can negatively affect the Fund's performance.
Convertible Securities Risk —
A convertible security is a form of hybrid security; that is, a security with both debt and equity characteristics.
The value of a convertible security fluctuates in relation to changes in interest rates and the credit quality of the issuer and also fluctuates in relation to changes in the price
of the underlying common stock. A convertible security tends to perform more like a stock when the underlying stock price is high relative to the conversion price (because more of
the security’s value resides in the option to convert) and more like a debt security when the underlying stock price is low relative to the conversion price (because the option to convert is less valuable). Because its value can be influenced by many different factors, a convertible security generally is not as sensitive to interest rate changes as a similar non-convertible debt security, and generally has less potential for gain or loss than the underlying stock. A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument, which may be less than the current market price of the security. If a convertible security held by the Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert
it into underlying common stock or sell it to a third party. Investments by the Fund in convertible debt securities may not be subject to any ratings restrictions, but the Fund's investment manager will consider ratings, and any changes to ratings, in its determination of whether the Fund should invest in and/or continue to hold the securities. Convertible securities are subject to equity risk, interest rate risk, and credit risk and are often lower-quality securities. Lower quality may lead to greater volatility in the price of a security and may negatively affect a security’s liquidity. Since it derives a portion of its value from the common stock into which it may be converted, a convertible security is also subject to the same types of market and issuer-specific risks that apply to the underlying common
stock. To the extent the Fund invests in convertible securities issued by small- or mid-cap companies, it also will be subject to the risks of investing in these companies. The securities of small- and mid-cap companies are often more volatile and less liquid than the securities of larger companies. Convertible securities are normally “junior” securities, which means an issuer usually must pay interest on its non-convertible debt securities before it can make payments on its convertible securities. If an issuer stops making interest or principal payments, these securities may become worthless and the Fund could lose its entire investment. In the event of a liquidation of the issuing company, holders of convertible securities may be paid before the company’s common stock holders but after holders of any senior debt obligations
of the company. To the extent the Fund invests in securities that may be considered “enhanced” convertible securities, some or all of these risks may be more pronounced.
Derivatives Risk — A derivative instrument
is generally an investment contract the value of which depends upon (or is derived from), in whole or in part, the value of an underlying asset, reference rate, index or event
(e.g., stocks, bonds, commodities, currencies, interest rates and market indexes). The Fund's investments in derivatives may rise or fall in value more rapidly than other
investments and may reduce the Fund's returns and increase the volatility of the Fund's net asset value. Examples of derivative instruments include,
More information
on strategies and risks 13
among others, futures contracts, options contracts, options on futures contracts, forward contracts, and swaps. The following provides a more general discussion of important risk factors (e.g., management risk, leveraging risk, liquidity risk, market and interest rate risk, counterparty and credit risk, and other risks) relating to all derivative instruments that the Fund may use. A discussion of additional risks associated with particular derivative instruments follows the general discussion, and particular derivative instruments are discussed in more detail under “Additional Investment Strategies and Risks” in the Statement of Additional Information.
Management
Risk — Derivative products are highly specialized instruments. Investing in derivatives involves investment techniques and risk
analyses different from, and risks in some respects greater than, those associated with investing in more traditional investments, such as stocks and bonds. The use of a derivative
requires an understanding not only of the underlying asset, reference rate, index or event, but also of the derivative itself, without the benefit of observing the performance of
the derivative under all possible market conditions.
Leveraging Risk — Derivatives may be leveraged such that a small investment can have a significant impact on the Fund's exposure to stock market values, interest rates, currency exchange rates or other investments. As a result, a relatively small price movement in a derivatives contract may cause an immediate and substantial loss or gain, and the Fund could lose more than
the amount it invested. The Fund may experience leveraging risk in connection with investments in derivatives because its investments in derivatives may be small relative to the investment exposure assumed, leaving more assets to be invested in
other investments. Such investments may have the effect of leveraging the Fund because the Fund may experience gains or losses not only on its investments in derivatives, but also on the investments purchased with the remainder of the assets. If the value of the Fund's investments in derivatives is increasing, this could be offset by declining values of the Fund's other investments. Conversely, it is possible that a rise in the value of the Fund's non-derivative investments could be offset by a decline in the value of the Fund's investments in derivatives. In either scenario, the Fund may experience losses. In a market where the value of the Fund's investments in derivatives is declining and the value of its other investments is declining, the Fund may experience substantial losses. Some derivatives can
have the potential for unlimited losses.
Liquidity Risk — It may be difficult or impossible for the Fund to purchase or sell certain derivatives in sufficient amounts to achieve the desired level of exposure, which may result in a loss or may be costly to the Fund. In addition, the possible lack of a liquid secondary market for certain derivatives, and the resulting inability of the Fund to sell or otherwise close out a derivatives position, could expose the Fund to losses and could make such derivatives more difficult for the Fund to value accurately. When the Fund uses derivatives, it likely will be required to provide margin or collateral and/or segregate cash or other liquid assets. Assets segregated
to cover these transactions may decline in value, may become illiquid, and are not available to meet
redemptions. The need to segregate assets also could limit the Fund's ability to pursue other opportunities as they arise.
Market and Interest Rate Risk — Some derivatives are more sensitive to market price fluctuations and to interest rate changes than other investments. The
successful use of derivatives will usually depend on the Adviser’s or a Sub-Adviser's ability to accurately forecast movements in the market relating to the underlying asset,
reference rate, index or event. If the Adviser or a Sub-Adviser does not predict correctly the direction of asset prices, interest rates and other economic factors, the Fund's
derivatives positions could lose value. Derivatives may not behave as anticipated by the Fund, especially in abnormal market conditions. Derivatives strategies that are successful under certain market conditions may be less successful or unsuccessful
under other market conditions. While some derivatives strategies can reduce the risk of loss, they can also reduce the opportunity for gain or result in losses by offsetting favorable price movements in other Fund investments.
Counterparty and Credit
Risk — The Fund also may be exposed to losses if the counterparty in the transaction is unable or unwilling to fulfill its
contractual obligation. Counterparty risk may arise because of market activities and developments, the counterparty’s financial condition (including financial difficulties,
bankruptcy, or insolvency), or other reasons. To the extent the Fund has significant exposure to a single counterparty or small group of counterparties, this risk will be
particularly pronounced. In addition, derivatives traded over-the-counter that are uncleared do not benefit from the protections provided by exchanges and central counterparties (derivatives clearing organizations and clearing corporations) in the event that a counterparty is
unable or unwilling to fulfill its contractual obligation. Such uncleared over-the-counter derivatives therefore involve greater counterparty and credit risk and may be more difficult to value than exchange-traded derivatives that are cleared by a
central counterparty.
Valuation Risk — Derivatives also may be subject to the risk of mispricing or improper valuation, and valuation may be more difficult in times of market turmoil. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to the Fund. Changes in the value of a derivative may not correlate perfectly, or at all, with the underlying asset, reference rate or index.
14 More information on strategies and risks
Other Risks — Derivatives also may be subject to risks related to potential operational issues, including documentation issues, settlement
issues, systems failures, inadequate controls, and human error, as well as legal risks, such as insufficient documentation, insufficient capacity or authority of a counterparty, or
legality or enforceability of a contract.
When a derivative is used as
a hedge against a position that the Fund holds, any loss generated by the derivative should generally be offset by gains on the hedged instrument, and vice versa. While hedging can
reduce or eliminate losses, it also can reduce or eliminate gains. Hedges are sometimes subject to imperfect matching between the derivative and the hedged investment, and there can be no assurance that the Fund's hedging transactions will be effective. Also, suitable derivative transactions may not be available in all circumstances, and there can be no assurance that the Fund will engage in derivative transactions to reduce exposure to other risks when that might be beneficial or that, if used, such strategies will be successful. Derivatives also may involve fees, commissions, or other costs that may reduce the Fund's gains or exacerbate its losses from the derivatives.
The federal income tax treatment of a derivative may not be as favorable as a direct
investment in an underlying asset and may adversely affect the timing, character and amount of income the Fund realizes from its investments. In addition, certain derivatives
are subject to mark-to-market or straddle provisions of the Internal Revenue Code. The federal income tax treatment of certain derivatives, such as swaps, is unsettled and may be subject to future legislation, regulation or administrative pronouncements
issued by the Internal Revenue Service.
Legislative and regulatory developments may limit the availability of certain derivatives, may make the use of derivatives by the Fund more costly, and may otherwise adversely impact the performance and value of derivatives. Legislative and regulatory
developments also may change the way in which the Fund itself is regulated. Such developments may impact the Fund's ability to invest, or remain invested, in certain derivatives, adversely affect the Fund's ability to achieve its investment objective, and subject the Fund to additional recordkeeping and reporting requirements. Complying with new requirements also may increase
the cost of the Fund's investments and the cost of implementing the Fund's investment program and related operations, which could adversely affect the Fund and its investors. For example, in October 2020 the SEC adopted Rule 18f-4 under the 1940
Act (“Rule 18f-4”), which imposes new requirements and restrictions on registered funds’ (including the Fund’s) use of derivatives, and with which the Fund generally will be required to comply in August 2022. Unless the Fund qualifies as a ‘‘limited derivatives user’’ as defined in Rule 18f-4, Rule 18f-4 would, among other things, require the Fund to establish a comprehensive derivatives risk management program, comply with certain value-at-risk based leverage limits, appoint a derivatives risk manager, and
provide additional disclosure both publicly and to the SEC regarding its derivatives positions. If the Fund qualifies as a limited derivatives user, Rule 18f-4 would require the Fund to have policies and procedures to manage its aggregate derivatives risk. Also, as the Fund transitions into reliance on the new requirements, the Fund’s approach to asset segregation and coverage requirements described in this Prospectus with respect to derivatives may be impacted.
A discussion of additional risks associated with particular derivative instruments follows:
Forward Contract
Risk — There are no limits on daily price fluctuations of forward contracts. Changes in foreign exchange regulations by
governmental authorities might limit the trading of forward contracts on currencies. There have been periods during which certain counterparties have refused to continue to quote
prices for forward contracts or have quoted prices with an unusually wide spread (i.e., the difference between the price at which the counterparty is prepared to buy and the price
at which it is prepared to sell).
Futures Contract
Risk — There is no assurance that a liquid market will exist for any particular futures contract at any particular time. Exchanges
may establish daily price fluctuation limits for futures contracts and may halt trading if a contract’s price moves upward or downward more than the limit in a given day. On
volatile trading days when the price fluctuation limit is reached or a trading halt is imposed, it may be impossible to enter into new positions or close out existing positions. If
the market for a contract is not liquid because of price fluctuation limits or other market conditions, it could prevent prompt liquidation of unfavorable positions, and potentially could require the Fund to continue to hold a position until delivery or expiration regardless of changes in its value. As a result, the Fund's access to other assets held to cover its futures positions could also be impaired.
Options Contract Risk — By writing put options, the Fund takes on the risk of declines in the value of the underlying instrument, including the
possibility of a loss up to the entire strike price of each option it sells, but without the corresponding opportunity to benefit from potential increases in the value of the
underlying instrument. When the Fund writes a put option, it assumes the risk that it must purchase the underlying instrument at a strike price that may be higher than the market
price of the instrument. If there is a broad market decline and the Fund is not able to close out its written put options, it may result in substantial losses to the Fund. By writing a call option, the Fund may be obligated to deliver instruments underlying an option at less than the market price. When the Fund writes a covered call option, it gives up the opportunity to profit from a price increase in the underlying instrument above the strike price. If a covered call option that the Fund has written is exercised, the Fund will
More information
on strategies and risks 15
experience a gain or loss from the sale of the underlying instrument, depending on the price at which the Fund purchased the instrument and the strike price of the option. The Fund will receive a premium from writing options, but the premium received
may not be sufficient to offset any losses sustained from exercised options. In the case of a covered call, the premium received may be offset by a decline in the market value of the underlying instrument during the option period. If an option that the Fund has purchased is never exercised or closed out, the Fund will lose the amount of the premium it paid and the use of those funds.
Swaps
Risk — Swap transactions generally do not involve delivery of reference instruments or payment of the notional amount of the
contract. Accordingly, the risk of loss with respect to swaps generally is limited to the net amount of payments that the Fund is contractually obligated to make or, in the case of
the other party to a swap defaulting, the net amount of payments that the Fund is contractually entitled to receive. As a seller of a credit default swap, the Fund effectively adds
economic leverage because, in addition to its total net assets, the Fund is subject to investment exposure on the entire notional amount of the contract. See “Leveraging Risk” above. Additionally, holding a position in a credit default swap could result in losses if the Fund does not correctly evaluate the creditworthiness of the company on which the credit default swap is based. Some swaps are now executed
through an organized exchange or regulated facility and cleared through a regulated clearing organization. The absence of an organized exchange or market for certain swap transactions may result in difficulties in trading and valuation, especially in the event of market disruptions. The use of an organized exchange or market for swap transactions is expected to result in swaps being easier to trade or value, but this may not always be the case.
Equity Risk — In general, the values
of stocks and other equity securities fluctuate, and sometimes widely fluctuate, in response to changes in a company’s financial condition as well as general market, economic
and political conditions and other factors. Stock markets tend to run in cycles, with periods when stock prices generally go up and periods when stock prices generally go down.
However, stock markets also can move up and down rapidly and unpredictably. Equity securities generally have greater price volatility than fixed-income securities. The Fund may experience a significant or complete loss on its investment in an equity security. In addition, common stock prices may be particularly sensitive to rising interest rates, which increase borrowing costs and the costs of capital.
Exchange-Traded Funds Risk —
The Fund's shareholders will indirectly bear fees and expenses paid by the ETFs in which it invests, in addition to
the Fund's direct fees and expenses. The cost of investing in the Fund, therefore, may be higher than the cost of investing in a mutual fund that invests directly in individual
stocks and bonds. In addition, the Fund's net asset value will be subject to fluctuations in the market values of the ETFs in which it invests. The Fund is also subject to the
risks associated with the securities or other investments in which the ETFs invest, and the ability of the Fund to meet its investment objective will directly depend on the ability
of the ETFs to meet their investment objectives. The extent to which the investment performance and risks associated with the Fund correlate to those of a particular ETF will depend upon the extent to which the Fund's assets are allocated from time to time for investment in the ETF, which will vary. The Fund does not control the investments of the ETFs, which may have different investment objectives and may engage in investment strategies that the Fund would not engage in directly. The ETFs may change their investment objectives or policies without the approval of the Fund. If that were to occur, the Fund might be forced to sell its investment in an ETF at a time and price that is unfavorable to the Fund.
In addition, many ETFs invest in securities included in, or representative of,
underlying indexes regardless of investment merit or market trends and, therefore, these ETFs do not change their investment strategies to respond to changes in the economy, which
means that such an ETF may be particularly susceptible to a general decline in the market segment relating to the relevant index. Imperfect correlation between an ETF’s securities and those in the index it seeks to track, rounding of prices, changes to the indices and regulatory policies may cause an ETF’s performance not to match the performance of its index. An ETF’s use of a representative sampling approach will result in it holding a smaller number of securities than are in the index it seeks to track. As a result, an adverse development respecting an issuer of securities held by the ETF could result in a greater decline in net asset value than would be the case if the ETF held all of the securities in the index. To the extent the assets in the ETF are smaller, these risks will be greater. No ETF fully
replicates its index, and an ETF may hold securities not included in its index. Therefore, there is a risk that the investment strategy of the ETF manager may not produce the intended results.
Moreover, there is the risk that an ETF may value certain securities at a price higher than the price at which it can sell them. Secondary market trading in shares of ETFs may be halted by a national securities exchange because of market conditions or for other reasons. In addition, trading in these shares is subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules. There can be no assurance that the requirements necessary to maintain the listing of the shares will continue to be met or will remain unchanged. In addition, although ETFs are listed for trading on national
securities exchanges, certain foreign exchanges and in over-the-counter markets, there can be no assurance that an active trading market for such shares will develop or be maintained, in which case the liquidity and value of the Fund's investment in the ETFs could be substantially and adversely affected. In addition, because ETFs are traded on these exchanges and in these markets, the purchase and sale of their shares involve transaction fees and commissions. The market price of an ETF may be different from the net asset value of such ETF (i.e., an ETF may trade at a discount or premium to its net asset value). If the Fund invests in such an ETF its performance could be adversely impacted.
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Foreign Securities Risk — Investments in foreign
securities, including depositary receipts, involve risks not associated with, or more prevalent than those that may be associated with, investments in U.S. securities. The
economies of certain foreign markets may not compare favorably with the economy of the United States with respect to such issues as growth of gross national product, reinvestment
of capital, resources and balance of payments position. Over a given period of time, foreign securities may underperform U.S. securities — sometimes for years. The Fund could also underperform if it invests in countries or regions whose economic performance falls short. Foreign markets may be less liquid, more volatile and subject to less government supervision and regulation than U.S. markets, and it may take more time to clear and settle trades involving foreign securities. Security values also may be negatively affected by changes in the exchange rates between the U.S. dollar and foreign currencies. Differences between U.S. and foreign legal, political and economic systems, regulatory regimes and market practices, as well as trade barriers and other protectionist trade policies (including those of the
U.S.), governmental instability, war or other political or economic actions or factors, also may adversely impact security values. Foreign securities are also subject to the risks associated with the potential imposition of economic or other sanctions against a particular foreign country, its nationals, businesses or industries. The costs of buying and selling foreign securities, including taxes, brokerage and custody costs, generally are higher than the costs of buying and selling domestic securities. World markets, or those in a particular region, may all react in similar fashion to important economic, political or other developments. Events and evolving conditions in certain economies or markets may alter the risks associated with investments tied to countries or regions that historically were perceived as comparatively stable
and make such investments riskier and more volatile. In addition, securities issued by U.S. entities with substantial foreign operations or holdings can involve risks relating to conditions in foreign countries. Regardless of where a company is organized or its stock is traded, its performance may be significantly affected by events in regions from which it derives its profits or in which it conducts significant operations.
Currency Risk — Investments in foreign currencies and in securities that trade in, or receive revenues in, or in derivatives that provide exposure to foreign currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar. Any such decline
may erode or reverse any potential gains from an investment in securities denominated in foreign currency
or may widen existing loss. To the extent the Fund invests or hedges based on the perceived relationship between two currencies, there is a risk that the correlation between those currencies may not behave as anticipated. Currency rates may fluctuate
significantly over short periods of time and can be affected unpredictably by a number of factors, including changes in interest rates; intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities; investor perception of a country’s economy; or the imposition of currency controls or other political developments in the U.S. or abroad. Currency exchange rates may fluctuate in response to factors external to a country’s economy, which makes the forecasting of currency market movements extremely difficult. Currency risk may be particularly high to the extent that the Fund invests
in foreign securities or currencies that are economically tied to emerging market countries.
Depositary Receipts Risk — Investments in depositary receipts (including American Depositary Receipts, European Depositary Receipts and Global
Depositary Receipts) are generally subject to the same risks of investing directly in the foreign securities that they evidence or into which they may be converted. Unsponsored
depositary receipts are issued by one or more depositaries in response to market demand, but without a formal agreement with the company that issues the underlying securities.
Unsponsored depositary receipts may not provide as much information about the underlying issuer and may not carry the same voting privileges as sponsored depositary receipts. The Fund may therefore receive less timely information or have less
control than if it invested directly in the foreign issuer. There also may be an imperfect correlation between the market value of depositary receipts and the underlying foreign securities.
Emerging Markets
Risk — Emerging market countries generally are located in Asia, the Middle East, Eastern Europe, Central and South America, and
Africa. There are greater risks and uncertainties involved in investing in emerging market countries and/or their securities markets, and investments in these countries and/or
markets are more susceptible to loss than investments in developed countries and/or markets. Investments in these countries and/or markets may present market, credit, currency,
liquidity, legal, political, technical and other risks different from, or greater than, the risks of investing in developed countries. For instance, these countries may be more likely than developed countries to experience rapid and significant adverse
developments in their political, economic or social structures or intervene in or manipulate financial markets. Some emerging market countries restrict foreign investments, impose high withholding or other taxes on foreign investments, impose restrictive exchange control regulations, or may nationalize or expropriate the assets of private companies. Therefore, the Fund may be
limited in its ability to make direct or additional investments in an emerging market country or could lose the entire value of its investment in the affected market. Such restrictions also may have negative impacts on transaction costs, market price, and investment returns. The U.S. government also may impose restrictions on the ability of U.S. investors to hold and/or acquire
securities of certain companies in emerging market countries, which may adversely impact the Fund.
In addition, companies in emerging market countries may be newly organized, smaller
and less seasoned, and the securities markets of emerging market countries generally are smaller, less liquid and more volatile than those of developed countries. Shareholder claims and legal remedies that are common in the United States may be difficult or impossible to pursue in many
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emerging market countries. In addition, due to jurisdictional limitations, matters of comity and various other factors, U.S. authorities may be limited in their ability to bring enforcement actions against non-U.S. companies and non-U.S. persons in certain emerging market countries. Emerging market countries often have less uniformity in (or may lack) regulatory, accounting, auditing and
financial reporting requirements or standards, which may impact the availability and quality of information about issuers; less reliable clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or
otherwise make it difficult to engage in such transactions; and less reliable registration and custodial procedures, which could result in ownership registration being completely
lost. There are generally higher commission rates on foreign portfolio transactions, transfer taxes, and higher custodial costs. The Fund may not know the identity of trading
counterparties, which may increase the possibility of the Fund not receiving payment or delivery of securities in a transaction. Emerging market countries also may be subject to high inflation and rapid currency devaluations, and currency-hedging techniques may be unavailable in certain
emerging market countries. In addition, some emerging market countries may be heavily dependent on international trade, which can materially affect their securities markets. Investments in frontier markets may be subject to greater levels of these risks than investments in more developed and traditional emerging markets.
European Economic
Risk — The European Union’s (the “EU”) Economic and Monetary Union requires member countries to comply with
restrictions on interest rates, deficits, debt levels, and inflation rates, and other factors, each of which may significantly impact every European country and their economic
partners. The economies of EU member countries and their trading partners may be adversely affected by changes in the exchange rate of the euro (the common currency of the EU),
changes in EU or governmental regulations on trade and other areas, geopolitical tensions or conflicts, and the threat of default or an actual default by an EU member country on its sovereign debt, which could negatively impact the Fund's investments and cause it to lose
money. In recent years, the European financial markets have been negatively impacted by concerns relating to rising government debt levels and national unemployment; possible default on or restructuring of sovereign debt in several European countries;
and economic downturns. Responses to financial problems by European governments, central banks and others, including austerity measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth
and economic recovery or have other unintended consequences. A European country’s default or debt restructuring would adversely affect the holders of the country’s debt and sellers of credit default swaps linked to the country’s creditworthiness and could negatively impact global markets more generally. Recent events in Europe may adversely affect the euro’s exchange rate and value and may continue to impact the economies of every European country and their economic partners.
Russia’s military invasion of Ukraine in February 2022, the resulting
responses by the United States and other countries, and the potential for wider conflict have had, and could continue to have, severe adverse effects on regional and global
economies and could further increase volatility and uncertainty in the financial markets.
In addition, uncertainties regarding the viability of the EU have impacted and may
continue to impact markets in the United States and around the world. Withdrawals from the EU (or the possibility of such withdrawals or the dissolution of the EU) could cause additional and significant market disruption globally and introduce new legal and regulatory uncertainties.
On January 31, 2020, the United Kingdom (“UK”) officially withdrew from
the EU, commonly referred to as “Brexit.” Following a transition period, the UK’s post-Brexit trade agreement with the EU went into effect on January 1, 2021. The
full impact of Brexit and the nature of the future relationship between the UK and the EU remains uncertain. Brexit may create additional and substantial economic stresses for the UK, including a contraction of the UK economy, price volatility in UK stocks, decreased trade, capital outflows, devaluation of the British pound, wider corporate bond spreads due to uncertainty, and declines in business and
consumer spending as well as foreign direct investment. Until the economic effects of Brexit become clearer, and while a period of political, regulatory and commercial uncertainty continues, there remains a risk that Brexit may negatively impact the Fund's investments and cause it to lose money.
Geographic Concentration
Risk — To the extent that the Fund invests a significant portion of its assets in securities of companies domiciled, or exercising
the predominant part of their economic activity, in one country or geographic region it assumes the risk that economic, political, social and environmental conditions in that
particular country or region will have a significant impact on the Fund's investment performance and that the Fund's performance will be more volatile than the performance of more geographically diversified funds. From time to time, a small number of companies and industries may
represent a large portion of the market in a particular country or region, and these companies and industries can be sensitive to adverse economic, political, social, currency, or regulatory developments. In addition, certain areas are prone to natural disasters such as earthquakes, volcanoes, fires, droughts or tsunamis and are economically sensitive to environmental events. The risks
associated with investing in a narrowly defined geographic area also are generally more pronounced with respect to investments in emerging market countries.
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International Fair Value
Pricing Risk — To the extent that the Fund invests in foreign securities it is subject to the risk that its share price may be exposed to
arbitrage attempts by investors seeking to capitalize on differences in the values of foreign securities trading on foreign exchanges that may close before the time the Fund's net
asset value is determined. If such arbitrage attempts are successful, the Fund's net asset value might be diluted. The Fund's use of fair value pricing in certain circumstances
may help deter such arbitrage activities. The effect of such fair value pricing is that foreign securities may not be priced on the basis of quotations from the primary foreign securities market in which they are traded, but rather may be priced using more
subjective methods, known as fair value pricing. As such, it is possible that fair value may differ materially from the value realized on a sale of a foreign security. It is also possible that the use of fair value pricing will limit the Fund's ability to implement its investment strategy (e.g., reduce the volatility of the Fund's share price) or achieve its investment objective.
Regulatory
Risk — Less information may be available about foreign companies. In general, foreign companies are not subject to uniform
accounting, auditing and financial reporting standards or to other regulatory practices and requirements as are U.S. companies. Many foreign governments do not supervise and
regulate stock exchanges, brokers and the sale of securities to the same extent as does the United States and may not have laws to protect investors that are comparable to U.S.
securities laws. In addition, some countries may have legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments.
Settlement Risk — Settlement and clearance procedures in certain foreign markets differ significantly from those in the United States. Foreign settlement and clearance procedures and trade regulations also may involve certain risks (such as delays in payment for or delivery of securities) not typically associated with the settlement of U.S. investments. At times, settlements in certain foreign countries have not kept pace with the number of securities transactions. These problems may
make it difficult for the Fund to carry out transactions. If the Fund cannot settle or is delayed in settling a purchase of securities, it may miss attractive investment opportunities and certain of its assets may be uninvested with no return earned thereon for some period. If the Fund cannot settle or is delayed in settling a sale of securities, it may lose money if the value of the security then declines or, if it has contracted to sell the security to another party, the Fund could be liable for any losses incurred.
Trade Suspensions Risk — Securities of issuers traded on foreign exchanges may be suspended, either by the issuers themselves, by an exchange, or by
governmental authorities. The likelihood of such suspensions may be higher for securities of issuers in emerging or less-developed market countries than in countries with more
developed markets. Suspensions may last for significant periods of time, during which trading in the securities and in instruments that reference the securities, such as derivative instruments, may be halted. In the event that the Fund holds material positions in such suspended securities or
instruments, the Fund's ability to liquidate its positions may be compromised and the Fund could incur significant losses. Trade suspensions, or other restrictions on trading, and market closures could lead to affected securities being valued at zero.
Investment Style Risk —
The Sub-Adviser may use a particular style or set of styles — in this case, a growth style — to select
investments. A particular style may be out of favor or may not produce the best results over short or longer time periods.
Growth investing generally focuses on companies that, due to their strong earnings and revenue potential,
offer above-average prospects for capital growth, with less emphasis on dividend income. Earnings predictability and confidence in earnings forecasts are an important part of the selection process. As a result, the price of growth stocks may be more sensitive to changes in current or expected earnings than the prices of other stocks. A Sub-Adviser using this approach generally seeks out companies experiencing some or all of the following: high sales growth, high unit growth, high or improving returns on assets and equity, and a strong balance sheet. Such a Sub-Adviser also prefers companies with a competitive advantage such as unique management, marketing or research
and development. Growth investing also is subject to the risk that the stock price of one or more companies will fall or will fail to appreciate as anticipated by the Sub-Adviser, regardless of movements in the securities market. Growth stocks tend to be more
volatile than value stocks, so in a declining market their prices may decrease more than value stocks in general. Growth stocks also may increase the volatility of the Fund's share price.
Large Transaction Risk — A significant percentage
of the Fund's shares may be owned or controlled by the Adviser and its affiliates, other funds advised by the Adviser (including funds of funds), or other large shareholders.
Accordingly, the Fund is subject to the potential for large-scale inflows and outflows as a result of purchases and redemptions of its shares by such shareholders. These inflows and outflows may be frequent and could negatively affect the Fund's net asset value and performance, and could cause
the Fund to purchase or sell securities at a time when it would not normally do so. It would be particularly disadvantageous for the Fund if it experiences outflows and needs to sell securities at a time of volatility in the markets, when values could be falling. These inflows and outflows also could negatively affect the Fund's ability to meet shareholder redemption requests or could limit the Fund's ability to pay redemption proceeds within the time period stated in its prospectus because of unusual market conditions, an unusually high volume of redemption requests, or other reasons. During periods of declining or illiquid markets, the Adviser or its affiliates also may be subject to conflicts of interest in selecting Fund shares for redemption and in deciding whether and when to redeem such shares.
In addition, these inflows and outflows could increase the Fund's brokerage or other transaction costs, and large-scale
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outflows could cause the Fund's actual expenses to increase, or could result in the Fund's current expenses being allocated over a smaller asset base, which, depending on any applicable expense caps, could lead to an increase in the Fund's expense ratio.
Market Risk —
The Fund is subject to the risk that the securities markets will move down, sometimes rapidly and unpredictably, based
on overall economic conditions and other factors, which may negatively affect Fund performance. Securities markets also may experience long periods of decline in value. The value
of a security may decline due to factors that are specifically related to a particular company, as well as general market conditions that are not specifically related to a
particular company, such as real or perceived adverse economic or political conditions, changes in the general outlook for corporate earnings, inflation rates and/or investor expectations concerning such rates, changes in interest rates or currency rates, lack of liquidity in the markets, or adverse investor sentiment generally. In some cases, for example, the stock prices of individual companies have been negatively impacted even though there may be little or no apparent degradation in the financial condition or prospects of the issuers. The value of a security may also decline due to factors that affect a particular industry or industries, such as tariffs, labor shortages or increased production costs and competitive conditions within an industry.
Equity securities generally have
greater price volatility than fixed income securities, although under certain market conditions fixed income securities may have comparable or greater price volatility. During a general downturn in the securities markets, multiple asset classes may decline in value simultaneously. Adverse market conditions may be prolonged and may not have the same impact
on all types of securities. Changes in value may be temporary or may last for extended periods. Changes in the financial condition of a single issuer can impact a market as a whole. The Fund may experience a substantial or complete loss on any individual security. Even when securities markets perform well, there is no assurance that the investments held by the Fund will increase in value along with the broader market. Market factors, such as the demand for particular portfolio securities, may cause the price of certain portfolio securities to fall while the prices of other securities rise or remain unchanged. Market speculation focused on profiting from fluctuations in the value of one or more securities or asset classes over a short period of time may result in large-scale and sudden purchases and sales
of those securities or asset classes, which can significantly affect the value of those securities and asset classes as well as the market more broadly in unexpected ways, and cause significant share price volatility and losses for the Fund.
Global economies and financial markets are highly interconnected, which increases the possibility that
conditions in one country or region or events affecting a single or small number of issuers might adversely impact issuers in a different country or region. World markets, or those in a particular region, may all react in similar fashion to important economic, political or other developments. Events such as environmental and natural disasters or other catastrophes, public health crises (such as epidemics and pandemics), social unrest, and cybersecurity incidents, and governments’ reactions (or failure to react) to such events, could cause uncertainty in the markets and may adversely affect the performance of the global economy. Geopolitical and other events, including terrorism, tensions, war or other open conflicts between nations, or political or economic dysfunction within some nations that are global economic
powers or major producers of oil, may lead to overall instability in world economies and markets generally and have led, and may in the future lead, to increased market volatility and may have adverse long-term effects. As a result, whether or not the Fund invests in securities of issuers located in or with significant exposure to the countries or regions directly affected, the value and liquidity of the Fund's investments may be negatively affected by developments in other countries and regions. Moreover, systemic market
dislocations of the kind that occurred during the global financial crisis that began in 2008, if repeated, would be highly disruptive to economies and markets, adversely affecting individual companies and industries, securities markets, interest rates, credit ratings, inflation, investor sentiment, and other factors affecting the value of the Fund's investments.
Scientific consensus indicates that elevated concentration of greenhouse gas emissions in the atmosphere is contributing to climate change. Impacts from climate change may include significant risks to global financial assets and economic growth. Certain issuers, industries and regions may be adversely affected by the impacts of climate change, including on the demand for and the development of goods and services and related
production costs, and the impacts of legislation, regulation and international accords related to climate change, as well as any indirect consequences of regulation or business trends driven by climate change.
In addition, the U.S. Federal Reserve has invested or otherwise made available substantial amounts of money to keep credit flowing through short-term money markets and has signaled that it will continue to adjust its operations as appropriate to support short-term money markets. Amid these efforts, concerns about the markets’ dependence on the Fed’s provision of liquidity have grown.
Policy changes by the U.S. government and/or the U.S. Federal Reserve and political events within the
United States, such as changes in the U.S. presidential administration and Congress, the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan, the threat of a federal government shutdown and threats not to increase the federal government’s debt limit, may affect investor and consumer confidence and may increase uncertainty in or impair the operation of the U.S. or other securities markets, perhaps suddenly and to a significant degree.
In addition, markets and market-participants are increasingly reliant on both publicly available and proprietary information data systems. Inaccurate data, software or other technology malfunctions, programming inaccuracies, unauthorized use or access, and
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circumstances may impair the performance of these systems and may have an adverse impact upon a single issuer, a group of issuers, or the market at-large. In certain cases, an
exchange or market may close or issue trading halts on either specific securities or even the entire market, which may result in the Fund being, among other things, unable to buy
or sell certain securities or financial instruments or accurately price its investments.
New Fund Risk — The Fund is newly or
recently established and has limited operating history. The Fund’s performance may not represent how the Fund is expected to or may perform in the long-term and the Fund may
not be successful in implementing its investment strategy. Fund performance may be lower or higher during this “ramp-up” period, and may also be more volatile, than
would be the case after the Fund is fully invested. In addition, investment positions may have a disproportionate impact (negative or positive) on performance in new funds. There can be no assurance that the Fund will grow to or maintain an economically viable size, which could result in the Fund being liquidated at any time without shareholder approval and at a time that may not be favorable for all shareholders.
Portfolio Management Risk —
The Fund is subject to the risk that strategies used by an investment manager and its securities selections fail to
produce the intended results. An investment manager’s judgments or decisions about the quality, relative yield or value of, or market trends affecting, a particular security
or issuer, industry, sector, region or market segment, or about the economy or interest rates, may be incorrect or otherwise may not produce the intended results, which may result
in losses to the Fund. In addition, many processes used in Fund management, including security selection, rely, in whole or in part, on the use of various technologies, some of which are created or maintained by an investment manager or its affiliates and some of which are created
or maintained by third parties. The Fund may suffer losses if there are imperfections, errors or limitations in the quantitative, analytic or other tools, resources, information and data used, or the analyses employed or relied on, by an investment manager, or if such tools, resources, information or data are used incorrectly, fail to produce the desired results, or otherwise do not work as intended. Imperfections, errors or limitations may go undetected for long periods of time or may never be detected, which could adversely affect decision making for the Fund, as well as the Fund's operations or performance, and may result in, among other things, the execution of unanticipated trades, the failure to execute anticipated trades, the failure to properly gather and organize available data and/or the failure
to take certain hedging or risk-reducing actions. There can be no assurance that the use of these technologies will result in effective investment decisions for the Fund.
Portfolio Turnover Risk — High portfolio turnover
(generally, turnover in excess of 100% in any given fiscal year) may result in increased transaction costs to the Fund, which may result in higher fund expenses and lower total
return and may generate a greater amount of capital gains distributions to Fund shareholders than if the Fund had low portfolio turnover. To the extent the Fund adopts new investment objectives or policies or portfolio management strategies, has a new or an additional Sub-Adviser, and/or undergoes a reorganization with another fund, the Fund may experience substantially increased portfolio turnover due to the differences between the Fund's previous and current investment objectives and policies and portfolio management strategies.
Preferred Stock Risk — Preferred stock is
subject to many of the risks associated with debt securities, including interest rate risk. Unlike interest payments on debt securities, dividends on preferred stock are generally
payable at the discretion of the issuer’s board of directors. Preferred shareholders may have certain rights if dividends are not paid but generally have no legal recourse
against the issuer. Shareholders may suffer a loss of value if dividends are not paid. In certain situations an issuer may call or redeem its preferred stock or convert it to common stock. The market prices of preferred stocks are generally more sensitive to actual or perceived changes in the issuer’s financial condition or prospects than are the prices of debt securities. Preferred stock also may be less liquid than common stock. To the extent that the Fund invests a substantial portion of its assets in convertible preferred stocks, declining common stock values may also cause the value of the Fund's investments to decline.
Real Estate Investing Risk — Real estate-related
investments may decline in value as a result of factors affecting the overall real estate industry. Real estate is a cyclical business, highly sensitive to supply and demand,
general and local economic developments and characterized by intense competition and periodic overbuilding. Real estate income and values also may be greatly affected by demographic trends, such as population shifts or changing tastes and values. Losses may occur from casualty or condemnation, and government actions, such as tax law changes, zoning law changes, regulatory limitations on rents, or environmental regulations, also may have a major impact on real estate. The availability of mortgages and changes in interest rates may also affect real estate values. Changing interest rates and credit quality requirements also will affect the cash flow of real estate companies and their ability to meet capital needs. In addition, global climate change may have an adverse effect on property and security values.
Real estate investment trusts (“REITs”) generally invest directly in real estate (equity
REITs), in mortgages secured by interests in real estate (mortgage REITs) or in some combination of the two (hybrid REITs). Investing in REITs exposes investors to the risks of
owning real estate directly, as well as to risks that relate specifically to the way in which REITs are organized and operated. Equity REITs may be affected by changes in the value of the underlying property owned by the REIT, while mortgage REITs may be affected by the
quality of any credit extended. Equity and mortgage REITs are also subject to heavy cash flow dependency, defaults by borrowers, and self-liquidations. The risk of defaults is generally higher in the case of mortgage pools that include subprime mortgages involving
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borrowers with blemished credit histories. The liquidity and value of subprime mortgages and non-investment grade mortgage-backed securities that are not guaranteed by Ginnie Mae, Fannie Mae, and Freddie Mac could change dramatically over time.
Operating REITs requires specialized management skills, and to the extent the Fund invests in REITs, it
indirectly bears REIT management and administration expenses along with the direct expenses of the Fund. Individual REITs may own a limited number of properties and may concentrate in a particular region or property type. Domestic REITs also must satisfy specific Internal Revenue Code
requirements in order to qualify for the tax-free pass-through of net investment income and net realized gains distributed to shareholders. Failure to meet these requirements may have adverse consequences on an investing fund. Similar treatment may
also apply to REIT-like entities under the laws of the countries in which they were formed. In addition, even the larger REITs in the industry tend to be small- to medium-sized companies in relation to the equity markets as a whole. Moreover, shares of REITs may trade less frequently and, therefore, are subject to more erratic price movements than securities of larger issuers.
Sector Risk —
To the extent the Fund invests more heavily in one sector, industry, or sub-sector of the market, its performance will
be especially sensitive to developments that significantly affect that sector, industry, or sub-sector. An individual sector, industry, or sub-sector of the market may be more volatile, and may perform differently, than the broader market. The industries that constitute a sector may all react in the same way to economic, political or regulatory events. The Fund's performance could also be affected if the sector, industry, or sub-sector does not perform as expected. Alternatively, the lack of exposure to one or more sectors or industries may adversely affect performance.
Small-Cap and Micro-Cap Company Risk — The Fund's investments
in small- and micro-cap companies may involve greater risks than investments in larger, more established issuers because they generally are more vulnerable than larger companies to
adverse business or economic developments, which can negatively affect their value. Such companies generally have narrower product lines, more limited financial and management resources and more limited markets for their securities as compared with larger
companies. Their securities may be less well-known and trade less frequently and in limited volume compared with the securities of larger, more established companies. As a result, the value of such securities may be more volatile than the value of securities of larger companies, and the Fund may experience difficulty in purchasing or selling such securities at the desired time and price or in the desired amount. Small- and micro-cap companies also are typically subject to greater changes in earnings and business prospects than larger companies. Consequently, the prices of small- and micro-cap company securities tend to rise and fall in value more
frequently than the prices of securities of larger companies. Although investing in small- and micro-cap companies offers potential for above-average returns, the companies may not succeed and the value of their securities could decline significantly. Investing more heavily in one market capitalization category (large, medium or small) carries the risk that due to market conditions that category may be out of favor with investors.
General Investment Risks — The Fund is subject to
the following general risks. The risks, which are described in alphabetical order and not in order of perceived importance or potential exposure, can negatively affect the Fund's
performance.
Asset Class Risk —
The Fund is subject to the risk that the returns from the asset classes, or types of securities, in which it invests
will underperform the general securities markets or different asset classes. Different asset classes tend to go through cycles of outperformance and underperformance in comparison to each other and to the general securities markets.
Cybersecurity and Operational Risk — The Fund and its service
providers, and shareholders’ ability to transact with the Fund, may be negatively impacted due to operational risks arising from, among other problems, human errors, systems
and technology disruptions or failures, or cybersecurity incidents. Cybersecurity incidents may allow an unauthorized party to gain access to Fund assets, customer data, or proprietary information, or cause the Fund or its service providers, as well as securities trading venues and their service providers, to suffer data corruption or lose operational functionality. Cybersecurity incidents can result from deliberate attacks (e.g., malicious software coding, ransomware, or “hacking”) or unintentional events (e.g., inadvertent release of confidential information, including by the Fund or its service providers). Recently, geopolitical tensions may have increased the scale and
sophistication of deliberate attacks, particularly those from nation-states or from entities with nation-state backing. A cybersecurity incident could, among other things, result in the loss or theft of customer data or funds, customers or employees being unable to access electronic systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network system, or remediation costs associated with system repairs. Any of these results could have a substantial adverse impact on the Fund and its shareholders.
The occurrence of any of these problems could result in a loss of information, the inability to process
Fund transactions or calculate the Fund's net asset value, violations of applicable privacy and other laws, regulatory scrutiny, penalties, fines, reputational damage, additional compliance costs or other consequences, any of which could have a material adverse effect on the Fund or its shareholders. The Adviser, through its monitoring and oversight of Fund service providers, seeks to determine that service providers take appropriate precautions to avoid and mitigate risks that could lead to such problems. However, it is not possible for the Adviser or Fund service providers to identify all of the cybersecurity or other operational risks that may affect the Fund or to develop processes and controls
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completely eliminate or mitigate their occurrence or effects. Technology is continuously changing, and new ways to carry out cyber attacks are always developing.
Among other situations, disruptions (for example, pandemics or health crises) or other developments that
cause prolonged periods of remote work or significant employee absences at the Fund's service providers could impact the ability to conduct the Fund's operations. Most issuers in which the Fund invests are heavily dependent on computers for data storage and operations and require ready access to the internet to conduct their businesses. Thus, cybersecurity incidents could also affect issuers of securities in which the Fund invests, leading to significant loss of value. The Fund may incur substantial costs to prevent or address cybersecurity incidents in the future.
Issuer-Specific Risk —
The value of an individual security or particular type of security can be more volatile than the market as a whole and
can perform differently from the market as a whole. The value of a security may decline for a number of reasons which directly relate to the issuer, such as poor management
performance; reduced demand for the issuer’s goods or services; investigations or other controversies related to the issuer; strategic initiatives such as mergers,
acquisitions or dispositions and the market response to any such initiatives; and the historical and prospective earnings of the issuer and the value of its assets. Certain
unanticipated events, such as litigation or natural disasters, can have a dramatic adverse effect on the value of an issuer’s securities. A change in the financial condition of a single issuer may affect securities markets as a whole.
Recent Market Conditions Risk — The novel coronavirus
(COVID-19) pandemic and efforts to contain its spread have resulted, and may continue to result, in significant disruptions to business operations, supply chains and customer
activity, widespread business closures and layoffs, travel restrictions, international, national and local border closings, extended quarantines and stay-at-home orders, event cancellations, service cancellations, reductions and other changes, labor shortages, and significant challenges in healthcare service preparation and delivery, as well as general concern, uncertainty and social unrest. Global financial markets have experienced, and may continue to experience, significant volatility and severe losses, and the pandemic has resulted in an economic slowdown that has negatively affected national and global economies, as well as national and global securities and commodities markets, which may continue for an extended period of time and have unforeseen impacts. Any deterioration in economic fundamentals may increase the
risk of default or insolvency of particular companies, negatively impact market values, increase market volatility, cause credit spreads to widen, and reduce liquidity. The pandemic has accelerated trends toward working remotely and shopping online, which
may negatively affect the value of office and commercial real estate and the value of investments in other companies and industries that historically have relied on higher concentrations of people working in traditional office and commercial environments. The travel, hospitality, and public transit industries, among others, may suffer long-term negative effects from the pandemic and resulting changes to public behavior. In addition, companies and industries may lose the services of key personnel on a temporary or long-term basis due to illness or other reasons. Although COVID-19 vaccines have been released, countries have struggled to control the spread
of the virus and re-open their economies. The prevalence of new COVID-19 variants or other unforeseen circumstances may result in the continued spread of the virus.
Public health crises caused by outbreaks of infectious diseases or other public health issues, such as
the COVID-19 pandemic, may exacerbate other pre-existing political, social, and economic tensions and risks, disrupt market conditions and operations and economies around the world, and negatively affect market performance and the value of investments in individual companies in
significant and unforeseen ways. The impact of infectious diseases may be greater in countries that do not move effectively to control them or that have limited access to vaccines, which may occur because of a lack of health care or economic resources or for political or other reasons.
Governments,
including the U.S. federal government, and central banks have taken extraordinary and unprecedented actions to support local and global economies and the financial markets during
the COVID-19 pandemic and may continue to do so, but the ultimate impact of these efforts is uncertain, and they may not be successful. Governments’ efforts to limit
potential negative economic effects of the COVID-19 pandemic may be altered, delayed, or eliminated at inopportune times for political, policy or other reasons. Central banks may increase interest rates or begin phasing out, or “tapering,” accommodative monetary policy facilities. The timing, coordination, magnitude and effect of such policy changes on various markets are uncertain, and such changes in monetary policy may adversely affect the value of the Fund's investments.
In the future, the U.S. federal government or other governments may take actions that could affect the overall economy as well as the securities in which the Fund invests, the markets in which they trade, or the issuers of such securities, in ways that cannot necessarily be foreseen at the present time.
Governmental and quasi-governmental authorities and regulators throughout the world, such as
the U.S. Federal Reserve, have in the past responded to major economic disruptions with a variety of significant fiscal and monetary policy changes, including but not limited to, direct capital infusions into companies, new monetary programs, and dramatically lower interest rates. Certain of those policy changes were implemented or considered in response to the COVID-19 pandemic. Changes
in government or central bank policies could negatively affect the value and liquidity of the Fund's investments and cause it to lose money, and there can be no assurance that the initiatives undertaken by governments and central banks will be successful.
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The COVID-19 pandemic, and other outbreaks of infectious diseases or other public health issues that may arise in the future, could also impair the information technology and other operational systems upon which the Adviser relies, and could otherwise disrupt the ability of the Fund's service providers to perform essential tasks. Such impacts could impair the Fund's ability to maintain operational standards (such as with respect to satisfying redemption requests), disrupt the operations of the Fund's service providers, and negatively impact the Fund's performance. In certain cases, an exchange or market may close or issue trading halts on either specific securities or even the entire market, which may result in
the Fund being, among other things, unable to buy or sell certain securities or financial instruments or accurately value its investments.
Global economies and financial markets are highly interconnected, which increases the possibility that conditions in one country or region might adversely impact issuers in, or foreign exchange rates with, a different country or region. The rise in protectionist trade policies, and changes to some major international trade agreements and the potential for changes to others, could affect
the economies of many countries in ways that cannot necessarily be foreseen at the present time. Political and diplomatic events within the United States and abroad, including the current contentious domestic political environment and changes in the
U.S. presidential administration and Congress, may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. The United States has developed increasingly
strained relations with a number of foreign countries. If relations with certain countries deteriorate, it could adversely affect U.S. issuers as well as non-U.S. issuers that rely on the United States for trade. Financial markets in the United States and China have been sensitive to the outlook for resolving ongoing U.S.-China trade disputes, a trend that may continue in the future.
Russia’s military invasion of Ukraine in February 2022, the resulting responses by the United States and other countries, and the potential for wider conflict have had, and could continue to have, severe adverse effects on regional and global economies and
could further increase volatility and uncertainty in the financial markets. The United States and other countries have imposed broad-ranging economic sanctions on Russia and certain Russian individuals, banking entities and corporations as a response to
its invasion of Ukraine. The United States and other countries have also imposed economic sanctions on Belarus and may impose sanctions on other countries that provide military or economic support to Russia. These sanctions, as well as any other economic consequences related to the invasion, such as additional sanctions, boycotts or changes in consumer or purchaser preferences or cyberattacks on governments, companies or individuals, may further decrease the value and liquidity of certain Russian securities and securities of issuers in other countries that are subject to economic sanctions related to the invasion. To the extent that the Fund has exposure to Russian investments or investments in countries affected by the invasion, the Fund’s ability to price, buy, sell, receive or deliver such investments
may be impaired. In addition, any exposure that the Fund may have to counterparties in Russia or in countries affected by the invasion could negatively impact the Fund’s investments. The extent and duration of military actions and the repercussions of such actions (including any retaliatory actions or countermeasures that may be taken by those subject to sanctions) are impossible to predict. These events have resulted in, and could continue to result in, significant market disruptions, including in certain industries or sectors such as the oil and natural gas markets, and may further strain global supply chains and negatively affect inflation and global growth. These and any related events could significantly impact the Fund’s performance and the value of an investment in the Fund beyond any direct exposure the Fund may have
to Russian issuers or issuers in other countries affected by the invasion.
On January 31,2020, the United Kingdom (“UK”) officially withdrew from the EU, commonly referred to as “Brexit.” Following a transition period, the UK’s post-Brexit
trade agreement with the EU went into effect on January 1, 2021. The full impact of Brexit and the nature of the future relationship between the UK and the EU remains uncertain.
The effects of Brexit on the UK and EU economies and the broader global economy could be significant, resulting in negative impacts, such as business and trade disruptions,
increased volatility and illiquidity, and potentially lower economic growth of markets in the UK, EU and globally, which could negatively impact the value of the Fund's investments. There is some uncertainty as to whether dislocations in the UK’s economy are mainly the result of the COVID-19 pandemic (as the government claims) or the result of the country’s having left the EU.
High public debt in the United States and other countries creates ongoing systemic and market risks and policymaking uncertainty, and there has been a significant increase in the amount of debt due to the economic effects of the COVID-19 pandemic and ensuing economic relief and public health measures. Economic, political and other developments may result in a further increase in the amount of public debt, including
in the United States. The long-term consequences of high public debt are not known, but high levels of public debt may negatively affect economic conditions and the value of markets, sectors and companies in which the Fund invests.
Interest rates have been unusually low in recent years in the United States and abroad, and central banks
reduced rates further in an effort to combat the economic effects of the COVID-19 pandemic. Because there is little precedent for this situation, it is difficult to predict the impact on various markets of a significant rate increase or other significant policy changes. However, due to concerns regarding rising inflation in many sectors of the U.S. and global economy, it is expected that the U.S. and many foreign governments and monetary authorities will raise interest rates and implement other policy initiatives that are intended to contain the impacts of rising inflation. Rising interest rates may present a particularly greater risk than has historically been the case due to the current period of relatively low rates and the effect of government fiscal and monetary policy initiatives and potential market reaction to
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initiatives, or their alteration or cessation. Inflation risk is the uncertainty over the future real value (after inflation) of an investment. The Fund’s investments may not
keep pace with inflation, and the value of an investment in the Fund may be eroded over time by inflation.
Extremely low or negative interest rates may persist or become more prevalent. In that event, to the
extent the Fund has a bank deposit or holds a debt instrument with a negative interest rate to maturity, the Fund would generate a negative return on that investment. Similarly, negative rates on investments by a fund that is a money market fund would make it difficult, if not impossible, for the fund to maintain a stable $1.00 net asset value per share without financial support from the fund’s sponsor or other persons. There is no assurance that such support would be provided, which could lead to losses on investments in the fund, including on
investments by a Fund that uses the fund as an investment option for the Fund's uninvested cash. While negative yields may reduce the demand, liquidity and valuation of fixed income investments, investors may be willing to continue to purchase such investments for a number of reasons, including, but not limited to, price insensitivity, arbitrage opportunities across fixed income markets or rules-based investment strategies. If negative interest rates persist or become more prevalent, investors may over time seek to reallocate assets to other income-producing assets or equity investments that pay a dividend, which may cause the price of such instruments to rise while triggering a corresponding decrease in yield and the value of debt instruments over time.
Funds and their advisers,
as well as many of the companies in which they invest, are subject to regulation by the federal government. There is a potential for materially increased regulation in the future, as well as higher taxes or taxes restructured to incentivize different activities. These changes, should they occur, may impose added costs on the Fund and its service providers, and affect the businesses of various portfolio companies, in ways that cannot necessarily be foreseen at the present time.
In addition, global climate change may have an adverse effect on property and security values. A rise in sea levels, an increase in powerful storms and/or an increase in flooding could cause coastal properties to lose value or become unmarketable altogether.
Economists warn that, unlike previous declines in the real estate market, properties in affected coastal zones may never recover their value. Large wildfires have devastated, and in the future may devastate, entire communities and may be very costly to any business found to be responsible for the fire or conducting operations in affected areas. The current U.S. administration may focus regulatory and public works projects around climate change concerns. Regulatory changes and divestment movements tied to
concerns about climate change could adversely affect the value of certain land and the viability of industries whose activities or products are seen as accelerating climate change. Losses related to climate change could adversely affect corporate borrowers and mortgage lenders, the value of mortgage-backed securities, the bonds of municipalities that depend on tax revenues and tourist dollars generated by such properties, and insurers of the property and/or of corporate, municipal or mortgage-backed securities. Since property and security values are driven largely by buyers’ perceptions, it is difficult to know the time period over which these effects might unfold.
All of these risks may have a material adverse effect on the performance and financial condition of the
companies and other issuers in which the Fund invests, and on the overall performance of the Fund.
Regulatory Risk — The Fund is subject to
extensive laws and regulations that govern its operations. The Fund is subject to regulation by the Securities and Exchange Commission (“SEC”) and is also subject to
regulations imposed by other governmental regulatory authorities and self-regulatory organizations. Similarly, the businesses and other issuers of the securities and other
instruments in which the Fund invests are also subject to considerable regulation. These laws and regulations are subject to change. Extensive regulation or a change in existing laws or regulations may have unpredictable and unintended effects and may materially impact
the Fund, a security, business, sector or market. For example, extensive regulation or a change in existing laws or regulations made by the government or a regulatory body may limit or preclude the Fund's ability to achieve its investment objective, impact the Fund's investment policies or strategies, adversely affect the Fund's efficiency in implementing its investment strategies, reduce the attractiveness or increase the cost of an investment, and/or adversely affect the Fund's performance. The Fund also may incur additional costs to comply with any new requirements as well as to monitor for compliance with any new requirements going forward. The
Fund also may be adversely affected by changes in the interpretation or enforcement of existing laws or regulations.
Risk Management —
The Adviser and Sub-Adviser undertake certain analyses with the intention of identifying particular types of risks and
reducing the Fund's exposure to them. However, risk is an essential part of investing, and the degree of return an investor might expect is often tied to the degree of risk the
investor is willing to accept. By its very nature, risk involves exposure to the possibility of adverse events. Accordingly, no risk management program can eliminate the Fund's
exposure to such events; at best, it can only reduce the possibility that the Fund will be affected by adverse events, and especially those risks that are not intrinsic to the
Fund's investment program. While the prospectus describes material risk factors associated with the Fund's investment program, there is no assurance that as a particular situation unfolds in the markets, the Adviser or Sub-Adviser will identify all of the risks that might affect the Fund, rate their probability or potential magnitude correctly, or be able to take appropriate measures to reduce the Fund's exposure to them. Measures taken with the intention of decreasing exposure to identified risks might have the unintended effect of increasing exposure to other risks.
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Valuation Risk —
The price at which the Fund sells any particular investment may differ from the Fund's valuation of the investment.
Such differences could be significant, particularly for illiquid securities and securities that trade in relatively thin markets and/or markets that experience extreme volatility. If market or other conditions make it difficult to value some investments, SEC rules and applicable accounting protocols may require the Fund to value these investments using more subjective methods, known as fair value
methodologies. Using fair value methodologies to price investments may result in a value that is different from an investment’s most recent closing price and from the prices used by other mutual funds to calculate their net asset values. An investment’s valuation may differ depending on the method used for determining value. Investors who purchase or redeem Fund shares on days when the
Fund is holding fair-valued securities may receive fewer or more shares, or lower or higher redemption proceeds, than they would have received if the Fund had not held fair-valued
securities or had used a different valuation methodology. The value of foreign securities, certain futures and fixed income securities, and currencies, as applicable, may be
materially affected by events after the close of the markets on which they are traded but before the Fund determines its net asset value. The Fund's ability to value its investments in an accurate and timely manner may be impacted by technological issues and/or errors by third party service providers, such as pricing services or accounting agents.
Additional Information about Risks — Additional information
that may be associated with the Fund's principal risks but that may not be principal to the Fund's investment strategies follows. The risks, which are described in alphabetical
order and not in order of perceived importance or potential exposure, can negatively affect the Fund's performance.
Cash Management Risk —
Upon entering into certain derivatives contracts, such as futures contracts, and to maintain open positions in certain
derivatives contracts, the Fund may be required to post collateral for the contract, the amount of which may vary. In addition, the Fund may maintain cash and cash equivalent
positions as part of the Fund's strategy in order to take advantage of investment opportunities as they arise, to manage the Fund's market exposure and for other portfolio
management purposes. As such, the Fund may maintain cash balances, including foreign currency balances, which may be significant, with counterparties such as the 1290 Funds' custodian or its affiliates. Maintaining larger cash and cash equivalent positions could negatively affect the Fund's performance due to missed investment opportunities and may also subject the Fund to additional risks, such as increased credit
risk with respect to the custodian bank holding the assets and the risk that a counterparty may be unable or unwilling to honor its obligations, and costs, such as any fees imposed for large cash balances.
Financial Services Sector Risk — To the extent the Fund
invests in the financial services sector, the value of the Fund's shares may be particularly vulnerable to factors affecting that sector, such as the availability and cost of
capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, extensive government regulation and price competition. The value of the Fund's shares could experience significantly greater volatility than the value of shares of funds investing more broadly.
Industrials Sector Risk —
The value of securities issued by companies in the industrials sector may be adversely affected by supply and demand
changes related to their specific products or services and industrials sector products in general. The products of manufacturing companies may face obsolescence due to rapid
technological developments and frequent new product introduction. Global events and changes in government regulations, economic conditions and exchange rates may adversely affect
the performance of companies in the industrials sector. Companies in the industrials sector may be adversely affected by liability for environmental damage and product liability claims. The industrials sector may also be adversely affected by changes or trends in commodity prices, which may be influenced by unpredictable factors. Companies in the industrials sector, particularly aerospace and defense companies, may also be adversely affected by government spending policies because companies in this sector tend to rely to a significant extent on government demand for their products and services. Any of these factors could result in a material adverse impact on the Fund’s securities and the performance of the Fund.
Information Technology Sector Risk — Investment
risks
associated with investing in the information technology sector include, in addition to other risks, the intense competition to which information technology companies may be
subject; the dramatic and often unpredictable changes in growth rates and competition for qualified personnel among information technology companies; effects on profitability from being heavily dependent on patent and intellectual property rights and the loss or impairment of those rights; rapid product obsolescence due to technological developments and frequent new product introduction; general economic
conditions; and government regulation. Any of these factors could result in a material adverse impact on a Fund’s securities and the performance of the Fund.
Infrastructure Sector Risk — Companies in the
infrastructure sector may be subject to a variety of factors that could adversely affect their business or operations, including high interest costs in connection with capital
construction programs, high degrees of leverage, costs associated with governmental, environmental and other regulations, the effects of economic slowdowns, increased competition from other providers of services, uncertainties concerning costs, the level of government spending on infrastructure projects, the effects of natural disasters, and other factors. Infrastructure companies may be adversely affected by commodity price volatility, changes in exchange rates, import controls, depletion of resources, technological developments, and labor relations. There
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the risk that corruption may negatively affect publicly funded infrastructure projects, especially in emerging markets, resulting in delays and cost overruns.
Infrastructure issuers can be significantly affected by government spending policies because companies
involved in this industry rely to a significant extent on U.S. and other government demand for their products. In addition, infrastructure companies may be adversely affected by government regulation or world events (e.g., expropriation, nationalization, confiscation of assets and property or the imposition of restrictions on foreign investments and repatriation of capital, military coups, social or labor unrest, or violence) in the regions in which the companies operate. Infrastructure companies may have significant capital investments in, or engage
in transactions involving, emerging market countries, which may heighten these risks. In addition, the failure of an infrastructure company to carry adequate insurance or to operate its assets appropriately could lead to significant losses. Infrastructure companies may be adversely affected by environmental clean-up costs and catastrophic events such as earthquakes, hurricanes, fires and terrorist acts. Infrastructure-related securities may be issued by companies that are highly leveraged, less creditworthy or financially distressed. These investments are considered to be speculative and are subject to greater risk of loss, greater sensitivity to interest rate and economic changes, valuation difficulties, and potential illiquidity. The value of the Fund's shares could experience significantly greater volatility
than the value of shares of funds investing more broadly.
Liquidity Risk — From time to time, there
may be little or no active trading market for a particular investment in which the Fund may invest or is invested due to a variety of circumstances, including but not limited to
deterioration in the financial condition of an issuer or issuers in a particular industry or market segment, periods of economic and market stress, changes in investor perceptions
regarding an issuer or industry, periods of market volatility that trigger market circuit breakers that halt trading in securities or close markets entirely, planned market closures, shortened trading hours, extended market holidays, and other reasons. In such a market, the value of such investments and the Fund's share price may fall dramatically. Illiquid investments may be difficult or impossible to sell or purchase at an advantageous time or price or in sufficient amounts to achieve the Fund's desired level of exposure. To meet redemption requests during periods of illiquidity, the Fund may be forced to dispose of investments at unfavorable times or prices and/or under unfavorable conditions, which may result in a loss or may be costly to the Fund. Judgment plays a greater role in valuing illiquid
investments than investments with more active markets, and there is a greater risk that the investments may not be sold for the price at which the Fund is carrying them. The Fund also may not receive its proceeds from the sale of certain investments for an extended period of time. Certain investments that were liquid when purchased may later become illiquid, sometimes abruptly,
particularly in times of overall economic distress or adverse investor perception. In addition, the trading market for certain investments may become illiquid under adverse market or economic conditions independent of any specific adverse changes in the conditions
of a particular issuer. An inability to sell a portfolio position can adversely affect the Fund's value or prevent the Fund from being able to take advantage of other investment opportunities. Market participants attempting to sell the same or a similar investment at the same time as the Fund could decrease the liquidity of such an investment, especially during periods of market stress. During periods of market stress, an investment or even an entire market segment may become illiquid, sometimes abruptly, which can adversely affect the Fund's ability to limit losses. In addition, a reduction in the ability or willingness of dealers and other institutional investors to make a market in certain securities may result in decreased liquidity in certain markets.
The SEC has instituted various
requirements for open-end funds, including the Fund, to establish, and the Fund have established, a program to manage liquidity risks. These requirements are intended to reduce liquidity risk, but they may not work as intended. Analyses, judgments and decisions made in connection with administering the liquidity risk management program may be incorrect
or otherwise may not produce the desired results. In addition, changes in market conditions, which may occur rapidly and unpredictably, may adversely affect the administration of the program. Changes related to the requirements may increase the Fund's expenses,
may negatively affect the Fund's yield and return potential, and may not reduce the Fund's liquidity risk.
Additional legislative or regulatory actions to address perceived liquidity or other issues in markets
generally, or in particular markets such as the fixed income securities markets, may alter or impair the Fund's ability to pursue its investment objectives or utilize certain
investment strategies and techniques.
Money Market Risk — Although a money market
fund is designed to be a relatively low risk investment, it is not free of risk. Despite the short maturities and high credit quality of a money market fund’s investments,
increases in interest rates and deteriorations in the credit quality of the instruments the money market fund has purchased may reduce the money market fund’s yield and can
cause the price of a money market security to decrease. In addition, a money market fund is subject to the risk that the value of an investment may be eroded over time by inflation. A low- or negative-interest rate environment may prevent a money market fund from providing a positive yield, and could negatively impact a money market fund’s ability to maintain a stable $1.00 net asset value per share. In the event that any money market fund that seeks to maintain a stable $1.00 net asset value fails to maintain a stable net asset value (or if there is a perceived threat that a money market fund is likely to fail to maintain a stable net asset value), money market funds in general could face increased redemption pressures, which could jeopardize the stability of their net asset values. Certain money market
funds have in the past failed to maintain stable $1.00 net asset values, and there can be no assurance that such failures and resulting redemption pressures will not occur in the future.
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Certain money market funds are institutional
money market funds, which means that the net asset value of the fund’s shares will “float”. A money market fund with a floating net asset value does not maintain
a stable $1.00 net asset value per share; rather, its net asset value will fluctuate with changes in the values of the securities in which the fund invests. Shares sold utilizing a
floating net asset value may be worth more or less than their original purchase price. An institutional money market fund may impose a fee upon the redemption of fund shares or may temporarily suspend the ability to redeem shares if the fund’s liquidity falls below required minimums because of market conditions or other factors.
Money market funds are subject to specific rules that affect the manner in which these funds are structured and operated. These rules are subject to change. A change in these rules may impact a money market fund’s expenses, operations, returns and liquidity.
Risks of Investing in Other Investment Companies —
To the extent the Fund invests in other investment companies, it indirectly bear fees and expenses paid by those
investment companies, in addition to the Fund's direct fees and expenses. The cost of investing in the Fund, therefore, may be higher than the cost of investing in a mutual fund
that invests directly in individual stocks and bonds. In addition, the Fund's net asset value is subject to fluctuations in the net asset values of the other investment companies
in which it invests. The Fund is also subject to the risks associated with the securities or other investments in which the other investment companies invest, and the ability of the Fund to meet its investment objective will depend, to a significant degree, on the ability of the other investment companies to meet their objectives. The extent to which the investment performance and risks associated
with the Fund correlate to those of a particular investment company will depend upon the extent to which the Fund's assets are allocated from time to time for investment in the investment company, which will vary. The Fund does not control the investments of the other investment companies, which may have different investment objectives and may engage in investment strategies that
the Fund would not engage in directly. The other investment companies may change their investment objectives or policies without the approval of the Fund. If that were to occur, the Fund might be forced to withdraw its investment from the investment company at a time and price that is unfavorable to the Fund.
Securities Lending Risk — The Fund may lend its
portfolio securities to brokers, dealers, and other financial institutions to seek income. Generally, any such loan of portfolio securities will be continuously secured by
collateral at least equal to the value of the security loaned. Such collateral will be in the form of cash, marketable securities issued or guaranteed by the U.S. government or
its agencies, or a standby letter of credit issued by qualified banks. The Fund could lose money on its investment of cash collateral. To the extent that portfolio securities acquired with such collateral have decreased in value, it may result in the Fund realizing a loss at a time when it would not otherwise do so. As such, securities lending may introduce leverage into the Fund. The risks of lending portfolio securities, as with other extensions of secured credit, also consist of possible delay in receiving additional collateral (to cover an increase in the market value of the loaned securities or a decrease in the value of any securities collateral) or in the recovery of the loaned securities or possible loss of rights in the collateral should the borrower fail financially. There is a risk that a borrower may default
on its obligations to return loaned securities. Securities loans are subject to termination by the Fund (lender) or a borrower at any time. If the Fund terminates a securities loan, it will forego any income on the loan after the termination. Loans will be made only to firms deemed by the Adviser to be of good standing and approved by the Board and will not be made unless, in the judgment of the Adviser, the consideration to be earned from such loans would justify the risk.
Sub-Adviser Selection Risk — The Fund is subject to
the risk that the Adviser’s process for selecting or replacing a Sub-Adviser and its decision to select or replace a Sub-Adviser does not produce the intended
results.
In addition, the Adviser is subject to certain conflicts of interest in connection
with recommending the appointment and continued service of Sub-Advisers. Since the Adviser pays fees to the Sub-Advisers from the advisory fees that it earns from the Fund, any
increase or decrease in the sub-advisory fees negotiated with proposed or current Sub-Advisers will result in a corresponding decrease or increase, respectively, in the amount of the advisory fee retained by the Adviser. If the Adviser is affiliated with a Sub-Adviser, the Adviser will benefit not only from the net advisory fee the Adviser retains, but also from the sub-advisory fee paid by the Adviser to the affiliated Sub-Adviser. The Adviser or its affiliates also have distribution relationships with certain Sub-Advisers or their affiliates under which the Sub-Advisers or their affiliates distribute or support the distribution of investment products issued or sold by the Adviser or its affiliates, which could financially benefit the Adviser and its affiliates or provide an incentive to the Adviser in selecting one
Sub-Adviser over another. In addition, the Adviser’s and/or its affiliates’ other existing or potential business relationships, including with Sub-Advisers and/or their affiliates, or other financial or personal relationships, could influence the Adviser’s selection and retention or termination of Sub-Advisers. When recommending the appointment or continued service of a Sub-Adviser, consistent with its
fiduciary duties, the Adviser relies primarily on the qualitative and quantitative factors described in detail in the Prospectus.
Tax Risk —
The Fund is subject to the risk that the tax treatment of swap agreements and other derivative instruments, such as
commodity-linked derivative instruments, including commodity index-linked notes and commodity options, futures, and options on futures, may be affected by future regulatory or legislative changes that could affect whether income from such investments
is “qualifying income” under Subchapter M of the Internal Revenue Code, or otherwise affect the character, timing and/or amount of the Fund's taxable income or gains and distributions.
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4. Management of the Fund
This section gives you information on 1290 Funds, the Adviser and
the Sub-Adviser for the Fund.
1290 Funds
1290 Funds is organized as a Delaware statutory trust and is registered with the SEC as an open-end
management investment company. 1290 Funds’ Board of Trustees is responsible for the overall management of 1290 Funds and the Fund. 1290 Funds issues shares of beneficial interest that are currently divided among sixteen (16) funds. This Prospectus describes the Fund which has authorized Class A, Class T, Class I and Class R shares. The Fund currently does not offer Class T shares. All share classes are currently not offered for sale in all states. The Fund has its own investment objective, investment strategies and risks, which have been previously described in this Prospectus.
The 1290
Funds’ Board of Trustees oversees generally the operations of the Fund. 1290 Funds enters into contractual arrangements with various parties, including among others, the
Adviser, Administrator, Sub-Adviser, custodian, transfer agent, and accountants, who provide services to the Fund. Shareholders are not parties to any such contractual arrangements
and those contractual arrangements are not intended to create in any shareholder any right to enforce them directly against the service providers or to seek any remedy under them directly against the service providers.
This Prospectus provides information concerning the Fund that you should consider in determining whether to purchase Fund shares. Neither this Prospectus nor the Statement of Additional Information is intended, or should be read, to be or create an agreement or contract between the 1290 Funds or the Fund and any investor, or to create any rights in any shareholder or other person other than any rights under federal or state law that may not be waived.
The Adviser
Equitable Investment Management Group, LLC is located at 1290 Avenue of the Americas, New York, New York10104, and is the investment adviser to the Fund. The Adviser is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940, as amended. The Adviser also is registered with the CFTC as a commodity pool operator (“CPO”) under the Commodity Exchange Act, as amended. The Adviser currently claims an exclusion (under CFTC Rule 4.5) from registration as a CPO with respect to the Fund. Being subject to dual regulation by the SEC and the CFTC may increase compliance costs and may affect Fund returns. The Adviser is a wholly-owned subsidiary of Equitable Financial Life Insurance Company (“Equitable Financial”). Equitable Financial is an indirect wholly-owned subsidiary of Equitable Holdings, Inc. (“Equitable
Holdings”), which is a publicly-owned company. The Adviser serves as the investment adviser to mutual funds and other pooled investment vehicles, and had approximately $135.2
billion in assets under management as of December 31, 2021. 1290 Funds is part of a family of mutual funds advised by the Adviser which also currently includes EQ Advisors Trust and EQ Premier VIP Trust.
The Adviser provides or oversees the provision of all investment advisory, portfolio management and administrative services to the Fund. The Adviser has supervisory responsibility for the management and investment of the Fund’s assets and develops the investment objectives and investment policies for the Fund. The Adviser also has full discretion to make all determinations with respect to the investment of the Fund’s assets that are not then managed by the Sub-Adviser. As further discussed below, the Adviser’s management responsibilities
include the selection and monitoring of Sub-Advisers.
The Adviser is responsible for overseeing Sub-Advisers and recommending their hiring, termination and replacement to the Board of Trustees.
The Adviser selects
Sub-Advisers to manage the Fund’s assets by utilizing a due diligence process covering a number of key factors which include, but are not limited to, the Sub-Adviser’s
reputation, organizational stability, investment personnel, long-term performance, investment philosophy and style and correlation with other Sub-Advisers, if any, retained for
other allocated portions of the Fund.
The Adviser plays an active role in monitoring the Fund and Sub-Adviser, as applicable, and uses portfolio analytics systems to strengthen its evaluation of performance, style, risk levels, diversification and other criteria. The Adviser also monitors the Sub-Adviser’s portfolio management team to determine whether its investment activities remain consistent with the Fund’s investment style and objectives.
Management of the Fund 29
Beyond performance analysis, the Adviser monitors significant changes that may impact the Sub-Adviser’s overall
business. The Adviser monitors continuity in the Sub-Adviser’s operations and changes in investment personnel and senior management. The Adviser performs due diligence reviews with the Sub-Adviser no less frequently than annually.
The Adviser obtains detailed, comprehensive information concerning Fund and Sub-Adviser performance and Fund operations that is used to supervise and monitor the Sub-Adviser and the Fund operations. The Adviser has a team responsible for conducting ongoing investment reviews with the Sub-Adviser and for developing the criteria by which Fund performance is measured.
The Adviser selects Sub-Advisers from a pool of candidates, including its affiliates, to manage the Fund
(or portion thereof). The Adviser may hire, terminate and replace Sub-Advisers and amend sub-advisory agreements subject to the approval of 1290 Funds’ Board of Trustees. The Adviser also may allocate the Fund’s assets to additional Sub-Advisers subject to the approval of 1290 Funds’ Board of Trustees and has discretion to allocate the Fund’s assets among the Fund’s current Sub-Advisers. The Adviser recommends Sub-Advisers for the Fund to 1290 Funds’ Board of Trustees based upon its continuing quantitative and qualitative evaluation of each Sub-Adviser’s skills in managing assets pursuant to specific investment styles and strategies. Short-term investment performance, by itself, is not a significant factor in selecting or terminating a Sub-Adviser, and the Adviser does not expect to recommend frequent changes
of Sub-Advisers.
If the
Adviser hires, terminates or replaces the Sub-Adviser to the Fund, the Fund may experience a period of transition during which the securities held in the Fund may be repositioned
in connection with the change in Sub-Adviser. The Fund may not pursue its principal investment strategies during such a transition period and may incur increased brokerage
commissions and other transaction costs in connection with the change. Generally, transitions may be implemented before or after the effective date of the new Sub-Adviser’s
appointment as a sub-adviser to the Fund, and may be completed in several days to several weeks, depending on the particular circumstances of the transition. In addition, the past performance of the Fund is not an indication of future performance. This may be particularly true where the Fund has undergone Sub-Adviser changes and/or changes to the investment objectives or policies
of the Fund.
A
committee of Adviser investment personnel is primarily responsible for the selection, monitoring and oversight of the Fund’s Sub-Adviser.
Kenneth T. Kozlowski, CFP®, ChFC, CLU has served as Executive Vice President and Chief Investment Officer of the Adviser since June 2012, as Executive Vice President of Equitable Investment Management, LLC since July 2021, and as Signatory Officer
of Equitable Financial since November 2021. He served as Senior Vice President of the Adviser from May 2011 to June 2012, as a Vice President of Equitable Financial from February 2001 to August 2011, and as Managing Director of Equitable Financial
from September 2011 to November 2021.
Alwi Chan, CFA® has served as Senior Vice
President and Deputy Chief Investment Officer of the Adviser since June 2012. He served as Vice President of the Adviser from May 2011 to June 2012. He has been an employee of
Equitable Financial since 1999.
Information about the portfolio managers’ compensation, other accounts they manage and their
ownership of securities of the Fund is available in the Trust’s SAI.
The Adviser has been granted relief from the SEC that permits the Adviser, subject to the approval of 1290 Funds’ Board of Trustees, to hire, terminate and replace Sub-Advisers and to amend the sub-advisory agreements between the Adviser and the Sub-Advisers
without obtaining shareholder approval. If a new Sub-Adviser is retained for the Fund, shareholders will receive notice of such action. However, the Adviser may not enter into a sub-advisory agreement on behalf of the Fund with an “affiliated person” of the Adviser (as that term is defined in the 1940 Act) (“Affiliated Sub-Adviser”), such as AllianceBernstein L.P., unless the sub-advisory agreement with the Affiliated Sub-Adviser, including compensation, is also approved by the Fund’s shareholders. The relief does not extend to any increase in the advisory fee paid by the Fund to the Adviser; any such increase would be subject to the approval of the
Fund's shareholders.
The Sub-Adviser
The following describes the Fund's Sub-Adviser and portfolio manager and the portfolio manager’s business experience. Information about the portfolio manager’s compensation, other accounts she manages and her ownership of securities of the Fund is available in 1290 Funds’ SAI. The Sub-Adviser is subject to the oversight of the Adviser.
Essex Investment Management Company, LLC, (“Essex”), 125 High Street, Suite 1803, Boston, Massachusetts02110, serves as
the Sub-Adviser to the 1290 Essex
Small Cap Growth Fund. Essex generally provides investment management services on a discretionary basis to institutional clients, such as employee benefits plans, endowment funds,
foundations, religious organizations,
30 Management of the Fund
and mutual funds. Essex also provides investment management services to individuals (private clients), limited
partnerships and limited liability companies. As of December 31, 2021, Essex had approximately $836.5 million in discretionary assets under management and approximately $8.8 million in non-discretionary assets under management.
Nancy Prial, CFA®, is the Co-Chief Executive
Officer and Senior Portfolio Manager of Essex. Nancy is the portfolio manager for the micro, small, and SMID growth strategies. Prior to joining Essex in 2005, Nancy spent six
years at Burridge Growth Partners as the Chief Investment Officer and Senior Vice President responsible for the SMID and Small Cap Growth Strategies. The Essex Small Cap Growth Strategy was launched and developed by Nancy in 2001 while at Burridge. Previously, Nancy spent four years
as a Senior Vice President and Senior Portfolio Manager at American Century Investors where her responsibilities included leading the team that managed the Heritage Fund. Nancy
began her career at Frontier Capital Management in 1984 where she served as both a fundamental analyst and portfolio manager in the small and mid-cap area. Nancy earned a B.S. in
Electrical Engineering and a B.A. in Mathematics from Bucknell University and an M.B.A. from Harvard Business School.
Conflicts of Interest
The Adviser currently serves as the investment adviser for the Trust and two other investment companies that are registered under the 1940 Act, and as the investment adviser for two private investment trusts that are exempt from such registration. The Adviser and its affiliates (including Equitable Financial, Equitable Distributors, LLC, Equitable Holdings, Equitable Investment Management, LLC and AllianceBernstein L.P.) and their respective managers, partners, directors, trustees, officers, and employees (collectively, for purposes of this Conflicts of Interest discussion, “Affiliates”) are insurance and related financial services companies engaged in life insurance, property and casualty insurance and reinsurance activities, as well as asset
management, investment banking, securities trading, brokerage, real estate and other financial services activities, providing a broad range of services to a substantial and diverse client base. The broad range of activities, services, and interests of the Adviser and its Affiliates gives rise to actual, potential and/or perceived conflicts of interest, and may introduce certain investment or transactional restrictions, that could disadvantage the Fund and its shareholders.
Certain actual and potential conflicts of interest are discussed below and elsewhere in this Prospectus, and a further discussion of conflicts of interest appears in the SAI. Investors should carefully review these discussions. These discussions are not, and are not intended to be, a complete discussion of all of
the actual and potential conflicts of interest that may arise. Additional or unanticipated conflicts of interest may arise from time to time in the ordinary course of the Adviser’s and its Affiliates’ various businesses. The Adviser and the Trust have adopted practices, policies and procedures that are intended to identify, monitor, and mitigate conflicts of interest. These practices, policies and procedures include, among others, information barriers, codes of ethics, pre-clearance and reporting of securities transactions by certain persons, and the use of independent persons to review certain types of transactions. There is no assurance, however, that these practices, policies and procedures will be effective, and these practices, policies and procedures also may limit the Fund’s investment activities and affect its performance.
Certain Conflicts Related to Fees and Compensation
The Adviser and certain of its Affiliates provide services including investment advisory, administration, shareholder servicing, and distribution support services to the Fund and earn fees from these relationships with the Fund. The Adviser and its Affiliates face conflicts of interest when the Fund selects affiliated service providers because the Adviser and its Affiliates receive greater compensation when they are used. Although these fees are generally based on asset levels, the fees are not directly contingent on Fund performance and the Adviser and its Affiliates would still receive significant compensation from the Fund even if shareholders lose money. In addition, the Adviser and certain of its Affiliates manage or
advise funds or accounts, including the Fund, with different fee rates and/or fee structures. Differences in fee arrangements may create an incentive for the Adviser and/or its Affiliates to favor higher-fee funds or accounts.
The Fund may be
included in investment models developed by the Adviser for use by clients and financial advisors. To the extent clients invest in these investment models and increase the assets
under management of the Fund, the amount of the advisory fee paid by the Fund to the Adviser may also increase. In addition, the liquidity of the Fund may be impacted by purchases
and redemptions of the Fund by model-driven investment portfolios.
Certain Conflicts Related to the Adviser and its Affiliates Acting in Multiple Commercial Capacities
The Adviser and/or one or more Affiliates act or may act in various commercial capacities, including as
investment manager, investment adviser, administrator, investor, commodity pool operator, underwriter, distributor, transfer agent, insurance company, investment banker, research provider, market maker, trader, lender, agent or principal, and may have direct and indirect interests in securities, commodities, currencies, derivatives and other instruments in which the Fund may directly or indirectly invest. Thus, it is likely that the Fund will have business relationships with and will invest in, engage in transactions with, make voting decisions with respect to, or obtain services from entities with which the Adviser and/or an Affiliate has developed or is trying to develop business relationships
Management of the
Fund 31
or in
which the Adviser and/or an Affiliate has significant investments or other interests. For example, the Adviser may have an incentive to hire as a Sub-Adviser or other service
provider an entity with which the Adviser or one or more Affiliates have, or would like to have, significant or other business dealings or arrangements. In addition, when
Affiliates act in various commercial capacities in relation to the Fund, the Affiliates may take commercial steps in their own interests, which may have an adverse effect on the
Fund.
Certain Conflicts Related to the Use of Sub-Advisers
The Adviser is subject to certain conflicts of interest in connection with recommending the appointment
and continued service of Sub-Advisers. Since the Adviser pays fees to the Sub-Advisers from the advisory fees that it earns from the Fund, any increase or decrease in the sub-advisory fees negotiated with proposed or current Sub-Advisers will result in a corresponding decrease
or increase, respectively, in the amount of the advisory fee retained by the Adviser. If the Adviser is affiliated with a Sub-Adviser, the Adviser will benefit not only from the net advisory fee the Adviser retains, but also from the sub-advisory fee paid by the Adviser to the affiliated Sub-Adviser. The Adviser or its Affiliates also may have distribution relationships with certain Sub-Advisers or their affiliates under which the Sub-Advisers or their affiliates distribute or support the distribution of investment products issued or sold by the Adviser or its Affiliates, which could financially benefit the Adviser and its Affiliates or provide an incentive to the Adviser in selecting one Sub-Adviser over another or a disincentive for the Adviser to recommend the termination of such Sub-Advisers.
In addition, the Adviser’s and/or its Affiliates’ other existing or potential business relationships (e.g., distribution, sub-administration, or custody arrangements), including with Sub-Advisers and/or their affiliates, or other financial or personal relationships or investments or other interests, could influence the Adviser’s selection and retention or termination of Sub-Advisers as well as sub-advisory or other fee negotiations.
The Adviser
may allocate the Fund's assets among multiple Sub-Advisers. While the Adviser seeks to allocate the Fund's assets among the Fund's Sub-Advisers in a manner that it believes is
consistent with achieving the Fund's investment objective(s), the Adviser is subject to conflicts of interest in allocating the Fund's assets among Sub-Advisers, including
affiliated Sub-Advisers, if any, because the Adviser pays different fees to the Sub-Advisers and due to other factors that could impact the Adviser’s revenues and profits.
The aggregation of
assets of multiple 1290 Funds or other funds or accounts for purposes of calculating breakpoints in sub-advisory fees may create an incentive for the Adviser to select Sub-Advisers
where the selection may serve to lower a sub-advisory fee and possibly increase the advisory fee retained by the Adviser or may provide a disincentive for the Adviser to recommend
the termination of a Sub-Adviser from the Fund if the termination may cause the sub-advisory fee payable by the Adviser to increase on the Fund or other fund or account that aggregates its assets with the Fund. The aggregation of assets, or the potential to aggregate assets, also may influence the Adviser’s and/or its Affiliates’ sub-advisory or other fee negotiations.
The Adviser is a fiduciary for the shareholders of the Fund and must put their interests ahead of its own interests (or the interests of its Affiliates). When recommending the appointment or continued service of a Sub-Adviser, consistent with its fiduciary duties, the Adviser relies primarily on the qualitative and quantitative factors described in detail in this Prospectus.
Furthermore, the range
of activities, services, and interests of a Sub-Adviser may give rise to actual, potential and/or perceived conflicts of interest that could disadvantage the Fund that it sub-advises and the Fund's shareholders. In addition, a Sub-Adviser’s portfolio managers may manage multiple funds and accounts for multiple clients. In addition to one or more 1290 Funds, these
funds and accounts may include, for example, other mutual funds, separate accounts, collective trusts, and offshore funds. Managing multiple funds and accounts may give rise to actual or potential conflicts of interest, including, for example, conflicts among investment strategies, conflicts in the allocation of limited investment opportunities, and conflicts in the aggregation and allocation of securities trades. In addition, a Sub-Adviser’s portfolio managers may manage or advise funds or accounts with different fee rates and/or fee structures, including performance-based fee arrangements. Differences in fee arrangements may create an incentive for a portfolio manager to favor higher-fee funds or accounts. Each Sub-Adviser has adopted practices, policies and procedures that are intended to identify,
monitor, and mitigate conflicts of interest. There is no assurance, however, that a Sub-Adviser’s practices, policies and procedures will be effective, and a Sub-Adviser’s practices, policies and procedures also may limit the investment activities of the Fund that it sub-advises and affect the Fund's performance. Please see the Fund’s Statement of Additional Information for a further discussion of Sub-Adviser conflicts of interest.
Sales Incentives and Certain Related Conflicts Arising from the Adviser’s and its Affiliates’ Financial and Other Relationships with Financial
Intermediaries are described in the sections entitled “Payments to Broker-Dealers and
Other Financial Intermediaries” and “Compensation to Financial Intermediaries.”
32 Management
of the Fund
5. Investing in the Fund
Choosing a Share Class
The Fund consists of the following four classes of shares: Class A, Class T, Class I and Class R shares. The Fund is not designed for market-timers (see the section entitled “Buying, selling, exchanging and converting shares — Purchase and Redemption Restrictions on Market-Timers and Active Traders”). Each class of shares has different costs associated with buying, selling and holding fund shares. Your broker or other financial professional can assist you in selecting which class of shares best meets your needs based on such factors as the size of your investment and the length of time you intend to hold your shares.
The table below summarizes the key features of each class of shares. They are described in more detail below.
The Fund currently does not offer Class T shares. All share classes are currently not offered for sale in all states.
Share Classes at a
Glance
Class A
Class T
Class I
Class R
Availability
Generally available
through financial
intermediaries.
Generally available
through financial
intermediaries.
Limited to certain
investors, including:
• Certain
Institutional
investors.
• Certain
employer-sponsored
retirement plans.
• Participants in
certain programs
sponsored by the
Adviser or its
affiliates or other
financial
intermediaries.
• Life insurance
company separate
accounts using the
investment to
fund benefits for
variable annuity
contracts for
which the Fund is
an investment
option.
• Certain employees
of the Adviser or
its affiliates.
Available only to
certain
employer-sponsored
retirement plans.
Corporate
retirement accounts
such as 401(K) and
403(b) plans.
Investing in the Fund 33
Class A
Class T
Class I
Class R
Minimum
Investment
$1,000 for all
accounts except:
• $500 for certain
fee-based
programs.
• $500, if
establishing an
Automatic Bank
Draft Plan.
• $250 minimum for
purchases by
accounts through
eligible financial
intermediary
platforms that
have entered into
selling or service
agreements with
the Distributor
and that are
eligible to
purchase Class A
shares without a
sales charge.
• No minimums for
certain
employer-sponsored
retirement plans
and certain wrap
fee based
programs.
$1,000 for all
accounts except:
• $500 for certain
fee-based
programs.
• $500, if
establishing an
Automatic Bank
Draft Plan.
• No minimums for
certain
employer-sponsored
retirement plans
and certain wrap
fee based
programs.
• $1,000,000 for
certain institutions
and individuals.
• $1,000 for certain
employees (or
their immediate
family members)
of Equitable
Holdings, Inc. or
its subsidiaries.
• Class I Shares are
available to clients
of registered
investment
advisers who have
$250,000 invested
in the Fund.
• No minimum
investment for a
wrap account
client of an eligible
broker-dealer or a
client of a
fee-based planner
that is unaffiliated
with a
broker-dealer, or a
client of an
investment
adviser, trustee,
administrator or
institution acting
in a similar
capacity that
invests in a Fund
through a
retirement plan
where the
administrator or
service provider of
such retirement
plan has entered
into a services
agreement with
the Fund’s
distributor and/or
investment
adviser.
No minimum.
Initial Sales
Charge?
Yes. Payable at the
time of purchase.
Lower sales charges
are available for
larger investments.
Yes. Payable at the
time of purchase.
No. Entire purchase
price is invested in
shares of the Fund.
No. Entire purchase
price is invested in
shares of the Fund.
34 Investing in the Fund
Class A
Class T
Class I
Class R
Contingent
Deferred Sales
Charge (“CDSC”)?
Yes. (On shares
purchased without
an initial sales
charge and
redeemed within 12
months of
purchase.)
No.
No.
No.
Distribution and
Service (12b-1)
Fees?
Yes. 0.25%
distribution and
service fee.
Yes. 0.25%
distribution and
service fee.
No.
Yes. 0.50%
distribution and
service fee.
Advantage
Makes sense for
investors who are
eligible to have the
sales charge
reduced or
eliminated or who
have a long-term
investment horizon
because there are
low ongoing
distribution and
service (12b-1) fees.
Makes sense for
investors who are
making an
investment of
$250,000 or less
because of the
lower up-front sales
load or who have a
long-term
investment horizon
because of low
ongoing
distribution and
service (12b-1) fees.
No up-front sales
charge so you start
off owning more
shares. No
distribution or
service fees.
No up-front sales
charge so you start
off owning more
shares.
Disadvantage
You pay a sales
charge up-front,
and therefore you
start off owning
fewer shares.
You pay a sales
charge up-front,
and therefore you
start off owning
fewer shares.
Limited availability.
You pay ongoing
distribution and
service (12b-1) fees
each year you own
Class R Shares,
which means that
over the long term
you can expect
higher total fees per
share than Class A
Shares and, as a
result, lower total
performance.
Investing in the
Fund 35
6. How sales charges are calculated
Class A Shares
The price that you pay when you buy Class A shares (the “offering price”) is their net asset value plus a sales charge (sometimes called a “front-end sales charge”), which varies depending upon the size of your purchase. No initial sales charge applies to Class A shares you receive through reinvestment of dividends or other distributions.
Class A Sales Charge
Your Investment*
As a % of
Offering Price
As a % of
Your Investment
Dealer Discount or
Agency Fee as a %
of Offering Price**
$0 to $49,999
5.50%
5.82%
5.00%
$50,000 to $99,999
4.75%
4.99%
4.25%
$100,000 to $249,999
3.75%
3.90%
3.25%
$250,000 to $499,999
2.75%
2.83%
2.50%
$500,000 to $999,999
2.00%
2.04%
1.75%
$1,000,000 and up
None
None
1.00% of the first $2.99
million;
0.75% of amounts from
$3-4.99 million;
0.50% of amounts in excess
of $5 million
*
In determining the amount of your investment and the applicable sales charge, we will include all shares you are currently purchasing in all of the 1290 Funds. For more information on reducing or eliminating sales charges, please see “Ways to Reduce or Eliminate Sales Charges.”
**
The distributor will compensate dealers in connection with purchases of Class A shares. From time to time, the distributor may hold special promotions for specified periods during which the distributor may reallow dealers up to the full sales charges shown above. In addition, the distributor may provide to all qualifying dealers, from its own profits and resources, additional compensation, as described below in the section entitled “Compensation to Financial Intermediaries.”
Class A Contingent Deferred Sales Charge. Class A shares may be subject to a 1.00% CDSC if they are purchased without an initial sales charge and redeemed within a 12-month “holding period” measured from the beginning of the calendar month in which they were purchased. That sales charge will be calculated on the lesser of the original net asset value of the redeemed shares at the time of purchase or the aggregate net asset value of the redeemed shares at the time of redemption.
Class A shares are also subject to a distribution and service fee of 0.25% per year.
Class T Shares
The
price that you pay when you buy Class T shares (the “offering price”) is their net asset value plus a sales charge (sometimes called a “front-end sales
charge”), which varies depending on the size of your purchase. Class T shares are also subject to a distribution and service fee of 0.25% per year. No initial sales charge
applies to Class T shares you receive through reinvestment of dividends or other distributions.
Class T Sales Charge
Your Investment
As a % of
Offering Price
As a % of
Your Investment
Dealer Discount or
Agency Fee as a %
of Offering Price
$0-$249,999
2.50%
2.56%
2.50%
$250,000-$499,999
2.00%
2.04%
2.00%
$500,000-$999,999
1.50%
1.52%
1.50%
$1,000,000 and up
1.00%
1.01%
1.00%
Class I Shares
Investors who purchase Class I shares do not pay sales charges. The ongoing expenses for Class I shares
are the lowest of all the classes because there are no ongoing distribution and service (12b-1) fees. Class I shares are sold at net asset value and
36 How sales
charges are calculated
have no
sales charge. The minimum investment amount for purchasing Class I shares generally is $1 million. Only specific types of investors can purchase Class I shares. You may be eligible
to purchase Class I shares if you:
• Are a corporation, bank, savings institution, trust company, insurance company, pension fund, employee benefit plan,
professional firm, trust, estate or educational, religious or charitable organization;
• Are an investment company registered under the 1940 Act (not subject to $1 million minimum investment
amount);
• Are an employee of Equitable Holdings, Inc. or its subsidiaries or an immediate family member of such employee (subject to
$1,000 minimum investment amount);
• Are a wrap account client of an eligible broker-dealer or a client of a fee-based planner that is unaffiliated with a broker/
dealer (not subject to $1 million minimum investment amount);
• Are a present or former trustee of 1290 Funds or a spouse or minor child of any
such trustee or any trust, Individual Retirement Account (“IRA”) or retirement plan account for the benefit of any such person or relative or the estate of any such person or relative (not subject to $1 million minimum investment amount); or
• Are a financial institutional buyer.
Class R Shares
Class R Shares are available only to certain employer-sponsored retirement plans, including corporate retirement accounts such as 401(k) and 403(b) plans. For this purpose, employer-sponsored retirement plans do not include SEP IRAs, SIMPLE IRAs
or SARSEPs. If you buy Class R Shares, you will pay neither an initial sales charge nor a CDSC. However, Class R Shares are subject to a distribution and service fee of 0.50% per
year. Because these fees are paid out of the Fund’s assets on an ongoing basis, over time these fees increase the cost of your investment and may cost you more than paying
other types of sales charges.
The distributor currently pays the annual Class R Shares distribution and service fee to dealers as an ongoing concession and as a shareholder servicing fee, respectively, on a monthly basis.
Compensation to Financial Intermediaries
ALPS Distributors, Inc. (“ALPS”) serves as the distributor for the Class A, Class T, Class I and Class R shares of the Fund offered by this Prospectus. ALPS is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended, and is a
member of the Financial Industry Regulatory Authority (“FINRA”).
1290 Funds has adopted Distribution Plans pursuant to Rule 12b-1 under the 1940 Act for Class A, Class T and Class R shares. Under the Distribution Plans, the Fund is authorized to pay ALPS a maximum annual fee of 0.25%, 0.25% and 0.50% of
the Fund’s average daily net assets attributable to Class A, Class T and Class R shares, respectively. These fees are paid to compensate ALPS for rendering services and
bearing expenses in connection with activities primarily intended to result in the sale of shares and/or providing services to shareholders of each class. Activities and services
contemplated under the Distribution Plans include printing and mailing of fund prospectuses, statements of additional information (including any supplements thereto) and shareholder reports, compensation to financial intermediaries and broker-dealers, holding seminars
and sales meetings with wholesale and retail sales personnel assigned to promote the distribution of shares and maintaining shareholder accounts. Because the fees authorized under
the Distribution Plans are paid out of the Fund's assets on an ongoing basis, over time, the fees for Class A, Class T and Class R shares will increase your cost of investing and
may cost you more than other types of charges.
In addition to the sales charges paid by investors and the distribution and service fees paid by the Fund, the distributor or the Adviser (and their respective affiliates) make payments out of their own resources to provide additional compensation to
selling brokers and other persons, including affiliates, who sell shares of the Fund (collectively, “Brokers”) and/or provide certain services. Such payments, which are sometimes referred to as “revenue sharing,” may be calculated by reference to the gross sales price of shares sold by such persons, the net asset value of shares held by the customers of such persons, the
number of accounts that invest in the Fund serviced by such persons, or otherwise.
The additional payments to such Brokers are negotiated based on a number of factors including, but not limited to, reputation in the industry, ability to attract and retain assets, target markets, customer relationships and quality of service. No one factor is determinative of the type or amount of additional compensation to be provided. The amount of these payments,
as determined from time to time by the Adviser or the distributor in its sole discretion, may be different for
How sales charges are calculated 37
different Brokers. These additional payments are
made by the Adviser, the distributor or their respective affiliates and do not increase the amount paid by you or the Fund as shown under the heading “Fees and Expenses of
the Fund” in the Fund Summary.
Such payments are intended to provide additional compensation to Brokers for various services provided with respect to shares of the Fund, including, without limitation, providing periodic and ongoing education and training of Broker personnel
regarding the Fund; disseminating to Broker personnel information and product marketing materials regarding the Fund; explaining to investors the features and characteristics of the Fund; conducting due diligence regarding the Fund; providing
reasonable access to sales meetings, sales representatives and management representatives of the Broker; granting
reasonable access to the Broker’s financial advisors and consultants; and furnishing marketing support and other services. Additional compensation also may include non-cash compensation, financial assistance to Brokers in connection with
conferences, seminars for the public and advertising campaigns, technical and systems support and reimbursement of ticket charges (fees that a Broker firm charges its representatives for effecting transactions in Fund shares) and other similar
charges. The distributor, the Adviser or their affiliates may make other payments or allow other promotional incentives to Brokers to the extent permitted by SEC and FINRA rules and by other applicable laws and regulations.
In some instances, these incentives may be made available only to Brokers whose representatives have sold or may sell a significant number of shares. The Brokers receiving additional payments include those that may recommend that their clients
consider or select a Fund of 1290 Funds for investment purposes, including those that may include one or more Funds of 1290 Funds on a “preferred” or “recommended” list of mutual funds. These payments create an incentive for a Broker firm or its representatives to recommend or offer shares of Funds of 1290 Funds to its customers over shares of other funds. In
addition, these payments may result in greater access by the Adviser, the distributor or their affiliates to, without limitation, the Broker, its representatives, advisors and consultants and sales meetings, than other funds which do not make such
payments or which make lower such payments.
In addition to the Broker compensation described above, the Fund, the Adviser and/or the distributor may pay fees to the Brokers and their affiliated persons for maintaining Fund share balances and/or for subaccounting, administrative or
transaction processing services related to the maintenance of accounts for retirement and benefit plans and other omnibus accounts (“subaccounting fees”). Such subaccounting fees paid by the Fund would otherwise be paid to the Fund’s transfer agent and generally are designed to be equal to or less than the fees the Fund would pay to its transfer agent for similar
services, but in certain circumstances the subaccounting fees may be higher due to differences in the services being provided or other factors. Because these subaccounting fees are directly related to the number of accounts and assets for
which the Brokers provide services, the fees will increase with the success of the Brokers’ sales activities.
The Fund's portfolio transactions are not used as a form of sales-related compensation to Brokers that
promote or sell shares of the Fund and the promotion or sale of such shares is not considered as a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. The Sub-Adviser places the Fund’s portfolio transactions with broker-dealer firms based on the firm’s ability to provide the best net results from the transaction to the Fund. To the extent that the Sub-Adviser determines that a Broker can provide the Fund with the best net results, the Sub-Adviser may place the Fund’s portfolio
transactions with the Broker even though it sells or has sold shares of the Fund.
You can find further information in the 1290 Funds’ SAI about the payments made by the distributor, the Adviser, or their affiliates and the services provided by your Broker. You can also ask your Broker about any payments it receives from the
distributor, the Adviser, or their affiliates (and any conflicts of interest that such payments may create) and any services your Broker provides, as well as about fees and/or commissions it charges. Your Broker may charge you fees or commissions in
addition to those disclosed in this Prospectus. Brokers may categorize and disclose these arrangements to their clients and to members of the public in a manner different from the disclosures in this Prospectus and the 1290 Funds’ SAI.
38 How sales
charges are calculated
7. Ways to reduce or eliminate sales charges
Ways to Reduce or Eliminate Sales Charges
You may qualify for a reduction or waiver of the sales charge on Class A shares. If you think you qualify
for any of the sales charge waivers described below, you or your financial advisor may need to notify and/or provide certain documentation to us. You or your financial advisor also will need to notify us of the existence of other accounts in which there are holdings eligible to be aggregated to meet certain sales load breakpoints. Information you may need to provide to us includes:
• Information or records regarding shares of the Fund held in all accounts at any financial
intermediary;
• Information or records regarding shares of the Fund held in any account at any financial intermediary by immediate family of
the shareholder; and/or
• Any other information that
may be necessary for us to determine your eligibility for a reduction or waiver of a sales charge.
Reducing Sales Charges — Class A Shares Only
There are a number of ways you can lower your sales charges on Class A shares, including:
• Letter of Intent — You may be entitled to a reduced sales charge if you
execute a Letter of Intent to purchase Class A shares at the public offering price within a period of 13 months. Your discount will be determined based on the schedule in the table
that appears above in the section entitled “How Sales Charges are Calculated — Class A Shares.” The minimum initial investment under a Letter of Intent is 5% of the amount stated in the Letter of Intent. Class A shares purchased with the first 5% of such amount will be held in escrow (while remaining registered in your name) to secure payment of the higher sales charge that would apply
to the shares actually purchased if the full amount stated is not purchased, and such escrowed shares will be involuntarily redeemed to pay the additional sales charge, if necessary. When the full amount has been purchased, the escrow will be released. If you
wish to enter into a Letter of Intent, you should complete the appropriate portion of the new account application. At your request, purchases made during the previous 90 days may be included.
• Rights of Accumulation — You are entitled to a reduced sales charge on
additional purchases of Class A shares of the Fund if the value of your existing aggregate holdings at the time of the additional purchase, calculated at the then applicable net
asset value per share or the initial purchase price, plus any additional investments, less any redemptions, whichever is higher, plus the amount of the additional purchase equals $50,000 or more. Your discount will be determined based on the schedule in the
section entitled “How Sales Charges are Calculated — Class A Shares.” For purposes of determining the discount, we will aggregate holdings of Fund shares of your spouse, immediate family or accounts you control, whether as a single investor or trustee, provided that you notify us of the applicable accounts at the time of your additional investment by providing us with appropriate
documentation, including the account numbers for all accounts that you are seeking to aggregate.
Eliminating Sales Charges and the CDSC — Class A Shares Only
Class A shares may be offered without a front-end sales charge or a CDSC to the following individuals and institutions:
• Any government entity that is
prohibited from paying a sales charge or commission to purchase mutual fund shares;
• Representatives and employees, or their immediate family members, of broker-dealers
and other intermediaries that have entered into selling or service arrangements with the distributor;
• Financial institutions and other financial institutions’ trust departments for funds over which they exercise exclusive discretionary investment authority and which are held in fiduciary, agency, advisory, custodial or similar capacity;
• Direct referrals by the Adviser’s employees;
• Clients of fee-based/fee-only
financial advisors; and
• Purchases by accounts through eligible financial intermediary platforms that have entered into selling or service agreements
with the Distributor.*
* The Distributor
has entered into an agreement with LPL Financial’s Mutual Fund Only Platform.
Ways to reduce or eliminate sales charges 39
The CDSC will not apply to Class A shares for which the selling dealer is not permitted to receive a sales load or
redemption fee imposed on a shareholder with whom such dealer has a fiduciary relationship in accordance with provisions of ERISA and regulations thereunder (for example, a broker providing brokerage services to a retirement plan), provided that the dealer agrees to the following
reimbursement arrangement with the distributor: in the event of a redemption of Class A shares sold without a front-end sales load within 12 months of purchase, the selling dealer will reimburse the distributor for the amount of commission paid, less the amount of the distribution fee with respect to such shares. If the dealer agrees to this reimbursement arrangement, no CDSC will be imposed with respect to Class A shares purchased for $1,000,000 or more. Currently, each dealer has agreed to this reimbursement arrangement.
Eliminating the CDSC
As long as we are notified at the time you sell, the CDSC for Class A shares also may generally be eliminated in the following cases:
• The liquidation of a shareholder’s account if the aggregate net asset value of shares held in the account is less than the required minimum;
• Redemptions through a systematic withdrawal plan;
• Redemptions of shares of a shareholder (including a registered joint owner) who has
died or has become totally disabled (as evidenced by a determination by the Social Security Administration);
• Redemptions made pursuant to any IRA systematic withdrawal based on the shareholder’s life expectancy in accordance with the requirements of the Code, including substantially equal periodic payments described in Code section 72 prior to age 59½ and required minimum distributions after age 72; or
• Required minimum
distributions from an IRA.
• Shares or amounts representing increases in the value of an account above the net cost of the investment due to increases in
the net asset value per share.
• Shares acquired by exchange from any Fund of the 1290 Funds where the exchanged
shares would not have been subject to a CDSC upon redemption.
• Exchanges to purchase shares of another Fund of the 1290 Funds (although a CDSC
will be imposed on shares (when redeemed) of the acquired fund purchased by exchange of shares subject to a CDSC).
Reinstatement Privilege
If you redeem Class A or Class T shares of the Fund on which you paid an initial sales charge or are charged a CDSC upon redemption, you will be eligible for a reinstatement privilege if you reinvest the proceeds in shares of the same class of the same or another Fund of 1290 Funds (equal to all or a portion of the redemption amount) within 60 days of redemption. This right may be exercised once a year and within 60 days of the redemption, provided that the share class of the Fund is currently open to new investors or the shareholder has a current account in that closed Fund. Shares will be purchased at the net asset value calculated at the close of trading on the day the request is received. To exercise this privilege, the Fund must receive written
notification from the shareholder of record or the financial intermediary of record, at the time of purchase. Investors should consult a tax adviser concerning the tax consequences of exercising this reinstatement privilege.
If you think you may be eligible for a sales charge elimination or reduction, contact your financial professional or 1290 Funds. For more information about sales charges, reductions, and waivers, see the SAI or visit the 1290 Funds’ website at
www.1290Funds.com, which includes
hyperlinks to facilitate access to this information.
40 Ways to reduce or eliminate sales charges
8. It’s easy to open an account
To open an account with 1290 Funds
1. Read the Prospectus carefully.
2. Determine how much you wish to invest. The following chart shows the investment minimums for various types of accounts.
Type of Account
Minimum to
Open an
Account*
Minimum for
Subsequent
Investments*
Individual Retail Accounts
$1,000
$50
Individual Retirement Accounts (IRAs)
$500
$50
Automatic Bank Draft Plan**
$500
$50
Accounts through eligible financial intermediary platforms that have entered into
selling or service agreements with
the Distributor and that are eligible
to purchase Class A shares without a sales charge.
$250
$50
Accounts established in a wrap program with which 1290 Funds, the Adviser or the
distributor has an agreement.
$500***
$50***
Corporate retirement accounts, such as 401(k) and 403(b) plans
No minimum
requirement.
No minimum
requirement.
*
Does not apply to Class I shares.
**
The Fund offers an automatic bank draft plan with a minimum initial investment of $500 through which the Fund will, following the initial investment, deduct $50 or more on a monthly basis from the investor’s demand deposit account to invest directly in the Fund’s Class A or Class T shares.
***
No minimum requirement for certain wrap fee based programs.
3. (a) Call your broker or other financial professional who can assist you in all the steps necessary to open an account;
or
(b) Complete the appropriate part of the account application,
carefully following the instructions. If you have any questions, please call your financial professional or 1290 Funds at 1-888-310-0416. For more information on 1290 Funds investment programs, refer to the section entitled “Additional Information — Additional Investor Services” in the Prospectus.
4. Use the following sections as your
guide for purchasing shares.
1290 Funds generally will not permit prospective investors with
non-U.S. addresses to establish accounts. U.S. citizens with APO/FPO addresses or addresses in the United States (including its territories) and resident aliens with U.S. addresses
are permitted to establish accounts with 1290 Funds.
To conform to regulations under the USA PATRIOT Act of 2001, 1290 Funds is required to obtain, verify, and record information that identifies each person who opens an account. A new account application includes your name, street address,
date of birth and other identification information. The regulations require completion of this information before an account is opened, and you may also be requested to provide
other identification documents. In addition, the Fund may confirm your identity through the use of identity verification reports provided by consumer reporting agencies. Your
personal information will be treated with the utmost confidentiality. If you fail to provide the required information or provide inaccurate information, this may lead to a delay in the processing of your account application and investment. If the Fund
cannot complete the identification process, your investment and the application may be returned.
The Fund will deduct a $25 annual fee from accounts with a balance of less than $1,000. This does not apply to Automatic Bank Draft Plan Accounts or IRAs.
The Fund reserves the right to close any Fund account whose balance drops to $500 or less due to
redemption activity. If an account is closed, its shares will be sold at the NAV on the day the account is closed. A shareholder will be given at least 60 days’ notice before the Fund closes an account with a balance of $500 or less so that the shareholder has an opportunity to increase the account balance.
It’s easy to open an account 41
9. Buying, selling, exchanging and converting shares
Buying Shares
Opening an Account
Adding to an Account
Through Your Broker or other Financial Professional
Call your broker or other financial professional. Your broker
or other financial professional can assist you in all the steps
Automatic Investing Through Automatic Clearing House
(“ACH”)
Please call 1-888-310-0416 and request a Shareholder
Maintenance Form or download from the 1290 Funds
website. Use the form to add ACH instructions to your
account. A medallion guarantee may be required to add this
privilege.
Your bank account may be debited monthly for automatic
investment into one or more of the funds for each class. Not
available for Class I shares.
Selling Shares
The
Fund typically expects to meet redemption requests by paying out proceeds from cash or cash equivalent portfolio holdings, or by selling portfolio holdings. In stressed market
conditions, redemption methods may include redeeming in kind.
Through Your Broker or other Financial Professional
• Call your broker or other financial professional. Your broker or other
financial professional can assist you in all the steps
necessary to sell
shares. Your broker or financial professional may charge you for its services.
42 Buying, selling, exchanging and converting shares
By Mail
• Write a letter to request a redemption specifying the name of the fund, the class of shares, your account number, the
exact registered account name(s), the number of shares or the dollar amount to be
redeemed and the method by which
you wish to receive your proceeds.
Additional materials may be required (see section entitled “Selling Shares in Writing”
and, in particular, the information regarding medallion guarantees).
• The request must be signed by all of the owners of the shares including the capacity in which they are signing, if
• Your proceeds (less any applicable CDSC) will be delivered by the method you choose. If you choose to have your
proceeds delivered by mail, they will generally be mailed to you on the business day
after the request is received. You
may also choose to redeem by wire or
via the ACH system to your bank (see below). Your bank may charge you a fee.
• The minimum amount that may be redeemed by check is $500.
By Wire
• Fill out the “Telephone Exchange Privilege and/or Telephone Redemption Privilege” and “Bank Account of Record”
sections on your account application.
• Call 1-888-310-0416, visit www.1290Funds.com or indicate in your redemption request letter that you wish to have your
proceeds wired to your bank.
• If you submit a written request, your proceeds may be wired to the bank currently on file. If written instructions are to
send the wire to any other bank, or redemption proceeds are greater than $50,000, a
medallion guarantee is required.
On a telephone request, your proceeds may
be wired only to a bank previously designated by you in writing. To change
the name of the single designated bank account to receive wire redemption proceeds, you
must send a written request
with signature(s) guaranteed to 1290
Funds.
• Proceeds (less any applicable CDSC) will generally be wired on the next business day. A wire fee (currently $15) will be
deducted from the proceeds. Your bank may charge you a fee.
• The minimum amount that may be redeemed by wire is $1,000.
By Systematic Withdrawal Plan
• Please refer to the section entitled “Additional Investor Services” or call 1-888-310-0416 or your financial professional for
more information.
• Because withdrawal payments may have tax consequences, you should consult your tax adviser before establishing such
a plan.
By Telephone
• If you have authorized this service, you may redeem your shares by telephone by calling 1-888-310-0416.
• If you make a telephone redemption request, you must furnish the name and address of record of the registered owner,
the account number and taxpayer identification number (“TIN”), the amount to
be redeemed, and the name of the per-
son making the request.
• Checks for telephone redemptions will be issued only to the registered shareowner(s) and mailed to the last address of
record or exchanged into another Fund of 1290 Funds. All telephone redemption
instructions are recorded and are
limited to requests of $50,000 or less.
If you have previously linked your bank account to your Fund account, you can
have the proceeds sent via the ACH system to your bank.
• Proceeds (less any applicable CDSC) will generally be sent on the next business day. Your bank may charge you a fee.
• The minimum amount that may be redeemed by check is $500.
Participate in the Bank Purchase and Redemption Plan
• You may initiate an ACH Purchase or Redemption directly to a bank account
when you have established proper
instructions, including all applicable
bank information, on the account. Your bank may charge you a fee.
Buying, selling, exchanging and converting shares 43
Selling Shares in Writing
To redeem your shares in writing, all owners of the shares must sign the redemption request in the exact
names in which the shares are registered and indicate any special capacity in which they are signing. If a written request to sell is required, a letter of instruction signed by the authorized owner is necessary. In certain situations a medallion guarantee or additional
documentation may be required.
A
Medallion Guarantee is necessary if:
• Total redemption proceeds exceed $50,000;
• A proceeds check for any amount is mailed to an address other than the address of
record or not sent to the registered owner(s);
• Wire instructions indicate that wire proceeds should be sent to a bank other than the bank currently
on file; or
• Your
address has changed within the past 30 days.
A Medallion Guarantee can be obtained from one of the following
sources:
• A
financial professional or securities dealer;
• A federal savings bank, cooperative or other type of bank;
• A savings and loan or other thrift institution;
• A credit union;
• A securities exchange or
clearing agency.
The table shows account types for which additional documentation may be
necessary. Please call your financial professional or 1290 Funds regarding requirements for other account types.
Seller (Account Type)
Requirements for Written Requests
Individual, joint, sole proprietorship, Uniform Transfers to
Minors Act / Uniform Gifts to Minors Act
• The signatures on the letter must include all persons
authorized to sign, including title, if applicable.
• Medallion Guarantee, if applicable (see above).
Corporate or association accounts
• The signatures on the letter must include all trustees
authorized to sign, including title.
Owners or trustees of trust accounts
• The signatures on the letter must include all trustees
authorized to sign, including title.
• If the names of the trustees are not registered on the
account, include a copy of the trust document certified
within the past 60 days.
• Medallion Guarantee, if applicable (see above).
Power of Attorney (POA)
• The signatures on the letter must include the attorney-
in-fact, indicating such title.
• Medallion guarantee, if applicable (see above).
• Certified copy of the POA document stating it is still in full
force and effect, specifying the exact fund and account
number, and certified within 60 days of receipt of
instructions.*
Qualified retirement benefit plans
• The signatures on the letter must include all trustees
authorized to sign, including title.
• Medallion Guarantee, if applicable (see above).
IRAs
• Additional documentation and distribution forms required.
*
Certification may be made on court documents by the court, usually certified by the clerk of
court. POA certification may be made by a commercial bank, broker/member of a domestic stock exchange or practicing attorney.
44 Buying, selling, exchanging and converting shares
1290 Funds may suspend the right of redemption
for any period or postpone payment for more than seven days when the New York Stock Exchange is closed (other than a weekend or holiday), or when trading is restricted by the SEC
or the SEC declares that an emergency exists. Redemptions may also be suspended and payments may be postponed for more than seven days during other periods permitted by the SEC. The Fund may pay the redemption price in whole or part by a
distribution in kind of readily marketable securities in lieu of cash or may take up to seven days to pay a redemption request in order to raise capital, when it is detrimental for the Fund to make cash payments as determined in the sole discretion of
the Adviser. Securities distributed in kind are subject to market risk until sold and shareholders may incur brokerage or other costs and taxable capital gains when converting those securities to cash.
Exchanging and Converting Shares
How to Exchange Shares
Shares of any class of the Fund generally may be exchanged for shares of the same class of any other 1290 Fund without paying a sales charge or a CDSC. Shares of any class of the Fund also may be acquired in exchange for shares of the same
class of any other 1290 Fund without paying a sales charge or a CDSC. You may make exchanges only between identically registered accounts (name(s), address, and TIN).
If an exchange results in opening a new account, you are subject to the applicable minimum investment requirement. All exchanges also are subject to the eligibility requirements of the 1290 Fund into which you are exchanging. The exchange
privilege may be exercised only in those states where shares of a 1290 Fund may be legally sold. The Fund may also discontinue or modify the exchange privilege on a prospective basis at any time upon notice to shareholders in accordance
with applicable law. For federal income tax purposes, an exchange of Fund shares for shares of another 1290 Fund is treated as a sale of the former on which gain or loss may be recognized.
How to Convert Shares
Shares of one class of the Fund may be converted into shares of another class of the Fund, provided you
meet the eligibility requirements for investing in the share class into which you are converting. A share class conversion has no effect on the dollar value of your investment in the Fund at the time of the conversion. However, the number of shares you own after the
conversion may be greater than or less than the number of shares you owned before the conversion, depending on the net asset values of the two share classes. A conversion between share classes of the Fund is a nontaxable event. Shares subject
to a CDSC at the time of the requested conversion are not eligible for conversion. The Fund reserves the right to refuse any conversion request.
If a shareholder no
longer meets the eligibility requirements for the shareholder’s current share class, the Fund may, upon notice to the shareholder, convert the shareholder into a share class
of the Fund for which the shareholder is eligible.
Through Your Broker or other Financial Professional
Call your broker or other financial professional. Your broker or other financial
professional can assist you in all the steps
necessary to exchange or
convert shares. Your broker or financial professional may charge you for its services.
By Mail
Write a letter to request an exchange specifying the name of the fund from which you are
exchanging, the registered
account name(s) and address, the account
number, the dollar amount or number of shares to be exchanged and the fund
into which you are exchanging.
The request must be signed by all of
the owners of the shares including the capacity in which they are signing, if
If you have authorized this service, you may exchange by telephone by calling 1-888-310-0416.
If you make a telephone exchange request, you must furnish the name of the fund from
which you are exchanging, the
name and address of record of the registered
owner, the account number and TIN, the dollar amount or number of shares
to be exchanged, the fund into which you are exchanging, and the name of the person
making the request.
Buying, selling, exchanging and converting shares 45
Through Your Broker or other Financial Professional
By Website
Log into your account portfolio and select “View Account” for the fund from which you would like to make the exchange.
On the next screen, choose “Fund Exchange.” Instructions on the following
Exchange Request page will guide you through
the final process. Previously
outlined exchange guidelines apply to any online exchanges.
Transactions Through Financial Intermediaries
The Fund has authorized one or more brokers to receive on its behalf purchase and redemption orders. Such
brokers are authorized to designate other intermediaries to receive purchase and redemption orders on the Fund’s behalf. The Fund will be deemed to have received a purchase or redemption order when an authorized broker or, if applicable, a broker’s
authorized designee, receives the order. Customer orders will be priced at the Fund’s net asset value next computed after they are received by an authorized broker or the broker’s authorized designee. Investors may be charged a fee if they effect transactions through an intermediary, broker or agent.
Restrictions on Buying, Selling and Exchanging Shares
Purchase and Exchange Restrictions
The Fund reserves the right to suspend or change the terms of purchasing or exchanging shares.
Purchase and Redemption Restrictions on Market-Timers and Active Traders
The Trust, on behalf of the Fund, believes that it is in the best interests of its long-term shareholders to discourage
the frequent purchases and redemptions or exchanges (sometimes referred to collectively as “trading activity”) of Fund shares. If you intend to trade frequently and/or use market timing investment strategies, you should not purchase this Fund.
Frequent trading of Fund shares, including market timing and other program trading or short-term trading
strategies, may be disruptive to the Fund. Excessive trading activity may adversely affect Fund performance and the interests of long-term shareholders by, among other things, requiring the Fund to maintain larger amounts of cash or to liquidate portfolio
holdings at a disadvantageous time or price. For example, when market timing occurs, the Fund may have to sell its holdings to have the cash necessary to redeem the market timer’s shares. This can happen when it is not advantageous to sell any
securities, so the Fund’s performance may be hurt. When large dollar amounts are involved, market timing can also make it difficult to use long-term investment strategies because the Fund cannot predict how much cash it will have to invest, and
the Fund’s portfolio management team may have to allocate a significant amount of assets to cash and other short-term investments or sell investments, rather than maintaining investments selected to achieve the Fund’s investment objective. In addition, disruptive trading activity of Fund shares may impede efficient portfolio management and impose increased
transaction costs, such as brokerage and tax costs, by requiring the portfolio manager to effect more frequent purchases and sales of portfolio securities. Similarly, the Fund may bear increased administrative costs as a result of the asset level and
investment volatility that accompanies patterns of excessive or short-term trading.
In addition, to the extent the Fund invests a significant portion of its assets in foreign securities it tends to be subject to the risks associated with market timing and short-term trading strategies to a greater extent than funds that do not. Securities
trading in overseas markets present time zone arbitrage opportunities when events affecting portfolio securities values occur after the close of the overseas market but prior to the close of the U.S. market. This short-term arbitrage activity can reduce the return received by long-term shareholders. The Fund will seek to minimize these opportunities by using fair value pricing,
as described in “How fund shares are priced” below.
To the extent the Fund invests in securities that are, or may be, restricted, unlisted, traded infrequently, thinly traded, or relatively illiquid it also may be vulnerable to market timing and short-term trading strategies. Traders using such strategies may seek to take advantage of a possible differential between the last available market prices for one or more of those
relatively illiquid securities that are used to calculate the value of the Fund’s shares and the latest indications of market values for those securities. For example, high yield securities may present opportunities for short-term trading strategies because
the market for such securities may be less liquid than the market for higher quality bonds which could result in pricing inefficiencies. One of the objectives of the Trust’s fair value pricing procedures, as described in “How fund shares are priced” below is to minimize the possibilities of this type of arbitrage; however, there can be no assurance that the Trust’s valuation procedures will be successful in eliminating it.
The Trust’s Board of Trustees has adopted certain policies and procedures discussed below to discourage what it considers to be disruptive trading activity. The Trust and the Fund discourage frequent trading of Fund shares by Fund shareholders and
46 Buying,
selling, exchanging and converting shares
will
not make special arrangements to accommodate such transactions in Fund shares. As a general matter, the Trust and the Fund reserve the right to reject any purchase or exchange that
they believe, in their sole discretion is disruptive (or potentially disruptive) to the management of the Fund.
Through the Trust’s transfer agent, the Trust, the Adviser or their designees (including the
Administrator) perform ongoing monitoring of shareholder trading in shares of the Fund in order to try and identify shareholder trading patterns that suggest an ongoing short-term or disruptive trading strategy. If shareholder trading patterns identified by the Trust, the Adviser or
their designees through monitoring leads the Trust, the Adviser or their designees to reasonably conclude that such trading may be detrimental to a Fund, then the transfer agent, on behalf of the Trust and the Fund may, among other things, reject
any specific purchase or exchange order and temporarily or permanently bar future purchases into the Fund. If the Fund rejects a shareholder’s purchase or exchange order, the shareholder will not be able to execute that transaction, and the Fund will not be responsible for any losses that the shareholder may suffer.
In considering a shareholder’s trading patterns, the Trust may consider, among other factors, the shareholder’s trading history both directly and, if known, through financial intermediaries, in the Fund and in another 1290 Funds of the Trust, or in accounts under common control or ownership. In order to reduce disruptive trading activity, the Trust, the Adviser or their
designees may consider a number of factors, including monitoring the frequency of trading activity, and the size of purchases and exchanges in relation to portfolio assets in the Fund.
Frequent Trading Through Financial Intermediaries. A Fund shareholder is subject to this policy whether the shareholder invests in the Fund directly or through a financial
intermediary, which includes, but is not limited to, broker dealers, banks, trust companies, insurance company products (such as an annuity contract), investment advisers, or
administrators or trustees of an IRS recognized tax deferred savings plan (such as a 401(k) retirement plan and a 529 college savings plan).
Some financial intermediaries maintain master accounts with the Fund on behalf of their customers
(“omnibus accounts”). Certain accounts, such as omnibus accounts, include multiple investors and such accounts typically provide the Fund with net purchase or redemption and exchange requests on any given day where purchases, redemptions and exchanges of shares are
netted against one another and the identity of individual purchasers, redeemers and exchangers whose orders are aggregated may not be known by the Fund. While the Trust, the
Adviser or their designees monitor for market timing activity, they may be unable to identify such activities because the netting effect in omnibus and other types of intermediary
accounts often makes it more difficult to locate and eliminate market timers from the Fund. The Trust, the Adviser or their designees will have the ability, pursuant to certain information sharing agreements with financial intermediaries, to request information from financial intermediaries concerning trades placed in omnibus accounts, in order to attempt to monitor trades that are
placed by the underlying shareholders of these omnibus accounts. If the Trust, the Adviser and their designees identify omnibus account level trading patterns that have the potential to be detrimental to the Fund, they may, in their sole
discretion, request from the financial intermediary information concerning the trading activity of its customers. Based upon their review of the information, if the Trust, the Adviser or their designees determine that the trading activity of any customer may be detrimental to the Fund, they may in their sole discretion, request the financial intermediary to, among other things,
restrict or limit further trading in the Fund by that customer. Identification of market timers also may be limited by operational systems and technical limitations.
The above policies
and procedures with respect to frequent activity of Fund shares also apply to retirement plan participants.
The Trust generally does not consider trading activity by any “fund of funds” advised by the Adviser or trading activity associated with approved asset allocation programs to be disruptive trading activity.
The Trust’s policies and procedures seek to discourage what it considers to be disruptive trading activity. The Trust seeks to apply its policies and procedures to all shareholders uniformly. It should be recognized, however, that such procedures are
subject to limitations:
• There is no assurance that the methods described above will prevent market timing
or other trading that may be deemed abusive. The Trust’s procedures do not eliminate the possibility that disruptive trading activity, including market timing, will occur or that Fund performance will be affected by such activity.
• The design of such policies and procedures involves inherently subjective
judgments, which the Trust, the Adviser or their designees seek to make in a fair and reasonable manner consistent with the interests of all shareholders.
• The limits on the ability to monitor certain potentially disruptive trading activity means that some shareholders may be
treated differently than others, resulting in the risk that some shareholders may be able to engage in frequent trading activity while others will bear the effect of that frequent trading activity.
Buying, selling, exchanging and converting shares 47
Consistent with seeking to discourage
potentially disruptive trading activity, the Adviser, or a designee thereof or the Trust also may, in its sole discretion and without further notice, change what it considers
potentially disruptive trading activity and its monitoring procedures and thresholds, as well as change its procedures to restrict this activity.
Selling Restrictions
The table below describes restrictions in place on selling shares of the Fund described in this Prospectus.
Restriction
Situation
• The Fund may suspend the right of redemption or
postpone payment for more than 7 days:
• When the New York Stock Exchange is closed (other than a
weekend/holiday).
• When trading is restricted by the SEC.
• When the SEC declares that an emergency exists.
• Any other period permitted by the SEC.
• The Fund reserves the right to suspend account services or
refuse transaction requests:
• With a notice of dispute between registered owners.
• With suspicion/evidence of a fraudulent act.
• The Fund may pay the redemption price in whole or part
by a distribution in kind of readily marketable securities in
lieu of cash or may take up to 7 days to pay a redemption
request in order to raise capital:
• When it is detrimental for the Fund to make cash
payments as determined in the sole discretion of the
Adviser.
• Securities distributed in kind are subject to market risk until
sold, and shareholders may incur brokerage or other costs
and realize capital gains when converting those securities
to cash.
• The Fund may withhold redemption proceeds until the
check or funds have cleared:
• When redemptions are made within 10 calendar days of
purchase by check of the shares being redeemed.
48 Buying, selling, exchanging and converting shares
10. How
fund shares are priced
“Net asset value” is the price of one share of the Fund without a sales charge, and is calculated each business
day using the following formula:
Total Market Value =
Total market value of securities
+
Cash and other assets
—
Liabilities
Number of outstanding shares
The net asset value of Fund shares is determined according to this schedule:
• A share’s net asset value is normally determined each day the New York Stock
Exchange (“Exchange”) is open for trading as of 4:00 p.m. Eastern time. In the event of an emergency or other disruption in trading on the Exchange, a share’s
price would still normally be determined as of 4:00 p.m. Eastern Time.
• The price for purchasing or redeeming a share will be based upon the net asset
value next calculated after an order is received and accepted by the Fund or its designated agent.
• If the Fund is heavily invested in foreign securities it may have net asset value changes on days when shares cannot be
purchased or sold because foreign securities sometimes trade on days when the Fund’s shares are not priced.
Generally, portfolio securities are valued as follows:
Equity securities (including securities issued by ETFs) — last sale price or official closing price or, if there is no sale or official closing price, latest available bid price provided by a pricing service.
Debt securities — valued on the basis of
prices provided by an approved pricing service; however, when the prices of the securities cannot be obtained from an approved pricing service, such securities are generally valued
at a bid price estimated by a broker.
Convertible bonds and unlisted
convertible preferred stocks — valued at prices obtained from a pricing service for such instruments or, if a pricing service price is not available, at bid prices obtained from one or more of the major dealers in such bonds or stocks. Where there is a discrepancy between dealers, values may be adjusted based on recent premium spreads to the underlying common stocks. Convertible bonds may be matrix-priced based upon the conversion value to the underlying common stocks and
market premiums.
Securities traded on foreign exchanges — most recent sales or bid
price on the foreign exchange or market, unless a significant event or circumstance occurs after the close of that market or exchange that will materially affect its value. In that
case, the security will be valued using the fair value procedures by or under the direction of 1290 Funds’ Board of Trustees at the close of regular trading on the Exchange. Foreign currency is converted into U.S. dollar equivalent daily at current exchange rates.
Options — for exchange traded
options, last sales price or, if not available, the bid price. Options not traded on an exchange or actively traded are valued according to fair value methods.
Futures
— last settlement
price or, if there is no sale, latest available bid price.
Investment
company securities — shares of open-end mutual funds (other than ETFs) held by the Fund will be valued at the net asset value of the shares of such funds as described in such funds’ prospectuses.
Repurchase agreements and reverse repurchase agreements — valued at original cost
(par) plus accrued interest. Other pricing methods may be utilized such as amortized cost depending on the features of the instrument.
Swaps —
centrally cleared swaps are priced using the value determined by the central counterparty at the end of the day, which
price may be provided by an approved pricing service. With respect to over-the-counter swaps and centrally cleared swaps where the central counterparty price is unavailable, a price provided by an approved pricing service will be used.
Securities and assets for which market quotations are not readily available, for which valuation cannot be provided or for which events or circumstances occurring after the close of the relevant market or exchange materially affect their value are valued pursuant to the fair value procedures in good faith by or under the direction of the Board of Trustees of 1290 Funds. For example, a security whose trading has been halted during the trading day may be fair valued based on the available information at the time of the close of the trading market. Similarly,
securities for which there is no ready market (e.g., securities of certain small capitalization issuers, high yield securities and securities of certain issuers located in emerging markets) also may be fair valued. Some methods for valuing
How fund shares
are priced 49
these
securities may include: fundamental analysis (earnings multiple, etc.), matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature
and duration of restrictions on the disposition of the securities.
Events or circumstances
affecting the values of portfolio securities that occur between the closing of their principal markets and the time the net asset value is determined, such as foreign securities
trading on foreign exchanges that close before the time the net asset value of Fund shares is determined, may be reflected in 1290 Funds calculations of net asset values for the
Fund when 1290 Funds deems that the particular event or circumstance would materially affect the Fund's net asset value. Such events or circumstances may be company specific, such as an earning reports, country or region specific, such as a natural disaster, or global in nature. Such events or circumstances also may include price movements in the U.S. securities markets.
The effect of fair value pricing as described above is that securities may not be priced on the basis of quotations from the primary market in which they are traded, but rather may be priced by another method that 1290 Funds’ Board of Trustees believes will reflect fair value. As such, fair value pricing is based on subjective judgments and it is possible that fair value may differ materially from the value realized
on a sale. This policy is intended to assure that the Fund's net asset value fairly reflects security values as of the time of pricing. Also, fair valuation of the Fund's securities can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that fair value pricing policies will prevent dilution of the Fund's net asset value by those traders.
50 How fund
shares are priced
11. Dividends and other distributions and tax consequences
Dividends and other Distributions
The Fund will distribute all or substantially all of its net investment income and net realized capital gains, if any, at least annually or more frequently as determined to be appropriate by the Adviser. The Fund may also pay a special distribution at the end of a calendar year to comply with federal tax requirements.
Dividends distributed by the Fund may be reinvested automatically in shares of the distributing class of the Fund at their net asset value without a sales charge or may be taken in cash. If you would like to receive distributions in cash, contact your financial professional, financial intermediary or the Fund. The Fund anticipates, although it cannot predict with any certainty, that a significant amount
of its distributions, if any, will consist of net capital gains.
Tax Consequences
For federal income tax purposes, the Fund has elected and intends to qualify for taxation as a regulated
investment company (a “RIC”) under the Code.
You will pay federal income tax on dividends from the Fund whether you receive them in cash or reinvest them in additional shares. If you redeem Fund shares or exchange them for shares of another 1290 Fund, you will be treated as having sold the Fund shares, and any gain on the transaction will be subject to federal income tax.
Any dividends you receive from the Fund attributable to its net investment income, the excess of its net short-term capital gain over net long-term capital loss and its net gains and losses from certain foreign currency transactions, if any, will be taxed to you as ordinary income. However, the Fund’s distributions to individuals and certain other non-corporate shareholders (each, an
“individual shareholder”) of certain dividend income it receives, consisting of dividends received from U.S. corporations and certain foreign corporations (“qualified dividend income”), and net capital gain (i.e., the excess of net long-term capital gain over net short-term capital loss) are subject to federal income tax at reduced rates, specifically, 15% for an individual shareholder with no more than $459,750 of taxable income ($517,200 if married filing jointly) and 20% for those with taxable income exceeding those respective amounts (which apply for 2022 and will be adjusted for inflation annually thereafter). Distributions of net capital gains will be taxable to you at different rates depending on how long the Fund held the assets the sale of which generated the gains, not how long you held
your Fund shares.
An individual
is required to pay a 3.8% federal tax on the lesser of (1) the individual’s “net investment income,” which generally will include dividends and other
distributions the Fund pays and gains recognized from the redemption or exchange of Fund shares, or (2) the excess of the individual’s “modified adjusted gross
income” over $200,000 for single taxpayers ($250,000 for married persons filing jointly). This tax is in addition to any other taxes due on that income. A similar tax applies
to estates and trusts. Shareholders should consult their own tax advisers regarding the effect, if any, this tax may have on their investment in Fund shares.
The Fund must withhold and remit to the U.S. Treasury Department 24% of dividends, other taxable
distributions, and redemption proceeds (regardless of whether you realize a gain or loss) otherwise payable to any individual shareholder who fails to certify that the TIN furnished to the Fund is correct or who furnishes an incorrect TIN (together with the withholding described in the next sentence, “backup withholding”). Withholding at that rate also is required from the Fund’s dividends and other taxable distributions otherwise payable to such a shareholder who (1) is subject to backup withholding for failure to report the receipt of interest or dividend income properly or (2) fails to certify to the Fund that he or she is not subject to backup withholding or that it is a corporation or other exempt recipient. Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholder’s
federal income tax liability or refunded.
A
Fund shareholder who wants to use a method for determining his or her basis in Fund shares other than the average basis method (which is the Fund’s default method) must elect
to do so in writing, which may be electronic. The Fund, or its administrative agent, must report to the IRS and furnish to its shareholders the basis information for Fund shares
that are redeemed or exchanged. See the “Taxation” section in the 1290 Funds’ SAI for a description of the rules regarding that election and the Fund’s
reporting obligation.
Dividends the Fund pays to a nonresident alien individual, foreign
corporation or partnership, or foreign trust or estate (each, a “foreign shareholder”), with certain exceptions, generally will be subject to a federal withholding tax
of 30% (or lower treaty rate). Two categories of dividends, however, “short-term capital gain dividends” and “interest-related dividends,” the Fund pays to
foreign shareholders (with certain exceptions) and reports in writing to its shareholders are exempt from that tax. See the “Taxation” section in the 1290 Funds’ SAI for details regarding that exemption.
Dividends and other distributions and tax consequences 51
Under the Foreign Account Tax Compliance Act
(“FATCA”), “foreign financial institutions” (“FFIs”) and “non-financial foreign entities” (“NFFEs”) that are Fund
shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends the Fund pays. As discussed more fully in the section of the 1290 Funds’ SAI
entitled “Taxation,” the FATCA withholding tax generally can be avoided (a) by an FFI, if it reports certain information regarding direct and indirect ownership of
financial accounts U.S. persons hold with the FFI, and (b) by an NFFE, if it certifies its status as such and, in certain circumstances, reports information regarding substantial U.S. owners to the withholding agent (which may be the Fund), which may, in turn, report that information to the IRS. Moreover, the U.S. Treasury Department has negotiated intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be required to comply with the terms of the IGA instead of U.S. Treasury Department regulations.
Dividends and interest the Fund receives, and gains it realizes, on foreign securities may be subject to
income, withholding, or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its investments. Tax conventions between certain countries and the United States may reduce or eliminate those taxes, however, and many foreign countries do not impose taxes on capital gains in respect of investments by foreign investors.
52 Dividends and other distributions and tax consequences
12. Additional information
Additional Investor Services
Automatic Bank Draft Plan
An Automatic Bank Draft Plan is available for investors who wish to purchase Class A or Class T shares of
the Fund in amounts of $50 or more on a regular basis by having the amount of the investment automatically deducted from the investor’s checking account. The minimum initial investment for this Plan is $500. Forms authorizing this service are available from 1290 Funds. For more information on how to join the Automatic Bank Draft Plan, please refer to the section entitled “Buying Shares.”
Automatic Reinvestment Plan
Dividends and other distributions may be automatically reinvested in the same class of shares without a sales
charge.
Dividend Diversification Program
This program allows you to have all dividends and any other distributions automatically invested in
shares of the same class of another Fund, subject to the eligibility requirements of that other Fund and to state securities law requirements. Shares will be purchased at the selected Fund’s net asset value without a front-end sales charge or CDSC on the dividend record date. Before establishing a Dividend Diversification Program into any other Fund, please carefully read the relevant information about it in the Prospectus.
Systematic Withdrawal Plan
If you have at least $10,000 in your account, you may participate in a systematic withdrawal plan. Under
this plan, you may arrange quarterly, semi-annual or annual automatic withdrawals of at least $500 from any Fund. The proceeds of each withdrawal will be mailed to you or as you otherwise direct in writing. The $10,000 minimum account size is not applicable to IRAs. 1290 Funds processes sales through a systematic withdrawal plan on the 15th day of the month or the following business day if the 15th is not a business day. Any income or capital gain dividends will be automatically reinvested at net asset value. A sufficient number of full and fractional shares will be redeemed to make the designated payment. Depending upon the size of the payments requested and fluctuations
in the net asset value of the shares redeemed, sales for the purpose of making such payments may reduce or even exhaust the account. You should not purchase Class A shares while participating in a systematic withdrawal plan because you may be redeeming shares
upon which a sales charge was already paid unless you purchased shares at net asset value. A Fund will not knowingly permit additional investments of less than $2,000 if you are making systematic withdrawals at the same time. A Fund will waive the CDSC on redemptions of shares made pursuant to a systematic withdrawal plan if the proceeds do not exceed 10% annually of the net asset value of the account. A Fund may amend the terms of the systematic withdrawal plan on 30 days’ notice. You or 1290 Funds may terminate the plan at any time.
Automatic Bank
Purchase Plan
If you have your bank account linked to your 1290 Funds account, you can call
1-888-310-0416 prior to 4:00 p.m. Eastern Standard Time and purchase shares at that day’s closing price. The money will be taken from your bank account within one to five
days.
1290 Funds — Related Web Site
Visit www.1290Funds.com to review your account balance and recent transactions, to view daily prices and performance information.
Transactions Through Processing Organizations
You may purchase or sell shares through an organization that provides recordkeeping and consulting services to 401(k) plans or other employee benefit plans or other omnibus accounts (“Processing Organization”). Processing Organizations may charge you a fee for this service and may require different minimum initial and subsequent investments than 1290 Funds. Processing Organizations may also impose other charges or restrictions different
from those applicable to shareholders who invest in the Fund directly. A Processing Organization, rather than its customers, may be the shareholder of record of your shares. 1290 Funds is not responsible for the failure of any Processing Organization to carry out its obligations to its customers. Certain Processing Organizations may receive compensation from the Adviser or its affiliates and certain Processing Organizations may receive compensation from 1290 Funds for shareholder recordkeeping and similar services. One of the Processing Organizations through which shares of the Fund
will be sold or redeemed is Equitable Advisors, LLC, a member of Investor Protection Corporation and an investment adviser registered with the SEC, which is an affiliate of the Fund and the Adviser.
Additional information 53
13. Financial highlights
Because the Fund has not commenced operations as of the date of
this Prospectus, financial highlights are not available for the Fund.
54 Financial highlights
If you would like more information about the Fund, the following documents (including a copy of this Prospectus) are
available at 1290 Funds' website: www.1290Funds.com, free of charge.
Annual and Semi-Annual Reports
— Include
more information about the Fund’s investments and performance. The reports usually include performance information, a discussion of market conditions and the investment
strategies that significantly affected the Fund’s performance during the last fiscal year.
Statement of Additional Information (SAI) — Provides more detailed
information about the Fund, has been filed with the SEC and is incorporated into this Prospectus by reference.
Portfolio Holdings Disclosure
— A
description of the Fund’s policies and procedures with respect to the disclosure of their portfolio securities holdings is available in the Fund’s SAI, which is
available on the Fund’s website.
To order a free copy of the
Fund’s SAI and/or Annual and Semi-Annual Report, request other information about the Fund, or make shareholder inquiries, contact your financial
professional, or the Fund at:
1290 Funds 1290 Avenue of the Americas New York, New York10104 Telephone: 1-888-310-0416 Hours: 8:30 a.m. to 5:30 p.m (Eastern Time) on any business day
Your financial professional or 1290 Funds will also be happy to answer your questions or to provide any
additional information that you may require.
Reports and other information about the Fund are available on the EDGAR database on the SEC’s Internet site at:
http://www.sec.gov
Investors may also obtain copies of this information, after paying a duplicating fee, by electronic
request at the following E-mail address: publicinfo@sec.gov
“Equitable” is the brand name of Equitable Holdings, Inc. and its family of companies, including Equitable Financial Life Insurance Company (NY, NY), Equitable Advisors, LLC and Equitable Distributors, LLC. The obligations of Equitable Financial
Life Insurance Company are backed solely by their claims-paying ability.
Mutual Funds: • Are Not a Deposit of Any Bank • Are
Not FDIC Insured • Are Not Insured by Any Federal Government Agency • Are Not Guaranteed by Any Bank or Savings Association • May Go Down in Value
Equitable Financial Life Insurance Company (NY, NY)
1290 Funds
STATEMENT OF ADDITIONAL INFORMATION
July __, 2022
This Part B of Post-Effective Amendment No. 49 to the Registration Statement of 1290 Funds relates to 1290 Essex Small Cap Growth Fund and is not intended to affect the Statement of Additional Information of any previously registered series (or any class of such series) of 1290 Funds.
Fund
Share Class (Ticker)
1290 Diversified Bond Fund
Class A (TNUAX); Class T (TNUCX)*; Class I (TNUIX); Class R (TNURX)
1290 DoubleLine Dynamic Allocation Fund
Class A (TNXAX); Class T (TNXCX)*; Class I (TNVDX); Class R (TNYRX)
1290 Essex Small Cap Growth Fund
Class A ( ); Class T ( )*; Class I ( ); Class R ( )
1290 GAMCO Small/Mid Cap Value Fund
Class A (TNVAX); Class T (TNVCX)*; Class I (TNVIX); Class R (TNVRX)
1290 High Yield Bond Fund
Class A (TNHAX); Class T (TNHCX)*; Class I (TNHIX); Class R (TNHRX)
1290 Multi-Alternative Strategies Fund
Class A (TNMAX); Class T (TNMCX)*; Class I (TNMIX); Class R (TNMRX)
1290 SmartBeta Equity Fund
Class A (TNBAX); Class T (TNBCX)*; Class I (TNBIX); Class R (TNBRX)
(each, a “Fund” and together, the “Funds”)
This Statement of Additional Information (“SAI”) is not a prospectus. It should be read in conjunction with the Prospectuses for the Funds dated March 1, 2022 and July __, 2022, as they may be supplemented from time to time, which may be obtained without
charge by calling the 1290 Funds toll-free at 1-888-310-0416 or writing to the 1290 Funds at 1290 Avenue of the Americas, New York, New York 10104. Unless otherwise defined herein, capitalized terms have the meanings given to them in the Prospectuses.
The Funds’ audited financial statements for the year ended October 31, 2021, including the financial highlights,
appearing in the 1290 Funds’ Annual Report to Shareholders (available without charge, upon request by calling toll-free 1-888-310-0416), filed electronically with the Securities and Exchange Commission on December 29, 2021 (File No. 811-22959), are incorporated by reference and made a
part of this document. Financial statements for 1290 Essex Small Cap Growth Fund are not available because the Fund is newly organized and had no operations or financial information of its own prior to the date of this SAI.
*
Class T shares currently are not offered for sale.
Appendix D —
Control Persons and Principal Holders of Securities
D-1
Description of the 1290 Funds
The 1290 Funds (the “1290 Funds” or the “Trust”) is an open-end management investment company and is registered as such under the Investment Company Act of 1940, as amended (“1940 Act”). The 1290 Funds was organized as a Delaware
statutory trust on March 1, 2013. (See “Other Information.”)
Equitable Investment Management Group, LLC (“EIM” or the “Adviser”) serves as the investment adviser for the 1290 Funds.
The 1290 Funds has
registered Class A, Class T, Class I and Class R shares on behalf of sixteen (16) funds. This SAI contains information with respect to shares of the following Funds:
1290 Diversified Bond Fund 1290
DoubleLine Dynamic Allocation Fund 1290 Essex Small Cap Growth Fund 1290
GAMCO Small/Mid Cap Value Fund 1290 High Yield Bond Fund 1290
Multi-Alternative Strategies Fund 1290 SmartBeta Equity Fund
Prior to March 1, 2017, Class T shares were known as Class C shares and included different 12b-1 fees and certain other expenses. In the Prospectus for the Funds dated March 1, 2022, the performance of Class T shares for periods prior to March1, 2017, has been adjusted to reflect the current sales charges applicable to Class T shares. For each Fund, Class T shares currently are not offered for sale. The 1290
Funds’ Board of Trustees (“Board”) is permitted to create additional funds or classes. The assets of the 1290 Funds received for the issue or sale of shares of
each Fund and all income, earnings, profits and proceeds thereof, subject to the rights of creditors, are allocated to the Fund, and constitute the assets of the Fund. The assets of each Fund are charged with the liabilities and expenses attributable to the Fund, except
that liabilities and expenses may be allocated to a particular class. Any general expenses of the 1290 Funds are allocated between or among any one or more Funds or classes.
Each class of shares is offered under the 1290 Funds’ multi-class distribution system, which is designed to allow promotion of investing in the Funds through alternative distribution channels. Under the 1290 Funds’ multi-class distribution system, shares of each class of a Fund represent an equal pro rata interest in that Fund and, generally, will have identical voting, dividend, liquidation, and other rights, preferences,
powers, restrictions, limitations, qualifications and terms and conditions, except that each class may differ with respect to sales charges, if any, distribution and/or service
fees, if any, other expenses allocable exclusively to each class, voting rights on matters exclusively affecting that class, and its exchange privilege and/or conversion features, if any. Each share of a Fund is entitled to participate equally in dividends,
other distributions and the proceeds of any liquidation of that Fund; however, the income attributable to each class and the dividends payable on the shares of each class will be reduced by the amount of the distribution fee or service fee, if
any, payable by that class. The distribution-related fees paid with respect to any class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation for selling different classes
of shares.
Each Fund is
classified as a “diversified” fund under the 1940 Act. Currently under the 1940 Act, a diversified fund may not, with respect to 75% of its total assets, invest in a
security if, as a result of such investment, more than 5% of the fund’s total assets would be invested in the securities of any one issuer or the fund would hold more than
10% of the outstanding voting securities of any one issuer. These percentage limitations do not apply to securities issued or guaranteed by the U.S. government, its agencies and instrumentalities or to securities issued by other investment companies. With respect to
the remaining 25% of its total assets, a diversified fund may invest more than 5% of its total assets in the securities of one issuer. Repurchase agreements will not be considered to be subject to the above-stated 5% limitation if the collateral
underlying the repurchase agreements consists exclusively of obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities. In addition, mortgage- and asset-backed securities will not be considered to have been issued
by the same issuer by reason of the securities having the same sponsor, and mortgage- and asset-backed securities issued by a finance or other special purpose subsidiary that are
not guaranteed by the parent company will be considered to be issued by a separate issuer from the parent company. The 1940 Act provides that a fund may not
3
change its classification from diversified to
non-diversified unless authorized by the vote of a majority of the outstanding voting securities of the fund.
1290 Funds Investment Policies
Fundamental Restrictions
Each Fund has adopted certain investment restrictions that are fundamental and may not be changed without approval by a “majority” vote of such Fund’s shareholders. Such majority is defined in the 1940 Act as the lesser of: (i) 67% or more of the voting securities of such Fund present in person or by proxy at a meeting, if the holders of more than 50% of the
outstanding voting securities are present or represented by proxy; or (ii) more than 50% of the outstanding voting securities of such Fund. Set forth below are each of the fundamental restrictions adopted by the Funds.
Each Fund will not:
(1)
issue senior
securities to the extent such issuance would violate the 1940 Act, and the rules thereunder, as interpreted or modified by regulatory authority having jurisdiction from time to
time, and any applicable exemptive relief.
(2)
borrow money, except as permitted under the 1940 Act, and the rules thereunder, as interpreted
or modified by regulatory authority having jurisdiction from time to time, and any applicable exemptive relief.
(3)
engage in the business of underwriting securities issued by others, except to the extent that
the sale of portfolio securities by the Fund may be deemed to be an underwriting or as otherwise permitted by the 1940 Act, and the rules thereunder, as interpreted or modified by regulatory authority having jurisdiction from time to time, and any
applicable exemptive relief.
(4)
concentrate its investments in a particular industry or group of industries, as the term “concentration” is used in the 1940 Act, and the rules thereunder, as interpreted or modified by regulatory authority having jurisdiction from time to
time, and any applicable exemptive relief.
(5)
purchase or sell real estate, except that the Fund may purchase and sell securities or other instruments that are secured
by, or linked to, real estate or interests therein, securities of real estate investment trusts, mortgage-related securities and securities of issuers engaged in the real estate
business, and the Fund may purchase and sell real estate acquired as a result of the ownership of securities or other instruments.
(6)
purchase or sell
physical commodities to the extent prohibited by the 1940 Act and other applicable laws, and the rules thereunder, as interpreted or modified by regulatory authorities having
jurisdiction from time to time, and any applicable exemptive relief.
(7)
make loans to other persons to the extent prohibited by the 1940 Act, and the rules
thereunder, as interpreted or modified by regulatory authority having jurisdiction from time to time, and any applicable exemptive relief.
Notations Regarding the Funds’ Fundamental
Restrictions
Each Fund’s fundamental restrictions are written and will be interpreted
broadly. From time to time, the Securities and Exchange Commission (“SEC”) and members of its staff, and others, issue formal or informal views on various provisions of
the 1940 Act and the rules thereunder, including through no-action letters and exemptive orders. For flexibility, each Fund’s fundamental restrictions will be interpreted with regard to these interpretations or modifications, as they are given from time to time. Therefore, it is possible that the interpretation of a Fund’s fundamental restrictions could change in the future.
The following notations
are not considered to be part of a Fund’s fundamental restrictions and are subject to change without shareholder approval.
Senior Securities and
Borrowing (notations regarding the fundamental restrictions set forth in (1) and (2)
above)
“Senior securities” generally are obligations that have a priority over a
fund’s shares with respect to the distribution of fund assets or the payment of dividends. Borrowings are viewed as involving the creation of a senior security. Under the
1940 Act, an open-end
4
fund currently may not issue senior securities, except that a fund is permitted to borrow money in an amount not in excess of 33⅓% of the fund’s total assets (including the amount of the senior securities issued but reduced by any liabilities not constituting senior securities) at the time of the issuance or borrowing, and except that a fund may borrow up to an additional 5% of its total assets (not including the amount borrowed) for temporary purposes, such as clearance of fund transactions and share redemptions. Any Fund borrowings that come to exceed these amounts will be reduced in accordance with applicable law. SEC staff guidance
and interpretations, however, permit a fund, provided certain conditions are met, to engage in a number of types of transactions that might otherwise be considered to create senior securities. For purposes of each Fund’s fundamental restrictions, provided such conditions are met, short sale transactions, the purchase or sale of securities on a “when-issued,” delayed delivery or forward commitment basis, the purchase and sale of other financial contracts or derivative instruments such as swaps, options, futures, forward and spot currency contracts and collateral and segregation arrangements with respect thereto, and deposits of margin
will not be deemed to be the issuance of a senior security, a borrowing or a pledge of assets. On October 28, 2020, the SEC adopted Rule 18f-4 under the 1940 Act, which governs the use of derivatives by registered investment companies. Rule 18f-4 imposes
limits on the amount of derivatives a fund can enter into and replaces the asset segregation framework used by funds to comply with the 1940 Act's limitations on the issuance of senior securities. The compliance date for Rule 18f-4 is August 19, 2022. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives and reverse repurchase agreements may be impacted.
Underwriting (notations
regarding the fundamental restriction set forth in (3) above)
A Fund engaging in
transactions involving the acquisition or disposition of portfolio securities may be considered to be an “underwriter” under certain federal securities laws. Although
it is not believed that the application of the federal securities laws so described would cause the Funds to be engaged in the business of underwriting, the fundamental restriction
will be interpreted not to prevent the Funds from engaging in transactions involving the acquisition or disposition of portfolio securities, regardless of whether a Fund may be considered to be within the technical definition of an underwriter under the federal securities laws
or is otherwise engaged in the underwriting business to the extent permitted under applicable law.
Concentration (notations
with respect to the fundamental restriction set forth in (4) above)
While the 1940 Act does
not define what constitutes “concentration” in an industry, the SEC staff has taken the position that investment of 25% or more of a fund’s total assets in one or
more issuers conducting their principal business activities in the same industry or group of industries constitutes concentration. The fundamental restriction does not apply to
securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities, or obligations the interest on which is excludable from gross income for federal income tax purposes issued or guaranteed by a U.S. territory or possession or a state or local
government, or a political subdivision of any of the foregoing. Private activity municipal securities are not included within the exclusion for political subdivisions. In addition, investments in other investment companies are not considered an investment
in any particular industry for purposes of the fundamental restriction. Industries generally are determined by reference to the classifications of industries set forth in the Funds’ shareholder reports. With respect to each Fund’s investments in options, futures, swaps and other derivative transactions, industries may be determined by reference to the industry of the reference asset. Each Fund may invest in securities of other investment companies or investment vehicles that may concentrate their assets in one
or more industries. Each Fund may consider the concentration of such investment companies and investment vehicles in determining compliance with the fundamental restriction.
Commodities (notations
with respect to the fundamental restriction set forth in (6) above)
The 1940 Act generally
does not prohibit a Fund from investing in commodities or commodity-related instruments. A Fund is, however, limited in the amount of illiquid assets it may purchase, and certain
commodities, especially physical commodities, may be considered to be illiquid. Each Fund may purchase or sell currencies and securities or other instruments backed by physical
commodities and may purchase, sell or enter into options, futures, forward and spot currency contracts, swap transactions and other financial contracts or derivative instruments, including commodity-linked derivative instruments. Each Fund may, consistent with the fundamental restriction, transact in securities of exchange-traded funds (“ETFs”) or similar instruments that provide exposure to physical commodities. In addition, a Fund will not qualify as a “regulated investment company” under the Internal Revenue Code of 1986, as amended (“Code”) (a “RIC”), in any taxable year for which more than 10% of its gross income consists of certain “non-qualifying” income, which includes gains from selling physical commodities (or options or futures contracts thereon unless the
gain is realized from certain hedging transactions). To remain within that limitation, a Fund may need to limit its purchases of commodity-related investments that generate non-qualifying income, hold such an investment to avoid realizing non-qualifying
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income, sell such an investment at a loss, or
take other actions, such as sell other investments, when for investment reasons it would not otherwise do so. A Fund would not intend to sell commodity-related investments when
doing so would cause it to fail to qualify as a RIC.
Loans (notations with
respect to the fundamental restriction set forth in (7) above)
The fundamental restriction
allows each Fund to engage in all forms of lending (including loans of cash and portfolio securities) — and thus become a creditor — to the full extent permitted under
the 1940 Act and related interpretations, as in effect from time to time. For purposes of the fundamental restriction, the acquisition of bonds, debentures, other debt securities
or instruments, or participations or other interests therein and investments in government obligations, commercial paper, certificates of deposit, bankers’ acceptances or similar instruments and repurchase agreements will not be considered the making of a loan. In addition, the fundamental restriction would allow each Fund to engage in interfund lending, subject to SEC approval of an exemptive
application. Interfund lending would allow each Fund to temporarily lend cash to another fund of 1290 Funds, subject to certain conditions of the exemptive relief. An interfund borrowing and lending program may provide the opportunity for a borrowing
fund to pay an interest rate lower than what would be typically available from a bank, and the opportunity for a lending fund to receive an interest rate higher than what could be typically expected from investing cash in short-term instruments for cash management purposes. While the Funds have not applied for interfund lending relief, they may do so in the future.
Non-Fundamental Restrictions
The following investment restrictions apply generally to each Fund but are not fundamental. They may be changed for any Fund by the Board and without a vote of that Fund’s shareholders.
A Fund does not currently intend to purchase any investment if, as a result, more than 15% of its net assets would be invested in illiquid investments
as such term is defined by Rule 22e-4 of the 1940 Act. If, through a change in values, net assets, or other circumstances, a Fund were in a position where more than 15% of its net assets were invested in illiquid investments, the Fund, in accordance with Rule 22e-4(b)(1)(iv), will report the occurrence to both the Board and the SEC and take steps to bring the
aggregate amount of illiquid investments back within the prescribed limitation within a reasonable period of time.
If shares of a Fund are purchased by another fund in reliance on Section 12(d)(1)(G) of the 1940 Act, for
so long as shares of the Fund are held by such fund, the Fund will not purchase securities of registered open-end investment companies or registered unit investment trusts in reliance on Section 12(d)(1)(F) or Section 12(d)(1)(G) of the 1940 Act.
A Fund may, notwithstanding any fundamental or non-fundamental investment policy or limitation, invest all of its assets in the securities of a single open-end management investment company with substantially the same investment objective, policies and
limitations as the Fund.
The 1290 Diversified Bond Fund, 1290 Essex Small Cap Growth Fund,
1290 GAMCO Small/Mid Cap Value Fund, 1290 High Yield Bond Fund and 1290 SmartBeta Equity Fund each has a policy that it will invest at least 80% of its net assets, plus borrowings
for investment purposes, in a particular type of investment, as more fully set forth in the Funds’ Prospectus. Each such policy is subject to change only upon at least sixty (60) days’ prior notice to shareholders of the affected Fund to the extent required by SEC rules.
Certain of the Funds
have investment policies, limitations, or practices that are applicable “normally” or under “normal circumstances” or “normal market conditions”
(as stated above and elsewhere in this SAI or in the Funds’ Prospectus). Pursuant to the discretion of the Adviser and a Fund’s sub-adviser(s), if any
(“Sub-Adviser(s)”), these investment policies, limitations, or practices may not apply during periods of abnormal purchase or redemption activity or during periods of
unusual or adverse market, economic, political or other conditions.
Such market, economic or political conditions may include periods of abnormal or heightened market volatility, strained credit and/or liquidity conditions, or increased governmental intervention in the markets or industries. These conditions may impact
the markets or economy broadly or may be more focused in impacting particular industries, groups or parties, including impacting the 1290 Funds alone. During such periods, a Fund may not invest according to its principal investment strategies or in the manner in which its name may suggest, and may be subject to different and/or heightened risks. It is possible that such unusual or adverse conditions may continue for extended periods of time.
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Investment Strategies
and Risks
In addition to the Funds’ principal investment strategies discussed in the
Prospectus, each Fund may engage in other types of investment strategies as further described below. Each Fund may invest in or utilize any of these investment strategies and
instruments or engage in any of these practices except where otherwise prohibited by law or a Fund’s own investment restrictions.
The 1290 Multi-Alternative Strategies Fund operates under a “fund of funds” structure, under
which the Fund invests primarily in exchange-traded securities of other registered investment companies or investment vehicles (“Underlying ETFs”) comprising various asset categories or strategies. The Fund may also invest in other instruments as set forth in its Prospectus and as permitted by applicable law. By investing in Underlying ETFs, the Fund will indirectly bear fees and expenses charged by the Underlying
ETFs in addition to the direct fees and expenses of the Fund. In addition, the performance of the Fund is directly related to the ability of the Underlying ETFs to meet their respective investment objectives, as well as the Adviser’s allocation among the Underlying ETFs. Accordingly, the investment performance of the Fund will be influenced by the investment strategies of, and the risks and fees associated with, the Underlying ETFs in direct proportion to the amount of assets the Fund allocates to the Underlying ETFs utilizing such strategies. The Fund’s Prospectus contains certain information about Underlying ETFs. For additional information regarding the Underlying ETFs, see their respective prospectuses and SAIs. In this section, the term “Fund” may include the Funds, an Underlying ETF or both.
Asset-Backed Securities. Certain of the Funds may invest in asset-backed securities. Asset-backed securities represent direct or indirect
participations in, or are secured by and payable from, pools of assets such as, among other things, motor vehicle installment sales contracts, installment loan contracts, leases of
various types of real and personal property, and receivables from revolving credit (credit card) agreements, or a combination of the foregoing. These assets are securitized through
the use of trusts and special purpose corporations. Asset-backed securities can also be collateralized by a single asset (e.g. a loan to a specific corporation). Asset-backed securities that represent an interest in a pool of assets provide greater credit diversification than those representing an interest in a single asset. Asset-backed securities may include securities backed by pools of loans made to borrowers with blemished credit histories (“subprime” loans). The underwriting standards for subprime loans may be lower and more flexible than the standards generally used by lenders for borrowers with non-blemished credit histories with respect to the borrower’s credit standing and repayment history. Asset-backed securities present certain risks. For instance, in the case of credit card
receivables, these securities are generally unsecured and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby
reducing the balance due. Certain collateral may be difficult to locate in the event of default, and recoveries of depreciated or damaged collateral may not fully cover payments due on such collateral. In the case of automobile loans, most issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in all of the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral may not, in some cases, be available to support payments on these securities. If a Fund purchases asset-backed securities that are “subordinated” to other interests in the same pool of assets, the Fund as a holder of those securities may only receive payments after the pool’s obligations to other investors have been satisfied. The subordinated securities may be more illiquid and less stable than other asset-backed securities.
The credit quality of
asset-backed securities depends primarily on the quality of the underlying assets, the rights of recourse available against the underlying assets and/or the issuer, the level of
credit enhancement, if any, provided for the securities, and the credit quality of the credit-support provider, if any. To lessen the effect of failures by obligors on underlying
assets to make payments, the securities may contain elements of credit support which fall into two categories: (i) liquidity protection and (ii) protection against losses resulting from ultimate default by an obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering the pool of assets, to ensure that the receipt of payments on the underlying pool occurs
in a timely fashion. Protection against losses resulting from ultimate default ensures payment through insurance policies or letters of credit obtained by the issuer or sponsor from third parties. A Fund will not pay any additional or separate fees for credit support. The degree of credit support provided for each issue is generally based on historical information respecting the level of credit risk associated with the underlying assets. Delinquency or loss in excess of that anticipated or failure of the credit support could adversely affect the return on an investment in such a security. In addition, the risk of default by borrowers is greater during times of rising interest rates and/or unemployment rates and generally is higher in the case of asset pools that include subprime assets.
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Asset-backed securities may be subject to
interest rate risk and prepayment risk. In a period of declining interest rates, borrowers may prepay the underlying assets more quickly than anticipated, thereby reducing the
yield to maturity and the average life of the asset-backed securities. Moreover, when a Fund reinvests the proceeds of a prepayment in these circumstances, it will likely receive a rate of interest that is lower than the rate on the security that was prepaid. In a period of rising interest rates, prepayments of the underlying assets may occur at a slower than expected rate, creating maturity extension risk. This particular risk may effectively change a security that was considered short- or intermediate-term at the time of purchase into a longer-term security. Since the value of longer-term securities generally fluctuates more widely in response to changes in interest rates than does the value of shorter-term securities, maturity extension risk could increase the volatility of a Fund.
Due
to the possibility that prepayments (on automobile loans and other collateral) will alter the cash flow on asset-backed securities, it is not possible to determine in advance the actual final maturity date or average life. Faster prepayment will shorten the average life and slower prepayments will lengthen it. However, it is possible to determine what the range of that movement could be and to calculate the effect that it will have on the price of the security. In selecting these securities, the Sub-Advisers will look for those securities that offer a higher yield to compensate for any variation in average maturity.
Bonds. Certain
of the Funds may invest in one or more types of bonds. Bonds are fixed or variable rate debt obligations, including bills, notes, debentures, money market instruments and similar
instruments and securities. Mortgage- and asset-backed securities are types of bonds, and certain types of income-producing, non-convertible preferred stocks may be treated as
bonds for investment purposes. Bonds generally are used by corporations, governments and other issuers to borrow money from investors. The issuer pays the investor a fixed or variable rate of interest and normally must repay the amount borrowed on or before maturity. Many preferred stocks and some bonds are “perpetual” in that they have no maturity date.
Bonds are subject to interest rate risk and credit risk. In addition, significant securities market disruptions related to the coronavirus disease (COVID-19) pandemic have led, and may continue to lead, to dislocation in the market for a variety of fixed income securities (including, without limitation, commercial paper, corporate debt securities, certificates of deposit, asset-backed debt securities and municipal obligations),
which has decreased liquidity and sharply reduced returns. To the extent that a Fund purchases illiquid corporate debt securities or securities which are restricted as to resale, such Fund may incur additional risks and costs.
Interest rate risk is the risk that interest rates will rise and that, as a result, bond prices will
fall, lowering the value of a Fund’s investments in bonds. If interest rates move sharply in a manner not anticipated by a Fund’s management, the Fund’s
investments in bonds could be adversely affected. In general, bonds having longer durations are more sensitive to interest rate changes than are bonds with shorter durations. Duration is a measure of a bond’s price sensitivity to a change in its yield. The change in the value of a fixed income security or portfolio can be approximated by multiplying its duration by a change in interest rates. For example, if a bond has a 5-year duration and its yield rises 1%, the bond’s value is likely to fall about 5%. Similarly, if a bond portfolio has a 5-year average duration and the yield on each of the bonds held by the portfolio rises 1%, the portfolio’s value is likely to fall about 5%. For portfolios with exposure to foreign markets, there are many reasons why all of the bond holdings do not
experience the same yield changes. These reasons include: the bonds are spread off of different yield curves around the world and these yield curves do not move in tandem; the shapes of these yield curves change; and sector and issuer yield spreads change. Other factors can influence a bond portfolio’s performance and share price. Accordingly, a bond portfolio’s actual performance will likely differ from the example. During periods of rising interest rates, the average life of certain bonds is extended because of slower than expected principal payments. This may lock in a below-market interest rate and extend the duration of these bonds, especially mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, these securities may
exhibit additional volatility and lose value. This is known as extension risk.
Credit risk is the risk that an issuer will not make timely payments of principal and interest on the
bond. The degree of credit risk depends on the issuer’s financial condition and on the terms of the debt securities. Changes in an issuer’s credit rating or the market’s perception of an issuer’s creditworthiness may also affect the value of a Fund’s investment in that issuer.
Collateralized Debt Obligations. Certain of the Funds may invest in collateralized bond obligations (“CBOs”), collateralized
loan obligations (“CLOs”), other collateralized debt obligations (“CDOs”) and other similarly structured securities. CBOs, CLOs and other CDOs are types of asset-backed securities. A CBO is ordinarily issued by a trust or other special purpose entity (“SPE”) and is typically backed by a diversified pool of high risk, below investment grade fixed income securities. The collateral can be from many different types of fixed income securities such as high yield debt, residential privately issued mortgage-related securities, commercial privately issued mortgage-related securities, trust preferred securities and emerging market debt. A CLO is ordinarily issued by a trust or other SPE and is typically collateralized by a pool of loans, which may include, among others, domestic and
8
foreign senior secured loans, senior unsecured
loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. Other CDOs are trusts backed by other types of assets
representing obligations of various parties. Although certain CDOs may benefit from credit enhancement in the form of a senior-subordinate structure, overcollateralization or bond insurance, such enhancement may not always be present, and may fail to protect a Fund against
the risk of loss upon default of the collateral. Certain CDO issuers may use derivatives contracts to create “synthetic” exposure to assets rather than holding such assets directly, which entails the risks of derivative instruments described elsewhere in this SAI. CBOs, CLOs and other CDOs may charge management fees and administrative expenses, which are in addition to those of a
Fund.
For CBOs, CLOs
and other CDOs, the cash flows from the trust or SPE are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the
“equity” tranche, which bears the bulk of defaults from the bonds or loans in the trust and serves to protect the other, more senior tranches from default in all but
the most severe circumstances. Since it is partially protected from defaults, a senior tranche from a CBO trust or CLO trust or trust of another CDO typically has higher ratings
and lower yields than its underlying securities, and may be rated investment grade. Despite the protection from the equity tranche, CBO, CLO or other CDO tranches can experience substantial losses due to actual defaults, downgrades of the underlying collateral by rating agencies, forced liquidation of the collateral pool due to a failure of coverage tests, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults, as well as aversion to CBO, CLO or other CDO securities as a class. Interest on certain tranches of a CDO may be paid in kind or deferred and capitalized
(paid in the form of obligations of the same type rather than cash), which involves continued exposure to default risk with respect to such payments.
The risks of an
investment in a CDO can be significant and depend largely on the type of the collateral securities and the class of the instrument in which a Fund invests. Normally, CDOs are
privately offered and sold, and thus, are not registered under the securities laws.
As a result, investments in CDOs may be characterized by the Funds as illiquid securities; but, an active dealer market may exist for CDOs allowing them to qualify as Rule 144A (under the Securities Act of 1933, as amended (“1933 Act”)) transactions. In addition to the normal risks associated with fixed income securities and asset-backed securities discussed elsewhere in this SAI and the Funds’ Prospectus (e.g., interest rate risk and credit risk), CDOs carry additional risks including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default
or be downgraded if rated by a rating agency; (iii) the Funds may invest in tranches of CDOs that are subordinate to other classes; (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results; (v) the investment return achieved by a Fund could
be significantly different from return predicted by financial models and (vi) the lack of a readily available secondary market for CDOs.
Convertible Securities. Certain of the Funds may invest in convertible securities, including both convertible debt and convertible
preferred stock. A convertible security is a bond, debenture, note, preferred stock or other security that may be converted into or exchanged for a prescribed amount of common stock or other equity security of the same or a different issuer within a particular period of time at a specified price or formula. A convertible security generally entitles the holder to receive interest paid or accrued on debt or the dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged.
Before conversion, convertible securities have characteristics similar to nonconvertible fixed income securities in that they ordinarily provide a stream of income with generally higher yields than those of common stocks of the same or similar issuers, but lower
yields than comparable nonconvertible securities. The value of a convertible security is influenced by interest rate changes, with investment values declining as interest rates increase and increasing as interest rates decline. The credit standing of the issuer and other factors also may have an effect on the convertible security’s investment value. Convertible securities are subordinate in rank to any senior debt obligations of the same issuer and, therefore, an issuer’s convertible securities entail more risk than its debt obligations. To the extent a Fund invests in securities that may be considered “enhanced” convertible securities, some or all of these risks may be more pronounced.
Convertible securities have unique investment characteristics in that they generally (1)
have higher yields than common stocks, but lower yields than comparable nonconvertible securities, (2) are less subject to fluctuation in value than the underlying stock because they have fixed income characteristics and (3) provide the potential for capital appreciation if the market price of the underlying common stock increases. While no securities investment is without some risk, investments in convertible securities
9
generally entail less risk than the
issuer’s common stock. However, the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a
fixed income security.
If the convertible security’s “conversion value,”
which is the market value of the underlying common stock that would be obtained upon the conversion of the convertible security, is substantially below the “investment
value,” which is the value of a convertible security viewed without regard to its conversion feature (i.e., strictly on the basis of its yield), the price of the convertible
security is governed principally by its investment value.
If the conversion value of a convertible security increases to a point that approximates or exceeds its investment value, the value of the security will be principally influenced by its conversion value. A convertible security will sell at a premium over its conversion value to the extent investors place value on the right to acquire the underlying common stock while holding an
income-producing security.
A convertible security may be subject to redemption at the option of the issuer at a price established in the convertible security’s governing instrument. If a convertible security held by a Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert it into underlying common stock or sell it to a third party. Certain convertible debt securities may provide a put option to the holder, which entitles the holder to cause the security to be redeemed by the issuer at a premium over the stated principal amount of the debt security under certain circumstances.
Convertible securities are often rated below investment grade or not rated because they fall below debt obligations and just above
common equity in order of preference or priority on an issuer’s balance sheet. Investments by certain of the Funds in convertible debt securities are not subject to any ratings restrictions, although each Sub-Adviser will consider such ratings, and any changes in such ratings, in its determination of whether a Fund should invest and/or continue to hold the securities.
Contingent Convertible Securities. Contingent convertible securities (“CoCos”) have equity and debt characteristics. A CoCo is typically issued by a non-U.S. bank and, upon the occurrence of a specified trigger event, may be (i) convertible into equity securities of the issuer at a predetermined share price; or (ii) written down in liquidation value. Trigger events are identified in the document’s requirements. CoCos are designed to behave like bonds in times of economic health yet absorb losses when
the trigger event occurs.
With respect to CoCos that provide for conversion of the CoCo into common shares of the issuer in the
event of a trigger event, the conversion would deepen the subordination of the investor, subjecting a Fund to a greater risk of loss in the event of bankruptcy. In addition, because the common stock of the issuer may not pay a dividend, investors in such instruments could experience
reduced yields (or no yields at all). With respect to CoCos that provide for the write-down in liquidation value of the CoCo in the event of a trigger event, it is possible that the liquidation value of the CoCo may be adjusted downward to below the original
par value or written off entirely under certain circumstances. For instance, if losses have eroded the issuer’s capital levels below a specified threshold, the liquidation value of the CoCo may be reduced in whole or in part. The write-down of the CoCo’s par value may occur automatically and would not entitle holders to institute bankruptcy proceedings against the issuer. In addition, an automatic write-down could result in a reduced income rate if the dividend or interest payment associated with the CoCo
is based on par value. Coupon payments on CoCos may be discretionary and may be canceled by the issuer for any reason or may be subject to approval by the issuer’s regulator and may be suspended in the event there are insufficient distributable reserves.
CoCos are subject to the credit, interest rate, high yield securities, foreign securities and market
risks associated with bonds and equity securities, and to the risks specified to convertible securities in general. They are also subject to other specific risks. CoCos typically are structurally subordinated to traditional convertible bonds in the issuer’s capital structure, which increases the risk that a Fund may experience a loss. In certain scenarios, investors in CoCos may suffer a loss of capital ahead of equity holders or when equity holders do not. CoCos are generally speculative and the prices of CoCos may be volatile. There is no guarantee
that a Fund will receive return of principal on CoCos.
Credit and Liquidity Enhancements. Certain of the Funds may invest in securities that have credit or liquidity enhancements or may purchase these types of
enhancements in the secondary market. Such enhancements may be structured as demand features that permit a Fund to sell the instrument at designated times and prices. These credit
and liquidity enhancements may be backed by letters of credit or other instruments provided by banks or other financial institutions whose credit standing affects the credit quality of the underlying obligation. Changes in the credit quality of these financial institutions could cause losses to
10
a Fund and affect its share price. The credit
and liquidity enhancements may have conditions that limit the ability of a Fund to use them when the Fund wishes to do so.
Cybersecurity and Operational Risks. With the increased use of technologies such as the Internet to conduct business, each Fund is susceptible to operational, information security and related risks, including potential damage to computer systems (including shareholder computer systems). Operational risks include processing errors and human errors, inadequate or failed internal
or external processes, failures in systems and technology errors or malfunctions, changes in personnel, and errors caused by a Fund’s Adviser, Sub-Adviser(s), third-party service providers or counterparties. The Funds attempt to mitigate such risks; however, it is not possible to identify all of the risks that may affect a Fund.
In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber attacks include, but are not limited to, gaining unauthorized access to digital systems (e.g., through “hacking” or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data, or causing operational disruption. Cyber attacks may also be carried out in a manner that does not require gaining unauthorized access,
such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures or breaches by a Fund’s Adviser, Sub-Adviser(s) and other service providers (including, but not limited to, Fund accountants, custodians, transfer agents and
administrators), and the issuers of securities in which the Funds invest, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with a Fund’s ability to calculate its net asset value, impediments to trading, the inability of Fund shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. While the Funds have established business continuity plans in the event of, and risk management systems to prevent, such cyber attacks, there are inherent limitations in such plans and systems including
the possibility that certain risks have not been identified. There is also a risk that cyber attacks are not detected. Furthermore, the Funds cannot control the cyber security plans and systems put in place by service providers to the Funds and
issuers in which the Funds invest. In certain situations, the Funds, the Adviser, a Sub-Adviser, or a service provider may be required to comply with law enforcement in responding to a cyber security incident, which may prevent the Funds from fully implementing
their cyber security plans and systems, and (in certain situations) may result in additional information loss or damage. The Funds and their shareholders could be negatively impacted as a result.
Depositary Receipts. Certain of the Funds may invest in depositary receipts. Depositary receipts represent ownership interests in securities of
foreign companies (an “underlying issuer”) that have been deposited with a bank or trust and that trade on an exchange or over-the-counter. Depositary receipts are not
necessarily denominated in the same currency as the underlying securities. Depositary receipts include American Depositary Receipts (“ADRs”), Global Depositary Receipts
(“GDRs”) European Depositary Receipts (“EDRs”) and other types of depositary receipts (which, together with ADRs, GDRs and EDRs, are hereinafter collectively referred to as “Depositary Receipts”). ADRs are dollar-denominated Depositary Receipts typically issued by a U.S. financial institution which evidence ownership interests in a security or pool of securities issued by a foreign issuer. ADRs are listed and traded in the United States. GDRs and other types of Depositary Receipts are typically issued by foreign banks or trust
companies, although they also may be issued by U.S. financial institutions, and evidence ownership interests in a security or pool of securities issued by either a foreign or a U.S. corporation. EDRs, which are sometimes called Continental Depositary Receipts, are receipts issued in Europe, typically by foreign banks or trust companies, that evidence ownership of either foreign or domestic underlying securities. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the United States. Depositary Receipts
generally are subject to the same risks as the foreign securities that they evidence or into which they may be converted.
Depositary Receipts may be “sponsored” or “unsponsored.” Sponsored Depositary
Receipts are established jointly by a depositary and the underlying issuer, whereas unsponsored Depositary Receipts may be established by a depositary without participation by the underlying issuer. Holders of an unsponsored Depositary Receipt generally bear all the costs associated with establishing the unsponsored Depositary Receipt. In addition, the issuers of the securities underlying unsponsored Depositary Receipts are
not obligated to disclose information that is, in the U.S., considered material. Therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary
Receipts. Depositary Receipts may be less liquid or may trade at a lower price than the securities of the underlying issuer. For purposes of a Fund’s investment policies, the Fund’s investment in Depositary Receipts will be deemed to be investments in the underlying securities except as noted.
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Derivatives. A
Fund may use a variety of financial instruments that derive their value from the value of one or more underlying assets, reference rates or indices (“Derivative
Instruments”), including certain options, futures contracts and swap transactions. A Fund may enter into transactions involving one or more types of Derivative Instruments
under which the full value of its portfolio is at risk. Under normal circumstances, however, a Fund’s use of these instruments will place at risk a smaller portion of its
assets. Further information about these instruments and the risks involved in their use is contained under the description of each of these instruments below.
A Fund might not
use any Derivative Instruments or derivative strategies, and there can be no assurance that using any strategy will succeed. If a portfolio manager is incorrect in his or her
judgment on market values, interest rates or other economic factors in using a Derivative Instrument or strategy, a Fund may have lower net income and a net loss on the investment.
Losses on certain instruments are potentially unlimited.
There have been numerous recent legislative and regulatory initiatives to implement a new regulatory framework for the derivatives markets. On October 28, 2020, the SEC adopted Rule 18f-4 (the “Derivatives Rule” or “Rule 18f-4”) under the 1940 Act which, following a transition period, will replace existing SEC and staff guidance with an updated, comprehensive framework for registered funds’ use of derivatives. Among other changes, the Derivatives Rule will require a Fund to trade derivatives and certain other instruments that create future payment or delivery obligations subject to a value-at-risk (“VaR”) leverage limit, develop and implement a derivatives
risk management program and new testing requirements, and comply with new requirements related to
board and SEC reporting. These new requirements will apply unless a Fund qualifies as a “limited derivatives user,” as defined in the Derivatives Rule. In connection
with the final rule, the SEC and its staff will rescind and withdraw applicable guidance and relief regarding asset segregation and coverage transactions reflected in the
Funds’ asset segregation and cover practices discussed in this SAI. Under the final rule, when a Fund trades reverse repurchase agreements or similar financing transactions,
it needs to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior securities representing indebtedness (e.g., bank borrowings, if applicable) when
calculating the Fund’s asset coverage ratio or treat all such transactions as derivatives transactions. Reverse repurchase agreements or similar financing transactions aggregated with other indebtedness do not need to be included in the calculation of whether
a Fund satisfies the limited derivatives users exception, but for Funds subject to the VaR testing requirement, reverse repurchase agreements and similar financing transactions must be included for purposes of such testing whether treated as derivatives
transactions or not. Complying with the Derivatives Rule may increase the cost of a Fund’s investments and cost of doing business, which could adversely affect investors. The Funds intend to comply with Rule 18f-4 on or before the compliance date of August 19, 2022. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives and reverse repurchase agreements may be impacted.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted in 2010, initiated a dramatic revision of the U.S. financial regulatory framework and covers a broad range of topics, including (among many others) a
reorganization of federal financial regulators; a process intended to improve financial systemic stability and the resolution of potentially insolvent financial firms; rules for derivatives clearing and trading; the creation of a consumer financial protection watchdog; the registration and additional regulation of hedge and private equity fund managers; and federal requirements for
residential mortgage loans. Although many of the implementing regulations mandated by the Dodd-Frank Act have been finalized, various U.S. Government entities, including the Commodity Futures Trading Commission (“CFTC”) and the SEC, are in the process of adopting and implementing additional regulations governing derivatives markets required by, among other things, the
Dodd-Frank Act.
The
statutory provisions of the Dodd-Frank Act significantly changed in several respects the ways in which investment products are marketed, sold, settled (or “cleared”) or
terminated. In particular, the Dodd-Frank Act mandates the elimination of references to credit ratings in numerous securities laws, including the 1940 Act. Certain swaps have been
and other swaps may be mandated for central clearing under the Dodd-Frank Act, which likely will require technological and other changes to the operations of registered investment companies and the market in which they will trade. Central clearing also entails the use of assets of a registered investment company to satisfy margin calls and this may have an effect on the performance of such a fund. The regulators have
not yet issued final regulations implementing clearing mandates for all standardized swaps. The banking regulators and the CFTC have issued regulations requiring the posting of initial and variation margin for uncleared swaps, although some of the initial margin requirements are subject to phase-in periods through September 1, 2022. The CFTC adopted regulations so that the
minimum transfer amount for margin postings can be measured at the account level rather than the entity level, which may be useful if the Funds employ multiple account managers to trade their portfolios.
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The regulators that have been charged with the
responsibility for implementing the Dodd-Frank Act (i.e., the SEC, the CFTC and the banking regulators) have been active in proposing and adopting regulations and guidance on the
use of derivatives by registered investment companies. Regulations adopted by the banking regulators require certain banks to include in a range of financial contracts, including Derivatives Instruments trading agreements, terms delaying or restricting default, termination and other
rights in the event that the bank and/or its affiliates become subject to certain types of resolution or insolvency proceedings. The regulations could limit a Fund’s ability to exercise a range of cross-default rights if its counterparty, or an affiliate of the counterparty, is subject to bankruptcy or similar proceedings. Such regulations could further negatively impact a Fund’s use of Derivatives Instruments.
Pursuant to
rules adopted under the Commodity Exchange Act by the CFTC, the Funds must either operate within certain guidelines and restrictions with respect to the Funds’ use of
futures, options on such futures, commodity options and certain swaps, or the Adviser will be subject to registration with the CFTC as a “commodity pool operator”
(“CPO”). The Adviser claims an exclusion (under CFTC Regulation 4.5) from the definition of a CPO with respect to the Funds. To qualify for an exclusion under CFTC
Regulation 4.5, if a Fund uses commodity interests (such as futures contracts, options on futures contracts, and swaps) other than for bona fide hedging purposes (as defined by the CFTC), the aggregate initial margin and premiums required to establish
these positions, determined at the time the most recent position was established, may not exceed 5% of the Fund’s net asset value (“NAV”) (after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are “in-the-money” at the time of purchase are “in-the-money”) or, alternatively, the aggregate net notional value of those positions, determined at the time the most recent position was established, may not exceed 100% of the Fund’s NAV (after taking into account unrealized profits and unrealized losses on any such positions). In addition, to qualify for an exclusion, a Fund must satisfy a marketing test, which requires, among other things, that a Fund not hold itself out as a vehicle for trading commodity interests.
The Adviser
intends to comply with one of the two alternative trading limitations described above and the marketing limitation with respect to each Fund. Complying with the trading limitations
may restrict the Adviser’s ability to use Derivative Instruments as part of these Funds’ investment strategies. Although the Adviser expects to be able to execute each
of these Fund’s investment strategies within the limitations, a Fund’s performance could be adversely affected. In addition, rules under the Dodd-Frank Act may limit the availability of certain Derivative Instruments, may make the use of Derivative Instruments by the Funds more costly, and may otherwise adversely impact the performance and value of Derivative Instruments. The Adviser is registered with the
SEC as an investment adviser under the 1940 Act. The Adviser also is registered with the CFTC as a CPO under the Commodity Exchange Act, as amended. Being subject to dual regulation by the SEC and the CFTC may increase compliance costs and may
affect Fund returns.
Equity Securities. Certain of the Funds may invest in one or more types of equity securities. Equity securities include common stocks, most
preferred stocks and securities that are convertible into them, including common stock purchase warrants and rights, equity interests in trusts, partnerships, joint ventures or
similar enterprises and depositary receipts. Common stocks, the most familiar type, represent an equity (ownership) interest in a corporation.
Different types of equity securities provide different voting and dividend rights and priority in the
event of the bankruptcy and/or insolvency of the issuer. Preferred stock has certain fixed income features, like a bond, but actually is an equity security that is senior to a company’s common stock. Convertible bonds may include debentures and notes that may be converted into or
exchanged for a prescribed amount of common stock of the same or a different issuer within a particular period of time at a specified price or formula. Some preferred stocks also may be converted into or exchanged for common stock. Depositary receipts typically are issued by banks or trust companies and evidence ownership of underlying equity securities.
While past performance does not guarantee future results, equity securities historically have provided the greatest long-term growth potential of an investment in a company. However, stock markets are volatile, and the prices of equity securities generally fluctuate more than other securities and reflect changes in a company’s financial condition as well as general market, economic and political conditions and other factors. The value
of an equity security may also be affected by changes in financial markets that are relatively unrelated to the issuing company or its industry, such as changes in interest rates or currency exchange rates. Common stocks generally represent the riskiest investment in a company. Even investments in high quality or “blue chip” equity securities or securities of established companies with large market capitalizations (which generally have strong financial
characteristics) can be negatively impacted by poor economic conditions. It is possible that a Fund may experience a substantial or complete loss on an individual equity investment. While this is also possible with bonds, it is less likely.
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Eurodollar and Yankee Dollar
Obligations. Certain of the Funds may invest in Eurodollar and Yankee dollar obligations.
Eurodollar bank obligations are U.S. dollar-denominated certificates of deposit and time deposits issued outside the U.S. capital markets by foreign branches of U.S. banks and by foreign banks. Yankee dollar bank obligations are U.S. dollar-denominated obligations
issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee dollar obligations are subject to the same risks that pertain to domestic issues; notably credit risk, market risk and liquidity risk. Additionally, Eurodollar (and to a limited extent, Yankee dollar) obligations are subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of dollars, from flowing across its borders. Other risks include adverse political and economic developments; the extent and quality of government regulation
of financial markets and institutions; the imposition of foreign withholding taxes; and the expropriation or nationalization of foreign issuers.
Event-Linked
Bonds. Certain of the Funds may invest in event-linked bonds. Event-linked bonds are fixed income
securities, for which the return of principal and payment of interest is contingent on the non-occurrence of a specific “trigger” event, such as a hurricane, earthquake, or other physical or weather-related phenomenon. They may be issued by government agencies,
insurance companies, reinsurers, special purpose corporations or other on-shore or off-shore entities. If a trigger event causes losses exceeding a specific amount in the geographic region and time period specified in a bond, a Fund investing in the bond
may lose a portion or all of its principal invested in the bond. If no trigger event occurs, a Fund will recover its principal plus interest. For some event-linked bonds, the trigger event or losses may be based on company-wide losses, index fund losses, industry
indices, or readings of scientific instruments rather than specified actual losses. Often the event-linked bonds provide for extensions of maturity that are mandatory, or optional at the discretion of the issuer, in order to process and audit loss claims in those cases where a trigger event has, or possibly has, occurred. In addition to the specified trigger events, event-linked bonds may also expose a Fund to certain unanticipated risks, including issuer (credit) default, counterparty risk, adverse regulatory or jurisdictional interpretations, and adverse tax consequences.
Event-linked bonds are a relatively new type of financial instrument. As such, there is no significant trading history of these securities, and there can be no assurance that a liquid market in these instruments
will develop. See “Illiquid Securities or Non-Publicly Traded Securities” below. Lack of a liquid market may impose the risk of higher transaction costs and the possibility that a Fund may be forced to liquidate positions when it would not be advantageous to do so. Event-linked bonds are typically rated, and a Fund
will only invest in event-linked bonds that meet the credit quality requirements for the Fund.
Floaters and Inverse Floaters. Certain of the Funds may invest in floaters and inverse floaters, which are securities with a floating or variable rate of
interest, i.e., the rate of interest varies with changes in specified market rates or indices, such as the prime rate, or at specified intervals. The interest rate on a floater
resets periodically. Because of the interest rate reset feature, floaters provide a Fund with a certain degree of protection against rises in interest rates, but a Fund will
participate in any declines in interest rates as well. Certain floaters may carry a demand feature that permits the holder to tender them back to the issuer of the underlying
instrument, or to a third party, at par value prior to maturity. When the demand feature of certain floaters represents an obligation of a foreign entity, the demand feature will be subject to certain risks discussed under “Foreign Securities.”
In addition, certain of the Funds may invest in inverse floating rate obligations, which are securities
that have coupon rates that vary inversely at a multiple of a designated floating rate. See “LIBOR Rate Risk” below for more information on
the phasing out of the London Inter-Bank Offered Rate (“LIBOR”) and the transition to alternative
reference rates. Any rise in the reference rate of an inverse floater (as a consequence of an increase in interest rates) causes a drop in the coupon rate while any drop in the
reference rate of an inverse floater causes an increase in the coupon rate. Inverse floaters may exhibit substantially greater price volatility than fixed rate obligations having similar credit quality, redemption provisions and maturity, and inverse floater collateralized mortgage obligations (“CMOs”) exhibit greater price volatility than the majority of mortgage-related securities. In addition, some inverse floater CMOs exhibit extreme sensitivity to changes in prepayments. As a result, the yield to maturity of an inverse floater CMO is sensitive not only to changes in interest rates but also to changes in prepayment rates on the related underlying
mortgage assets.
Foreign Currency. Certain of the Funds may purchase securities denominated in foreign currencies, including the purchase of foreign currency
on a spot (or cash) basis. A change in the value of any such currency against the U.S. dollar will result in a change in the U.S. dollar value of a Fund’s assets and income.
In addition, although a portion of a Fund’s investment income may be received or realized in such currencies, the Fund will be required to compute and distribute its income
in U.S. dollars. Therefore,
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if the exchange rate for any such currency declines after a Fund’s income has been earned and computed in U.S. dollars but before conversion and payment, the Fund could be required to liquidate portfolio securities to make such distributions.
Although each Fund values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. A Fund will convert foreign currencies to U.S. dollars and vice versa from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion,
they do realize a profit based on the difference (“spread”) between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer.
Currency exchange rates may be affected unpredictably by intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities and by currency controls or political developments in the United States or abroad. Foreign currencies in which a Fund’s assets are denominated may be devalued against the U.S. dollar, resulting in a loss to the Fund. Currency positions are not considered to be an investment in a foreign government
for industry concentration purposes.
Certain Funds may also invest in the following types of foreign currency transactions:
Forward Foreign Currency Transactions. Certain of the Funds may engage in forward foreign currency exchange transactions. A forward foreign currency exchange
contract (“forward contract”) involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of
the contract agreed upon by the parties, at a price set at the time of the contract.
A Fund may enter into forward contracts for a variety of purposes in connection with the management of the foreign securities portion of its portfolio. A Fund’s use of such contracts will include, but not be limited to, the following situations.
First, when a Fund enters into a contract for the purchase or sale of a security denominated in or
exposed to a foreign currency, it may desire to “lock in” the U.S. dollar price of the security. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars, of the amount of foreign currency involved in the underlying security transaction, a Fund will be able to protect itself against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the subject foreign currency during the period between the date the security is purchased or sold and the date on which payment is made
or received.
Second,
when a Fund’s Sub-Adviser believes that one currency may experience a substantial movement against another currency, including the U.S. dollar, it may enter into a forward
contract to sell or buy the amount of the former foreign currency, approximating the value of some or all of the Fund’s portfolio securities denominated in or exposed to such
foreign currency. Alternatively, where appropriate, a Fund may hedge all or part of its foreign currency exposure through the use of a basket of currencies, multinational currency units, or a proxy currency where such currency or currencies act as an effective proxy for other currencies. In such a case, a Fund may enter into a forward contract where the amount of the foreign currency to be sold exceeds the value of the
securities denominated in or exposed to such currency. The use of this basket hedging technique may be more efficient and economical than entering into separate forward contracts for each currency held in a Fund.
The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible since the future value of such securities in foreign currencies will change as a consequence of market movements in the value of those securities between the date the forward contract is entered into and the date it matures. The projection of short-term currency market movement is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Under normal circumstances, consideration of the prospect for currency
parities will be incorporated into the diversification strategies. However, the Sub-Advisers to the Funds believe that it is important to have the flexibility to enter into such forward contracts when they determine that the best interests of the Funds will be served.
A Fund may enter into forward contracts for any other purpose consistent with the Fund’s investment objective and program. For example, a Fund may use foreign currency options and forward contracts to increase exposure to a foreign currency or shift
exposure to foreign currency fluctuations from one country to another. However, a Fund will not enter into a forward contract, or maintain exposure to any such contract(s), if the amount of foreign currency required to be delivered thereunder would exceed the Fund’s holdings of liquid securities and currency available for cover of the forward contract(s). In determining the amount to be delivered under a contract, a Fund may net offsetting positions.
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At the maturity of a forward contract, a Fund
may sell the portfolio security and make delivery of the foreign currency, or it may retain the security and either extend the maturity of the forward contract (by
“rolling” that contract forward) or may initiate a new forward contract. If a Fund retains the portfolio security and engages in an offsetting transaction, the Fund
will incur a gain or a loss (as described below) to the extent that there has been movement in forward contract prices. If a Fund engages in an offsetting transaction, it may subsequently enter into a new forward contract to sell the foreign currency.
Should forward prices decline during the period between a Fund’s entering into a forward contract for the sale of a foreign currency and the date it enters into an offsetting contract for the purchase of the foreign currency, the Fund will realize a gain to the extent the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to purchase. Should forward prices increase, a Fund will suffer a loss to the extent the price of the currency it has agreed to purchase exceeds the price of the currency it
has agreed to sell.
Forward
contracts in which a Fund may engage include foreign exchange forwards. The consummation of a foreign exchange forward requires the actual exchange of the principal amounts of the
two currencies in the contract (i.e., settlement on a physical basis). Because foreign exchange forwards are physically settled through an exchange of currencies, they are traded
in the interbank market directly between currency traders (usually large commercial banks) and their customers. A foreign exchange forward generally has no deposit requirement, and no commissions are charged at any stage for trades; foreign exchange dealers realize
a profit based on the difference (the spread) between the prices at which they are buying and the prices at which they are selling various currencies. When a Fund enters into a foreign exchange forward, it relies on the counterparty to make or take delivery
of the underlying currency at the maturity of the contract. Failure by the counterparty to do so would result in the loss of any expected benefit of the transaction. A Fund may be required to obtain the currency that it must deliver under the foreign exchange forward through the sale of portfolio securities denominated in such currency or through conversion of other assets of a Fund
into such currency. Although foreign exchange forwards settled on a physical basis are generally not classified as swaps, these transactions must be reported to a swap data repository under the Dodd-Frank Act. In addition, swap dealers must observe
business conduct standards under the Dodd-Frank Act for such transactions and all foreign exchange forward contracts are subject to the prohibitions on fraud and manipulation under the Dodd-Frank Act.
Forward contracts in which a Fund may engage also include non-deliverable forwards (“NDFs”). NDFs are cash-settled, short-term forward contracts on foreign currencies (each a “Reference Currency”) that are non-convertible and that may be thinly traded or illiquid. NDFs are classified as swaps and regulated as such under the Dodd-Frank Act. NDFs involve an obligation to pay an
amount (the “Settlement Amount”) equal to the difference between the prevailing market exchange rate for the Reference Currency and the agreed upon exchange rate (the “NDF Rate”), with respect to an agreed notional amount. NDFs have a fixing date and a settlement (delivery) date. The fixing date is the date and time at which the difference between the prevailing market exchange rate and the agreed upon exchange rate is calculated. The settlement (delivery) date is the date by which the payment of the
Settlement Amount is due to the party receiving payment.
Although NDFs are similar to foreign exchange forwards, NDFs do not require physical delivery of the Reference Currency on the settlement date. Rather, on the settlement date, the only transfer between the counterparties is the monetary settlement
amount representing the difference between the NDF Rate and the prevailing market exchange rate. NDFs typically may have terms from one month up to two years and are settled in U.S. dollars.
NDFs are subject to many of the risks associated with derivatives in general and forward currency transactions, including risks associated with fluctuations in foreign currency and the risk that the counterparty will fail to fulfill its obligations. Although NDFs historically have been traded over-the-counter, currently some NDFs are centrally cleared and are exchange-traded on swap
execution facilities and designated contract markets. With respect to NDFs that are centrally-cleared, while central clearing is intended to decrease counterparty risk, an investor could lose margin payments it has deposited with the clearing organization
as well as the net amount of gains not yet paid by the clearing organization if the clearing organization breaches its obligations under the NDF, becomes insolvent or goes into bankruptcy. In the event of bankruptcy of the clearing organization, the investor may be entitled to the net amount of gains the investor is entitled to receive plus the return of margin owed to it only in proportion to the amount received by the clearing organization’s other customers, potentially resulting in losses to the investor. Even if some NDFs remain traded OTC, they will be subject to margin requirements for uncleared swaps and counterparty risk common to
other swaps. For more information about the risks associated with utilizing swaps, please see “Swaps.”
Foreign Currency Options, Foreign Currency Futures Contracts and Options on
Futures. Certain of the Funds may also purchase and sell foreign currency futures contracts and may purchase and write exchange-traded call and put options on foreign
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currency futures contracts and on foreign
currencies to increase exposure to a foreign currency or to shift exposure to foreign currency fluctuations from one country to another. Those Funds may purchase or sell
exchange-traded foreign currency options, foreign currency futures contracts and related options on foreign currency futures contracts as a hedge against possible variations
in foreign exchange rates. The Funds will write options on foreign currency or on foreign currency futures contracts only if they are “covered,” except as described below. A put on a foreign currency or on a foreign currency futures contract written by a Fund will be considered “covered” if, so long as the Fund is obligated as the writer of the put, it segregates, either on the records of the Adviser, Sub-Adviser(s), or the Fund’s custodian, cash or other liquid securities equal at all times to the aggregate exercise price of the put. A call on a foreign currency or on a foreign currency futures contract written by a Fund will be considered “covered” only if the Fund segregates, either on the records of the Adviser, Sub-Adviser(s), or the Fund’s custodian, cash or other liquid securities
with a value equal to the face amount of the option contract and denominated in the currency upon which the call
is written. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives may be impacted. The Funds intend to comply with Rule 18f-4 on or before the
compliance date of August 19, 2022. For more information about these practices, see the “Derivatives” section.
Option transactions may be effected to hedge the currency risk on non-U.S. dollar-denominated securities
owned by a Fund, sold by a Fund but not yet delivered or anticipated to be purchased by a Fund. As an illustration, a Fund may use such techniques to hedge the stated value in U.S. dollars of an investment in a Japanese yen-denominated security. In these circumstances, a
Fund may purchase a foreign currency put option enabling it to sell a specified amount of yen for dollars at a specified price by a future date. To the extent the hedge is successful, a loss in the value of the dollar relative to the yen will tend to be offset by an increase in the value of the put option.
Over-the-Counter Options on Foreign Currency Transactions. Certain of the Funds may engage in OTC options on foreign currency transactions. A Fund may engage in these transactions to
protect against uncertainty in the level of future exchange rates in connection with the purchase and sale of portfolio securities (“transaction hedging”) and to
protect the value of specific portfolio positions (“position hedging”). Certain differences exist between foreign currency hedging instruments. Foreign currency options provide the holder the right to buy or to sell a currency at a fixed price on or before a future date. Listed options are third-party contracts (performance is guaranteed by an exchange or clearing corporation) which are issued by a clearing
corporation, traded on an exchange and have standardized prices and expiration dates. OTC options are two-party contracts and have negotiated prices and expiration dates. A futures contract on a foreign currency is an agreement between two parties
to buy and sell a specified amount of the currency for a set price on a future date. Futures contracts and listed options on futures contracts are traded on boards of trade or futures exchanges. Options traded in the OTC market may not be as actively traded
as those on an exchange, so it may be more difficult to value such options. In addition, it may be difficult to enter into closing transactions with respect to options traded over the counter.
Hedging transactions involve costs and may result in losses. Certain of the Funds may also write covered call options on foreign currencies to offset some of the costs of hedging those currencies. A Fund will engage in OTC options transactions on foreign
currencies only when appropriate exchange traded transactions are unavailable and when, in the Sub-Adviser’s opinion, the pricing mechanism and liquidity are satisfactory and the participants are responsible parties likely to meet their contractual
obligations. A Fund’s ability to engage in hedging and related option transactions may be limited by federal income tax considerations (see the section of this SAI entitled “Taxation”).
Transactions and position hedging do not eliminate fluctuations in the underlying prices of the securities which the Funds own or intend to purchase or sell. They simply establish a rate of exchange which one can achieve at some future point in time.
Additionally, although these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, they tend to limit any potential gain which might result from the increase in the value of such currency.
A Fund will not hedge a currency substantially in excess of the market value of the securities denominated in that currency which it owns or the expected acquisition price of securities which it anticipates purchasing. OTC options on foreign currency also are considered to be swaps. However, options on foreign currency traded on a national securities exchange are not classified as swaps and are regulated by the SEC. For information concerning the risks associated with swaps please see “Swaps.”
Foreign
Securities. Certain of the Funds may invest in foreign securities or engage in certain types of
transactions related to foreign securities, such as Depositary Receipts, Eurodollar and Yankee dollar obligations and foreign currency transactions, including forward foreign currency transactions, foreign currency options and foreign currency futures contracts and options on futures.
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Further information about these instruments and
the risks involved in their use are contained under the description of each of these instruments in this SAI.
Foreign investments involve certain risks that are not present in domestic securities. For example,
foreign securities may be subject to currency risks or to foreign income or other withholding taxes that reduce their attractiveness. There may be less information publicly available about a foreign issuer than about a U.S. issuer, and a foreign issuer is not generally subject to uniform accounting, auditing and financial reporting standards and practices comparable to those in the United States. In addition, the governments of certain countries may prohibit or impose substantial restrictions on foreign investing in their capital markets or in certain industries. Other risks of investing in such securities include political or economic instability in the country involved, the difficulty of predicting international trade patterns and the possibility of imposition of exchange controls or limitations on the removal of funds or assets.
The prices of such securities may be more volatile than those of domestic securities. With respect to certain foreign countries, there is a possibility of expropriation of assets or nationalization, imposition of withholding taxes on dividend or interest payments, difficulty in obtaining and enforcing judgments against foreign entities or diplomatic developments which could affect investment in these countries. Legal remedies available to investors in certain foreign countries may be less extensive than those available to investors in the United States or other foreign countries.
Losses and other expenses may be incurred in converting between various currencies in connection with purchases and sales of foreign securities. Generally, when the U.S. dollar rises in value against a foreign
currency, a security denominated in that currency loses value because the currency is worth fewer U.S. dollars. Conversely, when the U.S. dollar decreases in value against a foreign currency, a security denominated in that currency gains value because the currency is worth more U.S. dollars. This risk, generally known as “currency risk,” means that a stronger U.S. dollar will reduce returns for U.S. investors while a weak U.S. dollar will increase those returns.
Foreign stock markets
are generally not as developed or efficient as, and may be more volatile than, those in the United States. While growing in volume, they usually have substantially less volume than
U.S. markets and a Fund’s investment securities may be less liquid and subject to more rapid and erratic price movements than securities of comparable U.S. companies. Equity
securities may trade at price/earnings multiples higher than comparable U.S. securities and such levels may not be sustainable. There is generally less government supervision and regulation of foreign stock exchanges, brokers, banks and listed companies abroad
than in the United States. Moreover, settlement practices for transactions in foreign markets may differ from those in U.S. markets. Such differences may include delays beyond periods customary in the United States and practices, such as delivery of securities prior to receipt of payment, which increase the likelihood of a “failed settlement,” which can result in losses to a Fund.
The economies of certain foreign markets often do not compare favorably with that of the U.S. with
respect to such issues as growth of gross national product, reinvestment of capital, resources, and balance of payments position. Certain such economies may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers, and other protectionist or retaliatory measures.
The value of foreign investments and the investment income derived from them may also be affected unfavorably by changes in currency exchange control regulations. Although the Funds will invest only in securities denominated in foreign currencies
that are fully exchangeable into U.S. dollars without legal restriction at the time of investment, there can be no assurance that currency controls will not be imposed subsequently. In addition, the value of foreign fixed income investments may fluctuate
in response to changes in U.S. and foreign interest rates.
A Fund that invests in foreign securities is subject to the risk that its share price may be exposed to arbitrage attempts by investors seeking to capitalize on differences in the values of foreign securities trading on foreign exchanges that may close before the time the Fund’s net asset value is determined. If such arbitrage attempts are successful, a Fund’s net asset value might be diluted. A Fund’s use of fair value pricing in certain circumstances (by adjusting the closing market prices of foreign securities to reflect what the Board believes to be their fair value) may help deter such arbitrage activities. The effect of such fair value pricing is that foreign securities may not be priced on the basis of quotations from
the primary foreign securities market in which they are traded, but rather may be priced by another method that the Board believes reflects fair value. As such, fair value pricing is based on subjective judgment and it is possible that fair value may differ materially from the value realized on a sale of a foreign security. It is also possible that use of fair value pricing will limit an investment adviser’s ability to implement a Fund’s investment strategy (e.g., reducing the volatility of a Fund’s share price) or achieve its investment objective.
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Foreign brokerage commissions, custodial
expenses and other fees are also generally higher than for securities traded in the United States. Consequently, the overall expense ratios of international or global funds are
usually somewhat higher than those of typical domestic stock funds.
Moreover, investments in foreign government debt securities, particularly those of emerging market country governments, involve special risks. Certain emerging market countries have historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate fluctuations, large amounts of external debt, balance of payments and trade difficulties and extreme poverty and unemployment. See “Emerging Market Securities” below for additional risks.
Fluctuations in exchange rates may also affect the earning power and asset value of the foreign entity issuing a security, even one denominated in U.S. dollars. Dividend and interest payments will be repatriated based on the exchange rate at the time of
disbursement, and restrictions on capital flows may be imposed.
In less liquid and less well developed stock markets, such as those in some Eastern European, Southeast Asian, and Latin American countries, volatility may be heightened by actions of a few major investors. For example, substantial increases or decreases in cash flows of mutual funds investing in these markets could significantly affect stock prices and, therefore, share prices. Additionally, investments in emerging market regions or the following geographic regions are subject to more specific risks, as discussed below.
The transmission of COVID-19 and efforts to contain its spread have resulted in significant disruptions
to business operations, supply chains and customer activity, widespread business closures and layoffs, international, national and local border closings, extended quarantines and stay-at-home orders, event cancellations, service cancellations, reductions and other changes, significant challenges in healthcare service preparation and delivery, as well as general concern and uncertainty that has negatively affected the global economy. These circumstances are evolving, and further developments could result in additional disruptions and
uncertainty. These impacts also have caused significant volatility and declines in global financial markets, which have caused losses for investors. The impact of the COVID-19 pandemic may last for an extended period of time and could result in a substantial economic downturn or recession. Health crises caused by pandemics, such as the COVID-19 outbreak, may exacerbate other
pre-existing political, social, economic, and financial risks. The impact of the coronavirus outbreak, and other epidemics and pandemics that may arise in the future, could result in a general decline in the global economy, and negatively affect the
performance of individual countries, industries, or sectors in significant and unforeseen ways. Although promising vaccines have been released and many global economies have begun to re-open, some countries, including countries with limited access to
vaccines, have struggled to control the spread of the virus and re-open their economies. The prevalence of new COVID-19 variants, a failure to achieve herd immunity, or other unforeseen circumstances may result in the continued spread of the virus throughout unvaccinated populations or a resurgence in infections among vaccinated individuals.
Emerging Market Securities. Certain of the Funds may invest in emerging market securities. Investments in emerging market country securities involve
special risks. The economies, markets and political structures of a number of the emerging market countries in which the Funds can invest do not compare favorably with the United
States and other mature economies in terms of wealth and stability. Therefore, investments in these countries may be riskier. Some economies are less well developed and less
diverse (for example, Latin America, Eastern Europe and certain Asian countries), and more vulnerable to the ebb and flow of international trade, trade barriers and other protectionist or retaliatory measures. Similarly, many of these countries are grappling with severe inflation or recession, high levels of national debt, fluctuations in currency exchange rates and government instability. Investments in countries that have begun moving away from central planning and state-owned industries toward free markets, such as the
Eastern European, Russian or Chinese economies, should be regarded as speculative.
Certain emerging market countries may experience (i) less developed securities markets with low or non-existent trading volume, resulting in a lack of liquidity and increased volatility in prices for emerging market securities; (ii) less organized settlement systems for trading securities, resulting in delayed settlements of trades and reduced liquidity for emerging market securities; (iii) uncertain national policies, increasing the potential for expropriation of assets, confiscatory taxation, high rates of inflation or unfavorable diplomatic developments; (iv) possible fluctuations in exchange rates, differing legal systems and the existence or possible imposition of exchange controls, custodial restrictions
or other foreign or U.S. governmental laws or restrictions applicable to such investments; (v) national policies that may limit a Fund’s investment opportunities such as restrictions on investment in issuers or industries deemed sensitive to national interests; and (vi) the lack or relatively early development of legal structures governing private and foreign investments and private property. In addition to withholding taxes on investment income, some countries with emerging
markets may impose differential capital gains taxes on foreign investors.
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Political and economic structures in emerging
market countries may be undergoing significant evolution and rapid development, and these countries may lack the social, political and economic stability characteristics of more
developed countries. In such a dynamic environment, there can be no assurance that any or all of these capital markets will continue to present viable investment opportunities for a Fund. In the past, governments of such nations have expropriated substantial amounts of private property,
and most claims of the property owners have never been fully settled. In such an event, it is possible that a Fund could lose the entire value of its investments in the affected market. As a result, the risks described above, including the risks of nationalization or expropriation of assets, may be heightened.
The issuer or governmental authority that controls the repayment of an emerging market country’s debt may not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A debtor’s willingness or ability to repay principal and interest due in a timely manner may be affected by, among other factors, its cash flow situation, and, in the case of a government debtor, the extent of its foreign reserves, the availability of sufficient
foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole and the political constraints to which
a government debtor may be subject. Government debtors may default on their debt and may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearages
on their debt. Holders of government debt may be requested to participate in the rescheduling of such debt and to extend further loans to government debtors.
If such
an event occurs, a Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself,
and the ability of the holder of foreign government fixed income securities to obtain recourse may be subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not contest payments to the holders of other foreign government debt obligations in the event of default under their commercial bank loan agreements.
The economies of individual emerging market countries may differ favorably or unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments position. Further, the economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been, and may continue to be, adversely affected by trade barriers, exchange controls, managed
adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. These economies also have been, and may continue to be, adversely affected by economic conditions in the countries
with which they trade. Many of these countries are also sensitive to world commodity prices. Emerging market economies may develop unevenly or may never fully develop.
The assessment of investment opportunities in certain emerging market securities markets may be more difficult in light of limitations on available information and different accounting, auditing and financial reporting standards. Investing in emerging market countries may entail purchasing securities issued by or on behalf of entities that are insolvent, bankrupt, in default or otherwise engaged in an attempt to reorganize or reschedule their obligations, and in entities that have little or no proven credit rating or credit history. In any such case, the issuer’s poor or deteriorating financial condition may increase
the likelihood that the investing Fund will experience losses or diminution in available gains due to bankruptcy, insolvency or fraud.
Eastern European and Russian Securities. Investing in the securities of Eastern European and Russian issuers is highly speculative and involves risks not usually
associated with investing in the more developed markets of Western Europe. Political and economic reforms are too recent to establish a definite trend away from centrally planned
economies and state-owned industries. Investments in Eastern European countries may involve risks of nationalization, expropriation, and confiscatory taxation. Many Eastern
European countries continue to move towards market economies at different paces with appropriately different characteristics. Most Eastern European markets suffer from thin trading activity, dubious investor protections, and often a dearth of reliable corporate information. Information and transaction costs, differential taxes, and sometimes political or transfer risk give a comparative advantage to the domestic investor rather than the foreign investor. In addition, these markets are particularly sensitive to social, political, economic, and currency events in Western Europe and Russia and may suffer heavy losses as a result of their trading and investment links
to these economies and currencies.
Additionally, Russia has attempted to assert its influence in the region through economic and even military measures. Russia launched a large-scale invasion of Ukraine on February 24, 2022. The extent and duration of the military action, resulting sanctions and resulting future market disruptions, including declines in its stock markets and the value of the ruble against the U.S. dollar, are impossible to predict, but could be significant. These events may result in significant adverse effects on regional and global
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economic markets for securities and commodities,
including adverse effects on global markets’ performance and liquidity, thereby negatively affecting the value of a Fund’s investments beyond any direct exposure to
Russian issuers. Disruptions caused by Russian military action or other actions (including cyberattacks and espionage) or resulting actual and threatened responses to such activity, including purchasing and financing restrictions, boycotts or changes in consumer or purchaser preferences, sanctions, tariffs or cyberattacks on the Russian government, Russian companies or Russian individuals, including politicians, may impact
Russia’s economy and Russian issuers of securities in which the Funds invest. Actual and threatened responses to such military action may also impact the markets for certain Russian commodities, such as oil and natural gas, as well as other sectors of the Russian economy, and may likely have collateral impacts on such sectors globally.
Governments in the United States and many other countries have imposed economic sanctions, which consist of prohibiting certain securities trades, certain private transactions in the energy sector, asset freezes, bans on Russian airlines and ships from using other countries’ airspace and ports, and prohibition of all business against certain Russian individuals, including politicians, and Russian corporate and banking entities. Additionally, the European
Union and certain other countries have committed to
remove selected Russian banks from the Society for Worldwide Interbank Financial Telecommunications (“SWIFT”), the electronic banking network that connects banks globally, and imposed restrictive measures to prevent the Russian Central Bank from
undermining the impact of the sanctions. A number of large corporations and U.S. states have announced plans to divest interests or otherwise curtain business dealings with certain Russian businesses. The United States has banned oil and other energy imports from Russia, and the United Kingdom made a commitment to phase out oil imports from Russia by the end of 2022. These sanctions, and the imposition or threat of further sanctions, may result in the further decline of the value and liquidity of Russian securities, a weakening of the ruble, downgrades in Russia’s credit rating, or other adverse consequences to the Russian economy. These sanctions could also result in the immediate freeze of Russian securities, commodities, resources and/or funds invested in prohibited assets, impairing the ability of
the Funds to buy, sell, receive or deliver those securities and/or assets. Sanctions could also result in Russia taking counter measures or retaliatory actions which may further impair the value and liquidity of Russian securities, including cyber actions. As a result, a Fund’s performance may be adversely affected.
In some of the countries of Eastern Europe, there is no stock exchange or formal market for securities. Some Eastern European countries may have government exchange controls, currencies with no recognizable market value relative to the established
currencies of Western market economies, little or no experience in trading in securities, no accounting or financial reporting standards, a lack of banking and securities infrastructure to handle such trading and a legal tradition that does not recognize rights in private property. Credit and debt issues and other economic difficulties affecting Western Europe and its financial institutions can negatively affect Eastern European countries.
Eastern European economies may also be particularly susceptible to the international credit market due to their reliance on bank related inflows of foreign capital, and especially their continued dependence on the Western European zone for credit and trade, which may have a negative effect on a Fund’s investments in the region. Over the past century,
Russia has experienced political, social and economic turbulence and has endured decades of communist rule under which tens of millions of its citizens were
collectivized into state agricultural and industrial enterprises. Since the collapse of the Soviet Union, Russia’s government has been faced with the task of stabilizing its domestic economy, while transforming it into a modern and efficient structure able to compete in international markets and respond to the needs of its citizens. To date, many of the country’s economic reform initiatives have been unsuccessful. In this environment, there is a risk that the government will abandon the current program of economic
reform and replace it with different political and economic policies that would be detrimental to the interests of foreign investors. This could entail a return to a centrally planned economy and nationalization of private enterprises similar to what existed under the Soviet Union.
Compared to most
national stock markets, the Russian securities market suffers from a variety of problems not encountered in more developed markets. There is little long-term historical data on the
Russian securities market because it is relatively new and a substantial proportion of securities transactions in Russia are privately negotiated outside of stock exchanges. The
inexperience of the Russian securities market and the limited volume of trading in securities in the market may make obtaining accurate prices on portfolio securities from independent sources more difficult than in more developed markets. Additionally, there is little solid corporate information available to investors. As a result, it may be difficult to assess the value or prospects of an investment in Russian companies. Poor accounting standards, inept management, pervasive corruption, insider trading and crime, and inadequate regulatory protection for the rights of investors all pose additional risk, particularly to foreign investors.
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Because of the relatively recent formation of
the Russian securities market as well as the underdeveloped state of the banking and telecommunications systems, settlement, clearing and registration of securities transactions
are subject to significant risks not normally associated with securities transactions in the United States and other more developed markets. Prior to 2013, there was no central registration system for equity share registration in Russia and registration was carried out by either the issuers themselves or by registrars located throughout Russia. Such registrars were not necessarily subject to effective state supervision nor were they licensed with any governmental entity, thereby increasing the risk that a Fund could lose ownership of its securities through fraud, negligence, or even mere oversight. With the implementation of the National Settlement Depository (“NSD”) in Russia as a recognized central securities depository, title to Russian equities is now based on the records of the NSD and not the
registrars. Although the implementation of the NSD is generally expected to decrease the risk of loss in connection with recording and transferring title to securities, issues resulting in loss still might occur. Russian securities laws may not recognize foreign nominee accounts held with a custodian bank, and therefore the custodian may be considered the ultimate owner of securities they hold
for their clients. In addition, issuers and registrars are still prominent in the validation and approval of documentation requirements for corporate action processing in Russia. Because the documentation requirements and approval criteria vary between registrars and/or issuers, there remain unclear and inconsistent market standards in the Russian market with respect to the completion
and submission of corporate action elections. Furthermore, significant delays or problems may occur in registering the transfer of securities, which could cause a Fund to incur losses due to a counterparty’s failure to pay for securities a Fund has delivered or a Fund’s inability to complete its contractual obligations because of theft or other reasons. To the extent that a Fund suffers a loss relating to title or corporate actions relating to its portfolio securities, it may be difficult for the Fund to enforce its rights or otherwise remedy the loss. In addition, there is the risk that the Russian tax system will not be reformed to prevent inconsistent, retroactive, and/or exorbitant taxation, or, in the alternative, the risk that a reformed tax system may result in the inconsistent and unpredictable
enforcement of the new tax laws.
The Russian economy is heavily dependent upon the export of a range of commodities including most industrial metals, forestry products, oil, and gas. Accordingly, it is strongly affected by international commodity prices and is particularly vulnerable to any weakening in global demand for these products. Decreases in the prices of commodities, which have in the past pushed the whole
economy into recession, have demonstrated the sensitivity of the Russian economy to such price volatility. Russia continues to face significant economic challenges, including weak levels of investment and a sluggish recovery in external demand, that had
been exacerbated following the 2008 global financial crisis. Over the long-term, Russia faces challenges including a shrinking workforce, a high level of corruption, and difficulty in accessing capital for smaller, non-energy companies and poor infrastructure in need of large investments.
Foreign investors also face a high degree of currency risk when investing in Russian securities and a
lack of available currency hedging instruments. In the past, the Russian ruble has been subject to significant devaluation pressure as a result of the imposition of sanctions by the United States and the European Union and the decline in commodity prices and the value of Russian exports.
Although the Russian Central Bank has spent a significant amount of its foreign exchange reserves in an attempt to maintain the ruble’s value, significant devaluation has occurred as a result of actions taken in response to the invasion of Ukraine and there is a risk of significant further devaluation. In addition, there is the risk that the Russian government may impose capital controls on foreign portfolio investments in the event of extreme financial or political crisis. Such capital controls may prevent the sale of a portfolio of foreign assets and the repatriation of investment income and capital. These risks may cause flight from the ruble into U.S. dollars and other currencies.
European Securities. The EU’s Economic
and Monetary Union (“EMU”), which is comprised of EU members that have adopted the euro
currency, requires eurozone countries to comply with restrictions on interest rates, deficits, debt levels, and inflation rates, fiscal and monetary controls, and other factors,
each of which may significantly impact every European country and their economic partners. Decreasing imports or exports, changes in governmental or other regulations on trade,
changes in the exchange rate of the euro (the common currency of the EU), the threat of default or actual default by one or more EU member countries on its sovereign debt, and/or an economic recession in one or more EU member countries may have a significant adverse effect
on the economies of other EU member countries and their trading partners.
The European financial markets have experienced volatility and adverse trends due to concerns relating to economic downturns, rising government debt levels and national unemployment and the possible default of government debt in several European
countries. In order to prevent further economic deterioration, certain countries, without prior warning, can institute “capital controls.” Countries may use these controls to restrict volatile movements of capital entering and exiting their country. Such controls may negatively affect a Fund’s investments. A default or debt restructuring by any European country would adversely impact holders
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of that country’s debt and sellers of
credit default swaps linked to that country’s creditworthiness, which may be located in other countries and can affect exposures to other EU countries and their financial
companies as well. In addition, the credit ratings of certain European countries were downgraded in the past. These events have adversely affected the value and exchange rate
of the euro and may continue to significantly affect the economies of every country in Europe, including countries that do not use the euro and non-EU member states. Responses to the financial problems by European governments, central banks and
others, including austerity measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments
and other entities of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro and/or withdraw from the EU. The impact of these actions,
especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching and could adversely impact the value of a Fund’s investments in the region.
On January 31, 2020, the United Kingdom (“UK”) officially withdrew from the EU, commonly referred to as “Brexit.” Following a transition period, the UK’s post-Brexit trade agreement with the EU went into effect on January 1, 2021, and principally relates to the trading of goods rather than services, including financial services. Further discussions are to be held between the U.K. and the EU in relation to matters not covered by the trade agreement, such as financial services. The full impact of Brexit and the
nature of the future relationship between the UK and the EU remains uncertain. Brexit may create additional and substantial economic stresses for the UK, including a contraction of the UK economy, price volatility in UK stocks, decreased trade, capital outflows, devaluation of the British pound, wider corporate bond spreads due to uncertainty, and declines in business and consumer spending as well as foreign direct investment. Brexit has also led to legal uncertainty and could lead to politically divergent national laws and regulations as a new relationship between the U.K. and EU is defined and the U.K. determines which EU laws to replace
or replicate. Until the economic effects of Brexit become clearer, and while a period of political, regulatory and commercial uncertainty continues, there remains a risk that Brexit may negatively impact a Fund’s investments and cause it to lose money. In the short term, financial markets may experience heightened volatility, particularly those in the U.K. and Europe, but possibly worldwide. In the longer term, there is likely to be a period of significant political, regulatory and commercial uncertainty as the U.K. continues to negotiate the terms of its future trading relationships.
Secessionist movements, such as the Catalan movement in Spain and the independence movement in Scotland, as well as government or other responses to such movements, may also create instability and uncertainty
in the region. In addition, the
national politics of countries in the EU have been unpredictable and subject to influence by disruptive political groups and ideologies. The governments of EU countries may be subject to change and such countries may experience social and political unrest.
Unanticipated or sudden political or social developments may result in sudden and significant investment losses. The occurrence of terrorist incidents throughout Europe also could impact financial markets. The impact of these events is not clear but could be significant and far-reaching and could adversely affect the value and liquidity of a Fund’s investments.
Russia launched a large-scale invasion of Ukraine on February 24, 2022. The extent and duration of the
military action, resulting sanctions and resulting future market disruptions including declines in its stock markets and the value of the ruble against the U.S. dollar, in the region are impossible to predict, but could be significant. Disruptions caused by Russian military action or other actions (including cyberattacks and espionage) or resulting actual and threatened responses to such activity, including purchasing and financing restrictions, boycotts or changes in consumer or purchaser preferences, sanctions, tariffs or cyberattacks on Russian entities or individuals, including politicians, could have a severe adverse effect on the region, including significant negative impacts on the economy and the markets for certain securities and commodities, such as oil and natural gas, as well as other sectors.
How long such military action and related events will last cannot be predicted. These events may result in significant adverse effects on regional and global economic markets for securities and commodities, including adverse effects on global markets’ performance and liquidity, thereby negatively affecting the value of a Fund’s investments beyond any direct exposure to
Russian issuers.
Latin
America
Inflation — Most Latin American countries have experienced, at one time or another, severe and persistent levels of inflation,
including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a generally debilitating
effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels.
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Political Instability — Certain Latin American countries have historically suffered from social, political, and economic instability, and
volatility, currency devaluations, government defaults and high unemployment rates. For investors, this has meant additional risk caused by periods of regional conflict, political
corruption, totalitarianism, protectionist measures, nationalization, hyperinflation, debt crises, sudden and large currency devaluation, and intervention by the military in
civilian and economic spheres. However, in some Latin American countries, a move to sustainable democracy and a more mature and accountable political environment is under way. Domestic economies have been deregulated, privatization of state-owned
companies is almost completed and foreign trade restrictions have been relaxed.
Nonetheless, there can be no guarantee that such trends will continue or that the desired outcomes of these developments will be successful. In addition, to the extent that events such as those listed above continue in the future, they could reverse favorable trends toward market and economic reform, privatization, and removal of trade barriers, and result in significant
disruption in securities markets in the region. Investors in the region continue to face a number of potential risks. Governments of many Latin American countries have exercised and continue to exercise substantial influence over many aspects of the
private sector. Governmental actions in the future could have a significant effect on economic conditions in Latin American countries, which could affect the companies in which a Fund invests and, therefore, the value of Fund shares.
Additionally, an investment in Latin America is subject to certain risks stemming
from political and economic corruption, which may affect negatively the country or the reputation of companies domiciled in a certain country. For certain countries in Latin America, political risks have created significant uncertainty in financial markets and may further limit the economic
recovery in the region. For example, in Mexico, the long-term implications of the United States-Mexico-Canada Agreement, the 2020 successor to NAFTA, are yet to be determined. This uncertainty may have an adverse impact on Mexico’s economic
outlook and the value of a Fund’s investments in Mexico. Additionally, recent political and social unrest in Venezuela has resulted in a massive disruption in the Venezuelan economy, including a deep recession and hyperinflation.
Dependence on Exports and Economic Risk — Certain Latin American countries depend heavily on exports to the U.S., investments from a small number of countries, and
trading relationships with key trading partners including the U.S., Europe, Asia and other Latin American countries. Accordingly, these countries may be sensitive to fluctuations
in demand, protectionist trade policies, exchange rates and changes in market conditions associated with those countries. The economic growth of most Latin American countries is highly dependent on commodity exports and the economies of certain Latin American
countries, particularly Mexico and Venezuela, are highly dependent on oil exports. As a result, these economies are particularly susceptible to fluctuations in the price of oil and
other commodities and currency fluctuations. The prices of oil and other commodities experienced volatility driven, in part, by a continued slowdown of growth in China and the
effects of the COVID-19 pandemic. If growth in China remains slow, or if global economic conditions worsen, prices for Latin American commodities may experience increased volatility and demand may continue to decrease. Although certain of these
countries have recently shown signs of recovery, such recovery, if sustained, may be gradual. In addition, prolonged economic difficulties may have negative effects on the
transition to a more stable democracy in some Latin American countries.
Sovereign
Debt — Latin American economies generally are heavily dependent upon foreign credit and loans, and may be more vulnerable to
diplomatic developments, the imposition of economic sanctions against a particular country or countries, changes in international trading patterns, trade barriers, and other
protectionist or retaliatory measures. In addition to risk of default, debt repayment may be restructured or rescheduled, which may impair economic activity. Moreover, the debt may be susceptible to high interest rates and may reach levels that would adversely affect Latin American economies.
In addition, certain Latin American economies have been influenced by changing supply and demand for a particular currency, monetary policies of governments (including exchange control programs, restrictions on local exchanges or markets and
limitations on foreign investment in a country or on investment by residents of a country in other countries), and currency devaluations and revaluations. A relatively small number of Latin American companies represents a large portion of Latin
America’s total market and thus may be more sensitive to adverse political or economic circumstances and market movements. A number of Latin American countries are among the largest debtors of developing countries and have a history of reliance on
foreign debt and default. The majority of the region’s economies have become dependent upon foreign credit and loans from external sources to fund government economic plans.
Historically, these plans have frequently resulted in little benefit accruing to the economy. Most countries have been forced to restructure their loans or risk default on their
debt obligations. In addition, interest on the debt is subject to market conditions and may reach levels that would impair economic activity and create a difficult and costly environment for borrowers. Accordingly, these governments may be forced to reschedule
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or freeze their debt
repayment, which could negatively affect local markets. While the region has recently had mixed levels of economic growth, recovery from past economic downturns in Latin America
has historically been slow, and such growth, if sustained, may be gradual. The ongoing effects of the European debt crisis, the effects of the COVID-19 pandemic, and persistent low growth in the global economy may reduce demand for exports from Latin America and limit the availability of
foreign credit for some countries in the region. Planned increases in interest rates may also negatively affect the ongoing recovery and increase the region’s debt-servicing
costs. As a result, a Fund’s investments in Latin American securities could be harmed if economic recovery in the region is limited.
Pacific Basin
Region. Many Asian countries may be subject to a greater degree of social, political and economic
instability than is the case in the U.S. and Western European countries. Such instability may result from, among other things, (i) authoritarian governments or military involvement in political and economic decision-making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; and (v) ethnic, religious and racial disaffection. In addition, the Asia Pacific geographic region has historically been prone to natural disasters. The occurrence of a natural disaster in the region, including the subsequent recovery, could negatively impact the economy of any country in the region. The existence
of overburdened infrastructure and obsolete financial systems also presents risks in certain Asian countries, as do environmental problems.
The economies of most of
the Asian countries are heavily dependent on international trade and are accordingly affected by protective trade barriers and the economic conditions of their trading partners,
principally, the U.S., Japan, China and the EU. The enactment by the U.S. or other principal trading partners of protectionist trade legislation, reduction of foreign investment
in the local economies and general declines in the international securities markets could have a significant adverse effect upon the securities markets of the Asian countries. The economies of certain Asian countries may depend to a significant degree upon only a few industries and/or exports of primary commodities and, therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of factors. In addition, certain developing Asian countries, such as the Philippines and India, are especially large debtors to commercial banks and foreign governments. Many of the Pacific Basin economies may be intertwined, so an economic downturn in one country may result in, or be accompanied by, an economic downturn in other countries in the
region. Furthermore, many of the Pacific Basin economies are characterized by high inflation, underdeveloped financial services sectors, heavy reliance on international trade, frequent currency fluctuations, devaluations, or restrictions, political and social instability, and less efficient markets.
The securities markets in Asia are substantially smaller, less liquid and more volatile than the major securities markets in the U.S., and some of the stock exchanges in the region are in the early stages of development, as compared to the stock exchanges in
the U.S. Equity securities of many companies in the region may be less liquid and more volatile than equity securities of U.S. companies of comparable size. Additionally, many companies traded on stock exchanges in the region are smaller and less
seasoned than companies whose securities are traded on stock exchanges in the U.S. A high proportion of the shares of many issuers may be held by a limited number of persons and financial institutions, which may limit the number of shares available
for investment by a Fund. In some countries, there is no established secondary market for securities. Therefore, liquidity of securities may be generally low and transaction costs generally high. Similarly, volume and liquidity in the bond markets in Asia are less than in the U.S. and, at times, price volatility can be greater than in the U.S. A limited number of issuers in Asian securities markets may represent a disproportionately large percentage of market capitalization and trading value. The limited liquidity of securities markets in Asia may also affect a Fund’s ability to acquire or dispose of securities at the price and time it wishes to do so. In addition, the Asian securities markets are susceptible to being influenced by large investors trading significant blocks of securities.
Many stock markets are undergoing a period of growth and change which may result in trading volatility
and difficulties in the settlement and recording of transactions, and in interpreting and applying the relevant law and regulations. With respect to investments in the currencies of Asian countries, changes in the value of those currencies against the U.S. dollar will result in corresponding changes in the U.S. dollar value of a Fund’s assets denominated in those currencies. Certain developing economies in the Asia Pacific region are characterized by frequent currency fluctuations, devaluations, and restrictions; unstable employment rates; rapid fluctuation in, among other things, inflation and reliance on exports; and less efficient markets. Currency fluctuations or devaluations in any one country can have a significant effect on the entire Asia Pacific region. Holding securities in currencies that are
devalued (or in companies whose revenues are substantially in currencies that are devalued) will likely decrease the value of a Fund’s investments.
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Some developing Asian countries prohibit or impose substantial restrictions on investments in their capital markets, particularly their equity markets, by foreign entities such as a Fund. For example, certain countries may require governmental approval prior to investments by foreign persons or limit the amount of investment by foreign persons in a particular company or limit the
investment by foreign persons to only a specific class of securities of a company which may have less advantageous terms (including price and shareholder rights) than securities of the company available for purchase by nationals of the relevant country. There can be no assurance that a Fund will be able to obtain required governmental approvals in a timely manner. In addition, changes to restrictions on foreign ownership of securities subsequent to a Fund’s purchase of such securities may have an adverse effect on the value of such shares. Certain countries may restrict investment opportunities in issuers or industries deemed important
to national interests.
Chinese Companies. Investing in China, Hong Kong and Taiwan involves a high degree of risk and special considerations not typically associated
with investing in other more established economies or securities markets. Such risks may include: (a) the risk of nationalization or expropriation of assets or confiscatory
taxation; (b) greater social, economic and political uncertainty (including the risk of war); (c) dependency on exports and the corresponding importance of international trade; (d)
the increasing competition from Asia’s other low-cost emerging economies; (e) greater price volatility, substantially less liquidity and significantly smaller market capitalization of securities markets, particularly in China; (f) currency exchange rate fluctuations and the lack of available currency hedging instruments; (g) higher rates of inflation; (h) controls on foreign investment and limitations on repatriation of invested capital and on a Fund’s ability to exchange local currencies for U.S. dollars; (i) greater governmental involvement in and control over the economy, and greater intervention in the Chinese financial markets, such as the imposition of trading restrictions; (j) the risk that the Chinese government may decide not to continue to support the economic reform programs and could return
to the completely centrally planned, economy that was in place prior to 1978; (k) the fact that Chinese companies, particularly those located in China, may be smaller, less seasoned and newly-organized; (l) the difference in, or lack of, auditing and financial reporting standards which may result in unavailability of material information about issuers, particularly in China; (m) the fact that statistical information regarding the Chinese economy may be inaccurate or not comparable to statistical information regarding the U.S. or other economies; (n) the less extensive, and still developing, regulation of the securities markets, business entities and commercial transactions; (o) the fact that the settlement period of securities transactions in foreign markets may be longer; (p) uncertainty surrounding the
willingness and ability of the Chinese government to support the Chinese and Hong Kong
economies and markets; (q) the risk that it may be more difficult or impossible, to obtain and/or enforce a judgment than in other countries; (r) the rapidity and erratic nature of growth, particularly in China, resulting in inefficiencies and dislocations; and (s) the risk that, because of the degree of interconnectivity between the economies and financial markets of China, Hong Kong and
Taiwan, any sizable reduction in the demand for goods from China, or an economic downturn in China could negatively affect the economies and financial markets of Hong Kong and Taiwan, as well.
There has been increased attention from the SEC and the Public Company Accounting Oversight Board (“PCAOB”) with regard to international auditing standards of U.S.-listed companies with operations in China as well as PCAOB-registered auditing firms in China. Currently, the SEC and PCAOB are only able to get limited information about these auditing firms and are restricted
from inspecting the audit work and practices of registered accountants in China. In addition, certain China-based issuers, even if listed on a U.S. exchange, may qualify as “foreign private issuers,” which are exempt from certain U.S. corporate governance requirements including board independence and various SEC reporting and certification requirements.
Investment in China, Hong Kong and Taiwan is subject to certain political risks. China’s economy has transitioned from a rigidly central-planned state-run economy to one that has been only partially reformed by more market-oriented policies. Although
the Chinese government has implemented economic reform measures, reduced state ownership of companies and established better corporate governance practices, a substantial portion of productive assets in China are still owned by the Chinese
government. The government continues to exercise significant control over regulating industrial development and, ultimately, control over China’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
The current political climate has intensified concerns about trade tariffs and a potential trade war between China and the United States, despite the United States’ signing a partial trade agreement with China that reduced some U.S. tariffs on Chinese goods while boosting Chinese purchases of American goods. However, this agreement left in place a number of existing tariffs, and
it is unclear whether further trade agreements may be reached in the future. The ability and willingness of China to comply with the trade deal may determine to some degree the extent to which its economy will be adversely affected, which cannot be predicted at the present time. Future tariffs imposed by China and the United States on the other country’s products, or other escalating
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actions, may trigger a significant reduction in
international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and possible failure of individual companies and/or large segments of
China’s export industry with a potentially negative impact to a Fund.
On June 3, 2021, President Biden issued an executive order prohibiting U.S. persons from entering into transactions in publicly traded securities, as well as derivatives and securities designed to provide investment exposure to any securities, of issuers designated “Chinese Military-Industrial Complex Companies” by the Department of the Treasury’s Office of Foreign Asset Control. This executive order superseded a prior similar order from then-President Trump. Continued ownership of such securities by U.S. persons is
prohibited after June 3, 2022, following a one-year divestment period. A number of Chinese issuers have been designated under this program and more could be added. Certain implementation matters related to the scope of, and compliance with, the executive order have not yet been resolved, and the ultimate application and enforcement of the executive order may change due to, among
other things, the change in the U.S. presidential administration. Under current guidance, U.S. investors may purchase interests in an investment fund that does not make any new purchases of designated securities and is “seeking to” divest its holdings of such securities during the applicable divestment period. As a result, the executive order and related guidance may significantly reduce the liquidity of such securities, force a Fund to sell certain positions at inopportune times or for unfavorable prices, and restrict future investments by a Fund. U.S. investment advisors are permitted to advise non-U.S. funds and non-U.S. persons
that purchase and sell such prohibited securities, provided this activity does not indirectly expose U.S. persons to such companies.
Although China adopted a plan in 2019 designed to encourage foreign investment in Chinese financial
systems, China continues to limit direct foreign investments generally in industries deemed important to national interests. Foreign investment in domestic securities are also subject to substantial restrictions. Some believe that China’s currency is undervalued. Currency fluctuations could significantly affect China and its trading partners. China continues to exercise control over the value of its currency, rather than allowing the value of the currency to be determined by market forces. This type of currency regime may experience sudden
and significant currency adjustments, which may adversely impact investment returns.
For decades, a state of hostility has existed between Taiwan and the People’s Republic of China. Beijing has long deemed Taiwan a part of the “one China” and has made a nationalist cause of recovering it. This situation poses a threat to Taiwan’s economy and could negatively affect its stock market. By treaty, China has committed to preserve Hong Kong’s autonomy and its economic, political and social freedoms until 2047. However, if China would exert its authority so as to alter the economic, political or legal structures or the existing social policy of Hong Kong, investor and business confidence in Hong Kong could be negatively affected, which in turn could negatively affect markets and business
performance. As demonstrated by protests in Hong Kong in 2019 and
2020 over political, economic, and legal freedoms, and the Chinese government’s response to the protests, there continues to be a great deal of political unrest, which may
result in economic disruption.
China could be affected by military events on the Korean
peninsula or internal instability within North Korea. North Korea and South Korea each have substantial military capabilities, and historical tensions between the two countries
present the risk of war. Any outbreak of hostilities between the two countries could have a severe adverse effect on the South Korean economy and securities market. These situations may cause uncertainty in the Chinese market and may adversely affect performance of the
Chinese economy.
China
A-Shares. China A-shares are equity securities of companies based in mainland China that trade on Chinese
stock exchanges such as the Shanghai Stock Exchange (“SSE”) and the Shenzhen Stock Exchange (“SZSE”) (“A-shares”). Foreign investment in A-shares on the SSE and SZSE is historically not permitted other than through a license granted under regulations in the People’s Republic of China known as the Qualified Foreign Institutional Investor (“QFII”) and Renminbi Qualified Foreign Institutional Investor (“RQFII”) systems. Regulations that came into effect on June 6, 2020 supersede certain post-registration rules applicable to QFII and RQFII regimes and remove prior quota restrictions on investment in A-shares. However, as of the date of this SAI, this is a relatively new development, and there is no guarantee that the quotas will continue to be relaxed.
Because restrictions continue to exist and capital therefore cannot flow freely into and out of the A-Share market, it is possible that in the event of a market disruption, the liquidity of the A-Share market and trading prices of A-Shares could be more severely affected than the liquidity and trading prices of markets where securities are freely tradable and capital therefore flows more freely. A Fund cannot predict the nature or duration of such a market disruption or the impact that it may have on the A-Share
market and the short-term and long-term prospects of its investments in the A-Share market. In the event that a Fund invests in A-Shares directly, a Fund may incur significant losses, or may not be able fully to implement or pursue its investment objectives
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or strategies, due to investment restrictions on
RQFIIs and QFIIs, illiquidity of the Chinese securities markets, or delay or disruption in execution or settlement of trades. A-Shares may become subject to frequent and widespread
trading halts.
The Chinese government has in the past taken actions that benefitted holders
of A-Shares. As A-Shares become more available to foreign investors, such as a Fund, the Chinese government may be less likely to take action that would benefit holders of
A-Shares.
The regulations which apply to investments by RQFIIs and QFIIs, including the
repatriation of capital, are relatively new. The application and interpretation of such regulations are therefore relatively untested. In addition, there is little precedent or
certainty evidencing how such discretion may be exercised now or in the future; and even if there were precedent, it may provide little guidance as PRC authorities would likely continue to have broad discretion. Although the relevant QFII/RQFII regulations have
recently been revised to relax the limitation on repatriation of capital, it is a relatively new development therefore subject to uncertainties as to whether and how it will be implemented in practice.
Investment in eligible A-shares listed and traded on the SSE is now permitted through the Stock Connect program, though such securities may lose their eligibility at any time. Stock Connect is a securities trading and clearing program established by Hong Kong Securities Clearing Company Limited, the SSE and Chinese Securities Depositary and Clearing Corporation that aims to
provide mutual stock market access between China and Hong Kong by permitting investors to trade and settle shares on each market through their local exchanges. Certain Funds may invest in other investment companies that invest in A-shares through
Stock Connect or on such other stock exchanges in China which participate in Stock Connect from time to time. Under Stock Connect, a Fund’s trading of eligible A-shares listed on the SSE would be effectuated through its Hong Kong broker.
Although no individual investment quotas or licensing requirements apply to investors in Stock Connect,
trading through Stock Connect’s Northbound Trading Link is subject to aggregate and daily investment quota limitations that require that buy orders for A-shares be rejected once the remaining balance of the relevant quota drops to zero or the daily quota is exceeded (although a Fund will be permitted to sell A-shares regardless of the quota balance). These limitations may restrict a Fund from investing in A-shares on a timely basis, which could affect a Fund’s ability to effectively pursue its investment strategy. Investment quotas are also subject to change. Investment in eligible A-shares through Stock Connect is subject to trading, clearance and settlement procedures that could pose risks to a Fund. A-shares purchased through Stock Connect generally may not be sold or otherwise
transferred other than through Stock Connect in accordance with applicable rules. In addition, Stock Connect will only operate on days when both the Chinese and Hong Kong markets are open for trading and when banks in both markets are open on the
corresponding settlement days. Therefore, an investment in A-shares through Stock Connect may subject a Fund to a risk of price fluctuations on days where the Chinese market is open, but Stock Connect is not trading. In addition, there is no assurance that the necessary systems required to operate Stock Connect will function properly or will continue to be adapted to changes
and developments in both markets. In the event that the relevant systems do not function properly, trading through Stock Connect could be disrupted.
China Variable-Interest Entities. Investments in Chinese companies may be made through a special structure known as a variable interest entity
(“VIE”) that is designed to provide foreign investors, such as a Fund, with exposure to Chinese companies that operate in certain sectors in which China restricts or
prohibits foreign investments. Investments in VIEs may pose additional risks because the investment is made through an intermediary shell company that has entered into service and
other contracts with the underlying Chinese operating company in order to provide investors with exposure to the operating company, and therefore does not represent equity ownership in the operating company. The value of the shell company is derived from its ability to consolidate the VIE into its financials pursuant to contractual arrangements that allow the shell company to exert a degree
of control over, and obtain economic benefits arising from, the VIE without formal legal ownership. The contractual arrangements between the shell company and the operating company may not be as effective in providing operational control as direct equity
ownership, and a foreign investor’s rights may be limited, including by actions of the Chinese government which could determine that the underlying contractual arrangements are invalid. While VIEs are a longstanding industry practice and are well known
by Chinese officials and regulators, the structure has not been formally recognized under Chinese law and it is uncertain whether Chinese officials or regulators will withdraw their implicit acceptance of the structure. It is also uncertain whether the contractual arrangements, which may be subject to conflicts of interest between the legal owners of the VIE and foreign investors, would
be enforced by Chinese courts or arbitration bodies. Prohibitions of these structures by the Chinese government, or the inability to enforce such contracts, from which the shell company derives its value, would likely cause the VIE-structured holding(s) to
suffer significant, detrimental, and possibly permanent loss, and in turn, adversely affect a Fund’s returns and net asset value.
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China Bond Connect. Certain Funds may invest in Chinese interbank bonds traded on the China Interbank Bond Market through the China-Hong Kong Bond Connect program (“Bond Connect”). Bond Connect provides a channel for overseas investors to invest in the Chinese bond market through investment links between Hong Kong and mainland China. In China, the Hong Kong
Monetary Authority Central Money Markets Unit holds Bond Connect securities on behalf of the ultimate investors (such as a Fund) in accounts maintained with a China-based custodian
(either the China Central Depository & Clearing Co. or the Shanghai Clearing House). This recordkeeping system subjects a Fund to numerous risks, including the risk that a Fund
may have a limited ability to enforce its rights as a bondholder and the risks of settlement delays and counterparty default of the Hong Kong sub-custodian. Trading through Bond Connect is subject to other restrictions and risks. For example, Bond Connect is generally
only available on business days when both the China and Hong Kong markets are open, which may limit a Fund’s ability to trade when it would be otherwise attractive to do so. Investing through Bond Connect also subjects a Fund to the clearance and settlement procedures associated with Bond Connect, which could pose risks to the Fund. Furthermore, securities purchased through Bond
Connect generally may not be sold, purchased or otherwise transferred other than through Bond Connect in accordance with applicable rules.
Forward Commitments, When-Issued and Delayed Delivery Securities. Certain of the Funds may invest in forward
commitments including “TBA” (to be announced), when-issued and delayed delivery securities. Forward commitments, when-issued and delayed delivery transactions arise when securities are purchased by a Fund with payment and delivery taking place in the
future in order to secure what is considered to be an advantageous price or yield to the Fund at the time of entering into the transaction. However, the price of or yield on a comparable security available when delivery takes place may vary from the price of or yield on the security at the time that the forward commitment or when-issued or delayed delivery transaction was entered
into. Agreements for such purchases might be entered into, for example, when a Fund anticipates a decline in interest rates and is able to obtain a more advantageous price or yield by committing currently to purchase securities to be issued later. When a
Fund purchases securities on a forward commitment, when-issued or delayed delivery basis, it does not pay for the securities until they are received. A Fund is required to designate the segregation, either on the records of the Adviser, Sub-Adviser(s), or the Fund’s custodian, of cash or other liquid securities in an amount equal to or greater than, on a daily basis, the amount of the Fund’s forward commitments, when-issued or delayed delivery commitments or to enter into offsetting contracts for the forward sale of other securities it owns. The availability of liquid assets for this purpose and the effect of asset segregation on a Fund’s ability to meet its current obligations, to honor requests for redemption, and to otherwise manage its investment portfolio will limit the extent to which a Fund may
purchase forward commitments, when-issued and delayed delivery securities. As the Funds
transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives may be impacted. The Funds intend to comply with Rule 18f-4 on or before the compliance date
of August 19, 2022. For more information about these practices, see the “Derivatives” section. Forward commitments may be considered securities in themselves and involve a risk of loss if the value of the security to be purchased declines prior to the settlement date, which risk is in addition to the risk of decline in the value of a Fund’s other assets. Where such purchases are made through dealers, a Fund relies on the dealer to consummate the sale. The dealer’s failure to do so may result in the loss to a Fund of an advantageous yield or price. Pursuant to recommendations of the Treasury Market Practices Group, which is
sponsored by the Federal Reserve Bank of New York, a Fund or its counterparty generally is required to post collateral when entering into certain forward-settling transactions, including without limitation TBA transactions.
A Fund will only enter into forward commitments and make commitments to purchase securities on a when-issued or delayed delivery basis with the intention of actually acquiring the securities. However, a Fund may sell these securities before the settlement date if it is deemed advisable as a matter of investment strategy. Forward commitments and when-issued and delayed delivery
transactions are generally expected to settle within three months from the date the transactions are entered into, although a Fund may close out its position prior to the settlement date by entering into a matching sales transaction. In general, a Fund
does not earn interest on the securities it has committed to purchase until they are paid for and delivered on the settlement date.
A Fund may purchase forward commitments and make commitments to purchase securities on a when-issued or
delayed-delivery basis for any number of reasons, including to protect the value of portfolio investments, as a means to adjust a Fund’s overall exposure, and to enhance the Fund’s return. Purchases made in an effort to enhance a Fund’s return may involve more risk than purchases made for other reasons. For example, by committing to purchase securities in the future, a Fund subjects itself to a
risk of loss on such commitments as well as on its portfolio securities. Also, a Fund may have to sell assets that have been set aside in order to meet redemptions. In addition, if a Fund determines it is advisable as a matter of investment strategy to sell the forward commitment or when-issued or delayed delivery securities before delivery, that Fund may incur a gain or loss because
of market fluctuations since the time the commitment to purchase such securities was made. When the time comes to pay for
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the securities to be purchased under a forward
commitment or on a when-issued or delayed delivery basis, a Fund will meet its obligations from the then available cash flow or the sale of securities, or, although it would not
normally expect to do so, from the sale of the forward commitment or when-issued or delayed delivery securities themselves (which may have a value greater or less than a Fund’s payment obligation).
Hybrid Instruments. Certain of the Funds may invest in hybrid instruments (a type of potentially high-risk derivative). Hybrid instruments
combine the elements of futures contracts or options with those of debt, preferred equity or a depositary instrument. Generally, a hybrid instrument will be a debt security,
preferred stock, depositary share, trust certificate, certificate of deposit or other evidence of indebtedness on which a portion of or all interest payments, and/or the principal
or stated amount payable at maturity, redemption or retirement, is determined by reference to prices, changes in prices, or differences between prices, of securities, currencies, intangibles, goods, articles or commodities (collectively “Underlying Assets”) or by another objective index, economic factor or other measure, such as interest rates, currency exchange rates, commodity indices, and securities indices (collectively “Benchmarks”). Thus, hybrid instruments may take a variety of forms, including, but not limited to, debt instruments with interest or principal payments or redemption terms determined by reference to the value of a currency or commodity or
securities index at a future point in time, preferred stock with dividend rates determined by reference to the value of a currency, or convertible securities with the conversion terms related to a particular commodity. Under certain conditions, the redemption value of such an instrument could be zero. Hybrid instruments can have volatile prices and limited liquidity and their use by a Fund may not be successful.
Hybrid
instruments may bear interest or pay preferred dividends at below market (or even relatively nominal) rates. Alternatively, hybrid instruments may bear interest at above market
rates but bear an increased risk of principal loss (or gain). The latter scenario may result if “leverage” is used to structure the hybrid instrument. Leverage risk
occurs when the hybrid instrument is structured so that a given change in a Benchmark or Underlying Asset is multiplied to produce a greater value change in the hybrid instrument,
thereby magnifying the risk of loss as well as the potential for gain.
Hybrid instruments can be an efficient means of creating exposure to a particular market, or segment of a market, with the objective of enhancing total return. For example, a Fund may wish to take advantage of expected declines in interest rates in several European countries, but avoid the transaction costs associated with buying and currency-hedging the foreign bond positions. One solution would be to purchase a U.S. dollar-denominated hybrid instrument whose redemption price is linked to the average three year
interest rate in a designated group of countries. The redemption price formula would provide for payoffs of greater than par if the average interest rate was lower than a specified level, and payoffs of less than par if rates were above the specified level. Furthermore, a Fund could limit the downside risk of the security by establishing a minimum redemption price so that the principal paid at maturity could not be below a predetermined minimum level if interest rates were to rise significantly. The purpose of
this arrangement, known as a structured security with an embedded put option, would be to give a Fund the desired European bond exposure while avoiding currency risk, limiting downside market risk, and lowering transaction costs. Of course, there is
no guarantee that the strategy will be successful and a Fund could lose money if, for example, interest rates do not move as anticipated or credit problems develop with the issuer of the hybrid instrument.
Although the risks of investing in hybrid instruments reflect a combination of the risks of investing in securities, options, futures and currencies, hybrid instruments are potentially more volatile and carry greater market risks than traditional debt instruments. The risks of a particular hybrid instrument will, of course, depend upon the terms of the instrument, but may include, without
limitation, the possibility of significant changes in the Benchmarks or the prices of Underlying Assets to which the instrument is linked. Such risks generally depend upon factors which are unrelated to the operations or credit quality of the issuer of the hybrid instrument and which may not be readily foreseen by the purchaser, such as economic and political events, the supply
and demand for the Underlying Assets and interest rate movements. The issuer or guarantor of a hybrid instrument may be unable or unwilling to make timely principal, interest or settlement payments, or otherwise honor its obligations. A Fund that invests in hybrid instruments is subject to varying degrees of risk that the issuers of the securities will have their credit rating downgraded or will default, potentially reducing a Fund’s share price and income level.
Various Benchmarks and prices for Underlying Assets have been highly volatile, and such volatility may be expected in the future.
Hybrid instruments may also carry liquidity risk since the instruments are often “customized”
to meet the portfolio needs of a particular investor, and therefore, the number of investors that are willing and able to buy such instruments in the secondary market may be smaller than that for more traditional debt securities. In addition, because the purchase and sale of hybrid instruments could take place in an OTC market without the guarantee of a central clearing organization or in a transaction between a Fund
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and the issuer of the hybrid instrument, the
creditworthiness of the counterparty or issuer of the hybrid instrument would be an additional risk factor which a Fund would have to consider and monitor. Hybrid instruments also
may not be subject to regulation of the CFTC, which generally regulates the trading of commodity futures and most swaps by persons in the United States, the SEC, which regulates the offer and sale of securities by and to persons in the United States, or any other governmental regulatory authority. The various risks discussed above, particularly the market risk of such instruments, may in turn cause significant fluctuations in the net asset value of a Fund.
Illiquid Securities or Non-Publicly Traded Securities. Certain of the Funds may invest in illiquid securities or non-publicly traded securities. The inability of a Fund to dispose
of illiquid or not readily marketable investments promptly or at a reasonable price could impair a Fund’s ability to raise cash for redemptions or other purposes. Generally,
an illiquid security is any investment that may not reasonably be expected to be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. Illiquid securities may include unregistered securities, securities subject to contractual or legal restrictions on resale or other restricted securities and repurchase agreements maturing in greater than seven days. Illiquid securities may also include commercial paper under section 4(2) of the 1933 Act, and Rule
144A securities (restricted securities that may be traded freely among qualified institutional buyers pursuant to an exemption from the registration requirements of the securities laws); these securities generally are considered illiquid unless the Adviser or Sub-adviser determines they are liquid. Most such securities held by the Funds are deemed liquid. Generally, foreign securities freely tradable in their principal market are not considered restricted or illiquid even if they are not registered in the United States. Illiquid securities may be difficult for a Fund to value or dispose of due to the absence of an active trading market. The sale of some illiquid securities by a Fund may be subject to legal restrictions, which could be costly to the Fund.
A Fund may invest in “restricted
securities,” which generally are securities that may be resold to the public only pursuant to an effective registration statement under the 1933 Act or an exemption from registration. Regulation S under the 1933 Act is an
exemption from registration that permits, under certain circumstances, the resale of restricted securities in offshore transactions, subject to certain conditions, and Rule 144A under the 1933 Act is an exemption that permits the resale of certain restricted securities to qualified institutional buyers.
Rule 144A is designed to facilitate trading of restricted securities among qualified institutional
investors. To the extent restricted securities held by a Fund qualify under Rule 144A and an institutional market develops for those securities, the Fund expects that it will be able to dispose of the securities without registering the resale of such securities under the 1933 Act. However, to the extent that a robust market for such 144A securities does not develop, or a market develops but experiences periods of illiquidity, investments in Rule 144A securities could increase the level of a Fund’s illiquidity. A Fund might have to register restricted securities in order to dispose of them, resulting in additional expense and delay. Adverse market conditions could impede such a public
offering of securities.
There is a large institutional market for certain securities that are not registered under the 1933 Act,
which may include markets for repurchase agreements, commercial paper, foreign securities, municipal securities, loans and corporate bonds and notes. Institutional investors depend on an efficient institutional market in which the unregistered security can be readily resold or on an issuer’s ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of the liquidity of such investments.
To the extent that a Fund acquires shares of a registered investment company in accordance with Section 12(d)(1)(F) of the 1940 Act, the registered investment company is not obligated to redeem its shares in an amount exceeding 1% of its shares outstanding during any period less
than 30 days. Shares held by a Fund in excess of 1% of a registered investment company’s outstanding securities therefore may, under certain circumstances, be considered not readily marketable securities, which, together with other such securities, are subject to the Funds’ restrictions on investments in illiquid securities.
Inflation-Indexed Securities. Certain Funds may invest in inflation-indexed securities issued by the U.S. Treasury and others. Inflation-indexed
securities are debt securities the principal value of which is adjusted periodically in accordance with changes in a measure of inflation. Inflation-indexed securities issued by
the U.S. Treasury use the Consumer Price Index for Urban Consumers (“CPI-U”) published by the U.S. Bureau of Labor Statistics. See “U.S. Government
Securities” below. Inflation-indexed securities issued by a foreign government are generally adjusted to reflect a comparable inflation index, calculated by that government.
Two structures for inflation-indexed securities are common: the U.S. Treasury and some other issuers utilize a structure that adjusts the principal value of the security according to the rate of inflation; most other issuers pay out the Consumer Price Index adjustments as part of a semi-annual coupon.
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In the first, the interest rate on the inflation-indexed bond is fixed, while the principal value rises or falls semi-annually based on changes in a published measure of inflation. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid at maturity may be less than the original principal. In the second, the inflation adjustment for certain inflation-indexed bonds is reflected in the semiannual coupon payment. As a result, the principal value of these
inflation-indexed bonds does not adjust according to the rate of inflation.
In general, the value of inflation-indexed securities increases in periods of general inflation and declines in periods of general deflation. If inflation is lower than expected during the period a Fund holds an inflation-indexed security, the Fund may earn less on it than on a conventional bond. Inflation-indexed securities are expected to react primarily to changes in the “real” interest rate (i.e., the nominal, or stated, rate less the rate of inflation), while a typical bond reacts to changes in the nominal interest rate. Accordingly, inflation-indexed securities have characteristics of fixed-rate U.S. Treasury securities having a shorter duration. Changes in market interest rates from causes other
than inflation will likely affect the market prices of inflation-indexed securities in the same manner as conventional bonds.
Any increase in the principal value of an inflation-indexed security is taxable in the taxable year the
increase occurs, even though its holders do not receive cash representing the increase until the security matures, and the amount of that increase for a Fund generally must be distributed each taxable year to its shareholders. See the “Taxation” section of this SAI. Thus, each Fund that invests therein could be required, at times, to liquidate other investments in order to satisfy its distribution requirements.
Insured Bank Obligations —
The Federal Deposit Insurance Corporation (“FDIC”) insures the deposits of federally insured banks
and savings and loan associations (collectively referred to as “banks”) up to $250,000. The Funds may purchase bank obligations which are fully insured as to principal by the FDIC. Currently, to remain fully insured as to principal, these investments must be limited to $250,000 per bank; if the principal amount and accrued interest together exceed $250,000, the excess accrued interest will not be insured. Insured bank obligations may have limited marketability. Unless a Fund determines that a readily available market exists for such obligations, a Fund will treat such obligations as subject to the limit for illiquid investments for each Fund unless such obligations are payable at principal amount plus accrued interest on demand or within seven days after demand.
Investment Company Securities. Certain of the Funds may invest in the securities of other investment companies to the extent permitted under the 1940 Act and the rules thereunder and by any applicable exemptive orders issued by the SEC. Investment
company securities include securities of other open-end, management investment companies (commonly called mutual funds), ETFs, closed-end investment companies, and unit investment trusts. Section 12(d)(1)(A) of the 1940 Act, in relevant part, prohibits a registered investment company (such as a Fund) from acquiring shares of an investment company if after such acquisition the
securities represent more than 3% of the total outstanding voting stock of the acquired company, more than 5% of the total assets of the acquiring company, or, together with the securities of any other investment companies, more than 10% of the total assets of the acquiring company, except in reliance on certain exceptions contained in the 1940 Act and the rules and regulations
thereunder. The 1940 Act further prohibits a Fund from acquiring in the aggregate more than 10% of the total outstanding voting shares of any registered closed-end investment company. Certain exceptions to these limitations are provided by the 1940 Act
and the rules and regulations thereunder, and exemptive orders issued by the SEC. Investing in other investment companies involves substantially the same risks as investing directly in the underlying instruments, but the total return on such investments at the investment company level will be reduced by the operating expenses and fees of such other investment companies, including advisory fees. In addition, certain types of investment companies, such as closed-end investment companies and ETFs, trade
on a stock exchange or over the counter at a premium or a discount to their net asset value per share. Such a premium or discount may impact the performance of a Fund’s investment. Further, the securities of other investment companies may be leveraged. As a result, a Fund may be indirectly exposed to leverage through an investment in such securities. An investment in securities of other investment companies that use leverage may expose a Fund to higher volatility in the market value of such securities
and the possibility that the Fund’s long-term returns on such securities will be diminished.
The SEC recently adopted certain regulatory changes and took other actions related to the ability of an investment company to invest in the securities of another investment company. These changes include, among other things, the adoption of Rule 12d1-4 under the 1940 Act. Rule 12d1-4 permits a Fund to invest in other investment companies beyond the statutory limits, subject
to certain conditions. Rule 12d1-4 includes conditions related to (i) limits on control and voting; (ii) required evaluations and findings related to investments in other investment companies; (iii) agreements between an acquiring and an acquired investment company; and (iv) limits on complex structures. The compliance date for Rule 12d1-4 was January 19, 2022.
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Passive Foreign Investment
Companies. Certain Funds may purchase the securities of “passive foreign investment
companies” (“PFICs”). In general, such companies have been the only or primary way to invest in countries that limit, or prohibit, all direct foreign investment in the securities of companies domiciled therein. However, the governments of some countries have authorized the organization of investment funds to permit indirect foreign investment in such securities. In addition to bearing their
proportionate share of a Fund’s expenses (management fees and operating expenses), shareholders will also indirectly (through the Fund) bear similar expenses of such funds. PFICs in which a Fund may invest may also include foreign corporations other
than such investment funds. Like other foreign securities, interests in PFICs also involve the risk of foreign securities, as described above, as well as certain federal income tax consequences (see the section of this SAI entitled “Taxation”).
ETFs.
Certain of the Funds may invest in ETFs and other pooled investment vehicles. These are a type of investment company
(or similar entity) the shares of which are bought and sold on a securities exchange and that hold a portfolio of securities or other financial instruments. An index-based ETF represents a portfolio of securities (or other assets) generally designed to track a particular market index or other referenced asset. The 1290 Multi-Alternative Strategies Fund invests substantially all of its assets in ETFs. As discussed above in “Investment Company Securities”, Rule 12d1-4 permits a Fund to invest in other investment companies, including ETFs, beyond certain statutory limits in the 1940 Act, subject to certain conditions. The risks of owning an index-based ETF generally reflect the risks of owning the underlying securities it is designed to track, although lack of liquidity in an ETF could result in it
being more volatile, and ETFs have fees which increase their costs. In addition, there is the risk that an index-based ETF may fail to closely track the index, if any, that it is designed to replicate. ETFs may also be actively managed. Actively managed ETFs are subject to management risk and may not achieve their objective if the ETFs manager’s expectations regarding particular securities or markets are not met. By investing in a Fund that invests in ETFs, you will indirectly bear fees and expenses charged by the ETFs in which the Fund invests in addition to the Fund’s direct fees and expenses.
Investment Grade Securities. Certain of the Funds may invest in or hold investment grade securities. Investment grade securities are securities rated Baa
or higher by Moody’s Investors Service, Inc. (“Moody’s”), BBB or higher by Standard & Poor’s Global Ratings (“S&P”), or BBB or
higher by Fitch Ratings Ltd. (“Fitch”), securities that are comparably rated by another rating agency, or unrated securities determined by the Adviser or Sub-Adviser to
be of comparable quality. Bonds rated in the lower investment grade rating categories (or determined to be of comparable quality by the Adviser or Sub-Adviser) have speculative
characteristics. This means that changes in economic conditions or other circumstances are more likely to lead to a weakened capacity to make principal and interest payments than is the case for higher rated debt securities. If a security is downgraded, the Adviser or
Sub-Adviser will reevaluate the holding to determine what action, including the sale of such security, is in the best interests of a Fund.
Non-Investment Grade Securities or “Junk Bonds.” Certain of the Funds may invest in or hold junk bonds or non-investment grade securities. Non-investment grade securities are securities rated Ba1 or lower by Moody’s or BB+ or lower by S&P or Fitch, securities that are comparably rated by another rating agency, or unrated securities determined by the Adviser or Sub-Adviser
to be of comparable quality. Non-investment grade securities are commonly known as “junk bonds” and are considered predominantly speculative with respect to the issuer’s ability to pay interest and repay principal. Junk bonds may be issued as a consequence of corporate restructuring, such as leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar
events or by smaller or highly leveraged companies and in other circumstances.
Non-investment grade securities generally offer a higher current yield than that available for investment grade securities; however, they involve greater risks than investment grade securities in that they are especially sensitive to, and may be more susceptible to, real or perceived adverse changes in general economic conditions and in the industries in which the issuers are engaged,
changes in the financial condition of, and individual corporate developments of, the issuers, and price fluctuations in response to changes in interest rates. Because a Fund’s investments in non-investment grade securities involve greater investment risk than its investments in higher rated securities, achievement of the Fund’s investment objective will be more dependent on the Adviser’s or Sub-Adviser’s analysis than would be the case if the Fund were investing in higher rated securities.
Non-investment grade securities generally will be susceptible to greater risk when economic growth slows
or reverses and when inflation increases or deflation occurs. Lower rated securities may experience substantial price declines when there is an expectation that issuers of such securities might experience financial difficulties. As a result, the yields on lower rated securities can rise dramatically. However, those higher yields may not reflect the value of the income stream that holders of such securities expect. Rather, those higher yields may reflect the risk that holders of such securities could lose a substantial portion of their value due to financial restructurings or defaults by the issuers. There can be no assurance that those declines will not occur.
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During periods of economic downturn or rising
interest rates, highly leveraged issuers may experience financial stress that could adversely affect their ability to make payments of interest and principal and increase the
possibility of default. In addition, such issuers may not have more traditional methods of financing available to them and may be unable to repay debt at maturity by refinancing. The risk of loss due to default by such issuers is significantly greater because such securities frequently are unsecured by collateral and will not receive payment until more senior claims are paid in full. Non-investment grade securities may contain redemption or call provisions. If an issuer exercises these provisions in a declining interest rate market, a Fund would have to replace the security with a lower yielding security, resulting in a decreased return. Conversely, a non-investment grade security’s value will decrease in a rising interest rate market, as will the value of a Fund’s investment in such securities. If a Fund experiences unexpected
net redemptions, this may force it to sell its non-investment grade securities, without regard to their investment merits, thereby decreasing the asset base upon which the Fund’s expenses can be spread and possibly reducing the Fund’s rate of return.
In addition, the market for non-investment grade securities generally is thinner and less active than
that for higher rated securities, which may limit a Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. This potential lack of liquidity may make it more difficult for the Adviser or Sub-Adviser to value accurately certain portfolio securities. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may also decrease the values and
liquidity of non-investment grade securities, especially in a thinly traded market. In periods of reduced market liquidity, junk bond prices may become more volatile and may experience sudden and substantial price declines. Also, there may be significant
disparities in the prices quoted for junk bonds by various dealers. Under such conditions, a Fund may find it difficult to value its junk bonds accurately. Under such conditions, a Fund may have to use subjective rather than objective criteria to value its junk bond investments accurately and rely more heavily on the judgment of the Trust’s Board. It is the policy of the Adviser and each Sub-Adviser not to rely exclusively on ratings issued by credit rating agencies but to supplement such ratings with their own
independent and ongoing review of credit quality.
Prices for junk bonds also may be affected by legislative and regulatory developments. For example, the Tax Cuts and Jobs Act includes a provision limiting the deductibility of “business interest” expense, and from time to time, Congress has considered legislation to regulate corporate restructuring such as takeovers, mergers or leveraged buyouts. Such legislation could depress the prices of outstanding junk bonds.
Credit Ratings. Moody’s, S&P, Fitch and other rating agencies are private services that provide ratings of the credit quality of
bonds, including municipal bonds, and certain other securities. A description of the ratings assigned to commercial paper and corporate bonds by Moody’s, S&P and Fitch is included in Appendix A to this SAI. The process by which Moody’s, S&P and Fitch determine ratings generally includes consideration of the likelihood of the receipt by security holders of all distributions, the nature of the underlying assets, the credit quality of the guarantor, if any, and the structural, legal and tax aspects associated with these securities. Not even the highest such rating represents an assessment of the likelihood that principal prepayments will be made by obligors on the underlying assets or the degree to which such prepayments may differ from that originally anticipated, nor
do such ratings address the possibility that investors may suffer a lower than anticipated yield or that investors in such securities may fail to recoup fully their initial investment due to prepayments.
Credit ratings attempt to evaluate the safety of principal and interest payments, but they do not evaluate the volatility of a bond’s value or its liquidity and do not guarantee the performance of the issuer. Rating agencies may fail to make timely changes in
credit ratings in response to subsequent events, so that an issuer’s current financial condition may be better or worse than the rating indicates. There is a risk that rating agencies may downgrade a bond’s rating. Subsequent to a bond’s purchase by a Fund, it may cease to be rated or its rating may be reduced below the minimum rating required for purchase by the Fund. Any subsequent change in a rating assigned by any rating service to a security (or, if unrated, deemed to be of comparable quality), or change in the percentage of portfolio assets invested in certain securities or other instruments, or change in the average duration of a Fund’s investment portfolio, resulting from market fluctuations or other changes in a Fund’s total assets will not require a Fund to dispose of an investment. The Funds
may use these ratings in determining whether to purchase, sell or hold a security. It should be emphasized, however, that ratings are general and are not absolute standards of quality. Consequently, bonds with the same
maturity, interest rate and rating may have different market prices.
In addition to ratings assigned to individual bond issues, the Adviser or the applicable Sub-Adviser will analyze interest rate trends and developments that may affect individual issuers, including factors such as liquidity, profitability and asset quality. The yields on bonds are dependent on a variety of factors, including general money market conditions, general conditions in the bond
market, the financial condition of the issuer, the size of the offering, the maturity of the obligation and its rating. There is a wide
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variation in the quality of bonds, both within a
particular classification and between classifications. An issuer’s obligations under its bonds are subject to the provisions of bankruptcy, insolvency and other laws
affecting the rights and remedies of bond holders or other creditors of an issuer; litigation or other conditions may also adversely affect the power or ability of issuers to meet
their obligations for the payment of interest and principal on their bonds.
Commodity-Linked Notes. Certain of the Funds may invest in commodity-linked notes, which are privately negotiated structured debt securities the
amount of principal repayment and/or interest payments for which are linked to the return of an index that is representative of the commodities market or a segment thereof. They
are available from a limited number of approved counterparties, and all invested amounts are exposed to the dealer’s credit risk. As such, commodity-linked notes are also
subject to counterparty risk. Commodity-linked notes may be leveraged. Investments linked to the prices of commodities, including commodity-linked notes, are considered speculative. The values of commodity-linked notes are affected by events that might
have less impact on the values of stocks and bonds. Prices of commodities and related contracts may fluctuate significantly over short periods due to a variety of factors, including changes in supply and demand relationships, weather, agriculture, fiscal, and exchange control programs, disease, pestilence, and international economic, political, military and regulatory developments.
In addition, the commodity markets may be subject to temporary distortions and other disruptions due to, among other factors, lack of liquidity, the participation of speculators, and government regulation and other actions. These circumstances could adversely affect the value of the commodity-linked notes and make them more volatile than other types of investments. Commodity-linked
notes may have substantial risks, including risk of loss of a significant portion of their principal value. Investments therein can also have adverse federal income tax consequences.
Exchange-Traded Notes (ETNs). Certain of the Funds may invest in ETNs. ETNs are generally notes representing debt of the issuer, usually a financial
institution. ETNs combine both aspects of bonds and ETFs. An ETN’s returns are based on the performance of one or more underlying assets, reference rates or indices, minus
fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary market. However, unlike an ETF, an ETN can be held until the ETN’s maturity, at
which time the issuer will pay a return linked to the performance of the specific asset, index or rate (“reference instrument”) to which the ETN is linked minus certain fees. This type of debt security differs from other types of bonds and notes because ETN returns are based upon
the performance of a market index minus applicable fees, no period coupon payments are distributed, and no principal protection exists. The value of an ETN may be influenced by time to maturity, level of supply and demand for the ETN, volatility and lack
of liquidity in underlying commodities or securities markets, changes in the applicable interest rates, changes in the issuer’s credit rating and economic, legal, political or geographic events that affect the referenced commodity or security. As a result, there may be times when an ETN share trades at a premium or discount to its market benchmark or strategy. A Fund’s decision to sell its ETN holdings may also be limited by the availability of a secondary market. If a Fund must sell some or all of its ETN holdings and the secondary market is weak, it may have to sell such holdings at a discount. There may be restrictions on a Fund’s right to redeem its investment in an ETN, which are generally meant to be held until maturity. ETNs are also subject to counterparty
credit risk and fixed income risk. Investments in ETNs may also have adverse federal income tax consequences. No assurance can be given that the Internal Revenue Service (“IRS”) will accept, or a court will uphold, how a Fund characterizes and treats ETNs and the net income and net realized gains therefrom for federal income tax purposes. Further, the IRS and Congress have,
from time to time, considered proposals that would change the timing of recognition and character of net income and net realized gains from ETNs.
LIBOR Rate
Risk. Many debt securities, Derivative Instruments and other financial instruments, including some
of the Funds’ investments, have historically used LIBOR as the reference or benchmark rate for variable interest rate calculations. However, the use of LIBOR started to come under pressure following manipulation allegations in 2012. Despite increased regulation and
other corrective actions since that time, concerns have arisen regarding its viability as a benchmark, due largely to reduced activity in the financial markets that it measures. Publication of LIBOR benchmarks for most maturities and currencies ceased as of
December 31, 2021, and publication of the remaining benchmarks is scheduled to be phased out on June 30, 2023. Some experts have called for legislation to ease the transition from LIBOR, but there is no assurance that any such legislation will be forthcoming.
Since the announcement that most tenors of U.S. dollar LIBOR would continue to be published through June30, 2023, the Alternative Reference Rates Committee, including its ex officio members from the Federal Reserve Board and New York Federal Reserve, has emphasized that the extension to June 2023 does not alter the regulatory perspective on new loan issuances and
that market participants should already be using language that provides for an automatic switch from LIBOR to a replacement in new loan agreements (or should start immediately), and that June 30, 2023 should be the target for the cessation of new loans based on LIBOR.
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The Secured Overnight Financing Rate (“SOFR”) has been selected by a committee established by the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of New York to replace LIBOR as a reference or benchmark rate in the
United States. SOFR is discussed in further detail below. Bank working groups and regulators in other countries have suggested other alternatives for their markets, including the
Sterling Overnight Interbank Average Rate (“SONIA”) in England.
Various
financial industry groups are transitioning away from LIBOR, but there are obstacles to converting certain longer term securities and transactions to a new benchmark, as well as
risks associated with using a new reference or benchmark rate with respect to new investments and transactions. Transition planning is ongoing, and neither the effect of the
transition process nor its ultimate success can yet be known. While some LIBOR-based instruments may contemplate a scenario in which LIBOR is no longer available by providing for an alternative rate-setting methodology and/or increased costs for certain LIBOR-related
instruments or financing transactions, not all may have such provisions and there may be significant uncertainty regarding the effectiveness of any such alternative methodologies, resulting in prolonged adverse market conditions for a Fund. The willingness and ability of issuers to include enhanced provisions in new and existing contracts or instruments also remains uncertain. The
transition process might lead to increased volatility and illiquidity in markets that currently rely on the LIBOR to determine interest rates. It could also lead to a reduction in the value of some LIBOR-based investments and reduce the effectiveness of new hedges placed against existing LIBOR-based instruments. Since the usefulness of LIBOR as a benchmark could deteriorate during the
transition period, these effects could occur prior to LIBOR ceasing to be published. Additionally, the transition away from LIBOR also introduces operational complexities that may require market participants to make significant changes to their IT systems
or operational processes, including enhancements or modifications to systems, controls, procedures, and risk or valuation models associated with the transition to a new reference rate or benchmark. Market participants that have fallen behind on software
releases may need to undertake systems upgrades, convert to new systems, or outsource the work in advance of vendor changes for LIBOR. Such efforts may take a significant amount of time and resources to complete.
SOFR is a broad measure of the cost of borrowing cash overnight collateralized by U.S. treasury securities, and has been published by the Federal Reserve Bank of New York since April 2018. The Federal Reserve Bank of New York has also been publishing historical indicative Secured Overnight Financing Rates from 2014. Historical changes or trends in SOFR may not be reliable as indicators
of future changes in SOFR. The composition and characteristics of SOFR are not the same as those of LIBOR, and SOFR is fundamentally different from LIBOR because (1) SOFR is a secured rate, while LIBOR is an unsecured rate, and (2) SOFR is an
overnight rate, while LIBOR is a forward-looking rate that represents interbank funding over different maturities. As a result, there can be no assurance that SOFR will perform in the same way as LIBOR would have at any time, including, without limitation, as
a result of changes in interest and yield rates in the market, market volatility or global or regional economic, financial, political, regulatory, judicial or other events.
Additionally, daily changes in SOFR have, on occasion, been more volatile than daily changes in other
benchmark or market rates, such as LIBOR. The return on and value of an investment in notes or other investments linked to SOFR may fluctuate more than the value of investments that are linked to less volatile rates. In addition, the volatility of SOFR has reflected the underlying volatility of the overnight U.S. Treasury repo market. The Federal Reserve Bank of New York has at times conducted operations in the
overnight U.S. Treasury repo market in order to help maintain the federal funds rate within a target range. There can be no assurance that the Federal Reserve Bank of New York will continue to conduct such operations in the future, and the duration and extent
of any such operations is inherently uncertain. The effect of any such operations, or of the cessation of such operations to the extent they are commenced, is uncertain and could result in losses to a Fund.
SOFR is published by the Federal Reserve Bank of New York based on data that is receives from various sources. There can be no guarantee, particularly given its relatively recent introduction, that SOFR will not be discontinued or fundamentally altered in a manner that is materially adverse to the interests of investors in the Funds. If the manner in which SOFR is calculated is changed, that change may result in a reduction in the amount of interest payable on a Fund’s investments and the trading prices of those investments. In addition, the Federal Reserve Bank of New York may
withdraw, modify or amend published SOFR data in its sole
discretion and without notice. The interest rate for any interest period typically will not be adjusted for any modifications or amendments to SOFR data that may be published after the interest rate for that interest period has been determined.
Since SOFR is a relatively new reference rate, a Fund’s investments in debt securities and other
instruments linked to SOFR may not have an established trading market, and an established trading market may never develop or may not be very liquid. Market terms for instruments linked to SOFR, such as the spread over the base rate reflected in interest rate provisions or the manner of compounding the base rate, may evolve over time, and trading prices for such instruments may be lower than those of
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later-issued SOFR-based debt instruments as a
result. Similarly, if SOFR does not prove to be widely used, the trading price of investments linked to SOFR may be lower than those of investments linked to reference rates that
are more widely used. A Fund may not be able to sell the investments at all or may not be able to sell them at prices that will provide a yield comparable to similar investments that have a developed secondary market, and may consequently suffer from increased pricing volatility and
market risk.
Loans, Loan Participations, Assignments, and Other Direct Debt
Instruments. Direct debt includes interests in loans, notes and other interests in amounts owed to financial institutions by borrowers, such as corporations and governments. Corporate
and sovereign loans typically are structured and negotiated by a group of financial institutions and other investors that provide capital to the borrowers. In return, the borrowers pay interest and repay the loan’s principal. Purchasers of loans and other forms of direct indebtedness depend primarily upon the creditworthiness of the borrower for payment of principal and interest. The
borrower may be in financial distress or may default. If a Fund does not receive scheduled interest or principal payments on such indebtedness, the Fund’s share price and yield could be adversely affected. Loans and other direct debt instruments may pay fixed rates of interest or may pay floating interest rates that are reset periodically on the basis of a floating base lending rate, such as the LIBOR plus a premium, a particular bank’s prime rate, the 90-day Treasury Department Bill rate, the rate of return on commercial paper or bank CDs, an index of short-term tax-exempt rates or some other objective measure. See “LIBOR Rate Risk” for more information on the phasing out of LIBOR. Corporate loans are made generally to finance internal
growth, mergers,
acquisitions, stock repurchases, leveraged buy-outs and other corporate activities. Unlike corporate loans, which are often secured, sovereign loans are typically unsecured. A Fund may invest in secured and unsecured loans.
A Fund may acquire a loan (1) directly at the time of the loan’s closing, (2) through a participation interest, which gives the Fund the right to receive payments of principal, interest and/or other amounts only from the lender selling the participation interest and only when the lender receives the payments from the borrower, or (2) through an assignment in which a Fund succeeds to
the rights of the assigning lender and becomes a lender under the loan agreement.
Participation
Interests — In purchasing a loan participation, a Fund acquires some or all of the interest of a bank or other lending institution in a
loan to a borrower. A Fund’s rights under a participation interest with respect to a particular loan may be more limited than the rights of original lenders or of investors
who acquire an assignment of that loan. In purchasing participation interests, a Fund will have the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the participation interest (the “participating lender”) and only when the participating lender receives the payments from the borrower.
In a participation interest, a Fund will usually have a contractual relationship only with the selling institution and not the underlying borrower. A Fund normally will have to rely on the participating lender to demand and receive payments in respect
of the loans, and to pay those amounts on to the Fund; thus, a Fund will be subject to the risk that the lender may be unwilling or unable to do so. In such a case, a Fund would not likely have any rights against the borrower directly. As a result, a Fund
will assume the credit risk of both the borrower and the lender that is selling the participation. In addition, a Fund generally will have no right to object to certain changes to the loan agreement agreed to by the participating lender.
In buying a participation interest, a Fund might not directly benefit from the
collateral supporting the related loan and may be subject to any rights of set off the borrower has against the selling institution. In the event of bankruptcy or insolvency
of the borrower, the obligation of the borrower to repay the loan may be subject to certain defenses that can be asserted by the borrower as a result of any improper conduct of the participating lender. As a result, a Fund may be subject to delays,
expenses and risks that are greater than those that exist when the Fund is an original lender or assignee.
Assignments
— When a Fund purchases a loan
by assignment, the Fund typically succeeds to the rights of the assigning lender under the loan agreement and becomes a lender under the loan agreement. Subject to the terms of the
loan agreement, a Fund typically succeeds to all the rights and obligations under the loan agreement of the assigning lender. However, assignments may be arranged through private negotiations between potential assignees and potential assignors, and the rights
and obligations acquired by the purchaser of an assignment may differ from, and be more limited than, those held by the assigning lender.
Creditworthiness
— A Fund’s ability to
receive payment of principal, interest and other amounts due in connection with loans will depend primarily on the financial condition of the borrower (and, in some cases, the
lending institution from
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which it purchases the loan). In evaluating the creditworthiness of borrowers, the Adviser or
Sub-Adviser may consider, and may rely in part, on analyses performed by others. Because loan interests may not be rated by independent rating agencies, the decision to invest in a particular loan may depend heavily on the credit analysis of the borrower by the Adviser or
Sub-Adviser or the original lending institution. In selecting the loans and other direct indebtedness that a Fund will purchase, the Adviser or Sub-Adviser will rely on its own credit analysis of the borrower and not solely on a lending institution’s credit analysis of the borrower. Indebtedness of borrowers whose creditworthiness is poor involves substantially greater risks and
may be highly speculative. Borrowers that are in bankruptcy or restructuring may never pay off their indebtedness, or may pay only a small fraction of the amount owed. In connection with the restructuring of a loan or other direct debt instrument
outside of bankruptcy court in a negotiated work-out or in the context of bankruptcy proceedings, equity securities or junior debt securities may be received in exchange for all or a portion of an interest in the security.
In buying a participation interest, a Fund assumes the credit risk of both the
borrower and the participating lender. If the participating lender fails to perform its obligations under the participation agreement, a Fund might incur costs and delays in realizing payment and suffer a loss of principal or interest. If a participating lender becomes insolvent, a Fund may be
treated as a general creditor of that lender. As a general creditor, a Fund may not benefit from a right of set off that the lender has against the borrower. A Fund acquiring a participation interest will evaluate the creditworthiness of the participating
lender or other intermediary participant selling the participation interest.
Agents — Loans are typically administered by a bank, insurance company, finance company or other financial institution (the “agent”) for a lending syndicate of financial institutions. In a typical loan, the agent administers the terms of the loan agreement and is responsible for the collection of principal and interest and fee payments from the borrower and the
apportionment of these payments to all lenders that are parties to the loan agreement. In addition, an institution (which may be the agent) may hold collateral on behalf of the lenders. Typically, under loan agreements, the agent is given broad
authority in monitoring the borrower’s performance and is obligated to use the same care it would use in the management of its own property. In asserting rights against a borrower, a Fund normally will be dependent on the willingness of the lead
bank to assert these rights, or upon a vote of all the lenders to authorize the action.
If an agent becomes insolvent, or has a receiver, conservator, or similar official
appointed for it by the appropriate regulatory authority, or becomes a debtor in a bankruptcy proceeding, the agent’s appointment may be terminated and a successor agent would be appointed. If an appropriate regulator or court determines that assets held by the agent for the benefit of
the purchasers of loans are subject to the claims of the agent’s general or secured creditors, a Fund might incur certain costs and delays in realizing payment on a loan or suffer a loss of principal and/or interest. A Fund may be subject to similar risks when it buys a participation interest or an assignment from an intermediary.
Collateral — Loans that are fully secured offer a Fund more protection than an unsecured loan in the event of non-payment of scheduled interest or principal. However, there is no assurance that the collateral from a secured loan in
which a Fund invests can be promptly liquidated, or that its liquidation value will be equal to the value of the debt. In most loan agreements there is no formal requirement to pledge additional collateral if the value of the initial collateral declines. As a result, a loan may not always be fully collateralized and can decline significantly in value.
If a borrower becomes insolvent, access to collateral may be limited by bankruptcy
and other laws. Borrowers that are in bankruptcy may pay only a small portion of the amount owed, if they are able to pay at all. If a secured loan is foreclosed, a Fund will likely be required to bear the costs and liabilities associated with owning and disposing of the collateral. There
is also a possibility that a Fund will become the owner of its pro rata share of the collateral which may carry additional risks and liabilities. In addition, under legal theories of lender liability, a Fund potentially might be held liable as a co-lender. In the event of a borrower’s bankruptcy or insolvency, the borrower’s obligation to repay the loan may be subject to certain defenses that the borrower can assert as a result of improper conduct by the lending agent. Some loans are unsecured. If the
borrower defaults on an unsecured loan, a Fund will be a general creditor and will not have rights to any specific assets of the borrower.
Liquidity
— Loans are generally subject to
legal or contractual restrictions on resale. Loans are not currently listed on any securities exchange or automatic quotation system, and there may not be an active trading market
for some loans. As a result, a Fund may be unable to sell such investments at an opportune time or may have to resell them at less than fair market value. The lack of a liquid secondary market may have an adverse impact on a Fund’s ability to dispose of particular
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assignments or
participations when necessary to meet redemptions of Fund shares, to meet the Fund’s liquidity needs or when necessary in response to a specific economic event, such as
deterioration in the creditworthiness of the borrower. In addition, transactions in loan investments may take a significant amount of time to settle (i.e., more than seven days and
up to several weeks or longer). Accordingly, the proceeds from the sale of a loan investment may not be available to make additional investments or to meet redemption obligations until potentially a substantial period after the sale of the loan.
The extended trade settlement periods could force a Fund to liquidate other securities to meet redemptions and may present a risk that the Fund may incur losses in order to timely honor redemptions. To the extent that the Adviser or Sub-Adviser
determines that any such investments are illiquid, they will be subject to the Funds’ restrictions on investments in illiquid securities.
Prepayment
Risk — The borrower in a loan arrangement may, either at its own election or pursuant to the terms of the loan documentation,
prepay amounts of the loan from time to time. Due to prepayment, the actual maturity of loans is typically shorter than their stated final maturity calculated solely on the basis
of the stated life and payment schedule. The degree to which borrowers prepay loans, whether as a contractual requirement or at their election, may be affected by general business conditions, the financial condition of the borrower and competitive conditions among lenders, among other things.
As such, prepayments cannot be predicted with accuracy. Upon a prepayment, either in part or in full, the actual outstanding debt on which a Fund derives interest income will be reduced. The effect of prepayments on a Fund’s performance may be
mitigated by the receipt of prepayment fees, and the Fund’s ability to reinvest prepayments in other loans that have similar or identical yields. However, there is no
assurance that a Fund will be able to reinvest the proceeds of any loan prepayment at the same interest rate or on the same terms as those of the prepaid loan.
Borrower
Covenants — Loan agreements, which set forth the terms of a loan and the obligations of the borrower and lender, contain certain
covenants that mandate or prohibit certain borrower actions, including financial covenants that dictate certain minimum and maximum financial performance levels. Covenants that
require the borrower to maintain certain financial metrics during the life of the loan (such as maintaining certain levels of cash flow and limiting leverage) are known as “maintenance covenants.” These covenants are included to permit the lender to monitor the financial performance of the borrower and declare an event of default if certain criteria are breached, allowing the lender to renegotiate the terms
of the loan based upon the elevated risk levels or take other actions to help mitigate losses. “Covenant lite” loans contain fewer maintenance covenants than traditional loans, or no maintenance covenants at all, and may not include terms that
permit the lender to monitor the financial performance of the borrower and declare an event of default if certain criteria are breached. This may hinder a Fund’s ability to reprice credit risk associated with the borrower and reduce a Fund’s ability to restructure a problematic loan and mitigate potential loss. A Fund may experience relatively greater difficulty or delays
in enforcing its rights on its holdings of certain covenant lite loans than its holdings of loans with the usual covenants. As a result, a Fund’s exposure to losses on covenant lite loans may be increased, especially during a downturn in the credit cycle.
Available Information — Loans normally are not registered with the SEC or any state securities commission or listed on any securities exchange. As a
result, the amount of public information available about a specific loan historically has been less extensive than if the loan were registered or exchange traded. Loans and certain
other forms of direct indebtedness may not be considered “securities” under the federal securities laws, and therefore purchasers of such instruments (such as a Fund) may not be entitled to the protections against fraud and misrepresentation contained in the federal securities
laws. In the absence of definitive regulatory guidance, a Fund relies on the Adviser’s or Sub-Adviser’s research in an attempt to avoid situations where fraud and misrepresentation could adversely affect a Fund.
Fees and
Expenses — A Fund may be required to pay and may receive various commissions and fees in the process of purchasing, holding and selling
loans. The fee component may include any, or a combination of, the following elements: assignment fees, arrangement fees, nonuse fees, facility fees, letter of credit fees, and
ticking fees. Arrangement fees are paid at the commencement of a loan as compensation for the initiation of the transaction. A non-use fee is paid based upon the amount committed but not used under the loan. Facility fees are on-going annual fees paid in connection with a loan.
Letter of credit fees are paid if a loan involves a letter of credit. Ticking fees are paid from the initial commitment indication until loan closing if for an extended period. The amount of fees is negotiated at the time of closing. In addition, a Fund may
incur expenses associated with researching and analyzing potential loan investments, including legal fees.
Leveraged Buy-Out Transactions — Loans purchased by a Fund may represent interests in loans made to finance highly leveraged corporate acquisitions, known as
“leveraged buy-out” transactions, leveraged recapitalization loans and
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other types of acquisition financing. The highly leveraged capital structure of the borrowers in
such transactions may make such loans especially vulnerable to adverse changes in economic or market conditions.
Obligations to Make Future Advances — Certain of the loans and other direct indebtedness acquired by a Fund may involve unfunded commitments of the lenders or
revolving credit facilities under which a borrower may from time to time borrow and repay amounts up to the maximum amount of the facility. In such cases, a Fund would have an
obligation to advance its portion of such additional borrowings upon the terms specified in the loan documentation. Such an obligation may have the effect of requiring a Fund to increase its investment in a company at a time when a Fund might not otherwise
decide to do so (including at a time when the company’s financial condition makes it unlikely that such amounts will be repaid).
Master Limited Partnerships. Master limited partnerships (“MLPs”) are limited partnerships (or similar entities, such as
limited liability companies) in which the ownership units (e.g., limited partnership interests) are publicly traded. MLP units are registered with the SEC and are freely traded on a securities exchange or in the OTC market. Many MLPs operate in oil and gas related
businesses, including energy processing and distribution. Many MLPs are pass-through entities that generally are taxed at the unitholder level and are not subject to federal or state income tax at the entity level. Annual income, gains, losses, deductions and credits of such an MLP pass through directly to its unitholders. Distributions from an MLP may consist in part of a return of capital. Generally, an MLP is operated under the supervision of one or more general partners. Limited partners are not involved in the day-to-day management of an MLP. Investing in MLPs involves certain risks related to investing in their underlying assets and risks associated with pooled investment vehicles. MLPs holding credit-related investments are subject to interest rate risk and the risk of default on payment obligations
by debt issuers. MLPs that concentrate in a particular industry or a particular
geographic region are subject to risks associated with such industry or region. Investments held by MLPs may be relatively illiquid, limiting the MLPs’ ability to vary their portfolios promptly in response to changes in economic or other conditions. MLPs may have limited financial resources, their securities may trade infrequently and in limited volume, and they may be subject to more abrupt or erratic price movements than securities of larger or more broadly based companies. The risks of investing in an MLP
are generally those inherent in investing in a partnership as opposed to a corporation. For example, state law governing partnerships is different than state law governing corporations. Accordingly, there may be fewer protections afforded investors in an MLP
than investors in a corporation. For example, although unitholders of an MLP are generally limited in their liability, similar to a corporation’s shareholders, creditors typically have the right to seek the return of distributions made to unitholders if the liability in question arose before the distributions were paid. This liability may stay attached to a unitholder even after it sells its units.
Mortgage-Backed or Mortgage-Related Securities. Certain of the Funds may invest in mortgage-related securities (i.e., mortgage-backed securities). Mortgage-backed securities (“MBS”) represent direct or indirect participations in, or are secured by and payable from, pools of mortgage loans. Those securities may be guaranteed by a U.S. Government agency or instrumentality (such as the Government National Mortgage Association, or “Ginnie Mae”); issued and guaranteed by a government-sponsored stockholder-owned corporation, though not backed by the full faith and credit of the United States (such as by the Federal National Mortgage Association, or “Fannie Mae”, or the Federal Home Loan Mortgage Corporation, or “Freddie Mac” (collectively,
the “GSEs”), and described in greater detail below); or issued by fully private issuers. Private issuers are generally originators of and investors in mortgage loans and include savings associations, mortgage bankers, commercial banks, investment bankers, and
special purpose entities. Private MBS may be supported by various forms of insurance or guarantees, including individual loan, title, pool and hazard insurance and letters of credit, which may be issued by governmental entities, private insurers or the mortgage poolers.
Government-related
guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include Fannie Mae and Freddie Mac. Fannie Mae is a government-sponsored corporation owned by
stockholders. It is subject to general regulation by the Federal Housing Finance Authority (“FHFA”). Fannie Mae purchases residential mortgages from a list of approved
seller/servicers that include state and federally chartered savings and loan associations, mutual savings banks, commercial banks, credit unions and mortgage bankers. Fannie Mae guarantees the timely payment of principal and interest on pass-through securities that it
issues, but those securities are not backed by the full faith and credit of the U.S. Government.
Freddie Mac is a government-sponsored corporation owned by stockholders. Freddie Mac issues Participation Certificates (“PCs”), which represent interests in mortgages from Freddie Mac’s national portfolio. Freddie Mac guarantees the timely payment of interest and ultimate collection of principal on the PCs it issues, but those PCs are not backed by the full faith and credit of the U.S. Government.
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Fannie Mae and Freddie Mac also securitize reperforming loans (“RPLs”), which are loans that have previously been delinquent but are current at the time they are securitized. For example, in Fannie Mae’s case, the RPLs are single-family, fixed rate reperforming loans that generally were previously placed in a mortgage backed securities trust guaranteed by Fannie Mae, purchased from
the trust by Fannie Mae and held as a distressed asset after four or more months of delinquency, and subsequently became current (i.e., performing) again. Such RPLs may have exited delinquency through efforts at reducing defaults (e.g., loan modification). In selecting RPLs for securitization, Fannie Mae follows certain criteria related to the length of time the loan has been performing, the type of loan (single-family, fixed rate), and the status of the loan as first lien, among other things. Fannie Mae may include different loan structures and modification programs in the future.
The U.S. Treasury historically had the authority to purchase obligations of Fannie Mae and Freddie Mac. However, in 2008, due to capitalization concerns, Congress provided the U.S. Treasury with additional
authority to lend the GSEs emergency funds and
to purchase their stock. In September 2008, those capital concerns led the U.S. Treasury and the FHFA to announce that the GSEs had been placed in conservatorship. Since that time, the GSEs have received significant capital support through U.S. Treasury
preferred stock purchases as well as U.S. Treasury and Federal Reserve purchases of their MBS. While the MBS purchase programs ended in 2010, the U.S. Treasury announced in December 2009 that it would continue its support for the entities’ capital as necessary to prevent a negative net worth. However, no assurance can be given that the Federal Reserve, U.S. Treasury, or FHFA initiatives will ensure that the GSEs will remain successful in meeting their obligations with respect to the debt and MBS they issue into
the future.
In 2012,
the FHFA initiated a strategic plan to develop a program related to credit risk transfers intended to reduce Fannie Mae’s and Freddie Mac’s overall risk through the
creation of credit risk transfer assets (“CRTs”). CRTs come in two primary series: Structured Agency Credit Risk (“STACRs”) for Freddie Mac and Connecticut
Avenue Securities (“CAS”) for Fannie Mae, although other series may be developed in the future. CRTs are typically structured as unsecured general obligations of either
entity guaranteed by a government-sponsored stockholder-owned corporation, though not backed by the full faith and credit of the United States (such as by GSEs or special purpose entities), and their cash flows are based on the performance of a pool of reference loans.
Unlike traditional residential MBS securities, bond payments typically do not come directly from the underlying mortgages. Instead, the GSEs either make the payments to CRT investors, or the GSEs make certain payments to the special purpose entities and
the special purpose entities make payments to the investors. The risks associated with these investments are different than the risks associated with an investment in mortgage-backed securities issued by GSEs or a private issuer. In certain structures, the special purpose entities make payments to the GSEs upon the occurrence of credit events with respect to the underlying mortgages, and the obligation of the special purpose entity to make such payments to the GSE is senior to the obligation of the special purpose entity to make payments to the CRT investors. CRTs are typically floating rate securities and may have multiple tranches with
losses first allocated to the most junior or subordinate tranche. This structure results in increased sensitivity to dramatic housing downturns, especially for the subordinate tranches. In the event of a default on the obligations to noteholders, noteholders have no recourse to the underlying mortgage loans. In addition, some or all of the mortgage default risk associated with the underlying mortgage loans is transferred to noteholders. As a result, there can be no assurance that losses will not occur on an investment in GSE credit risk transfer securities, and Funds investing in these instruments may be exposed to the risk of loss on their investment. In addition, these investments are subject to prepayment risk. Many CRTs also have collateral performance triggers (e.g., based on credit enhancement, delinquencies
or defaults, etc.) that could shut off principal payments to subordinate tranches. Generally, GSEs have the ability to call all of the CRT tranches at par in 10 years.
There remains significant uncertainty as to whether (or when) Fannie Mae and Freddie Mac will emerge from conservatorship, which has no specified termination date. Fannie Mae and Freddie Mac also are the subject of several continuing class action lawsuits and investigations by federal regulators, which (along with any resulting financial restatements) may adversely affect the
guaranteeing entities. In addition, the future of Fannie Mae and Freddie Mac is in question as Congress may consider reforms of Fannie Mae and Freddie Mac, which could address their structure, mission, portfolio limits and guarantee fees, among other
issues. The potential impact of these developments is unclear, but they could cause a Fund to lose money.
In late 2020, the FHFA issued a new capital rule requiring Fannie Mae and Freddie Mac to hold $283
billion in unadjusted total capital as of June 30, 2020, based on their assets at the time. In January 2021, the FHFA and the U.S. Treasury agreed to amend the preferred stock purchase agreements for the shares in the Fannie Mae and Freddie Mac that the federal government continues
to hold. The amendments permit Fannie Mae and Freddie Mac to retain all earnings until they have reached the requirements set by the 2020 capital rule.
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On June 3, 2019, under the FHFA’s “Single Security Initiative,” Fannie Mae and Freddie Mac ceased issuing their own mortgage-based securities and started issuing uniform mortgage-backed securities (“UMBS”). The Single Security Initiative seeks to align the characteristics of certain Fannie Mae and Freddie Mac mortgage-based securities and to support the overall liquidity in certain markets. Each UMBS will have a 55-day remittance cycle and can be used as collateral in either a Fannie Mae or Freddie Mac
security or held for investment. In addition, investors may be approached to convert existing mortgage-backed securities into UMBS, possibly with an inducement fee being offered to holders of Freddie Mac mortgage-backed securities. The effects that
the Single Security Initiative may have on the market and other mortgage-backed securities are uncertain.
Unlike MBS issued or guaranteed by the U.S. Government or one of the GSEs, MBS issued by private issuers
do not have a government or GSE guarantee. Private issuers may purchase various forms of private insurance or guarantees, including individual loan, title, pool and hazard insurance, to support the timely payment of principal and interest of the underlying mortgage loans. However, there can be no assurance that the private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. In addition, privately issued MBS are not traded on an exchange and there may be a limited market
for the securities, especially when there is a perceived weakness in the mortgage and real estate market sectors. Without an active trading market, private MBS may be particularly difficult to value because of the complexities involved in assessing the value
of the underlying mortgage loans.
The value of MBS may change due to shifts in the market’s perception of issuers and changes in interest rates. In addition, statutory and/or regulatory tax and/or other changes may adversely affect the mortgage securities market as a whole. Privately issued
MBS may offer higher yields than those issued by government entities, but also may be subject to greater price changes than government issues. MBS have yield and maturity characteristics corresponding to the underlying assets. Certain MBS may include
securities backed by pools of mortgage loans made to borrowers with blemished credit histories (“subprime” loans). The underwriting standards for subprime loans may be lower and more flexible than the standards generally used by lenders for
borrowers with non-blemished credit histories with respect to the borrower’s credit standing and repayment history. The risk of non-payment is greater for MBS that are backed by mortgage pools that contain subprime loans, but a level of risk exists for all loans. Market factors adversely affecting mortgage loan repayments may include a general economic downturn, high
unemployment, a general slowdown in the real estate market, a drop in the market prices of real estate, or an increase in interest rates resulting in higher mortgage payments by holders of adjustable rate mortgages. Unlike traditional debt securities, which
may pay a fixed rate of interest until maturity, when the entire principal amount comes due, payments on certain MBS include both interest and a partial repayment of principal. Besides the scheduled repayment of principal, repayments of principal may
result from the voluntary prepayment, refinancing, or foreclosure of the underlying mortgage loans.
MBS are subject to prepayment risk. Prepayment, which occurs when unscheduled or early payments are made on the underlying mortgages, may shorten the effective maturities of these securities and may lower their returns. If property owners make
unscheduled prepayments of their mortgage loans, these prepayments will result in early payment of the applicable MBS. In that event, the Funds may be unable to invest the proceeds from the early payment of the MBS in an investment that provides
as high a yield as the MBS. Consequently, early payment associated with MBS may cause these securities to experience significantly greater price and yield volatility than that experienced by traditional fixed-income securities. The occurrence of mortgage
prepayments is affected by factors including the level of interest rates, general economic conditions, the location and age of the mortgage and other social and demographic conditions. During periods of falling interest rates, the rate of mortgage
prepayments tends to increase, thereby tending to decrease the life of MBS. During periods of rising interest rates, the rate of mortgage prepayments usually decreases, thereby tending to increase the life of MBS. Since the value of long-term securities
generally fluctuates more widely in response to changes in interest rates than that of shorter-term securities, maturity extension could increase the inherent volatility of a Fund. This is known as extension risk. If the life of a MBS is inaccurately predicted, a Fund may not be able to realize the rate of return it expected. Under certain interest rate and prepayment scenarios, a Fund may fail to recoup fully its investment in MBS notwithstanding any direct or indirect governmental or agency guarantee.
MBS are less effective than other types of securities as a means of “locking in” attractive long-term interest rates. One reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting from declines in interest
rates. Prepayments may cause losses on securities purchased at a premium. At times, some of the MBS in
which a Fund may invest will have higher than market interest rates and, therefore, will be purchased at a premium above their par value. Unscheduled prepayments, which are made at par, will cause a Fund to experience a loss equal to any unamortized
premium.
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Certain Funds may invest in CMOs and stripped MBS that represent a participation in, or are secured by, mortgage loans. Some MBS, such as CMOs, make payments of both principal and interest at a variety of intervals; others make semiannual interest
payments at a predetermined rate and repay principal at maturity (like a typical bond). MBS are based on different types of mortgages including those on commercial real estate or residential properties.
CMOs may be issued by a U.S. Government agency or instrumentality or by a private issuer. Although payment of the principal of, and interest on, the underlying collateral securing privately issued CMOs may be guaranteed by the U.S. Government or its
agencies or instrumentalities, these CMOs represent obligations solely of the private issuer and are not insured or guaranteed by the U.S. Government, its agencies or instrumentalities or any other person or entity. Prepayments could cause early retirement of CMOs. CMOs are designed to reduce the risk of prepayment for investors by issuing multiple classes of securities (or “tranches”), each having different maturities, interest rates and payment schedules, and with the principal and interest on the underlying
mortgages allocated among the several classes in various ways. Payment of interest or principal on some classes or series of CMOs may be subject to contingencies or some classes or series may bear some or all of the risk of default on the underlying
mortgages. CMOs of different classes or series are generally retired in sequence as the underlying mortgage loans in the mortgage pool are repaid. If enough mortgages are repaid ahead of schedule, the classes or series of a CMO with the earliest maturities
generally will be retired prior to their maturities. Thus, the early retirement of particular classes or series of a CMO held by a Fund would have the same effect as the prepayment of mortgages underlying other MBS. Conversely, slower than anticipated
prepayments can extend the effective maturities of CMOs, subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities, and, therefore, potentially increasing the volatility of a Fund that invests in CMOs.
Stripped MBS are created
when a U.S. Government agency or a financial institution separates the interest and principal components of a MBS and sells them as individual securities. The securities may be
issued by agencies or instrumentalities of the U.S. Government and private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks,
commercial banks, investment banks and special purpose entities of the foregoing. Stripped MBS are usually structured with two classes that receive different portions of the interest and principal distributions on a pool of mortgage loans. The holder of the “principal-only” security (“PO”) receives the principal payments made by the underlying MBS, while the holder of the “interest-only” security (“IO”) receives interest payments from the same underlying security. The Funds may invest in both the IO class and the PO class. The
prices of stripped MBS may be particularly affected by changes in interest rates. The yield to maturity on an IO class of stripped MBS is extremely sensitive not only to changes in prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying assets. As interest rates fall, prepayment rates tend to increase, which tends to reduce prices
of IOs and increase prices of POs. Rising interest rates can have the opposite effect.
Prepayments may also result in losses on stripped MBS. A rapid rate of principal prepayments may have a measurable adverse effect on a Fund’s yield to maturity to the extent it invests in IOs. If the assets underlying the IO experience greater than anticipated prepayments of principal, a Fund may fail to recoup fully its initial investments in these securities. Conversely, POs tend to increase in value if prepayments are greater than anticipated and decline if prepayments are slower than anticipated. The secondary market for stripped MBS may be more volatile and less liquid than that for other MBS, potentially limiting the Funds’ ability to buy or sell those securities at any particular time.
As CMOs have evolved, some classes of CMO bonds have become more common. For example, the Funds may invest in
parallel-pay and planned amortization class (“PAC”) CMOs and multi-class pass through certificates. Parallel-pay CMOs and multi-class passthrough certificates are structured to provide payments of principal on each payment date to more than one
class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class, which, as with other CMO and multi-class pass-through structures, must be retired by its stated maturity date or final distribution date but may be retired earlier. PACs generally require payments of a specified amount of principal on each payment date. PACs are parallel-pay CMOs with the required principal amount on such securities having the highest priority after interest has been paid to all classes. Any CMO or multi-class pass through structure that includes PAC securities must also have support tranches — known as support bonds, companion bonds or non-PAC bonds— which lend or
absorb principal cash flows to allow
the PAC securities to maintain their stated maturities and final distribution dates within a range of actual prepayment experience. These support tranches are subject to a higher level of maturity risk compared to other mortgage-related securities, and usually provide a higher yield to compensate investors. If principal cash flows are received in amounts outside a pre-determined range
such that the support bonds cannot lend or absorb sufficient cash flows to the PAC securities as intended, the PAC securities are
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subject to heightened maturity risk. Consistent
with a Fund’s investment objectives and policies, the Fund may invest in various tranches of CMO bonds, including support bonds.
Certain Funds may also invest in directly placed mortgages including residential mortgages, multifamily
mortgages, mortgages on cooperative apartment buildings, commercial mortgages, and sale-leasebacks. These investments are backed by assets such as office buildings, shopping centers, retail stores, warehouses, apartment buildings and single-family dwellings. In the event that a Fund forecloses on any non-performing mortgage, it could end up acquiring a direct interest in the underlying real property and the Fund would then be subject to the risks generally associated with the ownership of real property. There may be fluctuations in the market value of the foreclosed property and its occupancy rates, rent schedules and operating expenses. Investment in
direct mortgages involve many of the same risks as investments in mortgage-related securities. There may also be adverse changes in local, regional or general economic conditions, deterioration of the real estate market and the financial circumstances of tenants and sellers, unfavorable changes in zoning, building, environmental and other laws, increased real property taxes, rising interest rates, reduced availability and increased cost of mortgage borrowings, the need for anticipated renovations, unexpected increases in the cost of energy, environmental factors, acts of God and other factors which are beyond the control of a Fund or the Adviser or any Sub-Adviser. Hazardous or toxic substances may be present on, at or under the mortgaged property and adversely affect
the value of the property. In addition, the owners of the property containing such substances may be held responsible, under various laws, for containing, monitoring, removing or cleaning up such substances. The presence of such substances may also
provide a basis for other claims by third parties. Costs of clean-up or of liabilities to third parties may exceed the value of the property. In addition, these risks may be uninsurable. In light of these and similar risks, it may be impossible to dispose profitably of properties in foreclosure.
Mortgage Dollar Rolls. Certain of the Funds may enter into mortgage dollar rolls in which a Fund sells securities for delivery in the current month
and simultaneously contracts with the same counterparty to repurchase similar (same type, coupon and maturity) but not identical securities on a specified future date at a
pre-determined price. During the roll period, a Fund loses the right to receive principal (including prepayments of principal) and interest paid on the securities sold. However,
the Fund would benefit to the extent of any difference between the price received for the securities sold and the lower forward price for the future purchase (often referred to as the “drop”) or fee income plus the interest earned on the cash proceeds of the securities sold until the settlement date of the forward purchase. Unless such benefits exceed the income, capital appreciation and gain
or loss due to mortgage prepayments that would have been realized on the securities sold as part of the mortgage dollar roll, the use of this technique will diminish the investment performance of a Fund compared with what such performance would have
been without the use of mortgage dollar rolls. Accordingly, the benefits derived from the use of mortgage dollar rolls depend upon the Adviser’s or Sub-Adviser’s ability to manage mortgage prepayments. There is no assurance that mortgage dollar rolls can be successfully employed. A “dollar roll” transaction can be viewed as a collateralized borrowing in which a Fund pledges a mortgage-related security to a dealer to obtain cash. However, in a “dollar roll” transaction, the dealer with which a Fund enters into a transaction is not obligated to return the same securities as those originally sold by the Fund, but generally only securities which are “substantially identical.” To be considered “substantially identical,” the securities returned to a Fund generally must: (1) be collateralized
by the same types of underlying mortgages; (2) be issued by the same agency and be part of the same program;
(3) have a similar original stated maturity; (4) have identical net coupon rates; (5) have similar market yields (and therefore price); and (6) satisfy “good delivery” requirements, meaning that the aggregate principal amounts of the securities delivered and received back must be within 0.01% of the initial amount delivered. If the dealer files for bankruptcy or becomes insolvent, a Fund’s right to repurchase or sell securities may be limited. Mortgage dollar rolls may be subject to leverage risks. In addition, mortgage dollar rolls may increase interest rate risk and result in an increased portfolio turnover rate, which would increase costs and may increase a Fund’s realized net gains that must be distributed to its shareholders. All cash proceeds from dollar roll transactions will be invested in
instruments that are permissible investments for a Fund. A Fund will maintain until the settlement date the segregation, either on the records of the Adviser, the applicable Sub-Adviser or with the Fund’s custodian, of cash or other liquid securities in an amount not less than the forward purchase price. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives and certain other transactions
may be impacted. The Funds intend to comply with Rule 18f-4 on or before the compliance date of August 19, 2022. For more information about these practices, see the “Derivatives” section. Because dollar roll transactions may be for terms ranging between one and six months, dollar roll transactions may be deemed “illiquid” and subject to the risks of investing in illiquid securities as well as to a Fund’s overall limitations on investments in illiquid securities.
Municipal Securities. Certain of the Funds may invest in municipal securities (“municipals”), including residual interest bonds, which
are debt obligations issued by local, state and regional governments that provide interest income that is excludable from
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gross income for federal income tax purposes
(“excludable interest”). Municipals include both municipal bonds (those securities with maturities of five years or more) and municipal notes (those with maturities of
less than five years). Municipal bonds are issued for a wide variety of reasons, including: to construct public facilities, such as airports, highways, bridges, schools, hospitals,
mass transportation, streets, water and sewer works; to obtain funds for operating expenses; to refund outstanding municipal obligations; and to loan funds to various public institutions and facilities. Certain private activity bonds (“PABs”) are also considered municipals if the interest thereon is excludable interest (even though that interest may be an item of tax preference for purposes of the federal alternative minimum tax). PABs are issued by or on behalf of public authorities to obtain funds for various privately operated
manufacturing facilities, housing, sports arenas, convention centers, airports, mass transportation systems and water, gas or sewer works. PABs are ordinarily dependent on the credit quality of a private user, not the public issuer.
The value of municipal securities can be affected by changes in the actual or perceived credit quality of the issuer, which can be affected by, among other things, the financial condition of the issuer, the issuer’s future borrowing plans and sources of revenue, the economic feasibility of the revenue bond project or general borrowing purpose, and political or economic developments in
the region where the instrument is issued. Local and national market forces — such as declines in real estate prices or general business activity — shifting
demographics or political gridlock may result in decreasing tax bases, growing entitlement budgets, and increasing construction and/or maintenance costs and could reduce the
ability of certain issuers of municipal securities to repay their obligations. Those obligations are subject to the provisions of bankruptcy, insolvency and other laws affecting
the rights and remedies of creditors. Congress or state legislatures may seek to extend the time for payment of principal or interest, or both, or to impose other constraints upon enforcement of such obligations. Budgetary constraints may cause municipal securities to be more susceptible to downgrade, default and bankruptcy. In addition, difficulties in the municipal securities markets could result in increased illiquidity, volatility and credit risk, and a decrease in the number of municipal securities investment opportunities. There is also the possibility that as a result of litigation or other conditions, the power or ability of issuers to meet their obligations for the payment of interest and principal on their municipal securities may be materially affected or their obligations may be found to be
invalid or unenforceable. These and other factors may adversely affect the value of a Fund’s investments in municipal securities.
The perceived increased likelihood of default among issuers of municipal securities has resulted in
constrained liquidity, increased price volatility and credit downgrades of issuers of municipal securities. Certain issuers of municipal securities have also been unable to obtain additional financing through, or must pay higher interest rates on, new issues, which may reduce revenues available for issuers of municipal securities to pay existing obligations. In addition, the lack of disclosure rules in this area can make it difficult for investors to obtain reliable information on the obligations underlying municipal securities. Adverse developments in the municipal securities market may negatively affect the value of all or a substantial portion of a Fund’s holdings in municipal securities.
Options and Futures Transactions. Certain of the Funds may buy and sell futures and options contracts for any number of reasons, including: to manage its exposure to changes in securities prices and foreign currencies; as an efficient means of adjusting its overall exposure to certain markets; in an effort to enhance income; to protect the value of portfolio securities and to adjust the duration of fixed income investments. Each Fund may purchase, sell, or write call and put options and futures contracts on
securities, financial indices, and foreign currencies and options on futures contracts.
The risk of loss in trading futures contracts can be substantial because of the low margin deposits required and the extremely high degree of leveraging involved in futures trading. As a result, a relatively small price movement in a futures contract may cause an immediate and substantial loss or gain. The primary risks associated with the use of futures contracts and options are: (i) imperfect correlation between the change in market value of the stocks held by a Fund and the prices of futures contracts
and options; and (ii) possible lack of a liquid secondary market for a futures contract or an option and the resulting inability to close a futures position or option prior to its maturity date. The degree of imperfection of correlation depends on circumstances such as variations in speculative market demand for futures and futures options on securities, including technical influences in futures trading and futures options, and differences between the financial instruments being hedged and the instruments underlying the standard contracts available for trading in such respects as interest rate levels, maturities, and creditworthiness of issuers.
Following is a description of specific Options and Futures Transactions. For information concerning the
risks associated with utilizing options, futures contracts, and forward foreign currency exchange contracts, please see “Risks of Transactions in Options, Futures Contracts, and Forward Currency Contracts.”
Futures Transactions. Certain of the Funds may utilize futures contracts. Futures contracts (a potentially high-risk investment) enable a Fund to
buy or sell an asset in the future at an agreed upon price. A futures contract is a bilateral agreement to buy or sell a security or other commodity (or deliver a cash settlement
price, in the case of a contract relating to a rate or an index
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or otherwise not calling for physical delivery at the end of trading in the contracts) for a set price in the future. Futures contracts are listed for trading by boards of trade that have been designated “contracts markets” by the CFTC.
No purchase price is paid or received when the contract is entered into. Instead, a Fund upon entering into a futures contract (and to maintain a Fund’s open positions in futures contracts) would be required to designate the segregation, either on the records of the Adviser, the applicable Sub-Adviser or with the 1290 Funds’ custodian, in the name of the futures broker an amount of cash, United States Government securities, suitable
money market instruments, or liquid, high-grade debt securities, known as
“initial margin.” The minimum margin required for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly modified from time to time by the exchange during the term of the contract. An individual broker, known as a futures commission merchant (“FCM”), may require a greater amount of margin for a particular customer depending upon an assessment of creditworthiness. Futures contracts are customarily purchased and sold on margin that may range upward
from less than 5% of the value of the contract being traded. By using futures contracts as a risk management technique, given the greater liquidity in the futures market than in the cash market, it may be possible to accomplish certain results more quickly and with lower transaction costs.
If
the price of an open futures contract changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches a point
at which the margin on deposit does not satisfy the maintenance margin level, the FCM will issue a margin call to restore the account to the initial margin level. However, if the
value of a position increases because of favorable price changes in the futures contract so that the margin deposit exceeds the required margin, the FCM will transfer the excess to a Fund. These subsequent payments called “variation margin,” to and from the FCM, may be required to be made on a daily or even intraday basis as the price of the underlying assets fluctuate making the long and short positions in the futures contract more or less valuable, a process known as “marking to the market.” A Fund expects to earn interest income on its accounts that exceeds the margin level required by the FCM. However, any such income may be limited or minimal in a
low interest rate environment.
A Fund will incur brokerage fees when it purchases and sells futures contracts. Positions taken in the futures markets are not normally held until delivery or cash settlement is required, but are instead liquidated through offsetting transactions, which may result in a gain or a loss. While futures positions taken by a Fund will usually be liquidated in this manner, the Fund may instead make or take delivery of underlying securities whenever it appears economically advantageous for the Fund to do so. A clearing
organization associated with the exchange on which futures are traded assumes responsibility for closing out transactions and guarantees that as between the clearing members of an exchange, the sale and purchase obligations will be performed with
regard to all positions that remain open at the termination of the contract.
Options on Futures Contracts. Certain of the Funds may purchase and write exchange-traded call and put options on futures contracts of the type which the
particular Fund is authorized to enter into. These options are traded on exchanges that are licensed and regulated by the CFTC for the purpose of options trading. A call option on
a futures contract gives the purchaser the right, in return for the premium paid, to purchase a futures contract (assume a “long” position) at a specified exercise
price at any time before the option expires. A put option gives the purchaser the right, in return for the premium paid, to sell a futures contract (assume a “short” position), for a specified exercise price, at any time before the option expires.
Options on futures contracts can be used by a Fund to hedge substantially the same risks as might be addressed by the direct purchase or sale of the underlying futures contracts. If a Fund purchases an option on a futures contract, it may obtain benefits similar to those that would result if it held the futures position itself. Purchases of options on futures contracts may present less risk in hedging than the purchase and sale of the underlying futures contracts since the potential loss is limited to the amount of the premium plus
related transaction costs.
A Fund will write only options on futures contracts that are “covered.” A Fund will be considered “covered” with respect to a put option it has written if, so long as it is obligated as a writer of the put, the Fund segregates, either on the records of the Adviser, the applicable Sub-Adviser or with the Fund’s custodian, cash or other liquid securities at all times equal to or greater than the aggregate exercise price of the puts it has written (less any related margin deposited with the futures broker). A Fund will be considered “covered” with respect to a call option it has written on a debt security future if, so long as it is obligated as a writer of the call, the Fund owns a security deliverable under the futures contract. A Fund will be considered “covered”
with respect to a call option it has written on a securities index future if the Fund owns, so long as the Fund is obligated as the writer of the call, a portfolio of securities the price changes of which are, in the opinion of its Adviser or Sub-Adviser, expected to replicate substantially the movement of the index upon which the futures contract is based. As the Funds transition into reliance on Rule 18f-4, the Funds’
46
approach to asset segregation and coverage
requirements described in this SAI with respect to derivatives may be impacted. The Funds intend to comply with Rule 18f-4 on or before the compliance date of August 19, 2022. For
more information on asset segregation and coverage practices, see the “Derivatives” section.
Upon the exercise of a call option, the writer of the option is obligated to sell the futures contract
(to deliver a “long” position to the option holder) at the option exercise price, which will presumably be lower than the current market price of the contract in the futures market. Upon exercise of a put, the writer of the option is obligated to purchase the futures contract (deliver a “short” position to the option holder) at the option exercise price which will presumably be higher than the current market price of the contract in the futures market. When the holder of an option exercises it and assumes a long futures position, in the case of a call, or a short futures position, in the case of a put, its gain will be credited to its futures margin account, while the loss suffered by the writer of the option will be debited to its account and must be immediately paid by the writer. However, as with the trading
of futures, most participants in the options markets do not seek to realize their gains or losses by exercise of their option rights. Instead, the holder of an option will usually realize a gain or loss by buying or selling an offsetting option at a market price that will reflect an increase or a decrease from the premium originally paid.
If a Fund writes options on futures contracts, the Fund will receive a premium but will assume a risk of adverse movement in the price of the underlying futures contract comparable to that involved in holding a futures position. If the option is not exercised, the Fund will realize a gain in the amount of the premium, which may partially offset unfavorable changes in the value of securities held in or to be acquired for the Fund. If the option is
exercised, the Fund will incur a loss in the option transaction, which will be reduced by the amount of the premium it has received, but which will offset any favorable changes in the value of its portfolio securities or, in the case of a put, lower prices of securities it intends to acquire.
Options Transactions. Certain of the Funds may also write and purchase put and call options. An option (another potentially high-risk security) is
a contract that gives the holder of the option, in return for a premium, the right, but not the obligation, to buy from (in the case of a call) or sell to (in the case of a put)
the writer of the option the asset underlying the option at a predetermined price, often at any time during the term of the option for American options or only at expiration for
European options. (The writer of a put or call option would be obligated to buy or sell the underlying asset at a predetermined price during the term of the option.) Each Fund will write put and call options only if such options are considered to be “covered,” except as described below. A call option on a security is covered, for example, when the writer of the call option owns throughout the option period the security on which the option is written (or a security convertible into such a security without the payment of additional consideration). A put option on a security is covered, for example, when the writer of the put maintains throughout the option
period the segregation, either on the records of the Adviser, Sub-Advisers or with the Fund’s custodian, of cash or other liquid assets in an amount equal to or greater than the exercise price of the put option. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives may be impacted. The Funds intend to comply with Rule 18f-4 on or before the compliance date of August 19, 2022. For more
information on asset segregation and coverage practices, see the “Derivatives” section.
Writing Call Options. A call option is a contract which gives the purchaser of the option (in return for a premium paid) the right to buy, and the
writer of the option (in return for a premium received) the obligation to sell, the underlying security at the exercise price at any time prior to the expiration of the option,
regardless of the market price of the security during the option period. If a Fund writes a call option, it will “cover” the position as required by the 1940 Act. A
Fund may “cover” a call option by segregating, either on the records of the Adviser, the applicable Sub-Adviser or with the Fund’s custodian, cash or liquid
assets having a current market value, marked to market daily, at least equal to that of the security underlying the written option, or by owning the security underlying the written option (or a security convertible into such security without additional consideration) throughout the option period. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives may be impacted. The Funds intend to comply with Rule 18f-4 on or before the
compliance date of August 19, 2022. For more information on asset segregation and coverage practices, see the “Derivatives” section.
The writing of a call
option on a futures contract constitutes a partial hedge against declining prices of the underlying securities. If the futures price at expiration is below the exercise price, a
Fund will retain the full amount of the option premium, which provides a partial hedge against any decline that may have occurred in the value of the Fund’s holdings of
securities. The writing of a put option on a futures contract is analogous to the purchase of a futures contract in that it hedges against an increase in the price of securities a Fund intends to acquire. However, the hedge is limited to the amount of premium received for writing the put.
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A Fund will write covered call options both to
reduce the risks associated with certain of its investments and to increase total investment return through the receipt of premiums. In return for the premium income, a Fund will
give up the opportunity to profit from an increase in the market price of the underlying security above the exercise price so long as its obligations under the contract continue, except insofar as the premium represents a profit. Moreover, in writing the call option, a Fund will retain the risk of loss should the price of the security decline. The premium is intended to offset that loss in whole or in part.
Unlike the situation in which a Fund owns securities not subject to a call option, a Fund, in writing
call options, must assume that the call may be exercised at any time prior to the expiration of its obligation as a writer, and that in such circumstances the net proceeds realized from the sale of the underlying securities pursuant to the call may be substantially below the prevailing
market price.
When a
Fund writes a call option, an amount equal to the premium received by the Fund is included in the Fund’s financial statements as an asset and an equivalent liability. The
amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. When an option expires on its stipulated expiration date or a
Fund enters into a closing purchase or sale transaction, the Fund realizes a gain (or loss) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option is extinguished. When an option is exercised, a Fund realizes a gain or loss from the sale of the underlying security, and the proceeds of sale are increased by the premium originally received, or reduced by
the price paid for the option.
A Fund may terminate its obligation under an option it has written by buying an identical option. Such a transaction is called a “closing purchase transaction.” A Fund will realize a gain or loss from a closing purchase transaction if the amount paid to purchase a call option is less or more than the amount received from the sale of the corresponding call option. Also, because increases
in the market price of a call option will generally reflect increases in the market price of the underlying security, any loss resulting from the exercise or closing out of a call option is likely to be offset in whole or part by unrealized appreciation of the underlying security owned by a Fund. When an underlying security is sold from a Fund’s securities portfolio, the Fund will effect a closing purchase transaction so as to close out any existing covered call option on that underlying security.
Writing Put Options. The writer of a put option becomes obligated to purchase the underlying security at a specified price during the option
period if the buyer elects to exercise the option before its expiration date. If a Fund writes a put option, it will “cover” the position as required by the 1940 Act. A
Fund may “cover” a put option by, for example, maintaining the segregation, either on the records of the Adviser, Sub-Advisers or with the Fund’s custodian, of
cash or other liquid assets having a value equal to or greater than the exercise price of the option. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach
to asset segregation and coverage requirements described in this SAI with respect to derivatives may be impacted. The Funds intend to comply with Rule 18f-4 on or before the compliance date of August 19, 2022. For more information on asset segregation and
coverage practices, see the “Derivatives” section.
A Fund may write put options either to earn additional income in the form of option premiums (anticipating that the price of the underlying security will remain stable or rise during the option period and the option will therefore not be exercised) or to acquire the underlying security at a net cost below the current value (e.g., the option is exercised because of a decline in the price of the underlying security, but the amount paid by a Fund, offset by the option premium, is less than the current price). The risk of either strategy is that the price of the underlying security may decline by an amount greater than the premium received. The premium which a Fund receives from writing a put option will reflect, among other things,
the current market price of the underlying security, the relationship of the exercise price to that market price, the historical price volatility of the underlying security, the option period, supply and demand and interest rates.
A Fund may effect a closing purchase transaction to realize a profit on an outstanding put option or to prevent an outstanding put option from being exercised.
Purchasing Put and Call Options. A Fund may purchase put options on securities to increase the Fund’s total investment return or to protect its
holdings against a substantial decline in market value. The purchase of put options on securities will enable a Fund to preserve, at least partially, unrealized gains in an
appreciated security in its portfolio without actually selling the security. In addition, a Fund will continue to receive interest or dividend income on the security. A Fund may
also purchase call options on securities to protect against substantial increases in prices of securities that a Fund intends to purchase pending their ability to invest in an orderly manner in those securities. A Fund may sell put or call options they have previously purchased, which could
48
result in a net gain or loss depending on
whether the amount received on the sale is more or less than the premium and other transaction costs paid on the put or call option which was bought.
Interest Rate Futures Contracts. Interest rate futures contracts are exchange-traded contracts for which the underlying reference asset is an interest-bearing fixed-income security or an inter-bank deposit. Two examples of common interest rate futures contracts are U.S. Treasury futures contracts and Eurodollar futures contracts. The underlying reference asset for a U.S. Treasury futures contract is a U.S. Treasury security. The underlying reference asset for a Eurodollar futures contract, as of the date of this SAI, is LIBOR; Eurodollar futures contracts enable the purchaser to obtain a fixed rate for the lending of funds over a stated period of time and the seller to obtain a fixed rate for a borrowing of funds over that same period. To the extent the reference
rate is based on LIBOR, a Fund will be exposed to additional risk. See the “LIBOR Rate Risk” section for additional information on the phasing out of LIBOR.
Interest rate futures
contracts may be purchased or sold for hedging purposes to attempt to protect against the effects of interest rate changes on a Fund’s current or intended investments in
fixed-income securities. For example, if a Fund owned long-term bonds and interest rates were expected to increase, the Fund might sell interest rate futures contracts. Such a sale
would have much the same effect as selling some of the long-term bonds in the Fund’s portfolio. However, since the market for interest rate futures contracts may generally be more liquid than the cash market for individual bonds, the use of interest rate futures contracts as a hedging technique allows the Fund to hedge its interest rate risk without having to sell its portfolio securities. If interest rates were to increase, the value of the debt securities in the portfolio would decline, but the value of the Fund’s interest rate futures contracts would be expected to increase at approximately the same rate, thereby keeping the net asset value, or NAV, of the Fund from declining as much as it otherwise would have. On the other hand, if interest rates were expected to decline, interest rate futures contracts
could be purchased to hedge in anticipation of subsequent purchases of long-term bonds at higher prices.
Because the fluctuations in the value of the interest rate futures contracts should be similar to those of long-term bonds, the Fund could protect itself against the effects of the anticipated rise in the value of long-term bonds without actually buying them until the necessary cash becomes available or the market has stabilized. At that time, the interest rate futures contracts could be liquidated and the Fund’s cash reserves could then be used to buy long-term bonds on the cash market.
Securities Index Futures Contracts. A securities index futures contract is a contract to buy a certain number of units of the relevant index at a specified
future date at a price agreed upon when the contract is made. A unit is the value at a given time of the relevant index. Purchases or sales of securities index futures contracts
may be used in an attempt to increase a Fund’s total investment return or to protect a Fund’s current or intended investments from broad fluctuations in securities
prices. Additionally, through the use of index futures, a Fund may maintain a pool of assets with diversified risk without incurring the substantial brokerage costs that may be associated with investment in multiple issuers. This may permit a Fund to avoid potential market and liquidity problems (e.g., driving up or forcing down the price by quickly purchasing or selling shares of a portfolio security) that may result from increases or decreases in positions already held by a Fund. A securities index futures contract does not require the physical delivery of securities, but merely provides for profits and losses resulting from changes in the market value of the contract to be credited or debited at the close of each trading day to the respective accounts of the parties to the contract. On the contract’s expiration
date a final cash settlement occurs and the futures positions are simply closed out. Changes in the market value of
a particular index futures contract reflect changes in the specified index of securities on which the future is based.
By establishing an appropriate “short” position in index futures, a Fund may also seek to
protect the value of its portfolio against an overall decline in the market for such securities. Alternatively, in anticipation of a generally rising market, a Fund can seek to
avoid losing the benefit of apparently low current prices by establishing a “long” position in securities index futures and later liquidating that position as particular securities are in fact acquired. To the extent that these hedging strategies are successful, a Fund will be affected to a lesser degree by adverse overall market price movements than would otherwise be the case.
A broad-based security index will generally have at least ten component issues, while a narrow-based
security index will generally have nine or fewer. Futures contracts on a broad-based security index are subject to exclusive regulatory jurisdiction of the CFTC, while futures contracts on a narrow-based security index are a class of “security futures” subject to joint SEC-CFTC jurisdiction.
Securities Index Options. A Fund may write covered put and call options and purchase call and put options on securities indices for the purpose of increasing the Fund’s total investment return or hedging against the risk of unfavorable price movements adversely affecting the value of a Fund’s securities or securities it intends to purchase. Unlike a stock option, which gives the holder the right to purchase or sell a specified stock at a specified price, an option on a securities index gives the holder the right to receive a cash “exercise settlement amount” equal to the difference between the exercise price of the option and the value of the underlying
49
stock index on the exercise date, multiplied by
a fixed “index multiplier.” Each Fund writes only “covered” options. A call option on a securities index is considered covered, for example, if, so long as
a Fund is obligated as the writer of the call, it holds securities the price changes of which are, in the opinion of the Fund’s Adviser or Sub-Adviser, expected to replicate
substantially the movement of the index or indices upon which the options written by the Fund are based. A put option on a securities index written by a Fund will be considered covered if, so long as it is obligated as the writer of the put, the Fund segregates, either on the records of the Adviser or Sub-Adviser or with the Fund’s custodian, cash or other liquid assets having a value equal to or greater than the exercise price of the option. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives may be impacted. The Funds intend to comply with Rule 18f-4 on
or before the compliance date of August 19, 2022. For more information on asset segregation and coverage practices, see the “Derivatives” section.
Securities index options are subject to exclusive SEC jurisdiction.
A securities index fluctuates with changes in the market value of the securities so included. For example, some securities index options are based on a broad market index such as the Standard & Poor’s 500 Composite Stock Index (“S&P 500 Index”) or the NYSE Composite Index, or a narrower market index such as the S&P 100 Index (a subset of the S&P 500 Index). Indices may also be based on an industry or market segment such as the NYSE Arca Oil and
Gas Index or the NASDAQ Computer Index.
Over-the-Counter Options. Certain of the Funds may engage in over the counter put and call option transactions. Options traded in the OTC market may
not be as actively traded as those on an exchange, so it may be more difficult to value such options. In addition, it may be difficult to enter into closing transactions with
respect to such options. Such OTC options, and the securities used as “cover” for such options, may be considered illiquid securities. Certain Funds may enter into
contracts (or amend existing contracts) with primary dealers with whom they write OTC options. The contracts will provide that each Fund has the absolute right to repurchase an option it writes at any time at a repurchase price which represents the fair market value, as determined in good faith through negotiation between the parties, but which in no event will exceed a price determined pursuant to a formula contained in the contract. Although the specific details of the formula may vary between contracts with different primary dealers, the formula will generally be based on a multiple of the premium received by each Fund for writing the option, plus the amount, if any, of the option’s intrinsic value (i.e., the amount the option is “in-the-money”). The formula will also include a factor to account for
the difference between the price of the security and the strike price of the option if the option is written “out-of-the-money.” Although the specific details of the formula may vary with different primary dealers, each contract will provide a formula to determine the maximum price at which each Fund can repurchase the option at any time. The Funds may be subject to the risk that firms
participating in such transactions will fail to meet their obligations. Unless the parties provide for it, no central clearing or guaranty function is involved in an OTC option. As a result, if a counterparty fails to make or take delivery of the security, currency or other instrument underlying an OTC option it has entered into with a Fund or fails to make a cash settlement payment due in accordance with the terms of that option, the Fund will lose any premium it paid for the option as well as any anticipated benefit of the
transaction. In instances in which a Fund has entered into agreements with respect to the OTC options it has written, and such agreements would enable the Fund to have an absolute right to repurchase at a pre-established formula price the OTC option
written by it, the Fund would treat as illiquid only securities equal in amount to the formula price described above less the amount by which the option is “in-the-money,” i.e., the amount by which the price of the option exceeds the exercise price. Certain OTC options are considered to be swaps. For information concerning the risks associated with utilizing swaps, please see “Swaps.”
Limitations on Purchase and Sale of Options, Futures Contracts and Options on Futures
Contracts. A Fund may invest
in futures and options for hedging purposes, as well as non-hedging purposes, to the extent permitted in the Prospectus and SAI. In instances involving the purchase of futures contracts or the writing of put options thereon by a Fund, an amount of cash and cash equivalents, equal to the cost of such futures contracts or options written (less any related margin deposits), will be designated either on the records of the Adviser, Sub-Advisers or with the Fund’s custodian, thereby insuring that the use of such futures contracts and options is unleveraged. In instances involving the sale of futures contracts or the writing of call options thereon by a Fund, the Fund generally will seek to, but is not required to, hold the securities underlying such futures contracts or options. In the case of index futures
and related options, a Fund may, but is not required to, own securities the price changes of which are, in the opinion of its Adviser or Sub-Adviser, expected to replicate substantially the movement of the index upon which the futures contract or option is based. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives may be impacted. The Funds intend to comply with
Rule 18f-4 on or before the compliance date of August 19, 2022. For more information on asset segregation and coverage practices, see the “Derivatives” section.
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Risks of Transactions in Options, Futures Contracts and Forward Currency Contracts
Options. A
closing purchase transaction for exchange-traded options may be made only on a national securities exchange (“exchange”). There is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular time, and for some options, such as OTC options, no secondary market on an exchange may exist. A
liquid secondary market for particular options, whether traded OTC or on an exchange may be absent for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be imposed with respect to particular classes or series of options or underlying securities; unusual or unforeseen circumstances may interrupt normal operations on an exchange; the facilities of an exchange or the Options Clearing Corporation may not at all times be adequate to handle current trading
volume; or one or more exchanges could, for economic or other reasons, decide or be compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable in accordance with their terms. If a Fund
is unable to effect a closing purchase transaction, the Fund will not sell the underlying security until the option expires or the Fund delivers the underlying security upon exercise.
Options traded in the OTC market may not be as actively traded as those on an exchange. Accordingly, it may be more difficult to value such options. In addition, it may be difficult to enter into closing transactions with respect to options traded OTC. The Funds will engage in such transactions only with firms of sufficient credit so as to minimize these risks. Such options and the securities used as “cover” for such options may be considered illiquid securities.
The effectiveness of hedging through the purchase of securities index options will depend upon the extent to which
price movements in the portion of the securities portfolio being hedged correlate with price movements in the selected securities
index. Perfect correlation is not possible because the securities held or to be acquired by a Fund will not exactly match the composition of the securities indices on which options are written. There are a number of factors which may prevent derivatives or other strategies used by a Fund from achieving desired correlation (or inverse correlation) with an index. These may include, but are not limited to: (i) the impact of a Fund’s fees, expenses and transaction costs, including borrowing and brokerage costs/bid-ask spreads, which are not reflected in index returns; (ii) differences in the timing of daily calculations of the value of an index and the timing of the valuation of derivatives, securities and other assets held by a Fund and the determination of the net asset value of the Fund’s shares; (iii)
disruptions or illiquidity in the markets for derivative instruments or securities in which a Fund invests; (iv) a Fund having exposure to or holding less than all of the securities in the underlying index and/or having exposure to or holding securities not included in the underlying index; (v) large or unexpected movements of assets into and out of a Fund (due to share purchases or redemptions, for example), potentially resulting in the Fund being over- or under-exposed to the
index; (vi) the impact of accounting standards or changes thereto; (vii) changes to the applicable index that are not disseminated in advance; (viii) a possible need to conform a Fund’s portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements; and (ix) fluctuations in currency exchange rates. In the purchase of securities index options the principal risk is that the premium and transaction costs paid by a Fund in purchasing an option will be lost if the changes (increase in the case of a call, decrease in the case of a put) in the level of the index do not exceed the cost of the option.
Futures.
The prices of futures contracts are volatile and are influenced, among other things, by actual and anticipated changes in the market and interest rates, which in turn are affected by fiscal and monetary policies and national and international political and economic events.
Most U.S.
futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of
a futures contract may vary either up or down from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in a particular
type of futures contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and subjecting some futures traders to substantial losses.
Because of the low margin deposits required, futures trading involves an extremely high degree of
leverage. As a result, a relatively small price movement in a futures contract may result in immediate and substantial loss, as well as gain, to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the
51
value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit, if the contract were closed out. Thus, a purchase or sale of a futures contract may result in losses in excess of the amount invested in the futures contract. In addition, transaction costs associated with investments in futures contracts may be significant, which could cause or increase losses or reduce gains.
A decision of whether, when, and how to hedge involves skill and judgment, and even a well-conceived hedge may be unsuccessful to some degree because of unexpected market behavior, market trends or interest rate trends. There are several risks in connection with the use by a Fund of futures contracts as a hedging device. One risk arises because of the imperfect correlation between
movements in the prices of the futures contracts and movements in the prices of the underlying instruments which are the subject of the hedge. The Adviser or Sub-Adviser will, however, attempt to reduce this risk by entering into futures contracts whose
movements, in its judgment, will have a significant correlation with movements in the prices of the Fund’s underlying instruments sought to be hedged.
Successful use
of futures contracts by a Fund for hedging purposes is also subject to the Adviser’s or Sub-Adviser’s ability to correctly predict movements in the direction of the
market and other economic factors. It is possible that, when a Fund has sold futures to hedge its portfolio against a decline in the market, the index, indices, or instruments
underlying futures might advance and the value of the underlying instruments held in the Fund’s portfolio might decline. If this were to occur, a Fund would lose money
on the futures and also would experience a decline in value in its underlying instruments.
Positions in futures contracts may be closed out only on an exchange or a board of trade which provides the market for such futures. Although the Funds, specified in the Prospectus, intend to purchase or sell futures only on exchanges or boards of trade where there appears to be an active market, there is no guarantee that such will exist for any particular contract or at any particular time. If there is not a liquid market at a particular time, it may not be possible to close a futures position at such time, and, in the event of adverse price movements, a Fund would continue to be required to make daily cash payments of variation margin. If a
Fund has insufficient cash, it may have to sell securities from its portfolio at a time when it may be disadvantageous to do so. However, in the event futures positions are used to
hedge portfolio securities, the securities will not be sold until the futures positions can be liquidated. In such circumstances, an increase in the price of securities, if any,
may partially or completely offset losses on the futures contracts.
Foreign Options and Futures. Participation in foreign futures and foreign options transactions involves the execution and clearing of trades on or
subject to the rules of a foreign board of trade. Neither the National Futures Association nor any domestic exchange regulates activities of any foreign boards of trade, including
the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign board of trade or any applicable foreign law. This is true
even if the exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures or foreign
options transaction occurs. For these reasons, when a Fund trades foreign futures or foreign options contracts, it may not be afforded certain of the protective measures provided by the Commodity Exchange Act, the CFTC’s regulations and the rules of the National Futures Association and any domestic exchange, including the right to use reparations proceedings before the CFTC
and arbitration proceedings provided by the National Futures Association or any domestic exchange. In particular, funds received from a Fund for foreign futures or foreign options transactions may not be provided the same protections as funds received in
respect of transactions on U.S. futures exchanges. In addition, the price of any foreign futures or foreign options contract and, therefore, the potential profit and loss thereon, may be affected by any variance in the foreign exchange rate between the time a Fund’s order is placed and the time it is liquidated, offset or exercised.
Foreign Currency Contracts. A Fund may also seek to enhance returns or hedge against a change in the value of a currency through use of currency futures
or currency options. Hedging against a change in the value of a currency does not eliminate fluctuations in the prices of portfolio securities or prevent losses if the prices of
such securities decline. These hedging transactions also preclude the opportunity for gain if the value of the hedged currency should rise. Whether a currency hedge benefits a Fund
will depend on the ability of a Fund’s Sub-Adviser to predict future currency exchange rates.
The writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received, and a Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses.
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The purchase of an option on foreign currency
may constitute an effective hedge against fluctuations in exchange rates although, in the event of rate movements adverse to a Fund’s position, it may forfeit the entire
amount of the premium plus related transaction costs.
Foreign government exchange controls and restrictions on repatriation of currency can negatively affect currency transactions. These forms of governmental actions can result in losses to a Fund if it is unable to deliver or receive currency or monies to settle obligations. Such governmental actions also could cause hedges it has entered into to be rendered useless, resulting in full currency exposure as well as incurring transaction costs.
The cost to a Fund of engaging in foreign currency transactions varies with such factors as the currencies involved, the length of the contract period and the prevailing market conditions. Since transactions in foreign currency exchanges usually are conducted on
a principal basis, no fees or commissions are involved.
Participatory Notes. A Fund may invest in participatory notes (commonly known as “P-Notes”) issued by banks or broker-dealers that
are designed to replicate the performance of certain issuers and markets. Participatory notes are a type of equity-linked derivative which generally are traded over-the-counter.
The performance results of participatory notes will not replicate exactly the performance of the issuers or markets that the notes seek to replicate due to transaction costs and
other expenses. Investments in participatory notes involve the same risks associated with a direct investment in the shares of the companies the notes seek to replicate. In addition, participatory notes are subject to counterparty risk, which is the risk that the broker-dealer or bank that issues the notes will not fulfill its contractual obligation to complete the transaction with a Fund. Participatory notes constitute general unsecured contractual obligations of the banks or broker-dealers that issue them, and a Fund relies on the creditworthiness of such banks or broker-dealers and has no rights under a participatory note against the issuers of the securities underlying such participatory notes. Participatory notes involve transaction costs. A Fund’s ability to redeem or exercise a participation note generally is
dependent on the liquidity in the local trading market for the security underlying the participation note. Participatory notes may be considered illiquid and, therefore, participatory notes considered illiquid will be subject to a Fund’s percentage limitation on investments in illiquid securities.
Preferred Stocks. Certain of the Funds may invest in preferred stocks. Preferred stocks have the right to receive specified dividends before
the payment of dividends on common stock. Preferred stock is subject to issuer-specific and market risks applicable generally to equity securities. In addition, in the event an
issuer is liquidated or declares bankruptcy, the claims of owners of the issuer’s bonds take precedence over the claims of owners of the issuer’s preferred and common
stock. For this reason, the value of preferred stock will usually react more strongly than bonds and other debt to actual or perceived changes in the company’s financial
condition or prospects. Preferred stock of smaller companies may be more vulnerable to adverse developments than preferred stock of larger companies. If interest rates rise, the specified dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. The value of preferred stocks is sensitive to changes in interest rates and to changes in the issuer’s credit quality. Unlike interest payments on debt securities, preferred stock dividends are payable only if declared by the issuer’s board of directors. Preferred stock also may be subject to optional or mandatory redemption provisions. Cumulative preferred stock requires the
issuer to pay stockholders all prior unpaid dividends before the issuer can pay dividends on common stock, whereas non-cumulative preferred stock does not require the issuer to do so. Some preferred stocks also participate in dividends paid on common stock. Preferred stocks may provide for the issuer to redeem the stock on a specified date. A Fund may treat such redeemable preferred stock as a fixed income security.
Precious Metals. Precious metals, such as gold and silver, generate no interest or dividends, and the return from investments in such
precious metals will be derived solely from the gains and losses realized upon sale. Prices of precious metals may fluctuate, sharply or gradually, and over short or long periods
of time. The prices of precious metals may be significantly affected by factors such as changes in inflation or expectations regarding inflation in various countries, the
availability of supplies and demand, changes in industrial and commercial demand, developments in the precious metals mining industries, precious metals sales by governments,
central banks or international institutions, investment speculation, hedging activity by producers, currency exchange rates, interest rates, and monetary and other economic policies of various governments. In addition, because the majority of the world’s supply of gold and silver is concentrated in a few countries, such investments may be particularly susceptible to political, economic and environmental conditions and events in those countries.
Real Estate Industry Investing. Investments in securities of issuers engaged in the real estate industry entail special risks and considerations. In
particular, securities of such issuers may be subject to risks associated with the direct ownership of real estate. These risks include: the cyclical nature of real estate values,
including the decline in the value of real estate, risks related to general
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and local economic conditions, overbuilding and increased competition, increases in property taxes and operating expenses, demographic trends and variations in rental income, changes in zoning laws, casualty or condemnation losses, environmental
risks, regulatory limitations on rents, changes in neighborhood values, changes in the appeal of properties to tenants, increases in interest rates and other real estate capital market influences. To the extent that assets underlying a Fund’s investments are concentrated geographically, by property type or in certain other respects, the Fund may be subject to certain of the foregoing risks to a greater extent. Generally, increases in interest rates will increase the costs of obtaining financing, which could directly and indirectly decrease the value of the Funds’ investments.
Real Estate Investment Trusts. Certain Funds may invest in real estate investment trusts (“REITs”). REITs pool investors’ funds for
investment primarily in income-producing real estate or real estate related loans or interests. REITs may concentrate their investments in specific geographic areas or in specific
property types, i.e., hotels, shopping malls, residential complexes and office buildings. A REIT is not taxed on net income and net realized gains that it distributes to its owners
if it complies with statutory and regulatory federal income tax requirements relating to its management, organization, ownership, assets and income and a statutory requirement that it distribute to its owners at least 90% of the sum of its REIT taxable income and certain other income for each taxable year. Various other countries have also adopted REIT-like structures that receive comparable tax treatment, provided that certain requirements are met. Failure by a REIT or REIT-like structure to meet such requirements may have adverse
consequences on a Fund that invests therein. Generally, REITs can be classified as equity REITs, mortgage REITs or hybrid REITs. Equity REITs invest the majority of their assets directly in real property and derive their income primarily from rents and capital gains from appreciation realized through property sales. Equity REITs are further categorized according to the types of real estate they own, e.g., apartment properties, retail shopping centers, office and industrial properties, hotels, health-care facilities, manufactured housing and mixed-property types. Mortgage REITs invest the majority of their assets in real estate mortgages
and derive their income primarily from interest payments. Hybrid REITs combine the characteristics of both equity and mortgage REITs.
A shareholder in any Fund, by
investing in REITs indirectly through the Fund, will bear not only its proportionate share of the expenses of the Fund, but also, indirectly, the management expenses of the
underlying REITs. In addition, equity REITs may be affected by changes in the values of the underlying property they own, while mortgage REITs may be affected by the quality of
credit extended. REITs are dependent upon management skills, may not be diversified and are subject to the risks of financing projects and risks inherent in investments in a limited number of properties, in a narrow geographic area, or in a single property type. REITs are also subject to heavy cash flow dependency, defaults by borrowers, self-liquidation and, with respect to domestic REITs, the possibility of failing (1) to qualify for tax-free “pass-through” under the Code of net investment income and net realized gains distributed to shareholders and (2) to maintain exemption from the 1940 Act. If an issuer of debt securities collateralized by real estate defaults, it is conceivable that the REITs holding those securities could end up holding the underlying real estate.
Investing in certain REITs, which often have small market capitalizations, may also involve the same
risks as investing in other small capitalization companies. REITs may have limited financial resources and their securities may trade less frequently and in limited volume and may be subject to more abrupt or erratic price movements than larger company securities. Historically, small capitalization stocks, such as REITs, have been more volatile in price than the larger capitalization stocks such as those included in the S&P 500 Index. The management of a REIT may be subject to conflicts of interest with respect to the operation of the business of the REIT and may be involved in real estate activities competitive with the REIT. REITs may own properties through joint ventures or in other circumstances in which the REIT may not have control over its investments. REITs may incur significant amounts
of leverage.
Risks
associated with investments in securities of real estate companies include those discussed above in “Real Estate Industry Investing.”
Recent Market Conditions. The novel coronavirus (COVID-19) pandemic and efforts to contain its spread have resulted, and may continue to result, in significant disruptions to business operations, supply chains and customer activity, widespread business closures and layoffs, travel restrictions, international, national and local border closings, extended quarantines and stay-at-home orders, event cancellations, service cancellations, reductions and other changes, labor shortages, and significant challenges in healthcare service preparation and delivery, as well as general concern, uncertainty and social unrest. Global financial markets have experienced, and may continue to experience, significant volatility and severe losses, and the pandemic has resulted in
an economic slowdown that has negatively affected national and global economies, as well as national and global securities and commodities markets, which may continue for an extended period of time and have unforeseen impacts. Any deterioration
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in economic fundamentals may increase the risk
of default or insolvency of particular companies, negatively impact market values, increase market volatility, cause credit spreads to widen, and reduce liquidity. The pandemic has
accelerated trends toward working remotely and shopping on-line, which may negatively affect the value of office and commercial real estate and the value of investments in other companies and industries that historically have relied on higher concentrations of people working in traditional office and commercial environments. The travel, hospitality, and public transit industries, among others, may suffer long-term
negative effects from the pandemic and resulting changes to public behavior. In addition, companies and industries may lose the services of key personnel on a temporary or long-term basis due to illness or other reasons. Although COVID-19 vaccines
have been released, countries have struggled to control the spread of the virus and re-open their economies. The prevalence of new COVID-19 variants or other unforeseen circumstances may result in the continued spread of the virus.
Public health crises caused by outbreaks of infectious diseases or other public health issues, such as the COVID-19 pandemic, may exacerbate other pre-existing political, social, and economic tensions and risks and disrupt market conditions and operations and economies around the world, and negatively affect market performance and the value of investments in individual companies
in significant and unforeseen ways. The impact of infectious diseases may be greater in countries that do not move effectively to control them or that have limited access to vaccines, which may occur because of a lack of health care or economic resources or for political or other reasons.
Governments, including the U.S. federal government, and central banks have taken extraordinary and
unprecedented actions to support local and global economies and the financial markets during the COVID-19 pandemic and may continue to do so, but the ultimate impact of these efforts is uncertain, and they may not be successful. Governments’ efforts to limit potential negative economic effects of the COVID-19 pandemic may be altered, delayed, or eliminated at inopportune times for political, policy
or other reasons. Central banks may increase interest rates or begin phasing out, or “tapering,” accommodative monetary policy facilities. The timing, coordination, magnitude and effect of such policy changes on various markets are uncertain, and such changes in monetary policy may adversely affect the value of a Fund’s investments.
In the future, the U.S. federal government or other governments may take actions that could affect the overall economy as well as the securities in which the Funds invest, the markets in which they trade, or the issuers of such securities, in ways that cannot necessarily be foreseen at the present time. Governmental and quasi-governmental authorities and regulators throughout the
world, such as the U.S. Federal Reserve, have in the past responded to major economic disruptions with a variety of significant fiscal and monetary policy changes, including but not limited to, direct capital infusions into companies, new monetary programs, and dramatically lower interest rates. Certain of those policy changes were implemented or considered in response to the COVID-19 pandemic. Changes in government or central bank policies could negatively affect the value and liquidity of a Fund’s investments and cause it to lose money, and there can be no assurance that the initiatives undertaken by governments and central banks
will be successful.
The
COVID-19 pandemic, and other outbreaks of infectious diseases or other public health issues that may arise in the future, could also impair the information technology and other
operational systems upon which the Adviser relies, and could otherwise disrupt the ability of a Fund’s service providers to perform essential tasks. Such impacts could impair
a Fund's ability to maintain operational standards (such as with respect to satisfying redemption requests), disrupt the operations of a Fund's service providers, and negatively impact a Fund's performance. In certain cases, an exchange or market may close or issue trading halts on either
specific securities or even the entire market, which may result in a Fund being, among other things, unable to buy or sell certain securities or financial instruments or accurately value its investments.
Global economies and financial markets are highly interconnected, which increases the possibility that conditions in one country or region might adversely impact issuers in, or foreign exchange rates with, a different country or region. The rise in protectionist trade policies, and changes to some major international trade agreements and the potential for changes to others, could affect
the economies of many countries in ways that cannot necessarily be foreseen at the present time. Political and diplomatic events within the United States and abroad, including the current contentious domestic political environment and changes in the
U.S. presidential administration and Congress, may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. The United States has developed increasingly
strained relations with a number of foreign countries. If relations with certain countries deteriorate, it could adversely affect U.S. issuers as well as non-U.S. issuers that rely on the United States for trade. Financial markets in the United States and China have been sensitive to the outlook for resolving ongoing U.S.-China trade disputes, a trend that may continue in the future.
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Russia’s military invasion of Ukraine in
February 2022, the resulting responses by the United States and other countries, and the potential for wider conflict have had, and could continue to have, severe adverse effects
on regional and global economies and could further increase volatility and uncertainty in the financial markets. The United States and other countries have imposed broad-ranging economic sanctions on Russia and certain Russian individuals, banking entities and corporations as a response
to its invasion of Ukraine. The United States and other countries have also imposed economic sanctions on Belarus and may impose sanctions on other countries that provide military or economic support to Russia. These sanctions, as well as any other
economic consequences related to the invasion, such as additional sanctions, boycotts or changes in consumer or purchaser preferences or cyberattacks on governments, companies or individuals, may further decrease the value and liquidity of certain
Russian securities and securities of issuers in other countries that are subject to economic sanctions related to the invasion. To the extent that a Fund has exposure to Russian investments or investments in countries affected by the invasion, the Fund’s ability to price, buy, sell, receive or deliver such investments may be impaired. In addition, any exposure that a Fund may have to
counterparties in Russia or in countries affected by the invasion could negatively impact the Fund’s investments. The extent and duration of military actions and the repercussions of such actions (including any retaliatory actions or countermeasures that may be taken by those subject to sanctions) are impossible to predict. These events have resulted in, and could continue to result
in, significant market disruptions, including in certain industries or sectors such as the oil and natural gas markets, and may further strain global supply chains and negatively affect inflation and global growth. These and any related events could significantly impact a Fund’s performance and the value of an investment in a Fund beyond any direct exposure a Fund may have to Russian issuers or issuers in other countries affected by the invasion.
On January 31, 2020, the United Kingdom (“UK”) officially withdrew from the EU, commonly referred to as “Brexit.” Following a transition period, the UK’s post-Brexit trade agreement with the EU went into effect on January 1, 2021. The full impact of
Brexit and the nature of the future relationship between the UK and the EU remains uncertain. The effects of Brexit on the UK and EU
economies and the broader global economy could be significant, resulting in negative impacts, such as business and trade disruptions, increased volatility and illiquidity, and potentially lower economic growth of markets in the UK, EU and globally, which could negatively impact the value of a Fund’s investments. There is some uncertainty as to whether dislocations in the UK’s economy are mainly the result of the COVID-19 pandemic (as the government claims) or the result of the country’s having left the EU.
High public debt in the United States and other countries creates ongoing systemic and market risks and
policymaking uncertainty, and there has been a significant increase in the amount of debt due to the economic effects of the COVID-19 pandemic and ensuing economic relief and public health measures. Economic, political and other developments may result in a further increase in the amount of public debt, including in the United States. The long-term consequences of high public debt are not known,
but high levels of public debt may negatively affect economic conditions and the value of markets, sectors and companies in which a Fund invests.
Interest rates
have been unusually low in recent years in the United States and abroad, and central banks reduced rates further in an effort to combat the economic effects of the COVID-19
pandemic. Because there is little precedent for this situation, it is difficult to predict the impact on various markets of a significant rate increase or other significant policy
changes. However, due to concerns regarding rising inflation in many sectors of the U.S. and global economy, it is expected that the U.S. and many foreign governments and monetary authorities will raise interest rates and implement other policy initiatives that are intended to contain the impacts of rising inflation. Rising interest rates may present a particularly greater risk than has historically been the case due to the current period of relatively low rates and the effect of government fiscal and monetary policy initiatives and potential market reaction to those initiatives, or their alteration or cessation. Inflation risk is the uncertainty over the future real value (after inflation) of an investment. A Fund’s investments may not keep pace with inflation, and the value of an investment in a Fund may be eroded over
time by inflation.
Extremely
low or negative interest rates may persist or become more prevalent. In that event, to the extent a Fund has a bank deposit or holds a debt instrument with a negative interest rate
to maturity, the Fund would generate a negative return on that investment. Similarly, negative rates on investments by a fund that is a money market fund would make it
difficult, if not impossible, for the fund to maintain a stable $1.00 net asset value per share without financial support from the fund’s sponsor or other persons.
There is no assurance that such support would be provided, which could lead to losses on investments in the fund, including on investments by a Fund that uses the money market fund as an investment option for the Fund’s uninvested cash. While negative yields may reduce the demand, liquidity and valuation of fixed income investments, investors may be willing to continue to purchase such investments for a number of reasons, including, but not limited to, price insensitivity, arbitrage opportunities across fixed income markets or rules-based investment strategies. If negative interest rates persist or become more prevalent, investors may
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over time seek to reallocate assets to other
income-producing assets or equity investments that pay a dividend, which may cause the price of such instruments to rise while triggering a corresponding decrease in yield and the
value of debt instruments over time.
Funds and their advisers, as well as many of the
companies in which they invest, are subject to regulation by the federal government. There is a potential for materially increased regulation in the future, as well as higher taxes
or taxes restructured to incentivize different activities. These changes, should they occur, may impose added costs on a Fund and its service providers, and affect the businesses of various portfolio companies, in ways that cannot necessarily be foreseen at the present time.
In addition, global climate change may have an adverse effect on property and security values. A rise in sea levels, an increase in powerful storms and/or an increase in flooding could cause coastal properties to lose value or become unmarketable altogether. Economists warn that, unlike previous declines in the real estate market, properties in affected coastal zones may never recover their value. Large wildfires have devastated, and in the future may devastate, entire communities and may be very costly to any business
found to be responsible for the fire or conducting operations in affected areas. The current U.S. administration may
focus regulatory and public works projects around climate change concerns. Regulatory changes and divestment movements tied to concerns about climate change could adversely affect the value of certain land and the viability of industries whose activities or products are seen as accelerating climate change. Losses related to climate change could adversely affect corporate borrowers and mortgage lenders, the value of mortgage-backed securities, the bonds of municipalities that depend on tax revenues and
tourist dollars generated by such properties, and insurers of the property and/or of corporate, municipal or mortgage-backed securities. Since property and security values are driven largely by buyers’ perceptions, it is difficult to know the time period over which these effects might unfold.
All of these risks may have a material adverse effect on the performance and financial condition of the
companies and other issuers in which the Funds invest, and on the overall performance of a Fund.
Repurchase Agreements. Certain of the Funds may enter into repurchase agreements. A repurchase agreement is a transaction in which a Fund purchases
securities or other obligations from a bank or securities dealer (or its affiliate) and simultaneously commits to resell them to a counterparty at an agreed-upon date or upon
demand and at a price reflecting a market rate of interest unrelated to the coupon rate or maturity of the purchased obligations. The difference between the total amount to be
received upon repurchase of the obligations and the price that was paid by a Fund upon acquisition is accrued as interest and included in the Fund’s net investment income. Repurchase agreements generally result in a fixed rate of return insulated from market fluctuation during the holding period, and generally are used as a means of earning a return on cash reserves for periods as short as overnight.
Repurchase agreements may have the characteristics of loans by a Fund. During the term of a repurchase
agreement, a Fund, among other things, (i) retains the securities or other obligations subject to the repurchase agreement, either through its regular custodian or through a special “tri-party” custodian or sub-custodian that maintains separate accounts for both the Fund and its counterparty, as collateral securing the seller’s repurchase obligation, (ii) continually monitors on a daily basis the market value of the securities or other obligations subject to the repurchase agreement and (iii) requires the seller to deposit with the Fund collateral equal to any amount by which the market value of the securities or other obligations subject to the repurchase agreement falls below the resale amount provided under the repurchase agreement.
Each Fund intends to enter into repurchase
agreements only in transactions with counterparties (which may include brokers-dealers, banks, U.S. government securities dealers and other intermediaries) believed by the Adviser and the Sub-Advisers to present
minimal credit risks. A Fund generally will not enter into a repurchase agreement maturing in more than seven days. Repurchase agreements that mature in more than seven days are generally considered illiquid.
Repurchase agreements carry certain risks, including risks that are not associated with direct investments in securities. If a seller under a repurchase agreement were to default on the agreement and be unable to repurchase the security subject to the repurchase agreement, a Fund would look to the collateral underlying the seller’s repurchase agreement, including the securities or other obligations subject to the repurchase agreement, for satisfaction of the seller’s obligation to the Fund. A Fund’s right to liquidate the securities or other obligations subject to the repurchase
agreement in the event of a default by the seller could involve certain costs and delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase are less than the repurchase price (e.g., due to transactions costs or a decline in the value of the collateral), the Fund could suffer a loss. In addition, if bankruptcy proceedings are commenced with respect to the seller, realization of the collateral may be delayed or limited and a loss may be incurred. Repurchase agreements involving obligations other than U.S. government securities (such as commercial
57
paper and corporate bonds) may be subject to
special risks and may not have the benefit of certain protections in the event of the counterparty’s insolvency.
Reverse Repurchase Agreements, Dollar Rolls and Sale-Buyback Transactions. Certain of the Funds may enter into reverse
repurchase agreements and dollar rolls with brokers, dealers, domestic and foreign banks and/or other financial institutions. In addition, a Fund may also enter into sale-buyback transactions and other economically similar transactions. Reverse repurchase agreements, dollar rolls and sale-buyback transactions may be viewed as the borrowing of money by a Fund. See “Fundamental Restrictions” for more information concerning restrictions on borrowing by each Fund. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act.
In a reverse repurchase agreement, a Fund sells a security and agrees to repurchase it at a mutually agreed upon date and price, reflecting the interest rate effective for the term of the agreement. During the term of the agreement, a Fund retains ownership of the security and will continue to receive any principal and interest payments on the underlying security. A Fund may enter
into a reverse repurchase agreement only if the interest income from investment of the proceeds is greater than the interest expense of the transaction and the proceeds are invested for a period no longer than the term of the agreement. If interest rates rise during a reverse repurchase agreement, it may adversely affect a Fund’s net asset value.
In “dollar roll” transactions, a Fund sells fixed income securities for delivery in the current month and simultaneously contracts to repurchase similar but not identical (same type, coupon and maturity) securities on a specified future date at a pre-determined price. During the roll period, a Fund would forego principal and interest paid on such securities. A Fund would be compensated
by the difference between the current sales price and the forward price for the future purchase, as well as by the interest earned on the cash proceeds of the initial sale. See “Mortgage Dollar Rolls” for more information.
A Fund also may effect simultaneous purchase and sale transactions that are known as “sale buybacks.” A sale-buyback is similar to a reverse repurchase agreement, except that in a sale-buyback, the counterparty who purchases the security is entitled to
receive any principal or interest payments made on the underlying security pending settlement of a Fund’s repurchase of the underlying security. A Fund’s obligations under a sale-buyback typically would be offset by liquid assets in an amount not less than the amount of the Fund’s forward commitment to repurchase the subject security.
At the time a Fund enters into a reverse repurchase agreement, dollar roll or sale-buyback, it will maintain the segregation, either on the records of the Adviser, Sub-Advisers or with the Fund’s custodian, of cash or other liquid securities having a value not less than the repurchase price (including accrued interest) and will subsequently monitor the account to ensure that its value is
maintained. The assets contained in the segregated account will be marked-to-market daily and additional assets will be placed in such account on any day in which the assets fall below the repurchase price (plus accrued interest). A Fund’s liquidity and ability to manage its assets might be affected when it sets aside cash or portfolio securities to cover such commitments. As the Funds
transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives and reverse repurchase agreements may be impacted. The Funds intend to comply with Rule 18f-4
on or before the compliance date of August 19, 2022.
Reverse repurchase agreements, dollar rolls and sale-buybacks represent a form of leverage and their use by a Fund may increase the Fund’s volatility. Reverse repurchase agreements, dollar rolls and sale-buybacks involve the risk that the market value of the securities retained in lieu of sale may decline below the price of the securities a Fund has sold but is obligated to repurchase. In addition, when a Fund invests the proceeds it receives in a reverse repurchase agreement, dollar roll or sale buy-back, there is a risk that those investments may decline in value. Reverse repurchase agreements, dollar rolls and sale-buybacks also involve the risk that the buyer of the securities
sold by a Fund might be unable or unwilling to deliver them when that Fund seeks to
repurchase, which may result in losses to the Fund. In the event the buyer of securities under a reverse repurchase agreement, dollar roll or sale-buyback files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Fund’s obligation to repurchase the securities, and a Fund’s use of the proceeds of the agreement may effectively be restricted pending such decision, which could adversely affect the Fund.
Securities Lending. The Funds may lend securities to brokers, dealers or other institutional investors needing to borrow securities to complete
certain transactions. In connection with such loans, a Fund remains the owner of the loaned securities and continues to be entitled to payments in amounts equal to the interest,
dividends or other distributions payable on loaned securities. A Fund has the right to terminate a loan at any time. If a Fund terminates a loan, it will forgo any income on the
loan after the termination. A Fund does not have the right to vote on securities while they are on loan, but the Fund’s Adviser or Sub-Adviser may attempt
58
to terminate loans in time to vote those proxies
the Adviser or Sub-Adviser has determined are material to the Fund’s interests. A Fund has the right to call each loan and obtain the securities on one standard settlement
period’s notice or, in connection with the securities trading on foreign markets, within such longer period for purchases and sales of such securities in such foreign markets. A lending Fund will receive collateral consisting of cash, U.S. government securities, letters of credit or such other collateral as may be permitted under a Fund’s investment program and applicable law, which will be maintained at all times in an amount at least equal to 100% of the current market value of the loaned securities. If the collateral consists of cash, a Fund will reinvest the cash and pay the borrower a pre-negotiated fee or “rebate” from any return earned on investment. If the collateral consists of a letter of credit or securities, the borrower will pay a Fund a loan premium fee. A Fund may participate in securities lending programs
operated by financial institutions, which act as lending agents (“Lending Agent”). The Lending Agent will receive a percentage of the total earnings of a Fund derived from lending the Fund’s securities. Should the borrower of securities fail financially, a Fund may experience delays in recovering the loaned securities or in exercising its rights in the collateral. Additional risks include the possible decline of the value of the securities acquired with cash collateral. This risk is increased when a Fund’s loans are concentrated with a single borrower or a limited number of borrowers. A Fund seeks to minimize this risk by limiting the investment of cash collateral to high quality instruments with short maturities, repurchase agreements, money market funds or similar private investment vehicles.
Short
Sales. Certain of the Funds may enter into a short sale. A “short sale” is the sale by
a Fund of a security which has been borrowed from a third party on the expectation that the market price will drop. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing
it at the market price at or prior to the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund. Until the security is replaced, a Fund is required to prepay the lender any dividends or interest that accrue during the period of the loan. To borrow the security, a Fund also may be required to pay a premium, which would
increase the cost of the security sold short. The net proceeds of a short sale will be retained by the Sub-Adviser (or by the Fund’s custodian), to the extent necessary to meet margin requirements, until the short position is closed out. The Funds will incur
transaction costs in effecting short sales.
A Fund generally will engage only in covered short sales. In a covered short sale, a Fund either (1) enters into a “short sale” of securities in circumstances in which, at the time the short position is open, the Fund owns an equal amount of the securities sold short or owns securities convertible or exchangeable, without payment of further consideration, into an equal number of securities sold short (also known as a short sale “against the box”), or (2) deposits in a segregated account cash, U.S. government securities, or other liquid securities in an amount equal to the market value of the securities sold short. A short sale may be entered into by a Fund to, for example, lock in a sale price for a security the Fund does not
wish to sell immediately. To the extent that a Fund engages in short sales, it will provide collateral to the broker-dealer arranging the short sale and (except in the case of short sales “against the box”) will maintain additional asset coverage in the form of segregated or “earmarked” assets that the Adviser or Sub-Adviser determines to be liquid in accordance with procedures established by the Fund’s Board and that is equal to the current market value of the securities sold short, or will ensure that such positions are covered by “offsetting” positions, until the Fund replaces the borrowed security. As discussed in more detail above, in 2020, the SEC adopted a final rule related to the use of
derivatives, short sales, reverse repurchase agreements and certain other transactions by registered investment companies, with a compliance date in August 2022. In connection with the rule, the SEC and its staff will rescind and withdraw applicable guidance and relief regarding asset segregation and coverage transactions reflected in each Fund’s asset segregation and cover practices discussed herein. For more information on the rule, see the “Derivatives” section.
A Fund will incur a loss as a result of a short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces the borrowed security. A Fund may realize a gain if the security declines in price between those dates. The amount of any gain will be decreased, and
the amount of any loss increased, by the amount of the premium, dividends, interest or expenses a Fund may be required to pay in connection with a short sale. There can be no assurance that a Fund will
be able to close out a short position at any particular time or an acceptable price.
Short-Term Investments. Short-term investments include investments in various types of U.S. government securities and high-quality, short-term debt
securities with remaining maturities of one year or less (“money market instruments”). This type of short-term investment generally is made to provide liquidity for the
purchase of new investments and to effect redemptions of shares. The money market instruments in which certain of the Funds may invest include but are not limited to: government
obligations, certificates of deposit, time deposits, bankers’ acceptances, commercial paper, short-term corporate securities and repurchase agreements. A Fund may invest in both foreign and domestic money market instruments, including foreign currency,
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foreign time deposits and foreign bank
acceptances of domestic branches of foreign banks and savings and loan associations and similar institutions. For cash management purposes, a Fund also may invest in money market
funds, including money market funds managed by the Adviser. Generally, these investments offer less potential for gains than other types of investments.
Small Company Securities and Micro-Cap Company Securities. Certain of the Funds may invest in the securities of smaller capitalization companies. Investing in securities of small companies may involve greater risks since these securities may have
limited marketability and, thus, may be more volatile. Because smaller companies normally have fewer shares outstanding than larger companies, it may be more difficult for a Fund to buy or sell significant amounts of shares without an unfavorable impact on prevailing prices. In addition, small companies often have limited product lines, markets or financial resources and are typically subject to greater changes in earnings and business prospects than are larger, more established companies. There is typically
less publicly available information concerning smaller companies than for larger, more established ones and smaller companies may be dependent for management on one or a few key persons. Therefore, an investment in these Funds may involve a greater
degree of risk than an investment in other portfolios that seek capital appreciation by investing in better known, larger companies.
Certain of the Funds also may invest in the securities of micro-capitalization companies.
Micro-capitalization companies represent the smallest sector companies based on market capitalization. Micro-capitalization companies may be in their earliest stages of development and may offer unique products, services or technologies or may serve special or rapidly expanding niches.
Micro-capitalization companies may be less able to weather economic shifts or other adverse developments than larger, more established companies and may have less experienced management and unproven track records. Micro-capitalization companies
also may be more susceptible to setbacks or economic downturns. Micro-capitalization securities are generally subject to the same risks as small-capitalization securities. However, micro-capitalization securities may involve even greater risk because they trade less frequently than larger stocks and may be less liquid, subjecting them to greater price fluctuations than larger
company stocks.
Small-cap and emerging growth securities will often be traded only in the OTC market or on a regional
securities exchange and may not be traded every day or in the volume typical of trading on a national securities exchange. As a result, the disposition by a Fund of portfolio securities to meet redemptions or otherwise may require the Fund to make many small sales over a lengthy period of time, or to sell these securities at a discount from market prices or during periods when, in the Adviser’s or Sub-Adviser’s judgment, such disposition is not desirable.
Structured Products. The Funds may invest in structured products, including instruments such as credit-linked securities, commodity-linked notes
and structured notes, which are potentially high-risk derivatives. For example, a structured product may combine a traditional stock, bond, or commodity with an option or forward
contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a structured product is tied (positively or negatively) to the price of
some commodity, currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most fixed income securities) the principal amount payable at maturity of a structured product may be increased or decreased, depending on changes in the value of the benchmark. An example of a structured product could be a bond issued
by an oil company that pays a small base level of interest with additional interest that accrues in correlation to the extent to which oil prices exceed a certain predetermined level. Such a structured product would be a combination of a bond and a call option
on oil.
Structured
products can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, duration management, and increased total return. Structured
products may not bear interest or pay dividends. The value of a structured product or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move
(up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a structured product.
Under certain conditions, the redemption value of a structured product could be zero. Thus, an investment in a structured product may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of structured products also exposes a Fund to the credit risk of the issuer of the structured product. These risks may cause significant fluctuations in the net asset value of a Fund.
Credit-Linked Securities. Credit-linked securities are issued by a limited purpose trust or other vehicle that, in turn, invests in
a basket of derivative instruments, such as credit default swaps, interest rate swaps and other securities, in order to provide exposure to certain high yield or other fixed income markets. For example, a Fund may invest in credit-linked securities as a cash management
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tool in order to gain exposure to the high yield
markets and/or to remain fully invested when more traditional income producing securities are not available. Like an investment in a bond, investments in credit-linked securities
represent the right to receive periodic income payments (in the form of distributions) and payment of principal at the end of the term of the security. However, these payments are conditioned on the trust’s receipt of payments from, and the trust’s potential obligations to, the counterparties to the derivative instruments and other securities in which the trust invests. For instance, the trust may sell one or more credit default swaps, under which the trust would receive a stream of payments over the term of the swap agreements provided that
no event of default has occurred with respect to the referenced debt obligation upon which the swap is based. If a default occurs, the stream of payments may stop and the trust would be obligated to pay the counterparty the par (or other agreed upon value)
of the referenced debt obligation. This, in turn, would reduce the amount of income and principal that a Fund would receive as an investor in the trust. A Fund’s investments in these instruments are indirectly subject to the risks associated with derivative instruments, including, among others, credit risk, default or similar event risk, counterparty risk, interest rate risk, leverage risk and management risk. It is expected that the securities will be exempt from registration under the 1933 Act. Accordingly, there may be no established trading market for the securities and they may constitute illiquid investments.
Structured Notes. Structured notes are derivative debt instruments, the terms of which may be “structured” by the purchaser
and
the borrower issuing the note. The amount of principal repayment and/or interest payments on structured notes is based upon the movement of one or more factors. Structured notes
are interests in entities organized and operated solely for the purpose of restructuring the investment characteristics of debt obligations. This type of restructuring involves the
deposit with or purchase by an entity, such as a corporation or trust, of specified instruments (such as commercial bank loans) and the issuance by that entity of one or more classes of securities backed by, or representing interests in, the underlying instruments. The cash flow on the underlying instruments may be apportioned among the newly issued structured notes to create securities with different
investment characteristics such as varying maturities, payment priorities and interest rate provisions, and the extent of the payment made with respect to structured notes is dependent on the extent of the cash flow on the underlying instruments. The credit
risk of structured notes that involve no credit enhancement generally will be equivalent to that of the underlying instruments. In addition, a class of structured notes that is subordinated to the right of payment of another class typically has higher yields and presents greater risks than a class of structured notes that is unsubordinated. Structured notes may also be more volatile, less liquid, and more difficult to price accurately than less complex securities and instruments or more traditional debt securities. In addition, the terms of structured notes may provide that in certain circumstances no principal is due at maturity, which may result in a loss of invested capital. Certain issuers of structured notes may be deemed to be “investment companies” as defined in the 1940 Act. As a result,
a Fund’s investment in these structured notes may be limited by restrictions contained in the 1940 Act. Structured notes are typically sold in private placement transactions, and there currently is no active trading market for structured notes. The possible lack of a liquid secondary market for structured notes and the resulting inability of a Fund to sell a structured note could expose the Fund to losses and could make structured notes more difficult for the Fund to value accurately.
Swaps.
Certain Funds may invest in swaps. Swap agreements are two party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. Cleared swaps are transacted through FCMs that are members of
central clearinghouses with the clearinghouse serving as a central counterparty similar to transactions in futures contracts. A “standard” swap contract is an agreement
between two parties to exchange the return generated by one asset for the return (or differential in rate of return) generated by another asset. The payment streams are calculated
by reference to a specified asset, such as a specified security or index, and agreed upon “notional amount” (e.g., a particular dollar amount invested in a specified
security or index). The “notional amount” of the swap agreement is used as a basis on which to calculate the obligations that the parties to a swap agreement have agreed to exchange. The term “specified index” includes, but is not limited to, currencies, fixed interest rates, prices and total return on interest rate indices, price indices, fixed income indices, stock indices and commodity indices (as well as amounts derived from arithmetic operations on these indices). For example, a Fund may agree to swap the
return generated by a fixed income index for the return generated by a second fixed income index or to swap a single or periodic fixed amount(s) (or premium) for periodic amounts based on the movement of a specified index.
With respect to swaps, if the underlying reference asset is a broad-based security index (generally, an index of securities having at least 10 component issues), the instrument will generally be classified as a swap, which means that it is fully subject to CFTC jurisdiction. If the underlying reference asset is a narrow-based security index (generally, an index of securities having nine or fewer component issues), the instrument will generally be classified as a “security-based swap,” which is subject to the antifraud, antimanipulation and insider trading
jurisdiction of the SEC. However, if the parties to the transaction or a third-party created the underlying index, and the transaction’s governing documents permit substitution of the component stocks comprising the index, the index would always be deemed narrow-based, even if it had 10 or more component securities at all times, and even
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if no actual substitution of component stocks
were made. If the underlying reference asset is a narrow-based security index, the instrument will be classified as a security-based swap and subject only to the full jurisdiction
of the SEC.
Swap agreements historically have been individually negotiated and most swap
agreements are currently traded over the counter. Certain standardized swaps currently are, and more in the future will be, centrally cleared and traded on either a swap execution
facility or a designated contract market. Central clearing is expected to decrease counterparty risk and increase liquidity compared to uncleared swaps because central clearing interposes the central clearinghouse as the counterparty to each participant’s swap. However, central clearing does not eliminate counterparty risk or illiquidity risk entirely. For example, swaps that are centrally cleared are subject to the creditworthiness of the clearing organization involved in the transaction. For example, an investor could lose margin payments it has deposited with its FCM as well as the net amount of gains not yet paid by the clearing organization if the clearing organization becomes insolvent or goes into bankruptcy. In the event of bankruptcy of the clearing organization, the investor may be entitled to
the net amount of gains the investor is entitled to receive plus the return of margin owed to it only in proportion to the amount received by the clearing organization’s other customers, potentially resulting in losses to the investor. As noted above, regulators have adopted regulations governing margin on uncleared swaps. Although margin posting
requirements may vary depending on the size of a portfolio and other factors, the initial margin required for uncleared swaps is likely to exceed the amount required under the rules of a clearinghouse and by a clearing member FCM, because the timeframe
that initial margin on uncleared swaps is designed to cover is longer than for cleared swaps.
To the extent a swap is not centrally cleared, the use of a swap involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply
with the terms of the agreement. If a counterparty’s creditworthiness declines, the value of the swap might decline, potentially resulting in losses to a Fund. Changing conditions in a particular market area, whether or not directly related to the referenced assets that underlie the swap agreement, may have an adverse impact on the creditworthiness of the counterparty. If a default
occurs by the counterparty to such a transaction, a Fund may have contractual remedies pursuant to the agreements related to the transaction.
A Fund will
usually enter into swaps on a net basis (i.e., the two payment streams are netted out in a cash settlement on the payment date or dates specified in the instrument, with the Fund
receiving or paying, as the case may be, only the net amount of the two payments). Thus, a Fund’s obligations (or rights) under a swap agreement generally will be equal only
to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). A Fund’s obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund), and any accrued but unpaid net amounts owed to a swap counterparty will be covered by, for example, designating the segregation, either on the records of the Fund’s Adviser or Sub-Adviser or with the Fund’s custodian, of cash, receivables or other liquid assets. To the extent that the net amount owed to a swap counterparty is covered by an offsetting position or with cash, receivables
or liquid assets, the Adviser believes that such obligation does not constitute a “senior security” under the 1940 Act and, accordingly, will not treat it as being subject to a Fund’s senior security or borrowing restrictions. With respect to swap transactions that are not entered into on a net basis, a Fund will cover its obligation under any such transaction in a manner consistent with the 1940 Act so that the obligation does not constitute a “senior security” under the 1940 Act. A Fund may enter into swap transactions in accordance with guidelines established by the Board of Trustees. Pursuant to these guidelines, a Fund may only enter into
swap transactions where its Adviser or Sub-Adviser has deemed the counterparties to be creditworthy and such counterparties have been approved by the Adviser. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives may be impacted. The Funds intend to comply with
Rule 18f-4 on or before the compliance date of August 19, 2022. For more information on asset segregation and coverage practices, see the “Derivatives” section.
Swaps generally do not involve the delivery of securities, other underlying assets, or principal. Accordingly, unless there is a counterparty or clearing house default, the risk of loss with respect to swaps is limited to the net amount of payments a Fund
is contractually obligated to make. If the other party to a swap defaults, a Fund’s risk of loss consists of the net amount of payments that the Fund contractually is entitled to receive. The swap market has grown substantially in recent years, with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation and
in some cases transacting in swaps that are centrally cleared and exchange traded. As a result, the swap market has become relatively liquid. Certain swap transactions involve more recent innovations for which standardized documentation has not yet
been fully developed and generally will not be centrally cleared or traded on an exchange and, accordingly, they are less liquid than traditional swap transactions. For purposes of applying a Fund’s investment policies and restrictions (as stated in the Prospectus
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and this SAI), swap agreements generally are
valued by the Fund at market value. In addition, because they are two party contracts and because they may have terms greater than seven days, some swap agreements may be
considered to be illiquid.
The use of swaps is a highly specialized activity that involves
investment techniques and risks (such as counter-party risk) different from those associated with ordinary portfolio securities transactions. If a Fund’s Adviser or
Sub-Adviser is incorrect in its forecasts of applicable market factors, such as market values, interest rates, and currency exchange rates, the investment performance of the Fund would be less favorable than it would have been if this investment technique were not used. The swaps market was
largely unregulated prior to the enactment of the Dodd-Frank Act on July 21, 2010. The Dodd-Frank Act changed the way the U.S. swap market is supervised and regulated. Developments in the swaps market, including implementing regulations adopted
under the Dodd-Frank Act, will adversely affect a Fund’s ability to enter into certain swaps in the OTC market (and require that certain of such instruments be exchange-traded and centrally-cleared). Dodd-Frank Act developments also could adversely
affect a Fund’s ability to support swap trades with collateral, terminate new or existing swap agreements, or realize amounts to be received under such instruments. As discussed above, regulations have been adopted by the CFTC and banking regulators
that require a Fund to post margin on OTC swaps, and would eventually require posting of initial margin if a Fund has a “material swaps exposure,” and clearing organizations and exchanges require minimum margin requirements for exchange-traded and
cleared swaps. These changes under the Dodd-Frank Act may increase the cost of a Fund’s swap investments, which could adversely affect Fund investors.
A Fund may
enter into a variety of swap transactions, including total return swaps, inflation swaps, currency swaps, interest rate swaps, caps, floors, and swaptions, credit default swaps,
and contracts for difference. Total return swap agreements are contracts in which one party agrees to make periodic payments to another party during a specified period of time
based on the change in market value of the assets underlying the contract, which may include a specified security, basket of securities or securities indices, in return for periodic payments based on a fixed or variable interest rate or the total return from other underlying assets. Total return swap agreements are often used to obtain exposure to a security or market without owning or taking physical custody of such security or investing directly in such market. The value of the swap position as well as the payments required to be made by a Fund or a counterparty will increase or decrease depending on the changes in the value of the underlying asset(s).
Inflation swaps into which a Fund may enter generally are contracts in which one party agrees to pay the
cumulative percentage increase in a price index (the Consumer Price Index with respect to CPI swaps) over the term of the swap (with some lag on the inflation index), and the other party pays a compounded fixed rate.
Currency swaps involve the exchange by one party with another party of a series of payments in specified currencies. Currency swaps usually involve the delivery of the entire principal value of one designated currency in exchange for the other designated currency. Therefore, the entire principal value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations. In addition, a Fund may enter into currency swaps that involve an agreement to pay interest streams in one currency based on a specified index
in exchange for receiving interest streams denominated in another currency.
Currency swaps may involve initial and final exchanges that correspond to the agreed upon notional amount.
Interest rate swaps involve the exchange between two parties of payments calculated by reference to
specified interest rates (e.g., an exchange of floating rate payments for fixed rate payments). The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the party selling such interest rate floor. Caps and floors may be less liquid than swaps. In addition, the value of interest rate transactions will fluctuate based on changes in interest rates.
An option on a swap agreement, also called
a “swaption,” is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based “premium.” A receive swaption gives the owner the right to receive the total return of a specified asset, reference rate, or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate, or index. A purchaser of a swaption risks losing only the amount of the premium it has paid should it decide to let the option expire, whereas the seller of a swaption is subject to the risk that it will become obligated if the option is exercised. Swaptions also include options that allow an existing swap to be terminated or extended by one of
the counterparties.
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A Fund also may enter into credit default swap agreements. The credit default swap agreement may have as reference obligations one or more securities that are not currently held by a Fund. The protection “buyer” in a credit default contract is generally obligated to pay the protection “seller” an upfront or a periodic stream of payments over the term of the contract, which is typically between one month and ten years, provided that no credit event, such as a default, on a reference obligation has occurred. If a credit event occurs, the seller generally must pay the buyer the “par value” (full notional value) of the swap in exchange for an equal face amount of deliverable obligations
of the reference entity described in the swap, or the seller may be required to deliver the related net cash amount, if the swap is cash settled. A Fund may be either the buyer or seller in the transaction. If a Fund is a buyer and no credit event occurs, the Fund may recover nothing if the swap is held through its termination date. However, if a credit event
occurs, the Fund generally may elect to receive the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity whose value may have significantly decreased. In this connection, there is a risk that instability in the markets can threaten the ability of a buyer to fulfill its obligation to deliver the underlying securities to the seller. As a seller, a Fund generally receives an upfront payment or a fixed rate of income throughout the term of the swap provided that there is no credit event. However, if a credit event occurs, the Fund generally must pay the buyer the full notional value of the swap in exchange for an equal face amount of deliverable obligations of the reference entity that may have little or no value. As the seller, a Fund would
effectively add leverage because, in addition to its total net assets, a Fund would be subject to investment exposure on the notional amount of the swap.
Credit default swap agreements involve greater risks than if a Fund had invested in the reference obligation directly since, in addition to general market risks, credit default swaps are subject to illiquidity risk, counterparty risk and credit risk. A Fund will enter into credit default swap agreements only with counterparties that meet certain standards of creditworthiness. A buyer generally also will lose its investment and recover nothing should no credit event occur and the swap is held to its termination date. If a credit event were to occur, the value of any deliverable obligation received by the seller, coupled with the upfront or periodic payments
previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the seller. A Fund’s obligations under a credit default swap agreement will be accrued daily (offset against any amounts owing to the Fund). In
connection with credit default swaps in which a Fund is the buyer, the Fund will segregate or “earmark” cash or assets determined to be liquid, or enter into certain offsetting positions, with a value at least equal to the Fund’s exposure (any accrued but unpaid net amounts owed by the Fund to any counterparty), on a marked-to-market basis. In connection with credit default swaps in
which a Fund is the seller, the Fund will segregate or “earmark” cash or assets determined to be liquid, or enter into offsetting positions, with a value at least equal to the full notional amount of the swap (minus any amounts owed to the Fund). Such
segregation or “earmarking” is intended to ensure that a Fund has assets available to satisfy its obligations with respect to the transaction and limit any potential leveraging of the Fund. Such segregation or “earmarking” will not limit a Fund’s exposure to loss. To the extent that credit default swaps are entered into for hedging purposes or are covered as described above, the Adviser believes such obligations do not constitute “senior securities” under the 1940 Act and, accordingly, will not treat them as being subject to a Fund’s senior security and borrowing restrictions. As the Funds transition into reliance on Rule 18f-4, the Funds’ approach to asset segregation and coverage requirements described in this SAI with respect to derivatives and reverse repurchase agreements may
be impacted. The Funds intend to comply with Rule 18f-4 on or before the compliance date of August 19, 2022.
In the case of a credit default swap sold by a Fund (i.e., where the Fund is selling credit default protection), the Fund may value the credit default swap at its notional amount in applying certain of the Fund’s investment policies and restrictions, but may value the credit default swap at market value for purposes of applying certain of the Fund’s other investment policies and restrictions.
A contract for difference (“CFD”) offers exposure to price changes in an underlying security
(e.g., a single security, stock basket or index) without ownership of such security, typically by providing investors the ability to trade on margin. A CFD is a privately negotiated contract between two parties, buyer and seller, stipulating that the seller will pay to or receive from the buyer the difference between the notional value of the underlying instrument at the opening of the contract and that instrument’s notional value at the end of the contract. The buyer and seller are both required to post margin, which is adjusted daily, and adverse market movements against the underlying instrument may require the buyer to make additional margin payments. The buyer will also
pay to the seller a financing rate on the notional amount of the capital employed by the seller less the margin deposit. A CFD is usually terminated at the buyer’s initiative.
By entering into a CFD, a Fund could incur losses because it would face many of the same types of risks as owning the underlying instrument directly. Also, there may be liquidity risk if the underlying instrument is illiquid because the liquidity of a CFD is based on the liquidity of the underlying instrument. A further risk is that adverse movements in the underlying security will require the buyer to post additional margin, and this may be on short notice. If additional margin is not provided in time, the seller may liquidate
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the positions at a loss for which a Fund would
be liable. As with other types of swap transactions, CFDs also carry counterparty risk, which is the risk that the counterparty to the CFD transaction may be unable or unwilling to
make payments or to otherwise honor its financial obligations under the terms of the contract, in which case the value of the contract, and of a Fund’s shares, may be reduced.
Time and Demand Deposits. Time deposits are interest-bearing, non-negotiable deposits at a bank or a savings and loan association that have a specific maturity date. A time deposit earns a specific rate of interest over a definite period of time. Time deposits may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties that vary depending
upon market conditions and the remaining maturity of such deposits. There are no contractual restrictions on the right to transfer a beneficial interest in a time deposit to a third party, but there is no secondary market for such deposits. Demand deposits are accounts at banks and financial institutions from which deposited funds can be withdrawn at any time without notice to the
depository institution. The majority of demand deposit accounts are checking and savings accounts. The Funds may invest in fixed time deposits, whether or not subject to withdrawal penalties; however, investment in such deposits which are subject to
withdrawal penalties, other than overnight deposits, are subject to the limits on illiquid securities.
Time deposits are subject to the same risks that pertain to domestic issuers of money market instruments,
most notably credit risk (and to a lesser extent, income risk, market risk, and liquidity risk). In addition, time deposits of foreign branches of U.S. banks and foreign branches of foreign banks may be subject to certain sovereign risks. One such risk is the possibility that a sovereign country might prevent capital, in the form of dollars, from flowing across its borders. Other risks include adverse political and economic developments, the extent of government regulation of financial markets, and expropriation or nationalization of foreign issuers. Demand deposits are subject to general market and economic risks as they are usually considered part of the money
supply. In addition, demand deposits are subject to risks of fraud. As access to demand deposits (e.g., via ATMs and online banking) has increased, so have the ways to carry out fraudulent schemes. Demand deposit fraud can take many forms, such as phishing
schemes, cross-channel and check fraud.
Temporary Investment. If a Fund believes that economic or market conditions are unfavorable to investors, it may temporarily invest up to 100% of
its assets in certain defensive strategies, including holding a substantial portion of the Fund’s assets in cash, cash equivalents or other highly rated short-term
securities, including securities issued or guaranteed by the U.S. government, its agencies or instrumentalities. As discussed in this SAI, a Fund may also invest in affiliated
money market and/or short-term bond funds for temporary cash management purposes.
U.S. Government Securities. Certain of the Funds may invest in U.S. Government Securities. U.S. government securities include direct obligations of the
U.S. Treasury (such as Treasury bills, notes or bonds) and obligations issued or guaranteed as to principal and interest (but not as to market value) by the U.S. government, its
agencies or its instrumentalities. Examples of obligations issued or guaranteed as to principal and interest by the U.S. government, its agencies or its instrumentalities include
securities issued or guaranteed by government agencies that are supported by the full faith and credit of the U.S. government (e.g., securities issued by the Federal Housing Administration, Export-Import Bank of the U.S., Small Business Administration, and Ginnie Mae);
securities issued and guaranteed by a government-sponsored stockholder-owned corporation, though not backed by the full faith and credit of the United States (e.g., securities issued by Fannie Mae or Freddie Mae); and securities issued or guaranteed by government agencies that are supported primarily or solely by the credit of the particular agency (e.g., Interamerican
Development Bank, the International Bank for Reconstruction and Development, and the Tennessee Valley Authority). As a result of market influences, yields of short-term U.S. Treasury debt instruments are near historic lows. No assurance can be given that the U.S. government will provide financial support to U.S. government agencies, instrumentalities or sponsored enterprises in
the future, and the U.S. government may be unable to pay debts when due.
U.S. government securities also include Treasury inflation-indexed securities (originally known as Treasury inflation-protected securities or “TIPS”), which are Treasury bonds on which the principal value is adjusted daily in accordance with changes in the Consumer Price Index. TIPS have maturities of five, ten or thirty years, although it is possible that securities with other maturities will be issued in the future. Interest on TIPS is payable semiannually on the inflation-adjusted principal value. The periodic adjustment to the principal value of TIPS is tied to the CPI-U, which is calculated monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living,
made up of components such as housing, food, transportation and energy.
There can be no assurance that the CPI-U will accurately measure the real rate of inflation in the prices of goods and services. The principal value of TIPS would decline during periods of deflation and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced, but the principal amount payable at maturity would not
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be less than the original par amount. The value
of TIPS is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of
inflation. Therefore, if inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed bonds. While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure. If inflation is lower than expected while a Fund holds TIPS, the Fund
may earn less on the TIPS than it would on conventional Treasury bonds. Any increase in the principal value of TIPS is taxable in the taxable year the increase occurs, even though holders do not receive cash representing the increase at that time.
U.S. government securities also include separately traded principal and interest components of securities
issued or guaranteed by the U.S. Treasury, which are traded independently under the Separate Trading of Registered Interest and Principal of Securities (“STRIPS”) program. Under the STRIPS program, the principal and interest components are individually numbered and separately issued by the U.S. Treasury at the request of depository financial institutions, which then trade the component parts independently. The market prices of STRIPS generally are more volatile than that of U.S. Treasury bills with comparable maturities.
In August 2011, S&P downgraded its long-term sovereign credit rating on the U.S. from
“AAA” to “AA+”. A further downgrade of the ratings of U.S. government debt obligations, or concerns about the U.S. government’s credit quality in
general, could result in higher interest rates for individual and corporate borrowers, cause disruptions in bond markets and have a substantial negative effect on the U.S. economy.
Variable Rate Notes. The commercial paper obligations which the Funds may buy are unsecured and may include variable rate notes. The nature and
terms of a variable rate note (i.e., the “Master Note”) permit a Fund to invest fluctuating amounts at varying rates of interest pursuant to a direct arrangement
between the Fund as lender and the issuer as borrower. It permits daily changes in the amounts borrowed. A Fund has the right at any time to increase, up to the full amount stated
in the note agreement, or to decrease the amount outstanding under the note. The issuer may prepay at any time and without penalty any part of or the full amount of the note. The note may or may not be backed by one or more bank letters of credit. Because these notes are
direct lending arrangements between the Funds and the issuer, it is not generally contemplated that they will be traded; moreover, there is currently no secondary market for them. There are no limitations on the type of issuer from whom these notes will be
purchased; however, in connection with such purchase and on an ongoing basis, the Adviser or Sub-Adviser will consider the earning power, cash flow and other liquidity ratios of the issuer, and its ability to pay principal and interest on demand, including a situation in which all holders of such notes made demand simultaneously.
Warrants. Certain
of the Funds may purchase warrants and similar rights. Warrants are securities that give the holder the right, but not the obligation, to purchase equity issues of the company
issuing the warrants, or a related company, at a fixed price either on a date certain or during a set period. At the time of issue, the cost of a warrant is substantially less than
the cost of the underlying security itself, and price movements in the underlying security are generally magnified in the price movements of the warrant. This effect enables the investor to gain exposure to the underlying security with a relatively low capital investment but increases an investor’s risk in the event of a decline in the value of the underlying security and can result in a complete loss of the amount invested in the warrant. In addition, the price of a warrant tends to be more volatile than, and may not correlate exactly to, the price of the underlying security. If the market price of the underlying security is below the exercise price of the warrant on its expiration date, the warrant will generally expire without value.
The equity security underlying a warrant is
authorized at the time the warrant is issued or is issued together with the warrant. Investing in warrants can provide a greater potential for profit or loss than an equivalent investment in the underlying security, and, thus, can be a high risk investment. The value of a warrant may decline because of a decline in the value of the underlying security, the passage of time, changes in interest rates or in the dividend or other policies of the company whose equity underlies the warrant or a change in the perception as to the future price of the underlying security, or any combination thereof. Warrants do not carry with them the right to dividends or voting rights with respect to the securities that they entitle their holder to purchase, and they do not represent any rights in the assets of the issuer. A warrant ceases to have value
if it is not exercised prior to its expiration date. As a result, warrants may be considered more speculative than certain other types of investments.
Zero-Coupon Bonds and Payment in-Kind Bonds. Certain of the Funds may invest in zero-coupon or payment-in-kind bonds or both. Zero-coupon bonds are issued at a significant discount from their principal amount (referred to as “original issue discount”
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or “OID”), generally pay interest
only at maturity rather than at intervals during the life of the security, and are redeemed at face value when they mature. Payment-in-kind bonds allow the issuer, at its option,
to make current interest payments on the bonds in additional bonds rather than in cash. Zero-coupon and payment-in-kind bonds thus allow an issuer to avoid the need to generate
cash to meet current interest payments. Accordingly, those bonds may involve greater credit risks, and their value is subject to greater fluctuation in response to changes in market interest rates, than bonds that pay current interest in cash. Even though
such bonds do not pay current interest in cash, a Fund that invests in them is nonetheless required annually to accrue as interest income a portion of the OID on zero-coupon bonds and to include in gross income the “interest” on payment-in-kind bonds for federal income tax purposes and generally to distribute the amount of that interest at least annually to its shareholders. See the “Taxation” section of this SAI. Thus, each Fund that invests in such bonds could be required, at times, to liquidate other investments in order to satisfy its distribution requirements.
Portfolio Turnover. The length of time a Fund has held a particular security is not generally a consideration in investment decisions.
A change in the securities held by a Fund is known as “portfolio turnover.” High portfolio turnover may result from the strategies of the Adviser, Sub-Advisers or when one Sub-Adviser replaces another, necessitating changes in the Fund it advises. Portfolio
turnover may vary significantly from year to year due to a variety of factors, within and outside the control of a Fund, the Adviser and a Sub-Adviser, including a fluctuating volume of shareholder purchase and redemption orders, market conditions, investment
strategy changes, changes in the Adviser’s or a Sub-Adviser’s investment outlook or changes in the Sub-Adviser managing the Fund, as well as changes in roll transaction volume. A high turnover rate (100% or more) increases transaction costs (e.g., brokerage commissions) which must be borne by the Fund and shareholders. A Fund’s Adviser or Sub-Adviser will consider the economic effects of portfolio turnover but generally will not treat a Fund’s annual portfolio turnover rate as a factor preventing a sale or purchase when the Adviser or a Sub-Adviser believes investment considerations warrant such sale or purchase. Decisions to
buy and sell securities for a Fund are made by the Adviser or a Sub-Adviser, as applicable independently. Thus, one Sub-Adviser could decide to sell a security when another Sub-Adviser decides to purchase the same security, thereby increasing a Fund’s portfolio turnover rate. Portfolio turnover may vary greatly from year to year as well as within a particular year. The portfolio turnover rates for a Fund are disclosed in the sections “Portfolio Turnover” and “Financial Highlights” of the Fund’s Prospectus.
A Fund may engage in roll-timing strategies where the Fund seeks to extend the expiration or maturity of
a position, such as a forward contract, futures contract or to-be-announced (“TBA”) transaction, on an underlying asset by closing out the position before expiration and contemporaneously opening a new position with respect to the same underlying asset that has substantially similar terms except for a later expiration date. Such “rolls” enable a Fund to maintain continuous investment exposure to an underlying asset beyond the expiration of the initial position without delivery of the underlying asset. Similarly, as certain standardized swap agreements transition from over-the-counter trading to mandatory exchange-trading and clearing due to the implementation
of Dodd-Frank Act regulatory requirements, a Fund may “roll” an existing over-the-counter swap agreement by closing out the position before expiration and contemporaneously entering into a new exchange-traded and cleared swap agreement on the same
underlying asset with substantially similar terms except for a later expiration date. These types of new positions opened contemporaneously with the closing of an existing position
on the same underlying asset with substantially similar terms are collectively referred to as “Roll Transactions.” Certain investment restrictions, which normally apply
at the time of investment, do not apply to Roll Transactions. A Fund will test for compliance at the time of the Fund’s initial entry into a position, but percentage limitations and absolute prohibitions may not be applicable to a Fund’s subsequent acquisition of securities or instruments through a Roll Transaction.
Portfolio Holdings Disclosure Policy
The 1290 Funds (the “Trust”) has adopted this Portfolio Holdings Disclosure Policy (the “Policy”) to govern the disclosure of the portfolio holdings of each Fund. It is the policy of the Trust to protect the confidentiality of material, non-public information about each Fund’s portfolio holdings and to prevent the selective disclosure of such information.
Each
Fund will publicly disclose its holdings in accordance with regulatory requirements in filings with the SEC, including the annual and semi-annual reports to shareholders which are transmitted to shareholders within 60 days after the end of each fiscal year
and fiscal half-year, respectively, for which the reports are made, and filed with the SEC on Form N-CSR within ten days after the reports are transmitted to shareholders. Monthly portfolio holdings reports on Form N-PORT are filed with the SEC within 60
days after the end of each fiscal quarter, and each Fund’s complete portfolio holdings as of its first and third fiscal quarter ends are made publicly available 60 days after the end of each quarter. Reports on Forms N-CSR and N-PORT are available on the
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SEC’s website at http://www.sec.gov. The Trust’s annual and semi-annual reports to shareholders are also available without charge
on its website at www.1290funds.com.
The Trust generally makes publicly available top portfolio holdings (typically, each Fund’s top fifteen (15) holdings) on a quarterly basis at the following website: www.1290Funds.com. Copies of such information are also available upon request to the 1290
Funds. Except as noted below, all such information generally is released with a 15-day lag time, meaning the top fifteen (15) portfolio holdings information as of the end of the quarter generally is not released until the 15th day following such quarter-end.
The Trust, through the Adviser, may provide non-public portfolio holdings data to certain third-parties
prior to the release of such information to the public as described above. The Adviser currently has ongoing arrangements with the Trust’s Administrator (Equitable Investment Management, LLC (“Administrator”)), Sub-Administrator (JPMorgan Chase Bank, N.A.), the Custodian (JPMorgan Chase Bank, N.A.), execution management services provider (Neovest, Inc.), certain third-party data services (Bloomberg PLC), website hosting services (ALPS Funds Services Inc.), mutual fund evaluation services (Broadridge Financial Solutions, Inc. and Morningstar, Inc.). Each of these third parties receives portfolio holdings information at month end, with the exception of the Administrator, JPMorgan Chase Bank, N.A., Neovest, Inc. and Bloomberg PLC which receive such information daily. Each of
these third parties, either by explicit agreement or by virtue of its respective duties to the 1290 Funds, is subject to a duty to treat non-public portfolio holdings information
confidentially and a duty not to trade on such information.
In addition, current non-public
portfolio holdings information may be provided as frequently as daily as part of the legitimate business purposes of each Fund to service providers that have contracted to provide
services to the 1290 Funds, and other organizations, which may include, but are not limited to: Equitable Financial Life Insurance Company; the Adviser; the Sub-Advisers;, transition managers; the independent registered public accounting firm (PricewaterhouseCoopers LLP); counsel to the Funds or
the non-interested trustees of the 1290 Funds (K&L Gates LLP, and Morgan, Lewis & Bockius LLP, respectively); regulatory authorities and courts; the Investment Company
Institute; peer analysis services; performance review services (eVestment Alliance); back office services (SunGard Financial, The Bank of New York Mellon Corporation, FIS Global);
research tool/quote system (Thomson Reuters); trade execution management and/or analysis (Elkins McSherry Inc., FX Transparency, LLC); data consolidator (Electra); trade order management services (Investment Technology Group Inc., Macgregor XIP, Charles River); books and records vendor;
GIPS auditor; marketing research services (Strategic Insight); portfolio analysis services (Barra TotalRisk System); commission tracking; accounting systems or services (Advent Software, Eagle Investment Systems Corp., Portia); transition management/brokerage services software vendors (CDS/Computer, The Abernathy MacGregor Group, OMGEO LLC, Radianz); analytic services or tools
(Confluence Technologies, Inc., FactSet Research Systems Inc., Investment Technology Group, Inc., MSCI Inc., Citigroup Analytics, Inc., Wilshire Analytics/Axiom, Wilshire
(Compass)); legal services (Financial Recovery Technologies); compliance services (TerraNua); corporate actions and trade confirmation (Brown Brothers Harriman & Co.);
over-the-counter derivative products and portfolio holdings (State Street Bank and Trust Company); ratings agencies (Standard & Poor’s Financial Services LLC (a division
of The McGraw-Hill Companies), Moody’s Investor Service, Inc.); index providers; consulting firms (Ernst & Young, ACA Compliance); data providers (InvestorForce); broker-dealers who provide execution or research services to the Funds; broker-dealers who provide quotations that are used in pricing; financial printers (Donnelley Financial Solutions); proxy voting services (Riskmetrics Group, Inc., Broadridge Financial Solutions, Inc., Glass Lewis & Co., Institutional Shareholder Services, Inc.); marketing services (Primelook, Inc.); 401k administrator (Fidelity); tax services (PricewaterhouseCoopers, LLP, Deloitte); and liquidity risk management services (BlackRock, Inc.). The Sub-Advisers may contract with additional third parties to provide services to the 1290 Funds. The entities to which each
Fund voluntarily provides portfolio holdings information, either by explicit agreement or by virtue of their respective duties to each Fund, are subject to a duty to treat non-public portfolio holdings information confidentially and a duty not to trade on such information.
On a
case-by-case “need to know” basis, the 1290 Funds’ Chief Financial Officer or Vice President, subject to the approval of the Adviser’s and
Administrator’s Legal and Compliance Group and the 1290 Funds’ Chief Compliance Officer (“CCO”), may approve the disclosure of additional portfolio holdings
information if such information is in the best interests of Fund shareholders. In all cases, the approval of the release of non-public portfolio holdings information by the
Adviser’s Legal and Compliance Group must be based on a determination that such disclosure is in the best interests of the Funds and their shareholders, that there is a legitimate business purpose for such disclosure and that the party receiving such information is subject to a duty to treat the information confidentially and a duty not to trade on such information. The 1290 Funds does not disclose its portfolio holdings to the media.
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The Adviser, with the assistance of the Administrator, is responsible for administering the release of portfolio holdings information with respect to the Funds. Until particular portfolio holdings information has been released to the public, and except with regard to the third parties described above, no such information may be provided to any party without the approval of the Adviser’s Legal and Compliance Group, which approval is subject to the conditions described above. No compensation is received by the
1290 Funds, the Adviser or any other person in connection with their disclosure of portfolio holdings information.
The Adviser’s and Administrator’s Legal and Compliance Group and the 1290 Funds’ CCO monitor and review any potential conflicts of interest between the Funds’ shareholders and the Adviser, distributor and their affiliates that may arise from the potential release of portfolio holdings information. The 1290 Funds’ Board has approved this policy and determined that it is in the best interest of the Funds. The Board must also approve any material change to this policy. The Board oversees implementation of
this policy and receives from the 1290 Funds’ CCO quarterly reports regarding any violations or exceptions to this policy that were granted by the Adviser’s Legal and Compliance Group.
Management of the 1290 Funds
The Board of Trustees
The 1290 Funds’ Board is responsible for the overall management of the 1290 Funds and the Funds,
including general supervision and review of the Funds’ investment activities and their conformity with federal and state law as well as the stated policies of the Funds. The Board elects the officers of the 1290 Funds who are responsible for administering the 1290 Funds’ day-to-day operations. The Trustees of the 1290 Funds are identified in the table below along with information as to their principal business occupations held during the last five years and certain other information. The registered investment companies in the fund complex include
EQ Premier VIP Trust, EQ Advisors Trust and the 1290 Funds. As of the date of this SAI, all of the Trustees are also Trustees of the two other registered investment companies in the fund complex.
Each Trustee serves during the existence of the Trust until the next meeting of shareholders called for the purpose of electing Trustees and until the election and qualification of his or her successor or, if sooner, until he or she dies, declines to serve, resigns, retires, is removed, is incapacitated or is otherwise unable or unwilling to serve. The Board has adopted a policy that currently provides that each Independent Trustee shall retire from the Board as of the last day of the calendar year in which he or she attains the age of 75 years. The Trust’s retirement policy is subject to periodic review by the Trust’s Governance Committee, which may recommend for Board approval any changes to the policy that it determines to be appropriate.
†
The registered investment companies in the fund complex include the Trust, EQ Advisors Trust, and EQ Premier VIP Trust. Mr. Joenk serves as Trustee, President and Chief Executive Officer for each of the registered investment companies in the fund complex, except for the Trust, for which he serves as Trustee and Chief Executive Officer. Mr. Schpero serves as Chairman of the Board for each such registered
investment company.
The Board had retained Ms. Patricia Haverland and Mr. Jeffery Perry to serve as consultants to the Trust effective as of October 1, 2021 through March 31, 2022. For their consulting services, Ms. Haverland and Mr. Perry received compensation of
$100,000 paid in two equal installments, as well as reimbursement for reasonable out-of-pocket expenses incurred in connection with their service to the Trust, including expenses
associated with attending Board or Committee meetings.
Qualifications and Experience of the Trustees
In determining that a particular Trustee is qualified to serve as a Trustee, the Board considered a wide variety of criteria, none of which, in isolation, was controlling. The Board believes that, collectively, the Trustees have diverse and
complementary qualifications, experience, attributes, and skills, which allow the Board to operate effectively in governing the 1290 Funds and protecting the interests of each Fund’s shareholders. Information about certain of the specific
qualifications and experience of each Trustee relevant to the Board’s conclusion that the Trustee should serve as a Trustee of the 1290 Funds is set forth in the table above. Set forth below are certain additional qualifications, experience,
attributes, and skills of each Trustee that the Board believes support a conclusion that the Trustee should serve as a Trustee of the 1290 Funds in light of the 1290 Funds’ business activities and structure.
Interested Trustee
Steven M. Joenk — Mr. Joenk has a
background in the financial services industry, senior management experience with multiple insurance companies, investment management firms and investment companies and multiple
years of service as an officer, Trustee and former Chairman of the Board of the 1290 Funds and other registered investment companies, including other registered investment companies in the fund complex.
Independent Trustees
Mark A. Barnard — Mr. Barnard has senior
management and investment experience with endowments and foundations, multiple years of service on limited partner advisory boards and on the boards of pension entities and an
investment
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company, and multiple years of service as a Trustee of the 1290 Funds and other registered investment companies in the fund complex. Prior to his election to the Board of Trustees of the 1290 Funds, Mr. Barnard had served as a consultant to
the Board of Trustees of the 1290 Funds and another registered investment company in the fund complex since April 1, 2016.
Thomas W.
Brock — Mr. Brock has a background in the financial services industry, senior management experience with financial services and investment management firms and multiple years of service on the boards of public companies and
organizations, and investment companies, and multiple years of service as a Trustee of the 1290 Funds and other
registered investment companies in the fund complex.
Michael B. Clement — Mr. Clement has a
background in the financial services industry, background as an accounting scholar and professor, and multiple years of service on the board of a real estate investment trust, and
multiple years of service as a Trustee of the 1290 Funds and other registered investment companies in the fund complex. Prior to his election to the Board of Trustees of the 1290 Funds, Mr. Clement had served as a consultant to the Board of Trustees of the
1290 Funds and other registered investment companies in the fund complex since September 1, 2018.
Donald E. Foley — Mr. Foley has a
background in the financial services industry, experience in senior management positions with financial services firms, multiple years of service on the boards of public and
private companies and organizations, and multiple years of service as a Trustee of the 1290 Funds and other registered investment companies in the fund complex.
Patricia M. Haverland —
Ms. Haverland has held senior management positions regarding pension plans for financial services and other
companies, experience overseeing outside investment managers for pension plans, serving on an advisory council for the U.S. Department of Labor, and serving on the boards of
non-profit organizations. Ms. Haverland holds the Chartered Financial Analyst designation. Prior to her election to the Trust’s Board of Trustees, Ms. Haverland served as a consultant to the Boards of Trustees of the Trust and other registered investment companies in the fund complex
from October 1, 2021 to March 31, 2022.
H. Thomas McMeekin —
Mr. McMeekin has a background in the financial services industry, has held senior management positions with
insurance companies, has multiple years of service on the boards of public and private companies and organizations, and has multiple years of service as a Trustee of the 1290 Funds
and other registered investment companies in the fund complex.
Jeffery S. Perry — Mr. Perry has multiple
years of experience as a management consultant, including experience as a partner at a global Big 4 professional services firm, and multiple years of service on the boards of
public and non-profit organizations and a college. Prior to his election to the Trust’s Board of Trustees, Mr. Perry served as a consultant to the Boards of Trustees of the Trust and other registered investment companies in the fund complex from October 1, 2021 to March31, 2022.
Gloria D. Reeg —
Ms. Reeg has a background in the financial services industry, senior management and investment experience with
investment management firms, a national foundation, and endowment and retirement assets for a top-ranked research hospital, multiple years of service on the board of a national
foundation, and multiple years of service as a Trustee of the 1290 Funds and other registered investment companies in the fund complex. Prior to her election to the Board of Trustees of the 1290 Funds, Ms. Reeg had served as a consultant to the Board of Trustees of the
1290 Funds and another registered investment company in the fund complex since January 1, 2016.
Gary S. Schpero — Mr. Schpero has
experience as the managing partner of the investment management practice group at a large international law firm and multiple years of service as a Trustee of the 1290 Funds and
other registered investment companies in the fund complex, as well as other unaffiliated investment companies.
Kathleen Stephansen —
Ms. Stephansen has a background in the financial services industry, background as an economist, and senior
management experience with a large financial services firm, and multiple years of service as a Trustee of the 1290 Funds and other registered investment companies in the fund
complex. Prior to her election to the Board of Trustees of the 1290 Funds, Ms. Stephansen had served as a consultant to the Board of Trustees of the 1290 Funds and other registered investment companies in the fund complex since September 1, 2018.
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Board Structure
The Board currently is comprised of nine Trustees, eight of whom are not “interested persons”
(as that term is defined in the 1940 Act) of the 1290 Funds (“Independent Trustees”). The Board has appointed Gary S. Schpero to serve as Chairman of the Board. The Chairman of the Board is recommended by the Trust’s Governance Committee and approved by
the full Board. The Chairman of the Board presides at meetings of the Trustees and shall have such other powers and perform such other duties as may be from time to time assigned
to him by the Trustees or prescribed by the Trust’s Declaration of Trust or By-laws.
The Board holds seven regular meetings each year to consider and address matters involving the 1290 Funds and its Funds. The Board also may hold special meetings to address matters arising between regular meetings. The Independent
Trustees also regularly meet outside the presence of management and are advised by independent legal counsel. These meetings may take place in-person, by videoconference or by telephone.
The Board has established a committee structure that includes an Audit Committee, a Governance Committee, and an Investment Committee (which is divided into sub-committees), discussed in more detail in the “Committees of the Board” section of this SAI. All Independent Trustees are members of each Committee. The Board believes that this structure allows
all of the Independent Trustees to participate in the full range of the Board’s oversight responsibilities. The Board reviews its structure regularly and believes that its leadership structure, including the appointment of an Independent Trustee to
serve in the role of Chairman of the Board, is appropriate given the asset size of the 1290 Funds, the number of Funds offered by the 1290 Funds and the other registered investment companies in the fund complex, the number of Trustees
overseeing the 1290 Funds and the other registered investment companies in the fund complex, and the Board’s oversight responsibilities, as well as the 1290 Funds’ business activities, manager of managers advisory structure and its offering as a retail investment product.
Risk Oversight
The
management of various risks relating to the administration and operation of the 1290 Funds and its Funds is the responsibility of the Adviser and the other service providers,
including any Sub- Advisers, retained by the 1290 Funds or the Adviser, many of whom employ professional personnel who have risk management responsibilities. Consistent with its
responsibility for oversight of the 1290 Funds and its Funds, the Board, among other things, oversees risk management of each Fund’s investment program and business affairs directly and through the committee structure that it has established. Risks to the Funds include, among others, investment risk, credit risk, liquidity risk, valuation risk, operational risk, litigation risk, regulatory risk, reputational risk, and compliance risk as well as the overall business and disclosure risks relating to the Funds and the 1290 Funds and the risk of conflicts of interest affecting the Adviser (or its affiliates) in managing the Funds. The Board has adopted, and periodically reviews, policies and procedures designed to address certain risks. Under the
overall supervision of the Board, the Adviser and other service providers to the Funds also have implemented a variety of processes, procedures and controls to address certain risks. Different processes, procedures and controls are employed with
respect to different types of risks. These processes include those that are embedded in the conduct of regular business by the Board and in the responsibilities of officers of the
1290 Funds and other service providers. The Board recognizes that not all risks that may affect the Funds can be identified, that it may not be practical or cost-effective to
eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Funds’ goals, and that the processes, procedures and controls employed to address certain risks may be
limited in their effectiveness.
The Board oversees risk management activities in part through receipt and review by the Board or its committees of regular and special reports, presentations and other information from officers of the 1290 Funds and from other service
providers. The Board requires senior officers of the 1290 Funds, including the President, Chief Financial Officer, Chief Investment Officer, Chief Compliance Officer (“CCO”) and Director of Risk, to report to the full Board on a variety of matters at regular and special meetings of the Board, including matters relating to risk management. The Chief Financial
Officer also reports regularly to the Board and to the Audit Committee on the 1290 Funds’ internal controls and accounting and financial reporting policies and practices. The Board and the Audit Committee also receive regular reports
from the 1290 Funds’ independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Board meets with the 1290 Funds’ CCO, including meetings in executive session, to
discuss issues related to portfolio compliance and, on at least an annual basis, receives a report from the CCO regarding
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the effectiveness of the 1290 Funds’
compliance program. In addition, the Board receives reports from the Adviser on the investments and securities trading of the Funds, as well as reports from the Valuation Committee
(discussed below in the section “Purchase, Redemption and Pricing of Shares”) regarding the valuation of those investments. Additionally, the Board meets regularly with the Director of Risk with respect to the Adviser’s risk management framework, risk monitoring
and reporting. The Board also receives reports from the 1290 Funds’ primary service providers on a periodic or regular basis, including the Sub-Advisers to the Funds, as well as the 1290 Funds’ custodian, distributor and sub-administrator.
The Board also requires the Adviser to report to the Board on other matters relating to risk management on a regular and as-needed basis. Because most of the Funds’ operations are carried out by various service providers, the Board’s
oversight of the risk management processes of those service providers, including processes to address cybersecurity and other operational issues, is inherently limited.
Committees of the Board
The Audit Committee’s function is to oversee the 1290 Funds’ accounting and financial reporting policies and practices and its internal controls, oversee the quality and objectivity of the 1290 Funds’ financial statements and the independent audit thereof, and act as a liaison between the 1290 Funds’ independent accountants and the Board. To carry out its
function, the Audit Committee, among other things, selects, retains or terminates the 1290 Funds’ independent accountants and evaluates their independence; meets with the 1290 Funds’ independent accountants as necessary to
review and approve the arrangements for and scope of the audit and to discuss and consider any matters of concern
relating to the 1290 Funds’ financial statements and the 1290 Funds’ financial reporting and controls; and approves the fees charged by the independent accountants for audit and non-audit services and, to the extent required by applicable law,
any non-audit services proposed to be performed for the 1290 Funds by the independent accountants. The Audit Committee held five meetings during the fiscal year ended October 31,2021. Mr. Clement serves as the Chair of the Audit Committee.
The Governance Committee’s functions are to consider the size and structure of the Board and other governance matters; evaluate and nominate candidates for Independent Trustee membership on the Board and for membership on any Board committees;
review the compensation arrangements for each of the Independent Trustees; provide oversight of the 1290 Funds’ CCO; and review the independence of counsel to the Independent
Trustees. The Governance Committee also assists the Board in selecting, appointing, and evaluating the 1290 Funds’ CCO, and meets in executive session from time to time with the Adviser to discuss the CCO’s performance and the effectiveness of the 1290 Funds’ compliance program. The Governance Committee will not consider nominees recommended by shareholders. The Governance Committee held five meetings
during the fiscal year ended October 31, 2021. Mr. McMeekin serves as the Chair of the Governance Committee.
The Investment Committee’s function is to assist the Board in its oversight of Fund performance.
The Investment Committee is primarily responsible for overseeing and guiding the process by which the Board reviews Fund performance and interfacing with personnel at the Adviser and the Sub-Advisers responsible for portfolio management. In addition, three
sub-groups of the Investment Committee, comprised of Independent Trustees, management representatives, and outside legal counsel, meet individually and engage in extensive
discussions with Sub-Advisers during in-person presentations made throughout the year. The Investment Committee held four meetings during the fiscal year ended October 31, 2021. Ms. Reeg, Mr. Brock and Mr. Foley serve as Co-Chairs of the Investment Committee.
Compensation of the Trustees
For services to the 1290 Funds, EQ Advisors Trust, and EQ Premier VIP Trust, each Independent Trustee receives an annual retainer of $420,000, payable quarterly, which covers all regular, committee, and special meetings. In addition, the
Chairman of the Board receives an annual retainer of $155,000; the Chair of the Audit Committee receives an annual retainer of $35,000; the Chair of the Governance Committee receives an annual retainer of $35,000; and each of the co-Chairs
of the Investment Committee receives an annual retainer of $35,000. Independent Trustees also receive reimbursement of reasonable out-of-pocket expenses incurred in connection with
serving as an Independent Trustee, including expenses associated with attending Board or Committee meetings. The following table sets forth the aggregate compensation paid to the Trustees by the Trust and by the fund complex, which includes the Trust, EQ Premier VIP Trust, and
EQ Advisors Trust, for the year ended October 31, 2021.
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Trustee Compensation for the Fiscal Year Ended October 31, 20211
The compensation reported in this table reflects the compensation arrangements in effect during
the fiscal year ended October 31, 2021.
2
The amounts reported in this column reflect the total compensation paid to each Trustee for his or her service as Trustee of 127 series of the Trust, EQ Advisors Trust, and EQ Premier VIP Trust.
As of December 31, 2021, no Independent Trustee or members of his or her immediate family beneficially owned or
owned of record securities representing interests in the Adviser, Sub-Advisers or distributor of the 1290 Funds, or any person controlling, controlled by or under common control with such persons. For this purpose, “immediate family
member” includes the Independent Trustee’s spouse, children residing in the Independent Trustee’s household and dependents of the Trustee. Furthermore, the Trustees of the 1290 Funds did not beneficially own shares of any Fund or of
funds overseen in the same family of investment companies, except as set forth in the following table:
A = None; B =
$1-$10,000; C = $10,001 - $50,000; D = $50,001-$100,000; E = over $100,000
*
This column reflects
information regarding ownership of equity securities issued by portfolios in the Trust, EQ Advisors Trust, and EQ Premier VIP Trust.
The 1290 Funds’ Officers
No officer of the 1290 Funds, other than the Chief Compliance Officer, receives any compensation paid by
the 1290 Funds. Each officer of the 1290 Funds is an employee of the Adviser. Some of the officers are also officers of other funds in the fund complex. The 1290 Funds’ principal officers are:
The officers in the table above (except Patricia Cox) hold similar positions with EQ Advisors Trust and EQ Premier VIP Trust, the other registered investment companies in the fund complex.
**
Each officer is elected on an annual basis.
***
During the fiscal year ended October 31, 2021, the Chief Compliance Officer of the Trust received, from the three registered investment companies in the fund complex for which he served in that capacity, compensation in the amount of $216,000, of which the Trust paid $867.
As of March 31, 2022, the Trustees and officers
of the 1290 Funds, as a group, owned beneficially less than 1% of the outstanding shares of each class of the 1290 Funds.
Control Persons and Principal Holders of Securities
As a “series” type of mutual fund, the 1290 Funds issues separate series of shares of
beneficial interest with respect to each Fund. Each Fund resembles a separate fund issuing separate classes of stock.
See Appendix D to this SAI for a list of control persons and principal holders of securities of each Fund.
Investment Management and Other Services
The Adviser
Equitable Investment Management Group, LLC (“EIM”), formerly known as AXA Equitable Funds Management Group, LLC, currently serves as the investment adviser for each Fund. AXA Investment Managers US Inc. (“AXA IM”), Brandywine
Global Investment Management, LLC (“Brandywine Global”), DoubleLine Capital LP (“DoubleLine”), Essex Investment Management Company, LLC (“Essex”), and GAMCO Asset Management, Inc. (“GAMCO”), (each a “Sub-Adviser,” and together the “Sub-Advisers”) serve as investment sub-advisers to one or more of the Funds, as described more fully in the Prospectus.
EIM is a wholly
owned subsidiary of Equitable Financial Life Insurance Company (“Equitable Financial”). Equitable Financial, which is a New York life insurance company and one of the
largest life insurance companies in the U.S., is a wholly owned subsidiary of Equitable Holdings, Inc. (“Equitable Holdings”). The principal offices of EIM, Equitable
Financial and Equitable Holdings are located at 1290 Avenue of the Americas, New York, New York10104.
The Adviser serves as the investment adviser of the 1290 Funds pursuant to an Investment Advisory
Agreement with respect to the Funds (the “Advisory Agreement”). Subject to the general supervision and control of the Trustees of the 1290 Funds, under the Advisory Agreement, the Adviser will provide a continuous investment program for each Fund and will
determine what securities and other investments will be purchased, retained, sold or loaned by each Fund and what portion of such assets will be invested or held uninvested as cash
in accordance with each Fund’s investment objectives, policies and restrictions as stated in the 1290 Funds’ governing documents and such Fund’s then-current
Prospectus and SAI. The Advisory Agreement also provides that the Adviser will monitor the implementation of each Fund’s investment program and assess each Fund’s investment objectives and policies, composition, investment style and investment
process. From time to time, as requested by the Trustees of the 1290 Funds or deemed necessary or appropriate by the Adviser, the Adviser will (i) develop and evaluate strategic initiatives with respect to the 1290 Funds and its Funds; (ii) make recommendations to the Trustees of the 1290 Funds regarding the investment program of the 1290 Funds and its Funds,
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including any changes to Fund investment
objectives and policies; (iii) coordinate and/or implement strategic initiatives approved by the Trustees of the 1290 Funds; and (iv) prepare and provide reports to the Trustees of
the 1290 Funds on the impact of such strategic initiatives on the 1290 Funds and its Funds. Additionally, the Advisory Agreement provides that the Adviser, unless and until otherwise directed by the Trustees of the 1290 Funds, will exercise all rights of security
holders with respect to securities held by each Fund, including, but not limited to: voting proxies, converting, tendering, exchanging or redeeming securities; acting as a claimant in class action litigation (including litigation with respect to
securities previously held), and exercising rights in the context of a bankruptcy or other reorganization. Under the Advisory Agreement, the Adviser will be responsible for effecting transactions for each Fund and selecting brokers or
dealers to execute such transactions for each Fund. In the selection of brokers or dealers and the placement of orders for the purchase and sale of portfolio investments for each Fund, the Adviser will use its best efforts to obtain for each Fund
the best execution available.
The Advisory Agreement also provides that the Adviser will furnish to the Trustees of the 1290 Funds such statistical information and periodic and special reports as the Trustees may reasonably request, and will apprise the Trustees of the
1290 Funds of important developments materially affecting each Fund (or any portion of a Fund). The Advisory
Agreement also provides that, in accordance with procedures and methods established by the Trustees of the 1290 Funds, the Adviser shall provide reasonable assistance in determining the fair value of all securities and other investments/assets
in the Funds, as necessary, and use reasonable efforts to arrange for the provision of valuation information or a price from a party independent of the Adviser for each security or other investment/asset in the Funds for which market prices are not
readily available. The Advisory Agreement also provides that the Adviser shall cooperate with and provide reasonable assistance to the 1290 Funds’ administrator, custodian
and foreign custodians, transfer agent and pricing agents, and all other agents and representatives of the 1290 Funds, keep all such persons fully informed as to such matters as
they may reasonably deem necessary to the performance of their obligations to the 1290 Funds, provide prompt responses to reasonable requests made by such persons and maintain any appropriate interfaces with each so as to promote the efficient
exchange of information. The Advisory Agreement also provides that the Adviser will provide information and reasonable assistance, other than services of outside counsel or
independent accountants or services to be provided by any Sub-Adviser or otherwise covered under the terms of a separate agreement between the Adviser and the 1290 Funds, in connection with the 1290 Funds’ preparation of all registration statements and prospectuses, prospectus
supplements, and SAIs; all annual, semi-annual, and periodic reports to shareholders of the 1290 Funds, regulatory authorities, or others; all notices and proxy solicitation materials furnished to shareholders of the 1290 Funds or regulatory
authorities; and all tax returns.
The Advisory Agreement also permits, subject always to the direction and control of the Trustees of the 1290 Funds, the Adviser to delegate any of its duties with respect to one or more Funds to a Sub-Adviser. Under the Advisory Agreement, the
Adviser has, with respect to each sub-advised Fund or portion thereof, (i) overall supervisory responsibility for the general management and investment of each Fund’s assets;
(ii) full discretion to select new or additional Sub-Advisers for the Fund; (iii) full discretion to enter into and materially modify existing Sub-Advisory Agreements with
Sub-Advisers; and (iv) full discretion to terminate and replace any Sub-Adviser. In connection with the Adviser’s responsibilities under the Advisory Agreement, the Adviser will oversee the performance of delegated functions by each Sub-Adviser, assess each
Fund’s investment focus and furnish the Trustees of the 1290 Funds with periodic reports concerning the performance of delegated responsibilities by the Sub-Adviser. The Adviser will also allocate and reallocate the assets of a Fund, or a
portion thereof, to be managed by one or more Sub-Advisers for such Fund and coordinate the activities of all
Sub-Advisers. In addition, the Adviser will monitor each Sub- Adviser’s implementation of the investment program established by the Adviser with respect to any Fund (or portions of any Fund) under the management of such Sub-Adviser. The
Adviser will also cause the appropriate Sub-Adviser, (i) to furnish to the Board such statistical information, with respect to the investments that a Fund (or portions of any Fund)
may hold or contemplate purchasing, as the Board may reasonably request, (ii) to furnish to the Board such periodic and special reports as the Board may reasonably request, and (iii) to apprise the Board of important developments materially affecting each Fund (or any portion
of a Fund) and furnish the 1290 Funds, from time to time, with such information as may be appropriate for this purpose. In addition, the Adviser will take reasonable steps to
ensure that the appropriate Sub-Adviser furnishes to third-party data reporting services all currently available standardized performance information and other customary data. The Adviser will also be responsible for compensating the Sub-Adviser in the manner specified by the Sub-Advisory
Agreement.
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Under the Advisory Agreement, the Adviser also is required to furnish to the 1290 Funds, at its own expense and without remuneration from or other cost to the 1290 Funds, the following:
• Office space, all necessary office facilities and equipment.
• Necessary executive and other personnel, including personnel for the performance of clerical and other office functions,
exclusive of those functions
• related to and to be performed under the 1290 Funds’ contract or contracts for administration, custodial, accounting,
bookkeeping, transfer, and dividend disbursing agency or similar services by any entity, including the Adviser or its affiliates, selected to perform such services under such
contracts; or
• related to the investment advisory services to be provided by any Sub-Adviser pursuant to a sub-advisory agreement with the
Adviser (“Sub-Advisory Agreement”).
The Advisory Agreement also requires the
Adviser (and its affiliates) to pay all salaries, expenses, and fees of the Trustees and officers of the 1290 Funds who are affiliated with the Adviser or its affiliates. However,
the Trust pays compensation of the CCO that the Adviser is not obligated to pay under the Advisory Agreement. Amounts paid by the Trust to the CCO during the last fiscal year are described above in the section entitled “The 1290 Funds’ Officers.”
The Advisory Agreement also specifically provides that the Adviser will not be liable for any error of
judgment or mistake of law or for any loss suffered by the 1290 Funds in connection with the matters to which the Advisory Agreement relates, but will be liable only for willful misconduct, bad faith, gross negligence, or reckless disregard of its duties or its failure to exercise due care in rendering its services to the 1290 Funds under such Agreement.
The continuance of the Advisory Agreement, with respect to each Fund, must be specifically approved at least annually (i) by a vote of a majority of the Trustees who are not parties to the Advisory Agreement or “interested persons” (as defined in the 1940 Act) of any such party (the “Independent Trustees”) cast in person at a meeting called for the purpose of voting on such approval and (ii) by the Board or, with respect
to a Fund, by an affirmative vote of a majority of the
outstanding voting securities of such Fund. The Advisory Agreement with respect to each Fund may be terminated at any time, without the payment of any penalty, (i) by the Board, upon the vote of a majority of the Trustees, or by the vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of such Fund upon sixty (60) days’ written notice to the Adviser or (ii) by the Adviser upon sixty (60) days’ written notice to the 1290 Funds. The Advisory Agreement will also terminate automatically in the event of its assignment (as defined in the 1940 Act).
Each Fund pays a fee to the Adviser for its services. The Adviser and the 1290 Funds have also entered into an expense limitation agreement with respect to certain Funds as set forth in the Prospectus (“Expense Limitation Agreement”), pursuant to which the Adviser has agreed to waive or limit its management, administrative and other fees and to assume other
expenses so that the net annual operating expenses (with certain exceptions as set forth in the Prospectus) of the Fund are limited to the extent described in the “Management
of the 1290 Funds — Expense Limitation Agreement” section of the Prospectus.
In addition to the management fees, the 1290 Funds pays all expenses not assumed by the Adviser or by a Sub-Adviser, including without limitation: fees and expenses of its independent accountants and of legal counsel for itself and the 1290
Funds’ Independent Trustees; the costs of preparing, setting in type, printing and mailing of prospectuses, prospectus supplements, statements of additional information, annual, semiannual and periodic reports, and notices and proxy
solicitation materials required to be furnished to shareholders of the 1290 Funds or regulatory authorities, and all tax returns; compensation of the officers and Trustees of the 1290 Funds who are not officers, directors/trustees, partners or
employees of the Adviser or its affiliates; the costs of printing registration statements; custodian’s fees; filing fees; Trustee expenses (including any special counsel to Trustees); transfer agent fees; advisory and administration fees; any federal,
state or local income or other taxes; any interest; any membership fees of the Investment Company Institute and similar organizations; fidelity bond and Trustees’ liability insurance premiums; and any extraordinary expenses, such as
indemnification payments or damages awarded in litigation or settlements made. All general 1290 Funds expenses are allocated among and charged to the assets of the Funds of the 1290 Funds on a basis that the Trustees deem fair and
equitable, which may be on the basis of relative net assets of each Fund or the nature of the services performed and
83
relative applicability to each Fund. As
discussed in greater detail below under “The Distributor,” the Class A, T and R shares of each Fund may pay for certain distribution-related expenses in connection with
activities primarily intended to result in the sale of its shares.
The tables below show the fees paid by each Fund, except the 1290 Essex Small Cap Growth Fund, to the Adviser during the fiscal years ended October 31, 2019, October 31, 2020 and October 31, 2021 respectively. The first column shows each fee
without fee waivers, the second column shows the fees actually paid to the Adviser after fee waivers and the third column shows the total amount of fees waived by the Adviser and
other expenses of each Fund assumed by the Adviser pursuant to the Expense Limitation Agreement. Since the 1290 Essex Small Cap Growth Fund had not commenced operations prior to the date of this SAI, no fees have been paid to the Adviser by that Fund.
The Adviser has entered into one or more Sub-Advisory Agreements on behalf of 1290 Diversified Bond
Fund, 1290 DoubleLine Dynamic Allocation Fund, 1290 Essex Small Cap Growth Fund, 1290 GAMCO Small/Mid Cap Value Fund, 1290 High Yield Bond Fund and 1290 SmartBeta Equity Fund with the Sub-Advisers identified in the Prospectus. The Sub- Advisory
Agreements obligate the Sub-Advisers to: (i) make investment decisions on behalf of their respective Funds (or portions thereof); (ii) place orders for the purchase and sale of
investments for their respective Funds (or portions thereof) with brokers or dealers selected by the Adviser and/or the Sub- Advisers; and (iii) perform certain related
administrative functions in connection therewith.
The Adviser pays fees to a Fund’s Sub-Adviser(s) from the advisory fees that it earns from the Fund.
During the fiscal years ended October 31, 2019, October 31, 2020 and October 31, 2021 respectively, the Adviser paid the following fees to the Sub-Advisers with respect to the Funds, pursuant to the Sub-Advisory Agreements:
Fund
Sub-Advisory Fee Paid
2019
2020
2021
1290
Diversified Bond Fund
$78,122
$172,594
$581,727
1290
DoubleLine Dynamic Allocation Fund*
$210,797
$226,415
$254,973
1290
GAMCO Small/Mid Cap Value Fund
$323,172
$298,435
$474,471
1290
High Yield Bond Fund
$131,331
$147,380
$214,840
1290
SmartBeta Equity Fund
$38,074
$61,534
$116,005
*
Inclusive of sub-advisory fee waiver in the amount of $26,226 for 2019, $25,040 for 2020 and $28,535 for 2021.
Since the 1290 Essex Small Cap Growth Fund had not commenced operations prior to the date of this SAI,
no fees have been paid by the Adviser to Essex with respect to that Fund.
The Adviser recommends Sub-Advisers for the Funds to the Trustees based upon its continuing quantitative and
qualitative evaluation of each Sub-Adviser’s skills in managing assets pursuant to specific investment styles and strategies. Short-term investment performance, by itself, is not a significant factor in selecting or terminating a Sub-Adviser, and the
Adviser does not expect to recommend frequent changes of Sub-Advisers.
The Adviser has received from the SEC an exemptive order (“Multi-Manager Order”) that permits the Adviser, subject to certain conditions, to enter into Sub-Advisory Agreements with Sub-Advisers approved by the Trustees, but without the
requirement of shareholder approval. Pursuant to the terms of the Multi-Manager Order, the Adviser is able, subject to the approval of the Trustees, but without shareholder approval, to employ new Sub- Advisers for new or existing funds,
change the terms of particular Sub-Advisory Agreements or continue the employment of existing Sub-Advisers after
events that under the 1940 Act and the Sub-Advisory Agreements would cause an automatic termination of the
agreement. The Adviser also may allocate a Fund’s assets to additional Sub-Advisers subject to approval of the 1290 Funds’ Board. The Adviser is responsible for overseeing Sub-Advisers and recommending their hiring, termination and
replacement to the Board of Trustees. However, the Adviser may not enter into a Sub-Advisory Agreement with an
“affiliated person” of the Adviser (as that term is defined in Section 2(a)(3) of the 1940 Act) (“Affiliated Sub-Adviser”), unless the Sub-Advisory Agreement with the Affiliated Sub-Adviser, including compensation payable thereunder, is
85
approved by the affected Fund’s
shareholders, including, in instances in which the Sub-Advisory Agreement pertains to a newly formed Fund, the Fund’s initial shareholder. Although shareholder approval would
not be required for the termination of Sub- Advisory Agreements, shareholders of a Fund would continue to have the right to terminate such agreements for the Fund at any time by a vote of a majority of outstanding voting securities of the Fund.
The following table discloses, with respect to a Fund’s Sub-Adviser, information about persons who control the Sub-Adviser.
Fund
Name and Control Persons of the Sub-Adviser
1290 Diversified Bond Fund
Brandywine Global is a wholly-owned, but independently operated, subsidiary of Legg
Mason, Inc.
Legg Mason, Inc. is a wholly-owned subsidiary of Franklin
Resources, Inc., a publicly owned company
engaged in the financial
services industry.
1290 DoubleLine Dynamic Allocation Fund
DoubleLine is a registered investment adviser, organized as a Delaware limited
partnership. Jeffrey E.
percentages of
DoubleLine and is deemed to be a control person.
1290 Essex Small Cap Growth Fund
Essex is a registered investment adviser, organized as a Delaware limited liability
company.
1290 GAMCO Small/Mid Cap Value Fund
GAMCO is a wholly-owned subsidiary of GAMCO Investors, Inc. (“GBL”).
Mr. Mario J. Gabelli may be
deemed a controlling person of GAMCO
because of his controlling interest in GBL, the parent
company of
GAMCO, a financial services company.
1290 High Yield Bond Fund
1290 SmartBeta Equity Fund
AXA IM is an indirect wholly-owned subsidiary of AXA Investment Managers, S.A., which is a
wholly-owned subsidiary of the AXA Group.
Information regarding the portfolio managers’ compensation, other accounts managed by the
portfolio managers and the portfolio managers’ ownership of shares of the Funds to the extent applicable is attached in Appendix B.
The Adviser reserves the right, subject to approval of the 1290 Funds’ Board, to appoint more than
one Sub- Adviser to manage the assets of each Fund. When a Fund has more than one Sub-Adviser, the assets of each Fund are allocated by the Adviser among the Sub-Advisers selected for the Fund. Each Sub-Adviser has discretion, subject to oversight by the
Trustees and the Adviser, to purchase and sell portfolio assets, consistent with each Fund’s investment objectives, policies and restrictions and specific investment strategies developed by the Adviser.
Generally, no Sub-Adviser provides any services to any Fund except asset management and related administrative and recordkeeping services. However, a Sub-Adviser or its affiliated broker-dealer may execute portfolio transactions for a Fund
and receive brokerage commissions in connection therewith as permitted by Section 17(e) of the 1940 Act and the rules thereunder.
Personal Trading Policies
The 1290 Funds, the Adviser and the Distributor (as defined below) each have adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act, which permits personnel covered by the rule to invest in securities that may be purchased or held
by a Fund but prohibits fraudulent, misleading, deceptive or manipulative acts or conduct in connection with that personal investing. Each Sub-Adviser also has adopted a code of
ethics under Rule 17j-1. Such codes of ethics may permit personnel covered by the rule to invest in securities that may be purchased or held by the Fund for which the Sub-Adviser serves as a sub-adviser. The Codes of Ethics of the 1290 Funds, EIM, the Distributor and the Sub-Advisers have
been filed as exhibits to the 1290 Funds’ Registration Statement.
The
Administrator
Pursuant to an administrative agreement (“Mutual Funds Service
Agreement”), Equitable Investment Management, LLC (the “Administrator”) provides the 1290 Funds with necessary administrative services, as more fully described in
the Prospectus. In addition, the Administrator makes available the office space, equipment, personnel and facilities required to provide such administrative services to the 1290 Funds. For these administrative services, each Fund pays the Administrator
an asset-based administration fee of 0.15% of the average daily net assets of the Fund. The asset-based administration fee is calculated and billed monthly, and subject to an
annual minimum of $30,000 per Fund or $30,000 for each allocated portion (or sleeve) of a Fund, as applicable.
86
Pursuant to a sub-administration arrangement,
the Administrator has contracted with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”) to provide the 1290 Funds with certain sub-administrative services, including
assisting with monitoring of portfolio compliance and portfolio accounting services, subject to the supervision of the Administrator. The Administrator pays JPMorgan Chase a fee for these services.
During the fiscal years ended October 31, 2019, October 31, 2020 and October 31, 2021, respectively, the Funds paid the following fees to the Administrator for administrative services. Prior to August 1, 2021, EIM served as the administrator of
the 1290 Funds and, accordingly, prior to August 1, 2021, the fees reflected in the table below were paid to EIM:
Fund
Administrative Fee Paid
2019
2020
2021
1290
Diversified Bond Fund
$78,151
$181,139
$720,130
1290
DoubleLine Dynamic Allocation Fund
$88,870
$94,333
$106,243
1290
GAMCO Small/Mid Cap Value Fund
$146,254
$134,001
$217,223
1290
High Yield Bond Fund
$52,145
$58,656
$85,967
1290
Multi-Alternative Strategies Fund
$30,004
$30,000
$30,048
1290
SmartBeta Equity Fund
$31,719
$53,194
$139,075
Since the 1290 Essex Small Cap Growth Fund had not commenced operations prior to the date of this SAI, no fees have been paid to the Administrator for administrative services with respect to that Fund.
The Distributor
The
1290 Funds has a distribution agreement with ALPS Distributors, Inc. (“ALPS”) (also referred to as the “Distributor”), under which it serves as Distributor
for the 1290 Funds’ Class A, Class T, Class I and Class R shares. Effective March 1, 2017, Class C shares were re-designated Class T shares. ALPS’ address is 1290
Broadway #1100, Denver, CO80203.
The 1290 Funds’ distribution agreement with respect
to the Class A, Class T, Class I and Class R shares of the Funds (“Distribution Agreement”) has been approved by the 1290 Funds’ Board, including a majority of
the Independent Trustees, with respect to each Fund. The Distribution Agreement will remain in effect from year to year provided its continuance is approved at least annually by (i) a majority of the Independent Trustees who are not parties to such
agreement and, if applicable, who have no direct or indirect financial interest in the operation of the distribution plans adopted pursuant to Rule 12b-1 under the 1940 Act (“Rule 12b-1 Distribution Plans”) or any such related agreement, by a vote cast in person at a meeting called for the purpose of voting on such Agreement and (ii) either by vote of a majority of
the Trustees or a majority of the outstanding voting securities (as defined in the 1940 Act) of the 1290 Funds, as applicable.
The Trust has adopted in the manner prescribed under Rule 12b-1 under the 1940 Act Rule 12b-1
Distribution Plans pertaining to the Class A, Class T and Class R shares of the 1290 Funds.
Under the Rule 12b-1 Distribution Plans, each Fund is authorized to pay the Distributor an annual fee at the rate listed below of each Fund’s average daily net assets attributable to Class A, Class T and Class R shares. These fees are paid to compensate the Distributor for distributing each share class (i.e., rendering services and bearing expenses in connection
with activities primarily intended to result in the sale of shares) and/or providing services to shareholders of each class, such as maintaining shareholder accounts for those classes. Activities and services contemplated under the Rule 12b-1
Distribution Plans include printing and mailing of fund prospectuses, statements of additional information (including any supplements thereto) and shareholder reports, compensation to financial intermediaries and broker-dealers, and holding
seminars and sales meetings with wholesale and retail sales personnel assigned to promote the distribution of shares.
Share Class
Distribution Fee and/or Service Fee
(as a % of average daily net assets attributable to the class)
Class A
0.25%
Class T
0.25%
Class R
0.50%
87
The Board considered various factors in connection with its decision as to whether to approve each Rule 12b-1
Distribution Plan, including: (i) the nature and causes of the circumstances which make approval or continuation of the Rule 12b-1 Distribution Plan necessary and appropriate; (ii) the way in which the Rule 12b-1 Distribution Plan would address
those circumstances, including the nature and potential amount of expenditures; (iii) the nature of the anticipated benefits; (iv) the possible benefits of the Rule 12b-1
Distribution Plan to any other person relative to those of the 1290 Funds; (v) the effect of the Rule 12b-1 Distribution Plan on existing shareholders; (vi) the merits of possible
alternative plans or pricing structures; (vii) competitive conditions in the mutual fund industry; and (viii) the relationship of the Rule 12b-1 Distribution Plan to other distribution efforts of the 1290 Funds. The Board noted that the overall distribution
arrangements would (1) enable investors to choose the purchasing option best suited to their individual situation, thereby encouraging current shareholders to make additional investments in the Funds and attracting new investors and assets to the
Funds to the benefit of the Funds and their respective shareholders, (2) facilitate distribution of the Funds’ shares and (3) maintain the competitive position of the Funds
in relation to other funds that have implemented or are seeking to implement similar distribution arrangements.
Based upon its review of the foregoing factors and the materials presented to it, and in light of its
fiduciary duties under the 1940 Act, the Board, including the Independent Trustees with no direct or indirect financial interest in the Rule 12b-1 Distribution Plans or any related agreements, unanimously determined, in the exercise of its reasonable business judgment,
that each Rule 12b-1 Distribution Plan is reasonably likely to benefit the 1290 Funds and the shareholders of the Funds. As such, the Trustees, including such Independent Trustees,
approved each Rule 12b-1 Distribution Plan.
Pursuant to the Rule 12b-1 Distribution Plans,
the 1290 Funds compensates the Distributor from assets attributable to the Class A, Class T and Class R shares for services rendered and expenses borne in connection with
activities primarily intended to result in the sale or servicing of these classes of shares. Generally, the 12b-1 fees are paid to the Distributor on a monthly basis. A portion of the amounts received by the Distributor will be used to defray various costs incurred or
paid by the Distributor in connection with the printing and mailing of Trust prospectuses, statements of additional information, and any supplements thereto and shareholder reports, and holding seminars and sales meetings with wholesale and
retail sales personnel designed to promote the distribution of Class A, Class T and Class R shares. The Distributor may also use a portion of the amounts received to provide
compensation to financial intermediaries and third-party broker-dealers for their services in connection with the distribution and servicing of Class A, Class T and Class R shares.
Each Rule 12b-1
Distribution Plan is of a type known as a “compensation” plan because payments are made for services rendered to the 1290 Funds with respect to a class of shares
regardless of the level of expenditures by the Distributor. The Trustees, however, take into account such expenditures for purposes of reviewing operations under each Rule 12b-1
Distribution Plan and in connection with their annual consideration of the Rule 12b-1 Distribution Plans’ renewal. The Distributor’s expenditures include, without limitation: (a) the printing and mailing of Trust prospectuses, statements of additional information, any supplements thereto and shareholder reports for prospective shareholders with respect to the
Class A, Class T and Class R shares of the 1290 Funds; (b) those relating to the development, preparation, printing and mailing of advertisements, sales literature and other promotional materials describing and/or relating to the Class A, Class
T and Class R shares of the 1290 Funds; (c) holding seminars and sales meetings designed to promote the distribution of the Funds’ Class A, Class T and Class R shares; (d)
obtaining information and providing explanations to wholesale and retail distributors of shares regarding the Funds’ investment objectives and policies and other information
about the 1290 Funds and its Funds, including the performance of the Funds; (e) training sales personnel regarding the Class A, Class T and Class R shares of the 1290 Funds; and (f) financing any other activity that the Distributor determines
is primarily intended to result in the sale of Class A, Class T and Class R shares.
The Distributor may use its past profits or other resources to pay for expenses incurred in connection with providing services intended to result in the sale of shares of the 1290 Funds and/or support services that benefit shareholders,
including payments of significant amounts made to intermediaries that provide those services. These services may include sales personnel training, prospectus review, marketing and related services. The Distributor also may receive payments from
Sub-Advisers of the Funds and/or their affiliates to help defray expenses for sales meetings, seminar sponsorships and similar expenses that may relate to the shares and/or the
Sub-Advisers' respective Funds. The Distributor may also use a portion of the amounts received to provide compensation to financial intermediaries and third-party broker-dealers
88
for their services in connection with the distribution of Class A, Class T and Class R shares as described further below in “Compensation to Financial Intermediaries and Third-Party Broker-Dealers.”
The Distributor pays all fees and expenses in connection with its qualification and registration as a broker or dealer under federal and state laws. In the capacity of agent, the Distributor offers shares of each Fund on a continuous basis in all
states in which the Fund or the 1290 Funds may, from time to time, be registered or where permitted by applicable law. The Distributor has made no firm commitment to acquire shares of any Fund.
Each Rule 12b-1 Distribution Plan and any Rule 12b-1 related agreement that is entered into by the 1290 Funds with the Distributor of the Class A, Class T and Class R shares in connection with a Rule 12b-1 Distribution Plan will continue in
effect for a period of more than one year only so long as such continuance is specifically approved at least annually by a vote of a majority of the 1290 Funds’ Board, and a majority of the Independent Trustees, with no direct or indirect financial interest in the operation of the Rule 12b-1 Distribution Plan or Rule 12b-1 related agreement, cast in person at a meeting
called for the purpose of voting on such Plan or agreement. In addition, annual continuance of the Distribution
Agreement must be approved by the 1290 Funds’ Board or a majority of outstanding voting securities (as defined in the 1940 Act), and a majority of Independent Trustees, by a vote cast in person at a meeting called for the purpose of voting on
the Distribution Agreement. In addition, each Rule 12b-1 Distribution Plan and any Rule 12b-1 related agreement may be terminated as to Class A, Class T and Class R shares of a
Fund at any time, without penalty, by vote of a majority of the outstanding Class A, Class T and Class R shares of the Fund, as applicable, or by vote of a majority of the
Independent Trustees, with no direct or indirect financial interest in the operation of the Rule 12b-1 Distribution Plan or Rule 12b-1 related agreement. Each Rule 12b-1 Distribution Plan also provides that it may not be amended to increase materially the
amount that may be spent for distribution of Class A, Class T or Class R shares of any Fund without the approval of Class A, Class T or Class R shareholders of that Fund.
The table below shows the fees paid to ALPS by Class A shares, Class T shares, and Class R shares of each Fund, pursuant to the Rule 12b-1 Distribution Plans, for the fiscal year ended October 31, 2021. Since the 1290 Essex Small Cap Growth Fund
had not commenced operations prior to the date of this SAI, no fees have been paid to the Distributor under the Rule 12b-1 Distribution Plans with respect to that Fund.
Fund
Class A
Distribution
Fee Paid
Class T
Distribution
Fee Paid
Class R
Distribution
Fee Paid
Total
Distribution
Fees Paid
1290
Diversified Bond Fund*
$22,590
$—
$3,297
$25,887
1290
DoubleLine Dynamic Allocation Fund*
$10,770
$—
$966
$11,736
1290
GAMCO Small/Mid Cap Value Fund**
$13,038
$418
$5,031
$18,487
1290
High Yield Bond Fund**
$5,020
$330
$3,325
$8,675
1290
Multi-Alternative Strategies Fund*
$1,530
$—
$790
$2,320
1290
SmartBeta Equity Fund**
$10,723
$414
$2,354
$13,491
*
Class T shares were not operational during the fiscal year ended October 31, 2021.
**
For the fiscal year ended October 31, 2021, the Distributor waived the following fees:
- 1290 GAMCO Small/Mid Cap Value Fund - $418 - 1290 High Yield Bond Fund - $330
Class A shares are subject to a maximum sales
charge imposed on purchases of 5.50% for 1290 GAMCO Small/Mid Cap Value Fund, 1290 SmartBeta Equity Fund, 1290 Multi-Alternative Strategies Fund, 1290 DoubleLine Dynamic
Allocation Fund, and 1290 Essex Small Cap Growth Fund, and 4.50% for 1290 High Yield Bond Fund and 1290 Diversified Bond Fund. Class T shares of each Fund are subject to a maximum sales charge imposed on purchases of 2.50%.
Compensation to Financial Intermediaries and Third-Party Broker-Dealers
In addition to the sales commissions paid by investors and the distribution and service fees paid by the funds to the Distributor for the purpose of compensating selling dealers (described above in the section entitled, “The Distributor”), the Distributor or the Adviser (or one of its affiliates) may make payments out of its own resources to provide additional
compensation to selling dealers and other financial intermediaries who are authorized to offer and sell shares of the Funds and other mutual funds distributed by the Distributor (collectively, “Dealers”). As described in the Prospectus, the
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Adviser and the Distributor may use their
respective past profits or other resources, without cost to the funds or shareholders, to pay for expenses incurred in connection with providing services intended to result in the
sale of shares of the Funds and/or support services that benefit shareholders, to reimburse certain expenses related to processing sales of Fund shares and to pay incentives to market the Funds, to cooperate with the Distributor’s promotional efforts or in
recognition of their marketing, transaction processing and/or administrative services support (collectively, “revenue sharing payments”). This compensation is not reflected in the fees and expenses listed in the fee table section of the
Prospectus.
Marketing Support Payments. The Distributor or the Adviser and their affiliates may make payments to certain Dealers for marketing support services, including: providing periodic and ongoing education and training of Dealer personnel regarding
the funds; disseminating to Dealer personnel information and product marketing materials regarding the Funds; explaining to clients the features and characteristics of the Funds; conducting due diligence regarding the funds; providing reasonable access to sales meetings, sales representatives and management representatives of the Dealer; granting reasonable access to the Dealer’s financial advisors and consultants; furnishing marketing support and other services; and sponsoring seminars for the public and advertising campaigns. These payments are generally based on a number of factors including, but not limited to, reputation
in the industry, ability to attract and retain assets, target markets, customer relationships and quality of service. No one factor is determinative of the type or amount of additional compensation to be provided. Such payments may be calculated by reference
to the gross sales price of shares sold by such Dealers, the net asset value of shares held by the customers of such Dealers, or otherwise.
Processing Support Payments. The Distributor or the Adviser (and their affiliates) may make payments to certain Dealers that sell Fund shares to help offset the Dealers’ costs associated with client account maintenance support, statement preparation and transaction processing. The types of payments that the Distributor or the Adviser (and their affiliates) may make under this category include, among others, payment of ticket charges placed by a Dealer, payment of networking fees on certain mutual
fund trading systems or one-time payments for ancillary services, such as setting up funds on a Dealer’s mutual fund trading system.
Other
Payments. From time to time, the Distributor or the Adviser at its expense, may make additional
payments to Dealers that sell or provide services in connection with the sale of Fund shares. Such payments by the Distributor may include payment or reimbursement to, or on behalf of, Dealers for costs associated with the purchase of products or services used in connection with sales and marketing, as well as conferences or seminars, sales or training programs for Dealer representatives and other
employees, client entertainment, client and investor events, and other Dealer-sponsored events, and travel expenses, including lodging incurred by Dealer representatives and other employees in connection with training and educational meetings, client
prospecting, retention and due diligence trips. Other compensation or promotional incentives may be offered to the extent not prohibited by federal or state laws or any self-regulatory organization. The Distributor makes payments for entertainment events it deems appropriate, subject to the Distributor’s policies and applicable law. These payments may vary depending upon the nature of the event.
Subaccounting and Other Payments. In addition to the payments described above, from time to time, the Funds and/or the Distributor may enter into arrangements with, and pay fees to, financial intermediaries that provide recordkeeping services to
certain groups of investors in the funds, including participants in retirement and benefit plans, investors in mutual fund advisory programs and clients of financial intermediaries that operate in an omnibus environment or utilize certain National Securities
Clearing Corporation networking levels (collectively referred to as “subaccounting”). The subaccounting services typically include: (i) establishing and maintaining investor accounts and records; (ii) recording investor account balances and changes thereto;
(iii) arranging for the wiring of funds; (iv) providing statements to investors; (v) furnishing proxy materials, periodic fund reports, prospectuses and other communications to investors as required; (vi) transmitting investor transaction information; and (vii)
providing information in order to assist the funds in their compliance with state securities laws.
The subaccounting fees the Funds generally pay are designed to be equal to or less than the fees the Funds would pay to their transfer agent for similar services, but in certain circumstances the subaccounting fees may be higher due to differences in the services being provided or other factors. The Funds understand that, in accordance with guidance from the U.S. Department of
Labor, retirement and benefit plans, sponsors of qualified retirement plans and/or recordkeepers may be required to use the fees they (or, in the case of recordkeepers, their
affiliates) receive for the benefit of the retirement and benefit plans or the investors.
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This may take the form of recordkeepers passing the fees through to their clients or reducing the clients’ charges by the amount of fees the recordkeeper receives from mutual funds.
The Funds may also make other payments to Dealers that sell Fund shares to help offset the Dealers’ costs associated with transaction processing, including payment of networking fees on certain mutual fund trading systems.
For more specific information about any revenue sharing and/or subaccounting payments made to your Dealer or financial intermediary, investors should contact their investment professionals.
Transfer Agency
Services
DST Asset Manager Solutions, Inc. (f/k/a Boston Financial Data Services, Inc.) (“DST” or “Transfer Agent”) 2000 Crown Colony Drive, Quincy, Massachusetts02169-0953, acts as each Fund’s Transfer Agent pursuant to a Transfer Agency and Servicing
Agreement (the “Transfer Agency Agreement”) with the 1290 Funds. Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for, among other things, the issuance, transfer and redemption of shares, the opening and maintenance
of shareholder accounts, the handling of certain communications between shareholders and the 1290 Funds, and the payment of dividends and other distributions payable by the Funds. Under the Transfer Agency Agreement, DST receives a monthly fee
comprised of a fixed base fee plus a fee computed on the basis of the number of shareholder accounts it maintains for the 1290 Funds during the month.
Brokerage Allocation and Other Strategies
Brokerage Commissions
The Funds may be charged for securities brokers’ commissions, transfer taxes (if any) and similar
fees relating to securities transactions. The Adviser and the Sub-Advisers of the Funds, as appropriate, seek to obtain the best net price and execution on all orders placed for the Funds, considering all the circumstances. The Adviser and the Sub-Advisers may, as appropriate,
in the allocation of brokerage business, take into consideration the receipt of research and other brokerage services, consistent with the obligation to seek to obtain best net price and execution.
Investment company securities (not including securities of ETFs) generally are purchased directly from the issuer. It is expected that other securities will ordinarily be purchased in the primary markets, whether OTC or listed, and that listed securities may be purchased in the OTC market if that market is deemed the primary market.
Purchases and sales of equity securities on a securities exchange or in the OTC market are effected through brokers who receive compensation for their services. Such compensation varies among different brokers. Generally, compensation relating
to securities traded on foreign exchanges will be higher than compensation relating to securities traded on U.S. exchanges and may not be
subject to negotiation. However, brokerage commission rates in certain countries in which the Funds may invest may be discounted for certain large domestic and foreign investors such as the Funds. A number of foreign banks and brokers will be used for execution of the Funds’ portfolio transactions. In the case of securities traded in the foreign and domestic OTC markets, there is generally no stated commission, but the price usually includes an undisclosed commission or mark-up. Equity securities may be purchased
from underwriters at prices that include underwriting fees.
Purchases and sales of fixed-income securities are generally made with an issuer or a primary market-maker acting as principal. Although there is generally no stated brokerage commission paid by a Fund for a fixed-income security, the price paid by a Fund to an underwriter includes the disclosed underwriting fee and prices in secondary trades usually include an undisclosed commission or mark-up.
The Adviser and
Sub-Advisers of the Funds may, as appropriate, in the allocation of brokerage business, take into consideration research and other brokerage services provided by brokers and
dealers to the Adviser or Sub-Advisers. The research services include economic, market, industry and company research material. Commissions charged by brokers that provide research
services may be somewhat higher than commissions charged by brokers that do not provide research services. As permitted by Section 28(e) of the Securities Exchange Act of 1934, as amended (“1934 Act”) and by policies adopted by the Trustees, the Adviser and Sub-Advisers, as appropriate, may cause the 1290 Funds to pay a broker-dealer that provides brokerage and research
services to the Adviser and Sub-Advisers an amount of commission for effecting a securities transaction for the 1290 Funds in excess of the commission another broker-dealer would have charged for effecting that transaction. To obtain the benefit of Section
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28(e), the Adviser or the relevant Sub-Adviser
must make a good faith determination that the commissions paid are reasonable in relation to the value of the brokerage and research services provided viewed in terms of either
that particular transaction or its overall responsibilities with respect to the accounts as to which it exercises investment discretion and that the services provided by a broker provide the Adviser or the Sub-Adviser with lawful and appropriate assistance in the performance of its investment
decision-making responsibilities. Accordingly, the price to a Fund in any transaction may be less favorable than that available from another broker-dealer if the difference is reasonably justified by other aspects of the portfolio execution services offered.
For futures transactions, the selection of a futures broker is generally based on the overall quality of
execution and other services provided by the futures broker. The Adviser and the Sub-Advisers or their affiliates may choose to execute futures transactions electronically.
Certain
Sub-Advisers may also receive research or research credits from brokers which are generated from underwriting commissions when purchasing new issues of fixed income securities or
other assets for a Fund in underwritten fixed price offerings. In these situations, the underwriter or selling group member may provide an Sub-Adviser with research in addition to
selling the securities (at the fixed public offering price) to the Fund. Because the offerings are conducted at a fixed price, the ability to obtain research from a broker-dealer in this situation provides knowledge that may benefit the Fund, the Sub-Adviser’s other clients and the Sub-Adviser without incurring additional costs. These arrangements may not fall within the safe harbor of Section 28(e) of the 1934 Act because the broker-dealer is considered to be acting in a principal capacity in underwritten transactions. However, the Financial Industry Regulatory Authority has adopted rules expressly permitting broker-dealers to provide bona
fide research to Sub-Advisers in connection with fixed price offerings under certain circumstances.
Certain Sub-Advisers may obtain third-party research from broker-dealers or non-broker dealers by entering into commission sharing arrangements (“CSAs”). Under a CSA, the executing broker-dealer agrees that part of the commissions it earns on certain equity trades will be allocated to one or more research providers as payment for research. CSAs allow a Sub-Adviser to direct
broker-dealers to pool commissions that are generated from orders executed at that broker-dealer, and then periodically direct the broker-dealer to pay third party research providers for research.
The overall reasonableness of commissions paid will be determined by evaluating brokers on such general factors as execution capabilities, quality of research (that is, quantity and quality of information provided, diversity of sources utilized, nature and frequency of communication, professional experience, analytical ability and professional stature of the broker) and financial standing, as well as the net results of specific transactions, taking into account such factors as price, promptness, confidentiality, size of order and difficulty of execution. The research services obtained will,
in general, be used by the Adviser and Sub-Advisers, as appropriate, for the benefit of all accounts for which the responsible party makes investment decisions. As such, research services paid for with the Funds’ brokerage commissions may not benefit the Funds, while research services paid for with the brokerage commissions of other clients may benefit the Funds. The receipt of research services from brokers will tend to reduce the Adviser’s and Sub-Advisers’ expenses in managing the Funds.
Securities or other investments held by a Fund may also be held by other separate accounts, mutual funds or other accounts for which the Adviser or a Sub-Adviser serves as an investment adviser, or held by the Adviser or a Sub-Adviser for its own account. Because of different investment objectives
or other factors, a particular security or other investment may be bought by the Adviser or a Sub-Adviser for one or more clients when one or more clients are selling the same security. If purchases or sales of securities for a Fund or other entities for which they act as investment adviser or for their advisory clients arise for consideration at or about the same time, transactions in such securities will be made, insofar as feasible, for the respective entities and clients in a manner deemed equitable to all. To the extent that transactions on behalf of more than one client of the Adviser or a Sub-Adviser during the same period may increase the demand for securities being purchased or the supply of securities being sold, there may be
an adverse effect on price.
When the Adviser or a Sub-Adviser deems the purchase or sale of a security to be in the best interests of a Fund as well as other accounts or companies, it may to the extent permitted by applicable laws and regulations, but will not be obligated to, aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for such other accounts or companies
in order to obtain favorable execution and lower brokerage commissions. In that event, allocation of the securities purchased or sold, as well as the expenses incurred in the transaction, will be made by the Adviser or the Sub-Adviser in the manner it considers to be most equitable and consistent with its fiduciary obligations to the Fund and to such other accounts or companies. In general, the Adviser and the Sub-Advisers, as appropriate, will make allocations among accounts with the same or similar investment
objective based upon a variety of factors which may include, among other things, the account’s available cash, investment
92
restrictions, permitted investment techniques,
tolerance for risk, tax status, account size, and other relevant considerations. In some cases this procedure may adversely affect the size of the position obtainable for a
Fund.
Since the 1290 Essex Small Cap Growth Fund had not commenced operations prior to the date of this SAI, no brokerage commissions have been paid by that Fund.
Brokerage Transactions with Affiliates
To the extent permitted by law and in accordance with procedures established by the 1290 Funds’ Board, the 1290 Funds may engage in brokerage transactions with brokers that are affiliates of the Adviser or its affiliates, including Sanford C.
Bernstein & Co., LLC (“Bernstein”), Sub-Advisers, brokers who are affiliates of such Sub- Advisers, or unaffiliated brokers who trade or clear through affiliates of the Adviser or the Sub-Advisers. The 1940 Act generally prohibits the 1290 Funds
from engaging in principal securities transactions with brokers that are affiliates of the Adviser or Sub-Advisers or their respective affiliates, unless pursuant to an exemption from the SEC. The 1290 Funds relies on exemptive relief from the SEC
that permits a portion of a Fund that has multiple portions advised by different Sub-Advisers and/or the Adviser to engage in principal and brokerage transactions with a
Sub-Adviser (or an affiliate of that Sub-Adviser) to another portion of the same Fund, subject to certain conditions. The 1290 Funds has adopted procedures, prescribed by the 1940
Act and the rules thereunder, which are reasonably designed to provide that any commissions or other remuneration it pays to brokers that are affiliates of the Adviser and brokers that are affiliates of a Sub-Adviser to a Fund for which that
Sub-Adviser provides investment advice do not exceed the usual and customary broker’s commission. In addition, the 1290 Funds will adhere to the requirements under the 1934 Act governing floor trading. Also, under applicable securities
law, the 1290 Funds will limit purchases of securities in a public offering, if such securities are underwritten by brokers that are affiliates of the Adviser or Sub-Advisers or their respective affiliates.
During the fiscal years ended October 31, 2019, October 31, 2020 and October 31, 2021, respectively, the following Funds paid the amounts indicated to affiliated broker-dealers of the Adviser, the Distributor, or Equitable Advisors, or
affiliates of the Sub-Advisers to each Fund.
Brokerage commissions may vary significantly from year to year due to a variety of factors,
including the type of investments selected by the Sub-Adviser(s), investment strategy changes, the appointment of a new or additional Sub-Advisers, changes in transaction costs and
market conditions.
Brokerage commissions may vary significantly from year to year due to a variety of factors,
including the type of investments selected by the Sub-Adviser(s), investment strategy changes, the appointment of a new or additional Sub-Advisers, changes in transaction costs and
market conditions.
Brokerage commissions may vary significantly from year to year due to a variety of factors,
including the type of investments selected by the Sub-Adviser(s), investment strategy changes, the appointment of a new or additional Sub-Advisers, changes in transaction costs and
market conditions.
Brokerage Transactions Relating to Research Services
For the fiscal year ended October 31, 2021, the following Funds directed the following amount of portfolio transactions to broker-dealers that provided research services, for which the Funds paid the brokerage commissions indicated:
Fund
Transaction
Amount
Related
Brokerage
Commission
Paid
1290
DoubleLine Dynamic Allocation Fund
$10,145,264
$1,896
Investments in Regular Broker-Dealers
As of October 31, 2021, the following Funds owned securities issued by their regular brokers or dealers (or by their parents) as follows:
Fund
Broker or Dealer
(or Parent Company)
Type of
Security
Value
(000)
1290 GAMCO
Small/Mid Cap Value
Fund
JPMorgan Securities, LLC
E
$5,456
1290 High
Yield Bond Fund
JPMorgan Securities, LLC
E
$2,525
1290 Diversified Bond Fund
Wells Fargo Securities, LLC
D
$10,094
JPMorgan Securities, LLC
E
$22,841
JPMorgan Securities, LLC
D
$12,767
1290 DoubleLine Dynamic Allocation
Fund
Bank of America Securities, Inc.
D
$245
Barclays Capital, Inc.
D
$358
Citigroup Global Markets, Inc.
E
$534
Goldman Sachs & Co., LLC
D
$115
JPMorgan Securities, LLC
D
$70
JPMorgan Securities, LLC
E
$54
Morgan Stanley & Co., LLC
D
$568
Wells Fargo Securities, LLC
D
$189
1290
SmartBeta Equity Fund
JPMorgan Securities, LLC
E
$1,548
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Proxy Voting Policies
and Procedures
Pursuant to the 1290 Funds’ Proxy Voting Policies and Procedures, the
1290 Funds has delegated the proxy voting responsibilities with respect to each Fund to the Adviser. With respect to each Fund or allocated portion of a Fund for which a Sub-Adviser provides portfolio management (i.e., each Fund in this SAI except the 1290 Multi-Alternative Strategies
Fund) (each, a “Sub-Advised Fund”), the Adviser views proxy voting as a function that is incidental and integral to portfolio management, and it has in turn delegated
the proxy voting responsibilities with respect to each Sub-Advised Fund to the applicable Sub-Adviser. The primary focus of the 1290 Funds’ proxy voting procedures as they
relate to a Sub-Advised Fund, therefore, is to seek to ensure that each Sub-Adviser has adequate proxy voting policies and procedures in place and to monitor each Sub-Adviser’s proxy voting.
Under certain circumstances, for example, when a Sub-Adviser notifies the Adviser that it is unable or unwilling to assume responsibility to vote a proxy for a Sub-Advised Fund, due to a potential material conflict of interest of the Sub-Adviser or
otherwise, the Adviser has deemed it appropriate to assume responsibility for voting the proxies for shares held by a Sub-Advised Fund instead of delegating that responsibility to the Sub-Adviser. Under these circumstances, the Adviser’s
Proxy Voting Committee will vote such proxies in the best interest of the relevant Sub-Advised Fund and its shareholders.
The Adviser is responsible for proxy voting for the 1290 Multi-Alternative Strategies Fund (“Fund
of Funds”). The Adviser’s Proxy Voting Committee will vote the Fund of Fund’s shares in Underlying ETFs in the best interest of the Fund of Funds and its shareholders.
The Adviser
may engage an independent proxy voting service to assist with the research and analysis of voting issues, provide voting recommendations or carry out the actual voting process as
deemed necessary. If the Adviser becomes aware that a proposal may present an issue as to which the Adviser, the Distributor or their affiliates could be deemed to have a material conflict of interest, the issue will be reviewed by the Trust’s CCO, who may take actions deemed
appropriate. If the 1290 Funds’ CCO determines that an affiliated person of the Adviser has a potential material conflict, that affiliated person will not participate in the voting decision.
A description of the 1290 Funds’ proxy voting policies and procedures and the proxy voting policies and procedures that each Sub-Adviser uses to determine how to vote proxies relating to the Fund’s portfolio securities are included in
Appendix C to this SAI. A description of the policies and procedures the 1290 Funds and each Sub-Adviser uses to
determine how to vote proxies relating to portfolio securities also is available (i) without charge, upon request, by calling a toll-free number at 1-888-310-0416 and (ii) on the Securities and Exchange Commission’s website at http://www.sec.gov.
Information regarding how the Funds voted proxies relating to portfolio securities during the most recent 12-month period ended June 30th is available (1) on the 1290 Funds’ website at http://www.1290Funds.com and (2) on the SEC’s website at http://www.sec.gov. Because the 1290 Essex
Small Cap Growth Fund is new, it had not voted any proxies relating to portfolio securities as of the date of this SAI.
Conflicts of Interest
The Adviser currently serves as the investment adviser for 1290 Funds and two other investment companies
that are registered under the 1940 Act, and as the investment adviser for two private investment trusts that are exempt from such registration. The Adviser and its affiliates (including Equitable Financial, Equitable Distributors, LLC, Equitable Holdings,
Equitable Investment Management, LLC, and AllianceBernstein L.P.) and their respective managers, partners, directors, trustees, officers, and employees (collectively, for purposes of this Conflicts of Interest discussion, “Affiliates”) are insurance and related financial services companies engaged in life insurance, property and casualty insurance and reinsurance
activities, as well as asset management, investment banking, securities trading, brokerage, real estate and other financial services activities, providing a broad range of services to a substantial and diverse client base. The broad range of
activities, services, and interests of the Adviser and its Affiliates gives rise to actual, potential and/or perceived conflicts of interest, and may introduce certain investment or transactional restrictions, that could disadvantage the Funds and their
shareholders.
Certain actual and potential conflicts of interest are discussed below and
elsewhere in this SAI. Investors should carefully review these discussions. These discussions are not, and are not intended to be, a complete discussion of all of the actual
and potential conflicts of interest that may arise. Additional or unanticipated conflicts of interest may arise from time to
95
time in the ordinary course of the
Adviser’s and its Affiliates’ various businesses. The Adviser and 1290 Funds have adopted practices, policies and procedures that are intended to identify, monitor, and
mitigate conflicts of interest. These practices, policies and procedures include, among others, information barriers, codes of ethics, pre-clearance and reporting of securities transactions by certain persons, and the use of independent persons to review certain types of
transactions. There is no assurance, however, that these practices, policies and procedures will be effective, and these practices, policies and procedures also may limit the Funds’ investment activities and affect their performance.
Certain Conflicts Related to Fees and Compensation
The Adviser and certain of its Affiliates provide services including investment advisory, investment
sub-advisory, administration, shareholder servicing, and distribution support services to the Funds and earn fees from these relationships with the Funds. The Adviser and its Affiliates face conflicts of interest when the Funds select affiliated service providers because the Adviser and its Affiliates receive greater compensation when they are used. Although these fees are
generally based on asset levels, the fees are not directly contingent on Fund performance and the Adviser and its
Affiliates would still receive significant compensation from the Funds even if shareholders lose money. In addition, the Adviser and certain of its Affiliates manage or advise funds or accounts, including the Funds, with different fee rates
and/or fee structures. Differences in fee arrangements may create an incentive for the Adviser and/or its Affiliates to favor higher-fee funds or accounts. The Adviser and its Affiliates also face conflicts of interest when the Funds select affiliated
service providers because services provided by an affiliated service provider may not be equal to services that could be provided by an unaffiliated service provider.
The Adviser also may have a financial incentive to implement (or not to implement) certain changes to the Funds. For example, the Adviser may, from time to time, rebalance a Fund or recommend a Fund combination or other restructuring. The
Adviser will benefit to the extent that a restructuring results in a Fund’s having a higher net advisory fee payable to the Adviser and/or administration fee payable to the
Administrator, and/or a Fund’s being sub-advised by an Affiliate of the Adviser (or a greater portion of a Fund’s assets being allocated to an affiliated Sub-Adviser).
In addition, the profits derived from the fees payable to the Adviser by a Fund after a restructuring may be higher than the profits derived from the fees payable to the Adviser by the Fund prior to the restructuring. The Adviser will further benefit to the extent that a
Fund restructuring eliminates or reduces the Adviser’s obligations under an expense limitation arrangement currently in effect for a Fund. In addition, in certain cases, the Adviser and/or its Affiliates may own a significant amount of shares of a Fund representing the Adviser’s and/or its Affiliates’ investment of seed money to facilitate the investment operations of the Fund. A Fund restructuring may increase the size of a Fund such that the Adviser and/or its Affiliates could redeem
shares held in the Fund representing such seed money investments. Redeeming seed money from a Fund may enable the
Adviser or an Affiliate to reduce its costs associated with providing seed money and/or use the proceeds to provide seed money for other funds and products that it manages or is developing or realize other benefits. In addition, since the
Adviser pays fees to a Sub-Adviser from the advisory fee that it earns from a Fund, the Adviser will benefit to the extent that a Fund restructuring leads to changes to a sub-advisory fee that result in an increase in the amount of the advisory
fee retained by the Adviser. Any Fund rebalancing or recommendation to 1290 Funds’ Board of Trustees concerning a Fund combination or other restructuring is subject to the Adviser’s fiduciary duty to act in the best interests of an affected Fund and its shareholders.
A Fund
may be included in investment models developed by the Adviser for use by clients and financial advisors. To the extent clients invest in these investment models and increase the
assets under management of a Fund, the amount of the advisory fee paid by the Fund to the Adviser may also increase. In addition, the liquidity of a Fund may be impacted by purchases and redemptions of the Fund by model-driven investment portfolios.
In addition, subject to applicable law, the Adviser or its Affiliates may, from time to time and without notice to the Funds’ shareholders, in-source or outsource certain processes or functions in connection with a variety of services that they
provide to the Funds in various capacities. Such in-sourcing or outsourcing may give rise to additional conflicts of interest.
Certain Conflicts Related to the Adviser and its Affiliates Acting in Multiple Commercial
Capacities
The Adviser and/or one or more Affiliates act or may act in various commercial
capacities, including as investment manager, investment adviser, administrator, investor, commodity pool operator, underwriter, distributor, transfer agent,
96
insurance company, investment banker, research
provider, market maker, trader, lender, agent or principal, and may have direct and indirect interests in securities, commodities, currencies, derivatives and other instruments in
which the Funds may directly or indirectly invest. Thus, it is likely that the Funds will have business relationships with and will invest in, engage in transactions with, make voting decisions with respect to, or obtain services from entities with which the Adviser
and/or an Affiliate has developed or is trying to develop business relationships or in which the Adviser and/or an Affiliate has significant investments or other interests. For example, the Adviser may have an incentive to hire as a Sub- Adviser or
other service provider an entity with which the Adviser or one or more Affiliates have, or would like to have, significant or other business dealings or arrangements. In addition, the Adviser and/or its Affiliates may have business dealings or
arrangements with entities that are significant investors in, or have business relationships with, or provide services to Equitable Holdings, the Adviser’s publicly traded indirect parent company, and these entities may try to influence the
Adviser’s and/or its Affiliates’ existing or other business dealings or arrangements. Furthermore, when Affiliates act in various commercial capacities in relation to the Funds, the Affiliates may take commercial steps in their own interests,
which may have an adverse effect on the Funds. The Adviser and/or an Affiliate will have an interest in obtaining fees or other compensation in connection with such activities that are favorable to it, and any fees or other compensation (which
could include advisory fees, underwriting or placement fees, financing or commitment fees, and brokerage and other transaction fees) will not be shared with the Funds.
The Adviser and/or its Affiliates also derive ancillary benefits from providing investment advisory, investment
sub-advisory, administration, shareholder servicing, and distribution support services to the Funds, and providing such services to the Funds may enhance the Adviser’s and/or its Affiliates’ relationships with various parties, facilitate additional business development, and enable the Adviser and/or its Affiliates to obtain additional business and generate additional
revenue.
Subject to applicable law and regulations, a Fund may enter into transactions in
which the Adviser and/or its Affiliates, or companies that are deemed to be affiliates of the Fund (including other Funds of 1290 Funds), may have an interest that potentially conflicts with the interests of the Fund. Such transactions create an opportunity for the Adviser and/or an
Affiliate to engage in self-dealing. The Adviser and its Affiliates face a potentially conflicting division of loyalties and responsibilities to the parties in such transactions, including with respect to a decision to enter into such transactions, as
well as with respect to valuation, pricing, and other terms. Any such transactions are executed in accordance with the provisions of Rule 17a-7 and Rule 17e-1, as applicable, under the 1940 Act. Applicable law and regulations also may prevent
a Fund from engaging in transactions with an affiliate of the Fund, which may include the Adviser and/or its Affiliates, or from participating in an investment opportunity in which
an affiliate of the Fund participates.
The Adviser and/or an Affiliate also faces conflicts
of interest if a Fund purchases securities during the existence of an underwriting syndicate of which an Affiliate is a member because the Affiliate typically receives fees for
certain services that it provides to the syndicate and, in certain cases, will be relieved directly or indirectly of certain financial obligations as a result of the Fund’s purchase of securities. Any such purchases are executed in accordance with the provisions of Rule
10f-3 under the 1940 Act.
In addition, as a result of the Adviser’s Affiliates acting in multiple commercial capacities, the
Affiliates, from time to time, may come into possession of information about certain markets and investments that, if known to the Adviser or, as applicable, an affiliated Sub-Adviser, could cause the Adviser or, as applicable, the affiliated Sub-Adviser to seek to
dispose of, retain, or increase interests in investments held by a Fund, acquire certain positions on behalf of a Fund, or take other actions. The Adviser or, as applicable, an affiliated Sub-Adviser generally will not have access, or will have
limited access, to such information, even when it would be relevant to its management of a Fund. Such Affiliates can trade differently from the Funds potentially based on information not available to the Adviser or, as applicable, an affiliated
Sub-Adviser. If the Adviser or, as applicable, an affiliated Sub-Adviser acquires or is deemed to acquire material non-public information regarding an issuer, it will be restricted from purchasing or selling securities of that issuer for its
clients, including a Fund, until the information has been publicly disclosed or is no longer deemed material.
Certain Conflicts Related to the Use of Sub-Advisers
The Adviser is subject to certain conflicts of interest in connection with recommending the appointment
and continued service of Sub-Advisers. Since the Adviser pays fees to the Sub-Advisers from the advisory fees that it earns from the
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Funds, any increase or decrease in the
sub-advisory fees negotiated with proposed or current Sub-Advisers will result in a corresponding decrease or increase, respectively, in the amount of the advisory fee retained by
the Adviser. If the Adviser is affiliated with a Sub-Adviser, the Adviser will benefit not only from the net advisory fee the Adviser retains, but also from the sub-advisory fee paid by the Adviser to the affiliated Sub-Adviser. The Adviser or its Affiliates also may have
distribution relationships with certain Sub-Advisers or their affiliates under which the Sub-Advisers or their affiliates distribute or support the distribution of investment products issued or sold by the Adviser or its Affiliates, which could
financially benefit the Adviser and its Affiliates or provide an incentive to the Adviser in selecting one Sub-Adviser over another or a disincentive for the Adviser to recommend the termination of such Sub-Advisers. In addition, the Adviser’s
and/or its Affiliates’ other existing or potential business relationships (e.g., distribution, sub-administration, or custody arrangements), including with Sub-Advisers and/or their affiliates (e.g., relationships between Sub-Advisers and the
Adviser’s Affiliates regarding management of other assets), or other financial or personal relationships or investments or other interests, could influence the Adviser’s selection and retention or termination of Sub-Advisers as well as
sub-advisory or other fee negotiations.
The Adviser may allocate a Fund’s assets among multiple Sub-Advisers. While the Adviser seeks to allocate a Fund’s assets among the Fund’s Sub-Advisers in a manner that it believes is consistent with achieving the Fund’s investment objective(s), the Adviser is subject to conflicts of interest in allocating the Fund’s assets among Sub-Advisers, including an affiliated Sub-Adviser, if any, because the Adviser pays different fees to the Sub-Advisers and due to other factors that could impact
the Adviser’s revenues and profits.
The aggregation of assets of multiple Funds or other funds or accounts for purposes of calculating breakpoints in sub-advisory fees may create an incentive for the Adviser to select Sub-Advisers where the selection may serve to lower a
sub-advisory fee and possibly increase the advisory fee retained by the Adviser or may provide a disincentive for the Adviser to recommend the termination of a Sub-Adviser from a Fund if the termination may cause the sub-advisory fee payable
by the Adviser to increase on a Fund or other fund or account that aggregates its assets with the Fund. The aggregation of assets, or the potential to aggregate assets, also may
influence the Adviser's and/or its Affiliates' sub-advisory or other fee negotiations.
The Adviser is a fiduciary for the shareholders of the Funds and must put their interests ahead of its own interests (or the interests of its Affiliates). When recommending the appointment or continued service of a Sub-Adviser, consistent with its
fiduciary duties, the Adviser relies primarily on the qualitative and quantitative factors described in detail in the Prospectus. In addition, the appointment and continued service of a Sub- Adviser are subject to the approval of 1290
Funds’ Board of Trustees. Moreover, the Adviser may not enter into a sub-advisory agreement with an Affiliate, such as AllianceBernstein L.P., unless the sub-advisory agreement with the Affiliate, including compensation, is also approved by
the affected Fund’s shareholders (in the case of a new Fund, the initial sole shareholder of the Fund, typically the Adviser or an Affiliate, may provide this approval).
Furthermore, the range of activities, services, and interests of a Sub-Adviser may give rise to actual, potential and/or perceived conflicts of interest that could disadvantage the Fund that it sub-advises and the Fund’s shareholders. In
addition, a Sub-Adviser’s portfolio managers may manage multiple funds and accounts for multiple clients. In addition to one or more Funds, these funds and accounts may include, for example, other mutual funds, separate accounts, collective
trusts, and offshore funds. Managing multiple funds and accounts may give rise to actual or potential conflicts of interest, including, for example, conflicts among investment strategies, conflicts in the allocation of limited investment
opportunities, and conflicts in the aggregation and allocation of securities trades. In addition, a Sub-Adviser’s portfolio managers may manage or advise funds or accounts with different fee rates and/or fee structures, including performance-based
fee arrangements. Differences in fee arrangements may create an incentive for a portfolio manager to favor higher-fee funds or accounts. Each Sub-Adviser has adopted practices,
policies and procedures that are intended to identify, monitor, and mitigate conflicts of interest. There is no assurance, however, that a Sub-Adviser’s practices, policies and procedures will be effective, and a Sub-Adviser’s practices, policies and procedures also may limit the
investment activities of the Fund that it sub-advises and affect the Fund’s performance. A Sub- Adviser and/or its affiliates also may derive ancillary benefits from providing investment sub-advisory services to a Fund, and providing such services to
a Fund may enhance the Sub-Adviser’s and/or its affiliates’ relationships with various parties, facilitate additional business development, and enable the Sub-Adviser
and/or its affiliates to obtain additional business and generate additional revenue. Please see Appendix B for a further discussion of Sub-Adviser conflicts of
interest.
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Certain Conflicts Related to the Funds of Funds Structure
The Adviser’s selection of Underlying ETFs may have a positive or negative impact on its (or its Affiliates’) revenues and/or profits. The Adviser’s and/or its Affiliates’ other existing or potential business relationships (e.g., distribution, sub-administration, or custody arrangements), including with investment advisers to Underlying ETFs, or other financial or
personal relationships, could influence the Adviser’s selection of Underlying ETFs. In addition, one or more Affiliates may invest (e.g., through its general account or separate accounts) in ETFs that are also held by the Funds, which may influence
the Adviser’s ETF investment decisions. The Adviser’s selection of Underlying ETFs also may positively or negatively impact its obligations under the Expense Limitation
Agreement and its ability to recoup previous payments or waivers made under the Expense Limitation Agreement.
Consistent with its fiduciary duties, the Adviser seeks to implement each Fund’s investment program
in a manner that is in the best interest of that Fund and that is consistent with its investment objective, policies, and strategies.
Certain Conflicts Related to the Adviser and its Affiliates Acting for Multiple Clients
The Adviser and certain of its Affiliates manage or advise other funds and accounts that have investment
objectives and strategies that are similar to those of the Funds and/or that engage in and compete for transactions in the same types of securities and instruments as the Funds. Such transactions could affect the prices and availability of the securities and
instruments in which a Fund invests, directly or indirectly, and could have an adverse impact on a Fund’s performance. For example, when another fund or account managed or advised by the Adviser or an Affiliate implements a portfolio decision or
strategy ahead of, or at the same time as, similar portfolio decisions or strategies for one or more Funds, market impact, liquidity constraints, or other factors could result in a
Fund receiving less favorable investment results, and the costs of implementing such portfolio decisions or strategies could be increased or a Fund could otherwise be disadvantaged. The Adviser and certain of its Affiliates also manage or advise other funds and accounts that have investment
objectives and strategies that differ from, or may be contrary to, those of the Funds. Other funds and accounts may buy or sell positions while a Fund is undertaking the same or a
different, including potentially opposite, strategy, which could disadvantage or adversely affect a Fund. A position taken by the Adviser and/or its Affiliates, on behalf of one or more other funds or accounts, may be contrary to a position taken on behalf of a Fund or may be adverse to
a company or issuer in which a Fund has invested. For example, the Adviser and/or its Affiliates may advise other funds or accounts with respect to different parts of the capital
structure of the same issuer, or with respect to classes of securities that are subordinate or senior to securities, in which a Fund invests. As a result, the Adviser and/or its
Affiliates may pursue or enforce rights or activities, or refrain from pursuing or enforcing rights or activities, on behalf of other funds and accounts with respect to a particular issuer in which one or more Funds have invested. In addition, the Adviser
may pursue, or refrain from pursuing, on behalf of one or more of the Funds, class action litigation that may be adverse to the interests of certain of the Adviser’s Affiliates.
A Fund’s performance will usually differ from the performance of other funds or accounts that are also managed or advised by the Adviser or its Affiliates even in cases where the investment objectives and strategies of the relevant funds
or accounts are similar. The Adviser and certain of its Affiliates may give advice to, or take actions with respect to, other funds or accounts that may compete or conflict with advice the Adviser may give to, or actions the Adviser may take with
respect to, the Funds. In addition, when the Adviser and/or its Affiliates seek to buy or sell the same security or instrument on behalf of more than one fund or account, including a Fund, the Adviser and/or its Affiliates may have an incentive to
allocate more favorable trades to certain funds or accounts, including a Fund. (For additional information about the Adviser’s trade aggregation and allocation policies, please see the section of the SAI entitled “Brokerage Allocation and Other Strategies.”). It is possible that a Fund could sustain losses during periods in which one or more other funds or
accounts that are managed or advised by the Adviser or its Affiliates achieve significant gains. The opposite result is also possible.
In addition, the
Adviser or, as applicable, an affiliated Sub-Adviser may restrict the investment policies or the design of a Fund or its investment decisions and activities on behalf of a Fund in
various circumstances, including as a result of regulatory or other restrictions applicable to one or more Affiliates, internal policies designed to comply with such restrictions, and/or potential reputational risk in connection with funds or accounts (including the Funds). For example, if
the Adviser and/or its Affiliates come into possession of material non-public information regarding other funds or
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accounts that are also managed or advised by the
Adviser or its Affiliates, they may be prohibited by legal and regulatory constraints, or internal policies and procedures, from using that information in connection with
transactions made on behalf of the Funds. In addition, potential conflicts of interest exist when the Adviser and/or its Affiliates maintain certain overall limitations on investments in securities or other instruments due to, among other things, investment restrictions
imposed on the Adviser and/or its Affiliates by law, regulation (for example, banking or insurance regulations),
mechanisms imposed by certain issuers (for example, poison pills), or the Adviser’s and/or its Affiliates’ own internal policies (including, for example, for risk management purposes). Certain of these restrictions may impose limits on the
aggregate amount of investments that may be made by affiliated investors. In these circumstances, the Adviser or, as applicable, an affiliated Sub-Adviser may be precluded from purchasing securities or other instruments (that it might
otherwise purchase) for a Fund if the purchase would cause the Fund and its affiliated investors to exceed an applicable limit, or the Adviser or, as applicable, an affiliated Sub-Adviser may be required to sell securities or other instruments (that it might otherwise prefer that a Fund hold) in order to comply with such a limit. In addition, aggregate investment
limitations could cause dispersion among funds and accounts managed or advised by the Adviser and/or its Affiliates with similar investment objectives and strategies.
Shareholders also should be aware that 1290 Funds’ Chief Executive Officer and other principal officers are also principals and/or employees of the Adviser and/or its Affiliates, and these principals and employees have obligations to such other
entities and/or their clients, and may come into possession of information, that could give rise to a potentially conflicting division of loyalties and/or responsibilities, which could have an adverse effect on a Fund and could benefit the Adviser
and/or its Affiliates. For example, 1290 Funds’ Chief Executive Officer serves as Chief Investment Officer for Equitable Financial, and certain of 1290 Funds’ other principal officers hold executive positions, including in operations, legal, and compliance, with the Adviser and/or its Affiliates. In addition, certain senior officers of the Adviser serve in similar
capacities for Equitable Investment Management, LLC, which provides non-discretionary advisory services to the Adviser's insurance company Affiliates, which could give rise to conflicts of interest. For additional information about the principal
occupations of 1290 Funds’ Chief Executive Officer and other principal officers (including positions held with the Adviser and/or its Affiliates), please see the section of the SAI entitled “Management of the 1290 Funds.”
Certain Conflicts Related to the Joint Use of Vendors and Other Service Providers
Certain service providers to the Funds (including sub-advisers, accountants, custodians, attorneys, lenders, bankers, brokers, consultants and investment or commercial banking firms) provide goods and services to, or have business, personal,
financial or other relationships with, the Adviser and/or its Affiliates. Such service providers may be clients of the Adviser and/or its Affiliates, sources of investment
opportunities, co-investors or commercial counterparties or entities in which the Adviser and/or its Affiliates have an investment or other interest. In addition, certain employees
of the Adviser and/or its Affiliates and/or the Trustees of 1290 Funds could have immediate family members or other relatives or friends employed by or serving as board members of such service providers. These relationships could have the appearance of
affecting or may potentially affect the Adviser in deciding whether to select or recommend such service providers to perform services for the Funds or terminate such service providers. These relationships also could have the appearance of
affecting or may potentially affect the Adviser's and/or its Affiliates' fee negotiations as well as their investment decisions and activities, including on behalf of a Fund.
Certain Conflicts Related to Proxy Voting
The Adviser and the Sub-Advisers have implemented policies and procedures designed to prevent conflicts of interest from influencing proxy voting decisions that they make on behalf of their clients, including the Funds, and to help ensure
that such decisions are made in accordance with their fiduciary obligations to their clients. Notwithstanding such proxy voting policies and procedures, actual proxy voting decisions made by the Adviser and/or the Sub-Advisers in respect of
securities held by the Funds may have the effect of favoring the interests of the Adviser and/or its Affiliates and/or the Sub-Advisers and/or funds or accounts other than the Funds; provided, that the Adviser and/or the Sub-Advisers believe such
voting decisions to be in accordance with their fiduciary obligations. Actual proxy voting decisions made by the Adviser and/or the Sub-Advisers in respect of securities held by
the Funds also may have the effect of favoring the Adviser's and/or its Affiliates' other existing or potential business relationships (e.g., with investment advisers to Underlying
ETFs). In addition, it is possible that the Adviser’s Affiliates may invest in the same securities held by the Funds. The Adviser’s Affiliates may have different proxy voting policies and procedures and, as a result, the Adviser may vote
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differently than its Affiliates. Please see
Appendix C to this SAI for 1290 Funds’ Proxy Voting Policies and Procedures. A description of the proxy voting policies and procedures that each Sub-Adviser uses to determine
how to vote proxies relating to a Fund’s portfolio securities is included in Appendix C to this SAI.
Certain Conflicts Related to Securities Lending
Certain securities loan termination practices have the potential to benefit corporate shareholders and
could have an adverse impact on a lending Fund. During the time a portfolio security is on loan, if the issuer of the security makes an interest or dividend payment, the borrower pays the lending Fund a substitute payment equal to any interest or dividends the
lending Fund would have received directly from the issuer of the security had the Fund not loaned the security. When a lending Fund receives dividends directly from domestic or
certain foreign corporations, a portion of the dividends paid by the Fund to its shareholders and attributable to those dividends (but not the portion attributable to substitute
payments) may be eligible for: (i) treatment as “qualified dividend income” in the hands of individuals, or (ii) the dividends-received deduction in the hands of corporate shareholders. Please see the section of the SAI entitled “Taxation.” The Adviser has implemented processes to ensure that a Fund does not engage in securities loan termination practices that
would cause the Fund to terminate a securities loan - and forgo any income on the loan after the termination - in anticipation of a dividend payment.
Certain Conflicts Related to Personal Securities Transactions
The Adviser and its Affiliates, including their respective managers, partners, directors, trustees,
officers, and employees, the Trustees of 1290 Funds, and a Sub-Adviser and its affiliates face conflicts of interest when transacting in securities for their own accounts because they could benefit by trading in the same securities as a Fund, which could have an adverse
effect on a Fund. In addition, the Adviser and its Affiliates, including their respective managers, partners, directors, trustees, officers, and employees, the Trustees of 1290 Funds, and a Sub-Adviser and its affiliates may acquire material
non-public information regarding individual securities in connection with their official duties. 1290 Funds, the Adviser, the Administrator, each Sub-Adviser, and the Distributor each have adopted a code of ethics pursuant to Rule 17j-1 under the
1940 Act that imposes certain restrictions on securities transactions in the personal accounts of covered persons to help avoid conflicts of interest.
Certain Conflicts Related to the Valuation of the Funds’ Investments
There is an inherent conflict of interest where the Adviser or its Affiliates value, or provide any
assistance in connection with the valuation of, the Funds’ investments and the Adviser or its Affiliates are receiving a fee based on the value of such investments. Overvaluing certain positions held by the Funds will inflate the value of the investments as well as the
performance record of the Funds, which would likely increase the fees payable to the Adviser and/or its Affiliates. As a result, there may be circumstances where the Adviser has an incentive to determine valuations that are higher than the
actual fair value of investments.
Certain Conflicts Related to Trade Errors and Other Operational Mistakes
Trade errors and other operational mistakes occasionally occur in connection with the Adviser’s or an Affiliate’s management of funds and accounts, including the Funds. Trade errors and other operational mistakes can result from a variety
of situations, including situations involving portfolio management (e.g., inadvertent violation of investment restrictions), trading, processing, or other functions (e.g.,
miscommunication of information, such as wrong number of shares, wrong price, wrong account, calling a transaction a buy rather than a sell and vice versa, etc.). The
Adviser’s policies and procedures generally do not require perfect implementation of investment management decisions or trading, processing, or other functions performed by the Adviser. Therefore, depending on the facts and circumstances, not all
mistakes will be considered compensable to an impacted fund or account, including a Fund. The Adviser or an Affiliate, including an affiliated Sub-Adviser, could face a potential conflict of interest when the Adviser identifies a trade error or
other operational mistake that is considered compensable to an impacted Fund and the Adviser or an Affiliate, including an affiliated Sub-Adviser, is responsible for compensating the Fund.
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The Adviser’s policies and procedures
require that all trade errors affecting a Fund’s account be resolved promptly and fairly. Further, any transaction relating to the disposition of a trading error in which the
Adviser’s own interests are placed before those of a Fund is prohibited. The Adviser will not use Fund assets to correct a trading error.
Certain Conflicts Related to Brokerage Transactions, including with Affiliates
To the extent permitted by applicable law and in accordance with procedures established by 1290
Funds’ Board, 1290 Funds may engage in brokerage transactions with brokers that are affiliates of the Adviser or its Affiliates, including Sanford C. Bernstein & Co., LLC, Sub-Advisers, brokers who are affiliates of such Sub-Advisers, or unaffiliated brokers who trade or clear through affiliates of the Adviser or the Sub-Advisers. A Fund’s portfolio managers may be able to select or influence the Sub-Advisers’ selection of the brokers that are used to execute securities transactions for the Fund. The
Adviser’s and/or its Affiliates’ other existing or potential business relationships, including with Sub-Advisers, or other financial or personal relationships, could create an incentive for a Fund’s portfolio managers, in the selection process, to favor certain brokers, including affiliated brokers. The Adviser and the Funds’ Sub-Advisers, as appropriate, seek to obtain the best net price and execution on all orders placed for the Funds, considering all the circumstances. Any such
transactions with an affiliated broker are executed in accordance with the provisions of Rule 17e-1 under the 1940 Act. For additional information about brokerage transactions, including with affiliates, please see the section of this SAI entitled
“Brokerage Allocation and Other Strategies.”
Certain Conflicts Related to Distributions of Assets Other Than Cash
With respect to redemptions from the Funds, the Funds may, in certain circumstances, have discretion to decide whether to permit or limit redemptions and whether to make distributions in connection with redemptions in the form of securities or
other assets, and in such case, the composition of such distributions. In making such decisions, the Adviser may have a potentially conflicting division of loyalties and
responsibilities with respect to redeeming shareholders (which, in certain cases, could be funds-of-funds) and remaining shareholders.
Certain Conflicts Related to Gifts and Entertainment, Political Contributions, and Outside Business
Activities
The code of ethics adopted by 1290 Funds, the Adviser, and the Administrator
contains a policy to address the conflicts of interest related to the giving or receipt of gifts and/or entertainment to or from clients, intermediaries, current or potential
Sub-Advisers, or current or potential service providers or third-party vendors to the Funds or the Adviser or its Affiliates, which could have the appearance of affecting or may potentially affect the judgment of covered persons or the manner in
which they conduct business. The policy requires the reporting and/or pre-clearance of gifts, meals and entertainment given or received that exceeds certain thresholds. The Adviser
also has adopted a policy that prohibits covered persons from making any direct or indirect political contribution to any political party, elected official or candidate with the
intention of soliciting or maintaining investment advisory business for the Adviser. Further, given the nature of the Adviser’s business, its duties to its clients and the role of investment advisory professionals generally, covered persons who engage in outside business activities may face numerous conflicts of interest. Outside business activities include, but
are not limited to, service as an officer, employee or member of the board of another organization that is not affiliated with the Adviser, consulting engagements, and public and charitable positions. To avoid such conflicts, covered persons must
receive pre-approval from the compliance department prior to pursuing any outside business activities. Actual and potential conflicts of interest are analyzed during the
pre-clearance and pre-approval processes.
Purchase, Redemption and
Pricing of Shares
Information concerning purchase and redemption of shares of the Funds, as
well as information concerning computation of net asset value per share is set forth in the Prospectus.
Each Fund has four separate classes of shares: Class A, T, I and R shares. Each class of shares of a Fund
represents an identical interest in the investment portfolio of that Fund and has the same rights, except that: (i) each class may bear differing amounts of certain class-specific expenses, (ii) Class A and Class T shares are subject to an initial sales charge,
(iii) Class A, Class T and Class R shares are subject to an ongoing distribution fee and service fee, (iv) the Class A, Class T and Class R shares have exclusive voting rights with respect to matters related to distribution and servicing expenditures;
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(v) Class I shares are not subject to any sales
charge or any distribution, account maintenance or service fee, (vi) the classes have separate exchange privileges, and (vii) the classes have separate conversion features. In
addition, the income attributable to each class and the dividends payable on the shares of each class will be reduced by the amount of the distribution fee or service fee, if any, payable by that class. The distribution-related fees paid with respect to any class will not be used to finance the distribution expenditures of another class. Sales personnel may receive different compensation
for selling different classes of shares.
Fund shares are purchased at the net asset value next determined, plus the applicable sales charge, after the application for the purchase of shares is received by the 1290 Funds’ transfer agent, DST (the “Transfer Agent”), or approved financial intermediaries. The sales charge may be imposed at the time of purchase (Class A and Class T shares) or may be deferred
(Class A shares purchased in the amount of $1,000,000 or more if held for less than 12 months). Purchases can be made through most investment dealers who, as part of the service they provide, must transmit orders promptly.
Exemptions from Class A CDSC
No contingent deferred sales charge (“CDSC”) will be imposed when a shareholder redeems Class A shares in the following instances: (a) shares or amounts representing increases in the value of an account above the net cost of the
investment due to increases in the net asset value per share; (b) shares acquired through reinvestment of income
dividends or other distributions; (c) shares acquired by exchange from any Fund of the 1290 Funds where the exchanged shares would not have been subject to a CDSC upon redemption; and (d) shares purchased in the amount of $1,000,000 or more
if held for more than 12 months.
In determining whether the Class A CDSC is payable, it will
be assumed that shares that are not subject to a CDSC are redeemed first and that other shares are then redeemed in the order purchased. No CDSC will be imposed on exchanges
to purchase shares of another Fund of the 1290 Funds although a CDSC will be imposed on shares (when redeemed) of
the acquired fund purchased by exchange of shares subject to a CDSC. The holding period of shares subject to a CDSC that are exchanged will be deemed to commence as of the date of the initial investment.
Special Fiduciary Relationships
The CDSC will not apply with respect to purchases of Class A shares for which the selling dealer is not permitted to receive a sales load or redemption fee imposed on a shareholder with whom such dealer has a fiduciary relationship in accordance
with the Employee Retirement Income Security Act and regulations thereunder. In accordance with the provisions of the CDSC exemption, such dealer agrees to the reimbursement
provision described below and no sales charge will be imposed on sales. In addition, the Distributor will pay to the selling dealer a commission described in the Prospectus. In the event of a redemption of any such shares within 12 months of purchase, the selling dealer will reimburse
the Distributor for the amount of commission paid, less the amount of the distribution fee with respect to such shares.
Services for Investors
For the convenience of investors, the following plans are available. Investors should realize that none of these plans can guarantee profit or insure against loss.
Automatic Reinvestment Plan.
All shareholders, unless they request otherwise, are enrolled in the Automatic Reinvestment Plan under which all dividends and other distributions on their shares are automatically reinvested in shares of the same class of the
distributing Fund(s), in each case at the net asset value per share computed on the record date of the distribution. The Automatic Reinvestment Plan may be terminated by participants or by the 1290 Funds at any time. No sales charge is applied
upon reinvestment of distributions.
Automatic Bank Draft Plan.
An Automatic Bank Draft Plan is available for investors who wish to purchase shares of one or more of the
funds in amounts of $50 or more on a regular basis by having the amount of the investment automatically deducted from the investor’s checking account. The minimum initial investment for this Plan is $500 for Class A and Class T shares. Forms
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authorizing this service for eligible classes of
shares are available from the 1290 Funds. The Automatic Bank Draft Plan is not available for Class R and Class I shares.
Letter of Intent Investments.
Any investor may execute a Letter of Intent covering purchases of Class A shares of a Fund, at the public
offering price, to be made within a period of 13 — months. A reduced sales charge may be applicable to the total dollar amount of Class A shares purchased in the 13 — month period. The minimum initial investment under a Letter of Intent is 5% of the amount
indicated in the Letter of Intent. Class A shares purchased with the first 5% of such amount will be held in escrow (while remaining registered in the name of the investor) to secure payment of the higher sales charge applicable to the shares
actually purchased if the full amount indicated is not purchased, and such escrowed shares will be involuntarily redeemed to pay the additional sales charge, if necessary. When the full amount indicated has been purchased, the escrow will be
released.
Investors wishing to enter into a Letter of Intent in conjunction with their
investment in Class A shares of the Funds should complete the appropriate portion of the new account application.
Systematic Withdrawal Plan.
Investors may elect a systematic withdrawal plan under which a fixed sum of at least $500 will be paid
quarterly, semi-annually or annually. Investors must have at least $10,000 in their account to participate in the plan. Shares in the plan are held on deposit in non-certificate form, and any dividends from investment income and other capital gain
distributions are invested in additional shares of the same class of the distributing Fund(s) at net asset value. Shares in the plan account are then redeemed at net asset value to make each withdrawal payment. Redemptions for the purpose of
withdrawals are made on or about the 15th day of the month of payment at that day’s closing net asset value and checks are mailed within five days of the redemption date. Such dividends and other distributions are subject to taxation. See the
“Taxation” section of this SAI.
Since withdrawal payments may include a return of principal, redemptions for the purpose of making such payments may reduce or even use up the investment, depending upon the size of the payments and the fluctuations of the market price of
the underlying Fund securities. For this reason, the payments cannot be considered as a yield of income on the investment.
Exchange Privilege.
Shares of each Fund generally may be exchanged for shares of the same class of any other Fund of 1290 Funds.
The minimum initial investment rules applicable to a Fund apply to any exchange where the exchange results in a new account being opened in such Fund. Exchanges into existing accounts are not subject to a minimum amount.
Shares of a Fund that are not subject to a CDSC will be processed at the net asset value next determined after the Transfer Agent or approved financial intermediary receives your exchange request. Shares of a Fund that are subject to a CDSC will be
exchangeable on the basis of the relative net asset value per share without payment of any CDSC which might otherwise be due upon redemption of the shares of the Fund. For purposes
of computing the CDSC that may be payable upon a disposition of the shares acquired in the exchange, the holding period for the previously owned shares of the Fund is “tacked” onto the holding period for the newly acquired shares of the other Fund. The exchange feature may be modified or discontinued at any time, upon notice to shareholders in accordance with applicable rules adopted by the SEC.
Your exchange may be processed only if the shares of the Fund to be acquired are eligible for sale in your state and if the exchange privilege may be legally offered in your
state.
An exchange represents the redemption of shares of one Fund which may produce a gain
or loss for federal income tax purposes, and the purchase of shares of another Fund.
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Redemptions — General
Payment for redeemed shares is ordinarily made within seven days after receipt by the Transfer Agent of
redemption instructions in proper form. The redemption privilege may be suspended or payment may be postponed for more than seven days during any period when: (1) the New York Stock Exchange (“NYSE”) is closed other than for customary
weekend or holiday closings or trading thereon is restricted as determined by the SEC; (2) an emergency, as defined by the SEC, exists making trading of portfolio securities or valuation of net assets not reasonably practicable; or (3) the SEC
has by order permitted such suspension or delay. The 1290 Funds reserves the right to redeem an account at its option upon not less than 60 days’ notice to a shareholder if an account’s net asset value is $500 or less and remains so during the notice period.
Redemptions In
Kind
The 1290 Funds’ organizational documents provide that it may redeem its shares in
kind. The 1290 Funds has elected, pursuant to Rule 18f-1 under the 1940 Act, to commit itself to pay in cash all requests for redemption by any shareholder of record, limited in amount with respect to each shareholder during any 90- day period to the lesser of: (i) $250,000; or
(ii) 1% of the net asset value of the 1290 Funds at the beginning of such period. Securities distributed in kind are subject to market risk until sold and shareholders may incur brokerage or other costs and taxable capital gains when converting
those securities to cash.
Determination of Net Asset Value
The 1290 Funds will offer and sell its shares for cash or securities based on each Fund’s net asset
value per share, which will be determined in the manner set forth below. Shares of a Fund will be issued to a shareholder upon receipt of consideration.
The net asset
value of the shares of each class of each Fund will be determined once daily, immediately after the declaration of dividends, if any, at the close of business on each business day
as defined below. The net asset value per share of each class of a Fund will be computed by dividing the sum of the investments held by that Fund applicable to that class plus any cash or other assets, minus all liabilities, by the total number of outstanding shares of that class of the Fund at such time. All expenses borne by the 1290 Funds and each of its classes will be accrued daily.
The net asset value per share of each Fund will be determined and computed as follows, in accordance with generally accepted accounting principles and consistent with the 1940 Act:
• The assets belonging to each Fund will include (i) all consideration received
by the 1290 Funds for the issue or sale of shares of that particular Fund, together with all assets in which such consideration is invested or reinvested, (ii) all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of such assets, (iii) any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, and (iv) “General Items,” if any, allocated to that Fund. “General Items” include any assets, income, earnings, profits, and proceeds thereof, funds, or payments which are not readily identifiable as belonging to any
particular Fund. General Items will be allocated in a manner or pursuant to procedures that the 1290 Funds’ Board considers fair and equitable.
• The liabilities belonging to each Fund will include (i) the liabilities of the 1290 Funds in respect of that Fund, (ii) all
expenses, costs, charges and reserves attributable to that Fund, and (iii) any general liabilities, expenses, costs, charges or reserves of the 1290 Funds which are not readily identifiable as belonging to any particular Fund which have been
allocated in a manner or pursuant to procedures that the 1290 Funds’ Board considers fair and equitable.
The value of each Fund is normally determined at the close of business on each “business
day.” Generally, this would be at the close of regular trading on the NYSE on days the NYSE is open for trading (usually 4:00 p.m. Eastern Time). In the event of an emergency or other disruption in trading on the NYSE, the value of each Fund would still normally be determined
as of 4:00 p.m. Eastern Time. The NYSE is closed on New Year’s Day (observed), Martin Luther King, Jr. Day, Washington’s Birthday (observed), Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas.
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The Board has approved pricing procedures
governing the method by which Fund securities are valued for purposes of determining the net asset values for the Funds. While the Board has primary responsibility to shareholders
for ensuring that appropriate valuation methods are used to value the assets of the 1290 Funds, the Board has delegated certain valuation functions for the Funds to the Administrator. The Funds may rely on pricing services or broker quotes to obtain
the current market value of securities for which market quotations are readily available. Accordingly, the pricing procedures authorize the Administrator to engage the services of one or more independent pricing services approved by the
Board to assist in valuing the assets of the 1290 Funds. In addition, there may be occasions when a different pricing provider or methodology is used. The Administrator monitors
the performance of these services on an ongoing basis.
Values are determined according to
accepted accounting practices and all laws and regulations that apply. Generally, the assets of each Fund are valued as follows:
• Stocks listed on national securities exchanges (including securities issued by ETFs) are generally valued at the last sale
price or official closing price, or, if there is no sale or official closing price, at the latest available bid price provided by a pricing service. Securities listed on the Nasdaq
Stock Market will be valued using the Nasdaq Official Closing Price (“NOCP”). Generally, the NOCP will be the last sale price unless the reported trade for the security
is outside the range of the bid/ask price. In such cases, the NOCP will be normalized to the nearer of the bid or ask price. Other unlisted stocks are valued at their last sale price or official closing price or, if there is no reported sale
during the day or official closing price, at a bid price estimated by a broker.
• Foreign securities not traded directly, or in ADRs or similar form, in the
U.S. are valued at most recent sales or bid price from the primary exchange in the currency of the country of origin. Foreign currency is converted into U.S. dollar equivalent at current exchange rates. Because foreign securities sometimes trade on days when a Fund’s
shares are not priced, the value of the Fund’s investment that includes such securities may change on days when shares of the Fund cannot be purchased or
redeemed.
• U.S. Treasury securities and other obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, corporate bonds and notes are generally valued on the basis of prices provided by an approved
pricing service. The pricing services may utilize many inputs that are observable in making evaluations which may
include, but are not limited to, trading activity for similar securities, issuer details, yields, default rates, credit spreads, quoted prices and any developments related to the specific securities. However, when the price of the securities
cannot be obtained from an approved pricing service, such securities are generally valued at a bid price estimated by a broker. Debt securities with original or remaining
maturities of 60 days or less may be valued at amortized cost.
• Convertible preferred stocks listed on national securities exchanges or
included on the Nasdaq Stock Market are valued as of their last sale price or official closing price or, if there is no sale, at the latest available bid price.
• Convertible bonds, and unlisted convertible preferred stocks, are valued at prices obtained from a pricing service for such
instruments or, if a pricing service price is not available, at bid prices obtained from one or more of the major dealers in such bonds or stocks. Where there is a discrepancy
between dealers, values may be adjusted based on recent premium spreads to the underlying common stocks. Convertible bonds may be matrix-priced based upon the conversion value to the underlying common stocks and market premiums.
• Mortgage-backed and asset-backed securities are valued at prices obtained
from an approved pricing service where available, or at a bid price obtained from one or more of the major dealers in such securities. If a quoted price is unavailable, an equivalent yield or yield spread quotes will be obtained from a broker and converted to a
price.
• Exchange traded options are valued at their last sales price or, if not available, the bid price. Options not traded on an
exchange or actively traded are valued according to fair value methods. The market value of a put or call option will usually reflect, among other factors, the market price of the
underlying security.
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• Futures contracts are valued at their last settlement price or, if there is no
sale, at the latest available bid price.
• Forward foreign exchange contracts are valued by interpolating between the forward and spot currency rates as quoted by a
pricing service as of a designated hour on the valuation date.
• Repurchase agreements and reverse repurchase agreements are valued at original cost (par) plus accrued interest. Other
pricing methods may be utilized such as amortized cost depending on the features of the instrument.
• Centrally cleared swaps are priced using the value determined by the central
counterparty at the end of the day, which price may be provided to the Funds by an approved pricing service. With respect to over-the-counter swaps and centrally cleared swaps where the central counterparty price is unavailable, a price provided by an approved pricing
service will be used. Central counterparties and approved pricing services may utilize evaluation techniques including pricing models to provide pricing information.
• Shares of open end mutual funds (other than ETFs) held by any Fund will be valued at the net asset value of the shares of
such funds as described in such funds’ prospectuses.
• Securities and assets for which market quotations are not readily available or for which valuation cannot be provided are
valued in good faith under the direction of the Board. For example, a security whose trading has been halted during the trading day may be fair valued based on the available
information at the time of the close of trading market.
Pricing services may use, without limitation, a matrix or formula method that takes into consideration market indices, matrices, yield curves and other specified inputs and assumptions. This may result in the securities being valued at a price
different from the price that would have been determined had the matrix or formula method not been used. Pricing
services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but a Fund may hold or transact in such securities in smaller, odd lot sizes. Odd lots often trade at lower prices than institutional
round lots. A Fund’s ability to value its investment may also be impacted by technological issues and/or errors by pricing services or other third-party service providers.
To assist the Board with its pricing responsibilities, the 1290 Fund’s Valuation Committee evaluates pricing services for selection by the Board and monitors pricing service reliability and price quality. In this connection, the Valuation
Committee, with the assistance of the Administrator, conducts ongoing monitoring and oversight of each pricing service. In certain instances, the Valuation Committee may determine that a reported valuation is unreliable, based on additional
information available or other factors, and may accordingly determine in good faith the fair value of the assets, which may differ from the reported valuation. When such circumstances arise, the Administrator is responsible for coordinating with
the pricing services, the Valuation Committee and, when applicable, the various Sub-Advisers to facilitate valuation.
Events or circumstances affecting the values of portfolio securities that occur between the closing of
their principal markets and the time the net asset value is determined, such as foreign securities trading on foreign exchanges that may close before the time the net asset value is determined, may be reflected in the 1290 Funds’ calculations of net asset
values for each applicable Fund when the 1290 Funds deems that the event or circumstance would materially affect such Fund’s net asset value. Such events or circumstances may be company specific, such as an earning report, country or
region specific, such as a natural disaster, or global in nature. Such events or circumstances also may include price movements in the U.S. securities markets.
The Valuation Committee determines the value of any of the 1290 Funds’ securities and assets for which market quotations are not readily available or for which valuation cannot otherwise be provided in accordance with procedures
adopted by the Board. The effect of fair value pricing as described above is that securities may not be priced on the basis of quotations from the primary market in which they are traded, but rather may be priced by a fair valuation method adopted
by the 1290 Funds’ Board that relies on other available pricing inputs. As such, fair value pricing is based on subjective judgments and it is possible that the valuations
reached may differ materially from the value realized on a sale. This policy is intended to assure that the Fund’s net asset value fairly reflects security values as of the
time of pricing. Also,
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fair valuation of a Fund’s securities can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that fair value pricing policies will prevent dilution of the Fund’s net asset value by those traders.
Taxation
Qualification for Treatment as a RIC
Each Fund is treated for federal tax purposes as a separate corporation. The 1290 Funds intends that each
Fund will qualify (in the case of a Fund that had not completed a taxable year at the date of this SAI) or continue to qualify each taxable year to be treated as a RIC (that is, a “regulated investment company” under Subchapter M of Chapter 1, Subtitle A, of the Code). By doing so, a Fund (but not its shareholders) will be relieved of federal income tax on the part of its
investment company taxable income (consisting generally of net investment income, the excess, if any, of net short-term capital gain over net long-term capital loss, and net gains and losses from certain foreign currency transactions, if any, all
determined without regard to any deduction for dividends paid) and realized net capital gain (the excess of net long-term capital gain over net short-term capital loss) that it distributes to its shareholders. Such qualification does not involve
supervision of management or investment practices or policies by any governmental agency or bureau.
To qualify or continue to qualify for treatment as a RIC, a Fund must distribute annually to its shareholders at least the sum of (i) 90% of its investment company taxable income and (ii) 90% of its tax-exempt interest, if any (“Distribution
Requirement”) and must meet several additional requirements. With respect to each Fund, these requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from (a) dividends, interest,
payments with respect to securities loans and gains (without regard to losses) from the sale or other disposition of stock, securities or foreign currencies, or other income (including gains from options, futures or forward contracts) derived with
respect to its business of investing in securities or those currencies (“Qualifying Income”), and (b) net income from an interest in a “qualified publicly traded partnership” (defined below) (“QPTP”) (“Income Requirement”); and (2) at the close of each quarter of a Fund’s taxable year, (a) at least 50% of the value of its total assets must be represented by cash and cash items, U.S. Government securities, securities of other RICs and other securities, with these other securities limited, in
respect of any one issuer, to an amount that does not exceed 5% of the value of a Fund’s total assets and that does not represent more than 10% of the issuer’s outstanding voting securities (equity securities of QPTPs being considered voting securities for these purposes), and (b) not more than 25% of the value of its total assets may be invested in (i) the
securities (other than U.S. Government securities or securities of other RICs) of any one issuer, (ii) the securities (other than securities of other RICs) of two or more issuers a Fund controls (by owning 20% or more of their voting power) that are
determined to be engaged in the same, similar or related trades or businesses, or (iii) the securities of one or more QPTPs (collectively, “Diversification Requirements”). A QPTP is defined as a “publicly traded partnership” (generally, a partnership the interests in which are “traded on an established securities market” or are “readily tradable on a secondary market (or the substantial equivalent thereof)”) other than a partnership at least 90% of the gross income of which consists of
Qualifying Income.
If a
Fund failed to qualify for treatment as a RIC for any taxable year — either (1) by failing to satisfy the Distribution Requirement, even if it satisfied the Income and
Diversification Requirements, or (2) by failing to satisfy one or more of the other requirements and was unable, or determined not to, avail itself of Code provisions that enable a
RIC to cure a failure to satisfy any of the Income and Diversification Requirements as long as the failure “is due to reasonable cause and not due to willful neglect” and the RIC pays a deductible tax calculated in accordance with those provisions and meets certain other requirements — then for federal income tax purposes it would be taxed as an ordinary corporation on its taxable
income for that year without being able to deduct the distributions it makes to its shareholders. In addition, for those purposes all those distributions, including distributions of net capital gain, would be taxable to its shareholders as
dividends to the extent of the Fund’s earnings and profits. For individual and certain other non-corporate shareholders (each, a “non-corporate shareholder”), those dividends would be taxable as “qualified dividend income” (as defined in the Prospectus) and thus subject to federal income tax at the rates for net capital gain — a maximum of 15% for a single
shareholder with taxable income not exceeding $459,750 ($517,200 for married shareholders filing jointly) and 20% for non-corporate shareholders with taxable income exceeding those respective amounts, which apply for 2022 and will be adjusted
for inflation annually thereafter. In the case of corporate shareholders that meet certain holding period and other requirements regarding their Fund shares, all or part of those
dividends would be eligible for the dividends-received
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deduction. In addition, the Fund could be required to recognize unrealized gains, pay substantial taxes and interest and make substantial distributions before requalifying for RIC treatment.
General Tax Treatment of Shareholders
Dividends and other distributions a Fund declares in October, November, or December of any year that are payable to shareholders of record on a date in any of those months are deemed to have been paid by the Fund and received by the
shareholders on December 31 of that year if the Fund pays the distributions during the following January. Accordingly, those distributions are taxed to shareholders for the year in which that December 31 falls.
If an investor buys shares shortly before the record date of a dividend or other distribution, the entire amount received will be taxable even though a part of the distribution is actually a return of part of the purchase price. This is called
“buying a distribution.” There is no advantage to buying a distribution, because a Fund’s NAV per share is reduced by the amount of the distribution.
A
shareholder’s basis in Fund shares will be determined in accordance with the Funds’ default method, which is average basis, unless the shareholder affirmatively elects
in writing (which may be electronic) to use a different acceptable basis determination method (e.g., a specific identification method). The method a Fund shareholder elects (or the
default method) with respect to a redemption (including a redemption that is part of an exchange) of Fund shares may not be changed after the settlement date of the redemption.
In addition to the requirement to report the gross proceeds from a redemption of shares, each Fund (or its administrative agent) must report to the IRS and furnish to its shareholders the basis information for shares that are redeemed and
indicate whether they had a short-term (one year or less) or long-term (more than one year) holding period. Fund
shareholders should consult with their tax advisers to determine the best IRS-accepted basis determination method for their tax situation and to obtain more information about how the basis reporting law applies to them.
Under the Foreign Account Tax Compliance Act (“FATCA”), “foreign financial institutions” (“FFIs”) and “non-financial foreign entities” (“NFFEs”) that are Fund shareholders may be subject to a generally nonrefundable 30% withholding tax on income dividends each Fund pays.
An
FFI can avoid FATCA withholding by becoming a “participating FFI,” which requires the FFI to enter into a tax compliance agreement with the IRS. Under such an
agreement, a participating FFI agrees to (1) verify and document whether it has U.S. accountholders, (2) report certain information regarding their accounts to the IRS, and (3)
meet certain other specified requirements.
An FFI resident in a country that has entered into a Model I intergovernmental agreement (“IGA”) with the United States must report to that country’s government (pursuant to the terms of the applicable IGA and applicable law), which will, in turn, report to the IRS. An FFI resident in a Model II IGA country generally must comply with U.S. regulatory requirements,
with certain exceptions, including the treatment of recalcitrant accountholders. An FFI resident in one of those countries that complies with whichever of the foregoing applies will be exempt from FATCA withholding.
An NFFE that is the beneficial owner of a payment from a Fund can avoid FATCA withholding generally by certifying its status as such and, in certain circumstances, either that (1) it does not have any substantial U.S. owners or (2) it does have
one or more such owners and reports the name, address, and taxpayer identification number of each such owner. The
NFFE will report to a Fund or other applicable withholding agent, which may, in turn, report information to the IRS.
Those foreign shareholders also may fall into certain exempt, excepted, or deemed compliant categories
established by U.S. Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need to provide the Fund with documentation properly certifying the entity’s status under FATCA to avoid FATCA withholding. The
requirements imposed by FATCA are different from, and in addition to, the tax certification rules to avoid backup
withholding described in the Prospectus. Foreign investors are urged to consult their tax advisers regarding the
application of these requirements to their own situation and the impact thereof on their investment in a Fund.
Shareholders will be advised annually on Forms 1099 as to the federal income tax character of
distributions, if any, each Fund makes. After calendar year-end, however, REITs can and often do change the category (e.g., ordinary income dividend, capital gain distribution, or “return of capital”) of the distributions they have made during that year, which would
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result at that time in a Fund also having to
re-categorize some of the distributions it made to its shareholders. Those changes would be reflected in the Forms 1099. Although those forms generally will be distributed in
February of each year, a Fund may, in one or more years, request from the IRS an extension of time to distribute those forms until mid-March to enable it to receive the latest information it can from the REITs in which it invests and thereby accurately
report that information to its shareholders on a single form (rather than having to send them amended forms).
Effective for taxable years beginning after December 31, 2017 and before January 1, 2026, the Code
generally allows individuals and certain non-corporate entities a deduction for 20% of (1) “qualified REIT dividends” and (2) “QPTP income.” Proposed regulations allow a Fund to pass the character of its qualified REIT dividends through to its
shareholders provided certain holding period requirements are met. The Treasury Department has also announced that it is considering adopting regulations that would provide a similar pass-through of QPTP income, but that pass-through is not
currently available. As a result, an investor who invests directly in QPTPs will be able to receive the benefit of the 20% deduction, which a shareholder in a Fund that invests in
QPTPs currently will not.
Taxation of the Funds in General
Each Fund will be subject to a nondeductible 4% federal excise tax (“Excise Tax”) to the
extent it fails to distribute by the end of any calendar year an amount equal to the sum of (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) at least 98.2% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses, as prescribed by the Code) for the one-year period ending on October 31 of the calendar year, and (3) any ordinary income and capital gains for previous years that were not distributed during those
years. A Fund will be treated as having distributed any amount on which it is subject to income tax for any taxable year. Each Fund intends to make sufficient distributions prior to the end of each calendar year to avoid liability for the Excise
Tax. However, a Fund may in certain circumstances be required to liquidate portfolio investments to make those
distributions, potentially resulting in additional taxable gain or loss.
If a Fund uses hedging strategies, such as selling (writing) and purchasing options and futures contracts and entering into forward contracts, complex rules apply to determine for income tax purposes the amount, character, and timing of recognition
of the gains and losses the Fund realizes in connection therewith. Gains from the disposition of foreign currencies (except certain gains that may be excluded by future
regulations), and gains from options, futures, and forward contracts a Fund derives with respect to its business of investing in securities or foreign currencies, are treated as
Qualifying Income.
Some
futures, foreign currency contracts, and “nonequity” options (i.e., certain listed options, such as those on a “broad-based” securities index) —
except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate swap,
currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement — in which a Fund
invests may be subject to section 1256 of the Code (“section 1256 contracts”). Any section 1256 contract a Fund holds at the end of its taxable year must be “marked-to-market” (i.e., treated as having been sold at that time for its fair market value) for federal tax purposes, with the result that unrealized gains or losses will be treated as though they were realized. Sixty
percent of any net gain or loss realized on these deemed sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as
short-term capital gain or loss. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.
These rules may operate to increase the amount that a Fund must distribute to satisfy the Distribution
Requirement (i.e., with respect to the portion treated as short-term capital gain, which will be included in investment company taxable income and thus taxable to its shareholders as ordinary income when distributed to them), and to increase the net capital
gain a Fund recognizes, without in either case increasing the cash available to it. A Fund may elect not to have the foregoing rules apply to any “mixed straddle” (i.e., a straddle the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of which are section 1256 contracts), although doing so may have
the effect of increasing the relative proportion of short-term capital gain (distributions of which are taxable to its shareholders as ordinary income) and thus increasing the amount of dividends it must distribute.
If a call option written by a Fund lapses (i.e., terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain. If a Fund enters into a closing purchase transaction with respect to a written
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call option, it will have a short-term capital
gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys. If such an option is exercised and a
Fund thus sells the securities or futures contract subject to the option, the premium it received will be added to the exercise price to determine the gain or loss on the sale. If a Fund allows a purchased call option to lapse, it will realize a capital loss. If a Fund exercises such an option, the premium it paid for the option will be added to its basis in the subject securities or
futures contract.
Offsetting positions a Fund may enter into or hold in any actively traded security, option, futures, or
forward contract may constitute a “straddle” for federal income tax purposes. Straddles are subject to certain rules that may affect the amount, character, and timing of recognition of a Fund’s gains and losses with respect to positions of the straddle by requiring, among other things, that (1) loss realized on disposition of one position of a straddle be deferred to the extent of any
unrealized gain in an offsetting position until the latter position is disposed of, (2) the Fund’s holding period in certain straddle positions not begin until the straddle is terminated (possibly resulting in gain being treated as short-term rather
than long-term capital gain), and (3) losses recognized with respect to certain straddle positions, that otherwise would constitute short-term capital losses, be treated as long-term capital losses. Applicable regulations also provide certain
“wash sale” rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. Different elections are available to a Fund, which may mitigate the effects of the straddle rules, particularly with respect to mixed straddles.
Under Code section 988, gains or losses (1) from the disposition of foreign currencies, including forward contracts, (2) except in certain circumstances, from options and forward contracts on foreign currencies (and on financial instruments
involving foreign currencies) and from notional principal contracts (e.g., swaps, caps, floors, and collars) involving payments denominated in foreign currencies, (3) on the
disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of acquisition and
disposition of the security, and (4) that are attributable to exchange rate fluctuations between the time a Fund accrues interest, dividends, or other receivables or expenses or other liabilities denominated in a foreign currency and the time it
actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss. These gains or losses will increase or decrease the amount of a Fund’s investment company taxable income to be distributed to its
shareholders as ordinary income, rather than affecting the amount of its net capital gain. If a Fund’s section 988 losses exceed its other investment company taxable income during a taxable year, the Fund would not be able to distribute any
dividends, and any distributions made during that year (including those made before the losses were realized), would be characterized as a “return of capital” to shareholders, rather than as a dividend, thereby reducing each shareholder’s basis in his or her Fund shares.
If a Fund
has an “appreciated financial position” — generally, an interest (including an interest through an option, futures or forward contract, or short sale) with
respect to any stock, debt instrument (other than “straight debt”), or partnership interest the fair market value of which exceeds its adjusted basis — and enters
into a “constructive sale” of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A
constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract a Fund or a related person enters into with respect to the same or substantially identical property. In addition, if
the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to any
transaction of a Fund during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days
after that closing (i.e., at no time during that 60-day period is the Fund’s risk of loss regarding that position reduced by reason of certain specified transactions with
respect to substantially identical or related property, such as having an option to sell, being contractually obligated to sell, making a short sale, or granting an option to buy
substantially identical stock or securities).
Certain Funds may invest in the stock of PFICs. A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests for a taxable year: (1) at least 75% of its gross income is passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, a Fund will
be subject to federal income tax on a portion of any “excess distribution” received on the stock of a PFIC and of any gain from disposition of that stock (collectively “PFIC income”), plus interest thereon, even if the Fund distributes the PFIC
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income as a dividend to its shareholders. The
balance of the PFIC income will be included in the Fund’s investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that
income to its shareholders. Fund distributions thereof will not be eligible for the 15% and 20% maximum federal income tax rates on non-corporate shareholders’ “qualified dividend income” mentioned above.
If a Fund invests in a PFIC and elects to treat the PFIC as a “qualified electing fund” (“QEF”), then in lieu of the foregoing tax and interest obligation, the Fund will be required to include in its gross income each taxable year its pro rata share of
the QEF’s annual ordinary earnings and net capital gain (which it may have to distribute to satisfy the Distribution Requirement and avoid imposition of the Excise Tax), even if the QEF does not distribute those earnings and gain to the
Fund. In most instances it will be very difficult, if not impossible, to make this election because of certain of
its requirements.
Each
Fund may elect to “mark-to-market” its stock in certain PFICs. “Marking-to-market,” in this context, means including in gross income each taxable year (and
treating as ordinary income) the excess, if any, of the fair market value of a PFIC’s stock over a Fund’s adjusted basis therein as of the end of that year. Pursuant to
the election, a Fund also would be allowed to deduct (as an ordinary, not a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair value thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock
the Fund included in income for prior taxable years under the election. A Fund’s adjusted basis in each PFIC’s stock with respect to which it has made this election will be adjusted to reflect the amounts of income included and deductions taken
thereunder.
Certain Funds may acquire (1) zero-coupon bonds issued with OID, (2)
payment-in-kind bonds, and/or (3) inflation-indexed securities (in the case of such securities issued by the U.S. Treasury, on which principal is adjusted based on changes in the CPI-U). A Fund must include in its gross income the OID that accrues on OID securities, bonds it
receives as “interest” on payment-in-kind bonds, and the amount of any principal increases on inflation-indexed securities during the taxable year, even if it receives no corresponding payment on them during the year. Because a Fund annually must
distribute substantially all of its investment company taxable income, including any accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid
imposition of the Excise Tax, it might be required in a particular taxable year to distribute as a dividend an amount that is greater than the total amount of cash it actually
receives. Those distributions would have to be made from a Fund’s cash assets or, if necessary, from the proceeds of sales of its portfolio securities. A Fund might realize capital gains or losses from those sales, which would increase or decrease its investment
company taxable income and/or net capital gain.
Certain Funds may invest in REITs that (1) hold residual interests in real estate mortgage investment conduits (“REMICs”) or (2) engage in mortgage securitization transactions that cause the REITs to be taxable mortgage pools (“TMPs”) or have a qualified REIT subsidiary that is a TMP. A portion of the net income allocable to REMIC residual interest holders may be
an “excess inclusion.” The Code authorizes the issuance of regulations dealing with the taxation and reporting of excess inclusion income of REITs and RICs that hold residual REMIC interests and of REITs, or qualified REIT subsidiaries, that are
TMPs. Although those regulations have not yet been issued, the U.S. Treasury and the IRS issued a notice in 2006
(“Notice”) announcing that, pending the issuance of further guidance (which has not yet been issued), the IRS would apply the principles in the following paragraphs to all excess inclusion income, whether from REMIC residual interests or TMPs.
The Notice provides that a REIT must (1) determine whether it or its qualified REIT subsidiary (or a part
of either) is a TMP and, if so, calculate the TMP’s excess inclusion income under a “reasonable method,” (2) allocate its excess inclusion income to its shareholders generally in proportion to dividends paid, (3) inform shareholders that are not “disqualified
organizations” (i.e., governmental units and tax-exempt entities that are not subject to tax on their unrelated business taxable income (“UBTI”)) of the amount and character of the excess inclusion income allocated thereto, (4) pay tax (at the highest federal income tax rate imposed on corporations, currently 21%) on the excess inclusion income allocable to its
shareholders that are disqualified organizations, and (5) apply the withholding tax provisions with respect to the excess inclusion part of dividends paid to foreign persons without regard to any treaty exception or reduction in tax rate. Excess
inclusion income allocated to certain tax-exempt entities (including qualified retirement plans, individual retirement accounts and public charities) constitutes UBTI to them.
A RIC with excess inclusion income is subject to rules identical to those in clauses (2) through (5) above (substituting “that are nominees” for “that are not ‘disqualified organizations’” in clause (3) and inserting “record” after “its” in clause (4)). The
112
Notice further provides that a RIC is not required to report the amount and character of the excess inclusion income allocated to its shareholders that are not nominees, except that (1) a RIC with excess inclusion income from all sources
that exceeds 1% of its gross income must do so and (2) any other RIC must do so by taking into account only excess inclusion income allocated to the RIC from REITs the excess inclusion income of which exceeded 3% of its dividends. Each
Fund will not invest directly in REMIC residual interests and does not intend to invest in REITs that, to its knowledge, invest in those interests or are TMPs or have a qualified REIT subsidiary that is a TMP.
As noted above under “Qualification for Treatment as a RIC,” to so qualify a Fund must, among other things, derive at least 90% of its gross income for each taxable year from Qualifying Income (and income from QPTPs). Although Qualifying
Income does not include income derived directly from commodities, including certain commodity-linked derivative instruments, the IRS issued a large number of private letter rulings
(“PLRs”) (which a Fund may not use or cite as precedent) beginning in 2006 concluding that income a RIC derives from commodity-linked notes, in which certain of the
Funds may invest, is Qualifying Income; the IRS suspended the issuance of those PLRs in July 2011. In September 2016, the IRS issued a revenue procedure, which provides that the IRS will not “ordinarily” issue PLRs on any issue relating to the treatment of a corporation as a RIC that requires a determination of whether a financial instrument or position is a
“security.” (At the same time, proposed regulations under the Code were published that would impact RICs’ investments in wholly owned foreign subsidiaries designed to indirectly give them exposure to commodities investments.) Accordingly, future
PLRs regarding the status of commodity-linked notes will be rarely issued, if at all, and the Funds’ existing investments in those notes might have to be
liquidated.
Other Information
Delaware Statutory Trust. The 1290 Funds is an entity of the type commonly known as a Delaware statutory trust. Delaware law provides a statutory framework for the powers, duties, rights and obligations of the Trustees and shareholders of the 1290
Funds, while the more specific powers, duties, rights and obligations of the Trustees and shareholders are determined by the Trustees as set forth in the 1290 Funds’ Second Amended and Restated Agreement and Declaration of Trust (“Declaration of Trust”) and Second Amended and Restated By-laws. Every shareholder of the 1290 Funds, by virtue of purchasing shares and
becoming a shareholder, agrees to be bound by the terms of the Declaration of Trust. Some of the more significant provisions of the Declaration are described below.
Shareholder Liability. Although Delaware law statutorily limits the potential liabilities of a Delaware statutory trust’s shareholders to the
same extent as it limits the potential liabilities of a Delaware corporation’s shareholders, shareholders of a Fund could, under certain conflicts of laws jurisprudence in
various states, be held personally liable for the obligations of the 1290 Funds or a Fund. However, the Declaration of Trust provides that no shareholder shall be personally liable
for the debts, liabilities, obligations and expenses incurred by, contracted for, or otherwise existing with respect to, the 1290 Funds or any Fund. The Declaration of Trust
provides for indemnification from a Fund’s property for all losses and expenses of any Fund shareholder held personally liable for the obligations of that Fund. Thus, the risk of a shareholder’s incurring financial loss on account of shareholder liability is limited to circumstances in which a Fund itself would be unable to meet its obligations, a possibility that the Adviser believes is remote and not material. Upon payment of any liability incurred by a shareholder solely by reason of being or having been a shareholder of a Fund, the shareholder paying such liability will be entitled to reimbursement from the general assets of the Fund. The Trustees intend to conduct the operations of the Funds in such a way as to avoid, as far as possible, ultimate liability of the shareholders for liabilities of the
Funds.
Classes of Shares. The Declaration of Trust provides that the Board may establish funds and classes in addition to those currently established
and that the Board may determine, in its sole discretion, the rights and preferences, limitations and restrictions, including qualifications for ownership, conversion and exchange
features, minimum purchase and account size, expenses and charges, and other features of the funds and classes. The Board may, without shareholder approval, change any of those
features, terminate any fund or class, combine funds with other funds of the 1290 Funds, combine one or more classes of a fund with another class in that fund or convert the shares of one class into shares of another class.
Each Fund consists of Class A shares, Class T shares, Class I shares and Class R shares. A share of each class of a Fund represents an identical interest in that Fund’s investment portfolio and has the same rights, privileges and preferences. Each class may differ, however, with respect to sales charges, if any, distribution and/or service fees, if any, other expenses allocable exclusively to each class, voting rights on matters exclusively affecting that class, and its exchange privilege and/or conversion features, if any. The
113
different sales charges and other expenses
applicable to the different classes of shares of the Funds will affect the performance of those classes. Each share of a Fund is entitled to participate equally in dividends, other
distributions and the proceeds of any liquidation of that Fund. Due to the differing expenses of the classes, however, dividends and liquidation proceeds on Class A, Class T, Class I and Class R shares will differ.
Voting Rights. The Declaration of Trust provides for shareholder voting as required by the 1940 Act or other applicable laws but otherwise
permits, consistent with Delaware law, actions by the Trustees without seeking the consent of shareholders. Trustees may fill vacancies on the Board or appoint new Trustees if the
result is that at least two-thirds of the Trustees have been elected by shareholders. Shareholders of each Fund are entitled to one vote for each full share held and fractional
votes for fractional shares held. The shares of the 1290 Funds will be voted in the aggregate, except when a separate vote of a Fund is required by law or when a matter involves any action that the Board of Trustees has determined will affect only the interests of one or more Funds or classes.
Shareholder
Meetings. The 1290 Funds does not hold annual meetings. Shareholders of record of no less than
two-thirds of the total combined net asset value of all issued and outstanding shares of the 1290 Funds may remove a Trustee through a declaration in writing or by vote cast in person or by proxy at a meeting called for that purpose. A meeting may be called to vote on the removal of a Trustee at the written request of holders of 10% of the outstanding shares of the 1290 Funds.
Class-Specific Expenses. Each Fund may determine to allocate certain of its expenses (in addition to service and distribution fees) to the specific classes of its shares to which those expenses are attributable.
Derivative and Direct Actions. The Declaration of Trust provides a detailed process for the bringing of derivative actions by shareholders in order to
permit legitimate inquiries and claims while avoiding the time, expense, distraction, and other harm that can be caused to a Fund or its shareholders as a result of spurious
shareholder demands and derivative actions. The Declaration of Trust provides that, prior to bringing a derivative action, a demand by no fewer than three unrelated shareholders
must first be made on the Trustees prior to bringing a derivative action. The Declaration of Trust details information, certifications, undertakings and acknowledgements that must be included in the demand. The Trustees are not required to consider a demand that is not
submitted in accordance with the requirements contained in the Declaration of Trust. The Declaration of Trust also requires that, in order to bring a derivative action, the complaining shareholders must be joined in their request by shareholders representing, at the time of the alleged wrongdoing, at the time of demand, and at the time the action is commenced, at least 5% of all shares issued or outstanding, or of the Funds or classes to which such action relates if it does not relate to all Funds and classes. The Declaration of Trust provides that the Trustees must be afforded a reasonable amount of time to consider a shareholder request
and to investigate the basis of the claim. The Declaration of Trust further provides that the Trustees are entitled to retain counsel or other advisors in considering the merits of a shareholder request and may require an undertaking by the shareholders making
a request to reimburse the Trust or the applicable Funds for the expense of any such advisors in the event that the Trustees determine not to bring the derivative action.
The Declaration of Trust provides that no shareholder may bring a direct action claiming injury as a
shareholder of any Fund or class thereof unless the shareholder has suffered an injury distinct from that suffered by shareholders of the Fund or class, generally. A shareholder bringing a direct claim must be a shareholder of the Fund or class against which the direct action is brought at
the time of the injury complained of, or acquired the shares afterwards by operation of law from a person who was a shareholder at that time.
The Declaration of
Trust also requires that direct or derivative actions by shareholders against the 1290 Funds be brought only in the Court of Chancery of the State of Delaware to the extent there
is subject matter jurisdiction in such court for the claims asserted or, if not, then in the Superior Court of the State of Delaware (the “Exclusive Jurisdictions”),
and that shareholders irrevocably consent to the jurisdiction of such courts and irrevocably waive, to the fullest extent permitted by law, any objection they may have to the laying of venue of any such actions in such courts. The Declaration of Trust further requires that the right to jury trial be waived to the fullest extent permitted by law. Other investment companies may not be subject to similar restrictions. The
designation of Exclusive Jurisdictions may make it more expensive for a shareholder to bring a suit than if the shareholder were permitted to select another jurisdiction. Also, the designation of Exclusive Jurisdictions and the waiver of jury trials limit a shareholder’s ability to litigate a claim in the jurisdiction and in a manner that may be more convenient and favorable to the shareholder. The Declaration of Trust further provides that no provision of the Declaration of Trust is effective to waive rights under the 1940 Act, the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
114
Amendments to the Declaration
of Trust. The Declaration of Trust provides that no vote or consent of any shareholder shall
be required for any amendment to the Declaration of Trust except (i) as determined by the Trustees in their sole discretion or (ii) as required by federal law, including the 1940 Act, but only to the extent so required.
Additional Information. No Fund is sponsored, endorsed, sold or promoted by any third party involved in, or related to, compiling, computing or
creating any index. No third party index provider makes any representation or warranty, express or implied, to the issuer or owners of any Fund or any other person or entity
regarding the advisability of investing in investment companies generally or in any Fund particularly or the ability of any index to track corresponding stock market performance.
Indices are determined, composed and calculated by third parties without regard to any Fund or the issuer or owners of a Fund or any other person or entity. No third party index provider has any obligation to take the needs of the issuer or owners of any Fund or any other person or entity into consideration in determining, composing or calculating indices. Further, no third party index provider has any obligation or liability to the issuer or owners of any Fund or any other person or entity in connection with the administration, marketing or offering of a Fund.
Third party index providers shall obtain information for inclusion in or for use in the calculation of
indices from sources that the third party index providers consider reliable, none of the third parties warrant or guarantee the originality, accuracy and/or the completeness of any index or any data included therein. None of the third party index providers make any warranty, express
or implied, as to results to be obtained by the issuer of the Funds, owners of the Funds, or any other person or entity, from the use of any index or any data included therein. None of the third party index providers shall have any liability for any errors, omissions or interruptions of or in connection with any index or any data included therein. Further, none of the third party index providers make any express or implied warranties of any kind, and the third party index providers hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to each index and any data included therein. Without limiting any of the foregoing, in no event shall any of the third party index providers have any liability for any direct, indirect, special, punitive, consequential
or any other damages (including lost profits) even if notified of the possibility of such damages.
Other Services
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP (“PwC”), 300 Madison Avenue, New York, New York10017, serves as the 1290 Funds’ independent registered public accounting firm. PwC is responsible for auditing the annual financial statements of the 1290 Funds. In addition to providing audit services, PwC assists in the preparation and/or review of the 1290 Funds’ federal and state
income tax returns.
Custodian
JPMorgan Chase, 4 Chase Metrotech Center, 16th Floor, Brooklyn, New York11245, serves as custodian of the 1290 Funds’ portfolio securities and other assets. Under the terms of the custody agreement between the 1290 Funds and JPMorgan Chase, JPMorgan
Chase maintains cash, securities and other assets of the Funds. JPMorgan Chase is also required, upon the order of the 1290 Funds, to deliver securities held by JPMorgan Chase, and to make payments for securities purchased by the 1290 Funds. JPMorgan
Chase has also entered into sub-custodian agreements with a number of foreign banks and clearing agencies, pursuant to which portfolio securities purchased outside the United States are maintained in the custody of these entities.
Transfer Agent
DST,
2000 Crown Colony Drive, Quincy, Massachusetts02169-0953, serves as the transfer agent and dividend disbursing agent for the 1290 Funds.
Securities Lending Agent
JPMorgan Chase also serves as securities lending agent for the Funds and in that role administers the Funds’ securities lending program pursuant to the terms of a securities lending agreement entered into between the 1290 Funds, on behalf of the Funds,
and JPMorgan Chase (“Securities Lending Agreement”).
The services provided by JPMorgan Chase include: (1) lending available securities to approved borrowers; (2) determining whether a loan shall be made and negotiating the terms and conditions of the loan with the borrower, provided that such terms and
conditions are consistent with the terms and conditions of the Securities Lending Agreement; (3) receiving and holding collateral from borrowers to secure obligations of borrowers with respect to any loan of available securities; (4) marking loaned securities
115
and collateral to their market value each
business day; (5) obtaining additional collateral, as needed, to maintain the value of the collateral relative to the market value of the loaned securities at the levels required
by the Securities Lending Agreement; (6) investing cash collateral in permitted investments according to the guidelines outlined in the Securities Lending Agreement; (7) ensuring that all dividends and other distributions paid with respect to loaned securities are credited to a Fund’s relevant account; (8) at the termination of the loan, returning the collateral to the borrower upon the return of the loaned securities; and (9) establishing and maintaining records and providing periodic statements related to a Fund’s securities lending activities.
JPMorgan Chase is compensated for the above-described services from its securities lending revenue split,
as provided in the Securities Lending Agreement. For the fiscal year ended October 31, 2021, the Funds did not engage in securities lending.
Counsel
K&L Gates LLP, 1601 K Street, N.W., Washington, DC20006-1600, serves as counsel to the 1290 Funds.
Morgan, Lewis & Bockius LLP, One Federal Street, Boston, Massachusetts02110, serves as counsel to the Independent Trustees of the 1290 Funds.
Financial
Statements
The Financial Statements for the fiscal year ended October 31, 2021, including the financial highlights, have been audited by PwC, an independent registered public accounting firm to the 1290 Funds, as indicated in its report with respect thereto, and
appear in the 1290 Funds’ Annual Report to Shareholders, filed electronically with the SEC on December 29, 2021 (File No. 811-22959), and are incorporated by reference and made a part of this document. Financial Statements for 1290 Essex Small
Cap Growth Fund are not available because the Fund is newly organized and had no operations or financial information of its own prior to the date of this SAI.
116
Appendix A
Ratings of Corporate Debt Securities
DESCRIPTION OF COMMERCIAL PAPER RATINGS
S&P’s ratings are as follows:
• A-1 is the highest rating and indicates that the obligor’s capacity to
meet its financial commitment on the obligation is strong or, where the obligation is rated A-1+, extremely strong.
• Issues or issuers rated A-2 are somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher rated categories; however, the obligor’s capacity to meet its financial commitment on the obligation is satisfactory.
• Issues or issuers rated A-3 exhibit adequate protection parameters. Adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
• Issues or issuers rated B are regarded as having significant speculative characteristics. The obligor of a B-rated
short-term obligation currently has the capacity to meet its financial commitment on the obligation but faces
major ongoing uncertainties which could lead to its inadequate capacity to meet its financial commitment on the
obligation.
• Issues or issuers rated C are currently vulnerable to nonpayment. The obligor of a C-rated short-term obligation is
dependent upon favorable business, financial and economic conditions for the obligor to meet its financial
commitment on the obligation.
• The D rating is used when a short-term obligation is in payment default or in
breach of an imputed promise. The D rating will also be used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered
to D if it is subject to a distressed exchange offer.
Moody’s ratings are as follows:
• The rating Prime-1 (P-1) is the highest commercial paper rating assigned by Moody’s. Issues or supporting institutions
rated Prime-1 have a superior ability to repay short-term obligations.
• Issues or
supporting institutions rated Prime-2 (P-2) have a strong ability to repay short-term obligations.
• Issues or supporting institutions rated Prime-3 (P-3) have an acceptable
ability to repay short-term obligations.
• Issues or supporting institutions rated Not Prime (NP) do not fall within any of the above Prime rating categories.
Fitch’s ratings are as follows:
• Issues or issuers rated F1 exhibit the highest short-term credit quality and
strongest intrinsic capacity for timely payment of financial commitments. Issues or issuers with any exceptionally strong credit feature may be rated F1+.
• Issues or issuers rated F2 exhibit good short-term credit quality and good intrinsic capacity for timely payment of
financial commitments.
• Issues or issuers rated F3 exhibit fair short-term credit quality and an
adequate intrinsic capacity for timely payment of financial commitments.
• Issues or issuers rated B exhibit speculative short-term credit quality with
a minimal capacity for timely repayment of financial commitments, plus a heightened vulnerability to near-term adverse changes in financial and economic conditions.
• Issues or
issuers rated C exhibit high short-term default risk, and default is a real possibility.
A-1
• RD
typically applies to entities only and indicates that the entity has defaulted on one or more of its financial commitments, although it continues to meet other financial
obligations.
• D indicates a broad-based default event for an entity or the default of a specific short-term obligation.
DESCRIPTION OF BOND RATINGS
Bonds are considered to be “investment grade” if they are in one of the top four ratings.
S&P’s ratings are as follows:
• Bonds rated AAA have the highest rating assigned by S&P’s. The
obligor’s capacity to meet its financial commitment on the obligation is extremely strong.
• The obligor of a bond rated AA has a very strong capacity to meet its financial
commitment on the obligation.
• The obligor of a bond rated A has a strong capacity to meet its financial commitment on the obligation. Bonds rated A are
somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than bonds in higher rated categories.
• Bonds rated BBB exhibit adequate protection parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
• Bonds rated BB, B, CCC, CC or C are regarded as having significant speculative characteristics. BB indicates the least
degree of speculation and C the highest. While such bonds will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
• Bonds rated BB are less vulnerable to nonpayment than other speculative issues but face major ongoing uncertainties and
exposure to adverse business, financial, or economic conditions that could lead to the obligor’s inadequate capacity to meet its financial commitments on the
obligation.
• Bonds rated B are more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to
meet its financial commitments on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity or willingness to meet its
financial commitments on the obligation.
• Bonds rated CCC are currently vulnerable to nonpayment and dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitments on the obligation.
• Bonds rated CC are currently highly vulnerable to nonpayment. The CC rating
is used when a default has not yet occurred but S&P expects default to be a virtual certainty, regardless of the anticipated time to default.
• Bonds rated C are currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority
or lower ultimate recovery compared with obligations that are rated higher.
• Bonds rated D are in payment default or in breach of an imputed promise. This
rating is also used upon the filing of a bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. A rating on an obligation is lowered to D if it is subject to a distressed
exchange offer.
The
ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
Moody’s ratings are as follows:
• Bonds which are rated Aaa are judged to be of the highest quality, subject to
the lowest level of credit risk.
A-2
• Bonds which are rated Aa are judged to be of high quality and are subject to
very low credit risk.
• Bonds which are rated A are to be considered as upper-medium grade obligations and are subject to low credit
risk.
• Bonds which are rated Baa are considered as medium grade obligations, are subject to moderate credit risk and may possess
certain speculative characteristics.
• Bonds which are rated Ba are judged to be speculative and are subject to substantial credit risk.
• Bonds which are rated B are considered speculative and subject to high credit
risk.
• Bonds which are rated Caa are judged to be speculative, of poor standing and are subject to very high credit risk.
• Bonds which are rated Ca represent obligations which are highly speculative. Such issues are likely in, or very near,
default, with some prospect of recovery of principal and interest.
• Bonds which are rated C are the lowest rated and are typically in default,
with little prospect for recovery of principal or interest.
Moody’s applies modifiers to each rating classification from Aa through Caa to indicate relative ranking within its rating categories. The modifier “1” indicates that a security ranks in the higher end of its rating category, the modifier “2” indicates a mid-range ranking and the modifier “3” indicates that the issue ranks in the lower end of its generic rating category. Additionally, a “hyb” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.
Fitch ratings are as
follows:
• AAA — This is the highest rating assigned by Fitch, denoting the lowest expectation of default risk relative to other
issues or issuers. This rating is assigned only to issues or issuers with an exceptionally strong capacity for payment of financial commitments that is highly unlikely to be adversely affected by foreseeable events.
• AA — This rating is assigned to issues or issuers that present very low default risk and have a very strong capacity
for payment of financial commitments that is not significantly vulnerable to foreseeable events.
• A — This rating is assigned to issues or issuers that present a low default risk and have a strong capacity for
payment of financial commitments; however, this capacity may be more vulnerable to adverse business or economic
conditions than higher rated issues or issuers.
• BBB — This rating indicates expectations of default risk are currently low. Issues or issuers assigned this rating have
an adequate capacity for payment of financial commitments; however, adverse business or economic conditions are
more likely to impair this capacity.
• BB — This rating indicates an elevated vulnerability to default risk, particularly in the event of adverse changes in
business or economic conditions over time; however, business or financial flexibility exists which supports the
servicing of financial commitments.
• B — This rating indicates a material default risk is present but a
limited margin of safety remains. Financial commitments are currently being met but the capacity for continued payment is vulnerable to deterioration in the business and economic environment.
• CCC
— This rating is assigned to issues or issuers with a substantial credit risk, and default is a real possibility.
• CC — This rating is assigned to issues or issuers with very high levels
of credit risk, and default of some kind appears probable.
• C — This rating is assigned to issues or issuers with exceptionally
high levels of credit risk, and default is imminent or inevitable, or the issuer is in standstill.
A-3
• RD
— This rating indicates that, in Fitch’s opinion, an issuer has experienced an uncured default but has not entered into bankruptcy filings, administration,
receivership, liquidation or other formal winding-up procedure, and has not otherwise ceased operating.
• D — This rating indicates that, in Fitch’s opinion, an issuer has entered into bankruptcy filings, administration,
receivership, liquidation or other formal winding-up procedure, or has otherwise ceased business.
PLUS (+) or MINUS (-) — The ratings above may be modified by the addition of a plus or minus sign to show relative standing within the major categories.
A-4
Appendix B
Portfolio Manager Information
Equitable Investment Management Group, LLC (“EIM” or the
“Adviser”)
Portfolio Manager
Presented below for each portfolio manager is the number
of other
accounts managed by the portfolio
manager and the total assets in the
Presented below for each of the categories is the number of
accounts
and the total assets in the accounts
with respect to which the advisory
fee is based
on the performance of the account.
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts
Number
of
Accounts
Total
Assets
(Billion)
Number
of
Accounts
Total
Assets
(Million)
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
1290 Diversified Bond Fund
Kenneth T. Kozlowski
126
$185.94
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
Alwi Chan
126
$185.94
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
1290 DoubleLine Dynamic Allocation Fund
Kenneth T. Kozlowski
126
$186.54
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
Alwi Chan
126
$186.54
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
1290 Essex Small Cap Growth Fund*
Kenneth T. Kozlowski
____
$___
____
$___
0
N/A
0
N/A
0
N/A
0
N/A
Alwi Chan
____
$___
____
$____
0
N/A
0
N/A
0
N/A
0
N/A
1290 GAMCO Small/Mid Cap Value Fund
Kenneth T. Kozlowski
126
$186.47
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
Alwi Chan
126
$186.47
B
6
$$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
1290 High Yield Bond Fund
Kenneth T. Kozlowski
126
$186.55
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
Alwi Chan
126
$186.55
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
1290 Multi-Alternative Strategies Fund
Kenneth T. Kozlowski
126
$186.60
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
Alwi Chan
126
$186,60
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
Xavier Poutas
50
$101.02
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
Miao Hu
45
$78.07
B
0
N/A
0
N/A
0
N/A
0
N/A
0
N/A
Kevin McCarthy
45
$78.07
B
0
N/A
0
N/A
0
N/A
0
N/A
0
N/A
1290 SmartBeta Equity Fund
Kenneth T. Kozlowski
126
$186.49
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
Alwi Chan
126
$186.49
B
6
$385.43
M
0
N/A
0
N/A
0
N/A
0
N/A
* As of [
], 2022 for 1290 Essex Small Cap Growth Fund.
Description of any Material
Conflicts
Actual or potential conflicts of interest may arise when a portfolio manager has
management responsibilities to more than one account, such as devotion of unequal time and attention to the management of the accounts, inability to allocate limited investment opportunities across a broad band of accounts and incentive to allocate opportunities to an account where
the portfolio manager or Adviser has a greater financial incentive, such as a performance fee account. The Adviser has adopted policies and procedures reasonably designed to
address these types of conflicts and that serve to operate in a manner that is fair and equitable among its clients, including the Funds.
In addition, certain registered investment companies for which the Portfolio Managers serve as the
portfolio manager are generally structured as a “fund of funds,” which invest in other registered investment companies for which the Adviser serves as the investment adviser and/or in registered investment companies that are exchange-traded funds (“ETFs”). Each Portfolio Manager also serves as a portfolio manager to allocated portions which invest in ETFs for certain funds
B-1
that are not “fund of funds”. None
of these funds or allocated portions is subject to an advisory fee that is based on the performance of the fund or allocated portion. Given the structure of these funds and
allocated portions and the absence of performance-based advisory fee, as well as the lack of any impact of portfolio performance on individual portfolio manager’s compensation as further described below, each Portfolio Manager is not, as a general matter and in relation to
these funds or allocated portions, subject to the potential conflicts of interest that may arise in connection with his management of the Funds, on the one hand, and the other funds and allocated portions, on the other, such as material
differences in the investment strategies or allocation of investment opportunities.
Because each Portfolio Manager serves as officer and employee of the Adviser and their respective roles are not limited to serving as the portfolio manager of the Funds and other accounts they manage their compensation is based on the
Adviser’s compensation program as it applies to the firm’s officers in general. The Adviser’s compensation program consists of a base salary, short-term incentive compensation and long-term incentive compensation. Individual jobs are
defined based on scope, responsibility and market value and assigned to a specific level within the firm’s base salary structure. An individual’s base salary is then established within the range of such structure based on a combination of
experience, skills, job content and performance and periodically evaluated based on survey data and market research. Annual short-term incentive compensation opportunities, granted in cash, are made available depending on whether firm-wide
objectives were met during the year, as measured by various performance objectives such as underlying and adjusted earnings, expense management and sales. Once the target level of
the short-term incentive compensation, granted in the form of stock options, restricted stocks, and/or performance units, is offered in a manner similar to the short-term incentive compensation and is based on the combination of firm-wide performance and individual performance.
Annual long-term incentive compensation, granted in the form of stock options, restricted stocks and/or performance units, is offered in a manner similar to the short-term
incentive compensation and is based on the combination of firm-wide performance and individual performance.
* As of [ ], 2022 for 1290 Essex Small Cap Growth Fund.
Presented below for each of the categories is the number of
accounts
and the total assets in the accounts
with respect to which the advisory
fee is based
on the performance of the account
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
1290 High Yield Bond Fund
Michael Graham
2
$187.854
M
14
$13.823
B
32
$4.383
B
0
N/A
0
N/A
0
N/A
Robert Houle
2
$187.854
M
8
$5.557
B
16
$2.918
B
0
N/A
0
N/A
0
N/A
1290 SmartBeta Equity Fund
Gideon Smith
1
$383.517
M
36
$11.136
B
45
$12.837
B
0
N/A
0
N/A
0
N/A
Cameron Gray
1
$383.527
M
36
$11.136
M
45
$12.837
B
0
N/A
0
N/A
0
N/A
Ram Rasaratnam
1
$383.571
M
9
$3,209
B
18
$6.244
B
0
N/A
0
N/A
0
N/A
Description of any Material Conflicts
As indicated above, a portfolio manager may also manage other funds and accounts. At different times, a portfolio manager may manage other funds or accounts with investment objectives and strategies similar to, or different from, those of
the Fund. At times, those responsibilities could potentially conflict with the interests of the Fund. That may occur whether the investment objectives and strategies of the other
funds and accounts are the same as, or different from, the Fund’s investment objectives and strategies. For example, a portfolio manager may need to allocate investment
opportunities between the Fund and another fund or account having similar objectives or strategies, or may need to execute transactions for another fund or account that could have a negative impact on the value of securities held by the
Fund. Not all funds and accounts advised by AXA Investment Managers US Inc. (the “Sub-Adviser”) have the same management fee. If the management fee structure of another fund or account is more advantageous to the Sub-Adviser than the
fee structure of the Fund, the Sub-Adviser could have an incentive to favor the other fund or account. However, the Sub-Adviser’s compliance procedures and Code of Ethics
recognize the Sub-Adviser’s obligation to treat all of its clients, including the Fund, fairly and equitably, and are designed to preclude a portfolio manager from favoring
one client over another. It is possible, of course, that those compliance procedures and the Code of Ethics may not always be adequate to do so. In addition, although the Sub-Adviser does not invest in securities for its own account, it does,
however, manage certain client accounts and funds which include investments by affiliated subsidiaries of the AXA Group. Clients should be aware that AXA Group investments in these accounts and funds (including the Fund) may be deemed to create
a conflict of interest for the Sub-Adviser, as there could be an incentive for the Sub-Adviser to allocate investment opportunities to these accounts and funds at the expense of
other advisory clients.
In addition, certain AXA IM employees have disclosed to the firm
that they have family members that are employed by third party services that support AXA IM and its business. AXA IM manages these conflicts through a comprehensive set of disclosure requirements, as well as through a combination of periodic testing oversight, financial analysis and internal
reporting procedures.
As part of its staff retention strategy, AXA IM has adopted a competitive compensation policy which is linked to both overall performance and individual achievements. Professional development also serves as a key retention tool. The financial
compensation package is composed of a fixed salary, based mainly on qualifications and experience, and a discretionary bonus. Bonus payments can be structured with a combination of
cash immediately payable and vesting programs that are tied to the performance of the overall investment strategy to which the fund belongs as well as overall firm performance. In this manner, the company can influence short term, medium term and long term value creation for both
parties. Total compensation is benchmarked against industry standards to ensure we retain our highly competent team members.
We constantly monitor the employment market in our area for talented investment professionals with an eye
for both new investment talent as well as market-competitive compensation packages. As an additional retention strategy for certain key individuals in the US high yield team, contractual arrangements have also been secured Feedback from the market and our
extremely low turnover indicates that we are offering competitive compensation. AXA IM consistently attempts to align employee compensation with overall firm goals. Incentive pools
are based on several factors, but focus on the following categories:
• Employee performance with respect to objectives and responsibilities set
• Employee contribution to overall
firm performance
• Investment strategy
performance
• Overall
firm profitability
Retention strategies for our team members are multifaceted. AXA IM
believes compensation should be viewed as a total reward approach. In addition to industry competitive compensation structures as detailed above, AXA IM’s retention strategies include career development and international mobility opportunities, an appropriate work-life balance, and
benefit programs that are viewed as investments in a team member (e.g., employee stock purchase program, health club reimbursement, corporate discounts, etc.). For our investment staff at AXA IM their incentive compensation is specifically
guided depending on their roles within the firm, as described below.
Portfolio Managers or Strategists
The performance of our portfolio managers is assessed at mid-year and year-end against stated objectives set at the start of the year with a senior manager. The criteria taken into consideration are:
• Their role in the investment process
• Overall client satisfaction relating to portfolios under management as measured by overall client dialogue and retention for
external clients)
Credit Analysts
The performance of our analysts is judged on their ability to translate information into practical
recommendations for the portfolio managers. The criteria taken into consideration are:
• Quality of industry and issuer coverage
• Ability
to react swiftly to market information
• Speed with which information is integrated into recommendations
Traders
The
performance of our traders is judged on their ability to deliver trading solutions that enhance performance for our clients. The criteria taken into consideration are:
B-4
• Trade execution and access to liquidity in the market
• Synthesis and dissemination of important information flow to the investment
team, and
• Ability to deliver qualitative and quantitative analysis
Presented below for each of the categories is the number of
accounts
and the total assets in the accounts
with respect to which the advisory
fee is based
on the performance of the account
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts3,4
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts3,4
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
1290 Diversified Bond Fund
Anujeet Sareen
12
$5,271
M
52
$14,698
M
46
$14,046
M
0
N/A
2
$530
M
14
$14,220
M
Brian Kloss
14
$5,519
M
52
$14,743
M
45
$13,236
M
0
N/A
2
$530
M
13
$13,953
M
Tracy Chen
14
$5,519
M
52
$14,743
M
45
$13,236
M
0
N/A
2
$530
M
13
$13,953 M
Description of any Material Conflicts
Brandywine Global does not anticipate any actual or potential conflicts of interest in providing its
investment management services other than those conflicts generally experienced by investment advisers.
At times, Brandywine Global manages client accounts that pay performance-based fees alongside client
accounts that pay asset based fees and utilize the same investment strategy and invest in the same assets. The simultaneous management of client accounts that pay performance-based fees alongside client accounts that only pay an asset-based fee
creates a conflict of interest as the portfolio manager may have an incentive to favor client accounts with the potential to receive greater fees.
Additionally, Brandywine Global may at times be trading identical securities in the opposite direction
for multiple client accounts. This typically occurs in accounts that have different investment mandates. In some instances, opposite direction trades may occur in accounts with similar investment mandates due to differing cash flows in client accounts.
To address these types of conflicts, Brandywine Global has developed trade allocation policies and procedures. Orders for all accounts seeking to make the same investment are aggregated and executions are allocated pro rata across all
participating accounts. Brandywine Global periodically reviews the trading of client accounts to seek to ensure that no account, or group of accounts, is receiving preference in the trading process.
Portfolio managers, analysts and traders earn a base salary and bonus tied to
investment performance. The performance bonus is awarded based on peer group outperformance on a one-quarter, one-year, three-year and five-year basis. The performance calculation is weighted to place more emphasis on longer-term outperformance, and less emphasis on the
short-term. This emphasis on long term performance, in addition to quarterly oversight of the investment committee, serves as mechanisms to deter excessive risk-taking.
Investment professionals also receive a second quarterly bonus based on the profitability of their product group. Each investment team at Brandywine Global manages its own P&L and retains the bulk of its profits at the end of each quarter.
The portion that is not retained is shared with the other investment teams in an effort to smooth income and to promote cross-team fertilization and cooperation. Brandywine Global has found that this form of compensation aligns the interests of
investment professionals and clients and leads to accountability and low-turnover among Brandywine Global’s staff. In essence, the portfolio management teams own all of the
residual profits of the Firm, which Brandywine Global believe leads to responsibility, accountability, and low turnover of people.
Presented below for each of the categories is the number of
accounts
and the total assets in the accounts
with respect to which the advisory
fee is based
on the performance of the account
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
Number
of
Accounts
Total
Assets
1290 DoubleLine Dynamic Allocation Fund
Jeffrey E. Gundlach
34
$103.858
B
16
$9.091
B
76
$20.672
B
0
N/A
2
$2.002
B
2
$960.450
M
Jeffrey Sherman
24
$44.982
B
8
$3.463
B
19
$7.442
B
0
N/A
0
N/A
0
N/A
Emidio Checcone
1
$50.685
M
0
N/A
0
N/A
0
N/A
0
N/A
0
N/A
Description of any Material Conflicts
From time to time, potential and actual conflicts of interest may arise between a portfolio manager’s management of the investments of the Fund, on the one hand, and the management of other accounts, on the other. Potential and actual conflicts
of interest also may result because of DoubleLine’s other business activities. Other accounts managed by a portfolio manager might have similar investment objectives or
strategies as the Fund, be managed (benchmarked) against the same index the Fund tracks, or otherwise hold, purchase, or sell securities that are eligible to be held, purchased or sold by the Fund. The other accounts might also have different investment objectives or strategies
than the Fund.
Knowledge and Timing of Fund Trades — A potential conflict of interest may arise as a result of the portfolio manager’s management of the Fund. Because of
their positions with the Fund, the portfolio managers know the size, timing and possible market impact of the Fund’s trades. It is theoretically possible that a portfolio
manager could use this information to the advantage of other accounts under management, and also theoretically possible that actions could be taken (or not taken) to the detriment
of the Fund.
B-6
Investment Opportunities — A potential conflict of interest may arise as a result of the portfolio manager’s management of a number of accounts
with varying investment guidelines. Often, an investment opportunity may be suitable for both the Fund and other accounts managed by the portfolio manager, but securities may not
be available in sufficient quantities for both the Fund and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by the
Fund and another account. DoubleLine has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time.
Under DoubleLine’s allocation procedures, investment opportunities are allocated among various investment strategies based on individual account investment guidelines, DoubleLine’s investment outlook, cash availability and a series of other factors. DoubleLine has also adopted additional internal practices to complement the general trade allocation policy that are designed
to address potential conflicts of interest due to the side-by-side management of the Fund and certain pooled investment vehicles, including investment opportunity allocation issues.
Conflicts potentially limiting the Fund’s investment opportunities may also arise when the Fund and other clients of DoubleLine invest in, or even conduct research relating to, different parts of an issuer’s capital structure, such as when the Fund owns senior debt obligations of an issuer and other clients own junior tranches of the same issuer. In such circumstances, decisions over whether to trigger an event of default, over the terms of any workout, or how to exit an investment may result in conflicts of interest. In order to minimize such conflicts, a portfolio manager may avoid certain investment
opportunities that would potentially give
rise to conflicts with other clients of DoubleLine or result in DoubleLine receiving material, non-public information, or DoubleLine may enact internal procedures designed to minimize such conflicts, which could have the effect of limiting the Fund’s investment opportunities. Additionally, if DoubleLine acquires material non-public confidential information in connection with its business activities for other clients, a portfolio manager or other investment personnel may be restricted from purchasing securities or selling certain securities for the Fund or other clients. When making investment decisions where a conflict of interest may arise, DoubleLine will endeavor to act in a fair and equitable manner between the Fund and other clients; however, in certain instances the resolution of the conflict may
result in DoubleLine acting on behalf of another client in a manner that may not be in the best interest, or may be opposed to the best interest, of the Fund.
Investors in the Fund may also be advisory clients of DoubleLine. Accordingly, DoubleLine may in the course of its business provide advice to advisory clients whose interests may conflict with those of the Fund. For example, DoubleLine may advise a client who has invested in the Fund to redeem its investment in the Fund, which may cause the Fund to incur transaction costs and/or have
to sell assets at a time when it would not otherwise do so. DoubleLine currently provides asset allocation investment advice, including recommending the purchase and/or sale of shares of the Fund, to a large number of investors.
Affiliates of DoubleLine may provide initial funding to or otherwise invest in a Fund. DoubleLine could face a conflict if an account it advises is invested in the Fund and that account’s interests diverge from those of the Fund. When an affiliate provides “seed capital” or other capital for the Fund, it may do so with the intention of redeeming all or part of its interest in the Fund at a future point in time or when it deems that sufficient additional capital has been invested in the Fund. The timing of a redemption by
an affiliate could benefit the affiliate. For example, the affiliate may choose to redeem its shares at a time when the Fund’s portfolio is more liquid than at times when other investors may wish to redeem all or part of their interests. In addition, a consequence of any redemption of a significant amount, including by an affiliate, is that investors remaining in the Fund will bear a proportionately higher share of Fund expenses following the redemption.
Broad and Wide-Ranging Activities — The portfolio managers, DoubleLine and its affiliates engage in a broad spectrum of activities. In the ordinary course of
their business activities, the portfolio managers, DoubleLine and its affiliates may engage in activities where the interests of certain divisions of DoubleLine and its affiliates
or the interests of their clients may conflict with the interests of the shareholders of the Fund.
Possible Future Activities — DoubleLine and its affiliates may expand the range of services that it provides over time. Except as provided herein,
DoubleLine and its affiliates will not be restricted in the scope of its business or in the performance of any such services (whether now offered or undertaken in the future) even
if such activities could give rise to conflicts of interest, and whether or not such conflicts are described herein. DoubleLine and its affiliates have, and will continue to
develop, relationships with a significant number of companies, financial sponsors and their senior managers, including relationships with clients who may hold or may have held investments similar to those intended to be made by the Fund. These clients may themselves represent
appropriate investment opportunities for the Fund or may compete with the Fund for investment opportunities.
B-7
Performance Fees and Personal
Investments — A portfolio manager may advise certain accounts with respect to which the advisory fee is based entirely or partially on performance or in respect of which the portfolio manager may have made a significant personal investment. Such circumstances may create a conflict of interest for the portfolio manager in that the portfolio manager may have an incentive to allocate the investment opportunities that he or she believes might be the most profitable to such other accounts instead of allocating them to the Fund. DoubleLine has adopted policies and procedures reasonably designed to allocate investment opportunities between the Fund and performance fee based accounts on a fair and equitable basis over time.
The overall objective of the compensation program for the portfolio managers employed by DoubleLine is
for DoubleLine to attract competent and expert investment professionals and to retain them over the long-term. Compensation is comprised of several components which, in the aggregate, are designed to achieve these objectives and to reward DoubleLine’s portfolio managers for their contribution to the success of their clients and DoubleLine. The DoubleLine Portfolio managers are compensated through a combination of base salary, discretionary bonus and, in some cases, equity participation in DoubleLine.
Salary
— Salary is agreed to with managers at time of employment and is reviewed from time to time. It
does not change significantly and often does not constitute a significant part of a portfolio manager’s compensation.
Discretionary Bonus/Guaranteed Minimums — Portfolio managers receive discretionary bonuses. However, in some cases, pursuant to contractual arrangements, some portfolio managers may be entitled to a mandatory minimum bonus if the sum of
their salary and profit sharing does not reach certain levels.
Equity
Incentives — Some portfolio managers participate in equity incentives based on overall firm
performance of DoubleLine, through direct ownership interests in DoubleLine. These ownership interests or participation interests provide eligible portfolio managers the opportunity to participate in the financial performance of DoubleLine. Participation is generally determined in
the discretion of DoubleLine, taking into account factors relevant to the portfolio manager’s contribution to the success of DoubleLine.
Other Plans and Compensation Vehicles — Portfolio managers may elect to participate in DoubleLine’s 401(k) plan, to which they may contribute a portion of their pre- and post-tax compensation to the plan for investment on a tax-deferred basis.
DoubleLine may also choose, from time to time, to offer certain other compensation plans and vehicles, such as a deferred compensation plan, to portfolio managers.
Summary
— As described above, an investment professional’s total compensation is determined through a
subjective process that evaluates numerous quantitative and qualitative factors, including the contribution made to the overall investment process. Not all factors apply to each employee and there is no particular weighting or formula for considering certain factors. Among
the factors considered are: relative investment performance of portfolios (although there are no specific benchmarks or periods of time used in measuring performance); complexity of investment strategies; participation in the investment team’s dialogue; contribution to business results and overall business strategy; success of marketing/ business development efforts and client
servicing; seniority/length of service with the firm; management and supervisory responsibilities; and fulfillment of DoubleLine’s leadership criteria.
Presented below for each of the categories is the number of
accounts
and the total assets in the accounts
with respect to which the advisory
fee is based
on the performance of the account
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts
Registered
Investment
Companies
Other Pooled
Investment
Vehicles
Other Accounts
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
Number of
Accounts
Total
Assets
1290 GAMCO Small/Mid Cap Value Fund
Mario J. Gabelli
22
$20.0
B
9
$955.7
B
912
$11.2
B
5
$6.4
B
7
$929.3
M
0
N/A
Description of any Material Conflicts
Actual or apparent conflicts of interest may arise when the portfolio manager also has day-to-day management
responsibilities with respect to one or more other accounts. These potential conflicts include:
Allocation of Limited Time and Attention — Because the portfolio manager manages many accounts, he may not be able to formulate as complete a strategy or identify
equally attractive investment opportunities for each of those accounts as if he were to devote substantially more attention to the management of only a few accounts.
Allocation of Limited Investment Opportunities — If the portfolio manager identifies an investment opportunity that may be suitable for multiple accounts, the Fund may not be able to take full advantage of that opportunity because the opportunity
may need to be allocated among all or many of these accounts.
Pursuit of Differing Strategies — At times, the portfolio manager may determine that an investment opportunity may be appropriate for only some of the
accounts for which he exercises investment responsibility, or may decide that certain of these accounts should take differing positions with respect to a particular security. In
these cases, the portfolio manager may execute differing or opposite transactions for one or more accounts which may affect the market price of the security or the execution
of the transactions, or both, to the detriment of one or more of his accounts.
B-9
Selection of Broker/Dealers
— Because of the portfolio manager’s position with an affiliated broker/dealer and his
indirect majority ownership interest in such affiliate, he may have an incentive to use the affiliate to execute portfolio transactions for the Fund even if using the affiliate is not in the best interest of the Fund.
Variation in Compensation — A conflict of interest may arise where the financial or other benefits available to the portfolio manager differ among the
accounts that he manages. If the structure of the Sub-Adviser’s management fee or the portfolio manager’s compensation differs among accounts (such as where certain
funds or accounts pay higher management fees or performance-based management fees), the portfolio manager may be motivated to favor certain accounts over others. The portfolio manager also may be motivated to favor funds or accounts in which he has an investment interest, or in which the
Sub-Adviser or its affiliates have investment interests. In Mr. Gabelli’s case, the Sub-Adviser’s compensation (and expenses) for the Fund are marginally greater as a percentage of assets than for certain other accounts and is less than for certain other accounts managed by Mr. Gabelli, while his personal compensation structure varies with near-term performance to a greater degree in
certain performance fee based accounts than with non-performance based accounts. In addition he has investment interests in several of the funds managed by the Sub-Adviser and its affiliates. The Sub-Adviser has adopted compliance policies and
procedures that are designed to address the various conflicts of interest that may arise for the Sub-Adviser and its staff members. However, there is no guarantee that such policies and procedures will be able to identify and address every situation in which
an actual or potential conflict may arise.
Mr. Gabelli receives compensation from his employer, GAMCO Investors, Inc., based on the fees received from sub-advisory assets. These fees fluctuate with the asset level of the Funds. Mr. Gabelli receives incentive-based variable compensation from his employer based on a percentage of net revenues received by the Sub-Adviser for managing the Fund(s). Net revenues are
determined by deducting from gross investment management fees the firm’s expenses (other than Mr. Gabelli’s compensation) allocable to the Fund(s). Additionally, he receives similar incentive-based variable compensation for managing other accounts
within GAMCO Investors, Inc. This method of compensation is based on the premise that superior long-term performance in managing a portfolio should be rewarded with higher compensation as a result of growth of assets through appreciation and
net investment activity. One of the other registered investment companies managed by Mr. Gabelli has a performance (fulcrum) fee arrangement for which his compensation is adjusted up or down based on the performance of the investment company relative to
an index. Four closed-end registered investment companies managed by Mr. Gabelli have arrangements whereby the Sub- Adviser will only receive its investment advisory fee
attributable to the liquidation value of particular series of preferred stock (and Mr. Gabelli would only receive his percentage of such advisory fee) if certain performance levels
are met. Mr. Gabelli manages other accounts with performance fees. Compensation for managing these accounts has two components. One component is based on a percentage of net revenues received by the Sub-Adviser for managing the account. The second component is based on
absolute performance of the account, with respect to which a percentage of such performance fee is paid to Mr. Gabelli. As an executive officer of the Sub-Adviser’s parent
company, GAMCO Investors, Inc., Mr. Gabelli also receives ten percent of the net operating profits of the parent company. He receives no base salary, no annual bonus and no stock
options. Mr. Gabelli elected to waive his full compensation for the period July 1, 2021 to November 30, 2021.
(individually, a
“Trust” and collectively, the “Trusts”)
I.
TRUSTS’ POLICY STATEMENT
Each Trust is firmly committed to ensuring that proxies relating to
the Trust’s portfolio securities are voted in the best interest of the Trust. The following policies and procedures have been established to implement each Trust’s proxy voting program (the “Program”).
II.
TRUSTS’ PROXY VOTING PROGRAM
Equitable Investment Management Group, LLC (“EIM”)
serves as the investment adviser to each series of the Trusts (each, a “Portfolio”, and together, the “Portfolios”). Each Trust has delegated proxy voting responsibility with respect to each Portfolio to EIM. EIM, through its
Proxy Voting Committee, is responsible for monitoring and administering the Program. Equitable Investment Management, LLC (“Administrator”) serves as the administrator of the Trusts and is generally responsible for monitoring, testing and
maintaining compliance policies, procedures and other items for the Trusts, and thus assists in monitoring compliance with applicable requirements pursuant to these Policies and Procedures.
A.
Sub-Advised Portfolios
EIM is responsible for the selection and ongoing monitoring of investment sub-advisers (the “Sub-Advisers”) who, among other responsibilities, provide portfolio management services including the day-to-day research
and stock selection for each sub-advised Portfolio or an allocated portion of a Portfolio (a “Sub-Advised Portfolio”). EIM views proxy voting as a function
that is incidental and integral to the portfolio management services provided by Sub-Advisers. Therefore, except as described in Section III below, EIM, in turn, delegates proxy voting responsibility with
respect to each Sub-Advised Portfolio to the applicable Sub-Adviser. The primary focus of the Trusts’ Program as it relates to the
Sub-Advised Portfolios, therefore, is to seek to ensure that the Sub-Advisers have adequate proxy voting policies and procedures in place and to monitor each Sub-Adviser’s proxy voting. The Sub-Advisers’ proxy voting policies and procedures may be amended from time to time and need not be identical.
B.
“Fund-of-Funds Portfolios”
EIM provides the day-to-day portfolio management
services to certain Portfolios, or an allocated portion of a Portfolio (“Allocated Portion”), each of which seeks to achieve its investment objective by investing in other mutual funds managed by EIM (“Underlying Affiliated
Portfolios”), unaffiliated mutual funds (“Underlying Unaffiliated Funds”) or exchange-traded funds (“Underlying ETFs”) (referred to collectively as the
“Fund-of-Funds Portfolios”). Accordingly, EIM retains proxy voting responsibility with respect to each Fund-of-Funds Portfolio and votes proxies in accordance with the policies and procedures set forth in Section III below.
III.
EIM’S PROXY VOTING POLICIES AND PROCEDURES
EIM has a fiduciary duty to vote proxies on
behalf of a Portfolio in the best interest of the Portfolio and its shareholders. EIM believes that its proxy voting policies and procedures represent the voting positions most likely to support a Portfolio’s and its shareholders’ best
interests across a range of sectors and contexts.
A.
Underlying Affiliated Portfolios. EIM will vote the
Fund-of-Funds Portfolios’ or Allocated Portions’ shares in Underlying Affiliated Portfolios either for or against a proposal, or abstain, in the same
proportion as the vote of all other securities holders of the applicable Underlying
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Affiliated Portfolio (whether or not the proposal presents an issue as to which EIM or its affiliates could be deemed to have a conflict of interest). If there are no security holders of an
Underlying Affiliated Portfolio except Fund-of-Funds Portfolio, EIM will vote a
Fund-of-Funds’ Portfolios’ shares in Underlying Affiliated Portfolio in its discretion, subject to compliance with other provisions of these Procedures,
including Section III.E.2. below regarding resolution of potential conflicts of interest regarding a proposal.
B.
Underlying Unaffiliated Funds, Underlying ETFs and Certain Sub-Advised
Portfolios.
a.
With respect to voting proxies of Underlying Unaffiliated Funds and Underlying ETFs where a Portfolio, and other members
of its “advisory group” (as defined in Rule 12d1-4 under the Investment Company Act of 1940) in the aggregate (i) hold more than 25% of the outstanding voting securities of an Underlying
Unaffiliated Fund or Unaffiliated ETF aasa result of a decrease in the outstanding voting securities of the acquired fund, or (ii) hold more than 10% of the outstanding voting securities of an Underlying Unaffiliated Fund or Unaffiliated ETF
that is a registered closed-end management investment company or business development company, each member of such “advisory group” will vote its securities in the same proportion as the vote of all
other holders of such securities; provided, however, that in circumstances where all holders of the outstanding voting securities of the Underlying Unaffiliated Fund or Unaffiliated ETF are required by the rule or otherwise under
Section 12(d)(1) to vote such securities in the same proportion as the vote of all other holders of such securities, the Portfolio will seek instructions from its security holders with regard to the voting of all proxies with respect to such
Underlying Unaffiliated Fund or Underlying ETF securities and vote such proxies only in accordance with such instructions.
b.
With respect to voting proxies for Underlying Unaffiliated Funds, Underlying ETFs in all other circumstances, and certain
Sub-Advised Portfolios as described in Section III. D below, the following guidelines generally will apply:
1.
The decision whether, and if so, how to vote a proxy will be made by EIM based on what it determines to be in the best
interest of the relevant Portfolio and its shareholders and in accordance with these procedures.
2.
EIM, with the assistance of Administrator, may enlist the services of an independent proxy voting service to assist with
the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process, as further described in Section III.E below.
3.
EIM’s policy is to vote all proxies, except under circumstances in which EIM has determined that it is consistent
with the best interest of the relevant Portfolio and its shareholders not to vote the proxy or to abstain on one or more proposals. Such circumstances may include the following:
a.
When securities are out on loan, they are transferred into the borrower’s name and are voted by the borrower, at its
discretion. In most cases, EIM will not take steps to see that loaned securities are voted. However, if EIM determines that a proxy vote is materially important to the relevant Portfolio, EIM will make a good faith effort to recall the loaned
security in order to vote.
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b.
If an issuer is based in a country that requires “share
blocking,”1 EIM may determine that the value of exercising the vote is outweighed by the detriment of not being able to sell the shares during the blocking period, in which case EIM may not
vote the proxy.
c.
EIM may abstain or vote against ballot issues where EIM has not received sufficient information to make an informed
decision.
1.
EIM will include a description of these procedures in each Trust’s Registration Statement.
2.
Any potential material conflicts of interest associated with voting proxies will be disclosed and reviewed by the
Trusts’ Chief Compliance Officer (“CCO”) or other member of EIM’s and Administrator’s Legal and Compliance Department (“Legal and Compliance”).
3.
EIM will cast votes in a manner consistent with any applicable rule or regulation of the United States Securities and
Exchange Commission (“SEC”).
C.
Seed Capital Investments. EIM and any affiliate will vote Portfolio shares they own, including through “seed
money” investments in a Portfolio, either for or against a proposal, or abstain, in the same proportion as the vote of all other security holders of the Portfolio (whether or not the proposal presents an issue as to which EIM or its affiliates
could be deemed to have a conflict of interest), or as otherwise required under applicable law (e.g., as may be required under a “mixed and shared funding” order). If EIM or an affiliate is the sole shareholder of a Portfolio, EIM or the
affiliate will vote the Portfolio’s shares that it owns in its discretion.
D.
Sub-Advised Portfolios; No Delegation. Under certain circumstances EIM may assume
responsibility for voting the proxies for shares held by a Sub-Advised Portfolio. For example, if a Sub-Adviser notifies EIM that it is unable or unwilling to assume
responsibility for voting a proxy for a Sub-Advised Portfolio (e.g., if voting such proxy presents a potential material conflict of interest for the Sub-Adviser),
EIM will vote such proxy in accordance with these procedures.
E.
EIM and Administrator will be required to maintain proxy voting policies and procedures that satisfy the following
elements:
1.
Written Policies and Procedures: EIM and Administrator must maintain written proxy voting policies and procedures
in accordance with applicable laws and regulations and must provide to each Trust copies of such policies and procedures.
2.
Conflicts of Interest: If EIM or Administrator becomes aware that a proxy voting issue may present a potential
material conflict of interest, the issue will be referred to the CCO or other member of Legal and Compliance. If the CCO and/or Legal and Compliance determines that an affiliated person of EIM has a potential material conflict, that affiliated
person will not participate in the voting decision.
•
Potential material conflicts may arise between the interests of a Portfolio and EIM or any of its affiliated persons if,
for example, a proxy vote relates to a matter involving issuers in which EIM or its affiliates have a substantial economic interest. Potential conflicts of interest include, but are not limited to:
•
Portfolio Managers owning shares of Underlying Unaffiliated Funds, ETFs or shares of securities that are also held in the
Portfolios of the Trust(s).
•
Equitable Financial Life Insurance Company (“Equitable”) holding investments in Underlying Unaffiliated Funds or
ETFs that are also held in the Portfolios of the Trust(s). It is possible that EIM may vote differently than Equitable.
1
Shareholders in “share blocking” countries wishing to vote must deposit their shares shortly before the date of
the meeting (usually one week) with a designated depositary. During the blocking period shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to clients’ custodian banks.
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3.
Voting Guidelines: EIM, with the assistance of Administrator, may engage an independent proxy voting service to
assist with the research and analysis of voting issues, provide voting recommendations and/or carry out the actual voting process as deemed necessary. Currently, EIM subscribes to the corporate governance and proxy research services of International
Shareholder Services (“ISS”), a provider of proxy voting services. ISS provides voting recommendations based on established guidelines and practices. The ISS U.S. Proxy Voting Guidelines (the “ISS Guidelines”) are attached hereto
as Appendix A. Based on its review of the ISS Guidelines, EIM has determined generally to instruct ISS to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs and certain Sub-Advised Portfolios as
described in Section III.D above consistent with the ISS Guidelines. However, EIM’s use of the ISS Guidelines is not intended to constrain EIM’s consideration of any proxy proposal, and so there may be times when EIM deviates from the ISS
Guidelines. EIM reserves the right not to vote in accordance with the ISS recommendation if it determines that it is not in the best interest of a Portfolio and its Shareholders to do so. In addition, if EIM becomes aware of a conflict of interest
between ISS and an issuer subject to a proxy vote, EIM will consider the recommendation of the issuer and instruct ISS to vote the proxy based on what EIM believes to be in the best interest of the Portfolio and its shareholders.
The Proxy Voting Committee, with the assistance of Administrator, will maintain records regarding EIM’s determination
generally to vote proxies for Underlying Unaffiliated Funds, Underlying ETFs, and certain Sub-Advised Portfolios as described in Section III.D above consistent with the ISS Guidelines, and that determination
will be reviewed periodically.
The following guidelines describe EIM’s general positions on common proxy issues for Underlying Unaffiliated
Funds and Underlying ETFs:
•
Election of Directors: EIM generally votes in favor of slates recommended by the board of directors.
•
Fee Increases: EIM generally votes against proposals to increase fees.
•
Changes to the investment strategy, investment objective or fundamental investment restrictions, and proposed
mergers: EIM generally votes against changes that would impact adversely the allocation model of a Fund-of-Funds Portfolio.
The EIM and Administrator Compliance Department (“Compliance”) will conduct a due diligence review of any proxy voting service (“Proxy
Service”) engaged by EIM or Administrator to assess (1) the adequacy and quality of the Proxy Service’s staffing, personnel and technology, and whether the Proxy Service has the capacity and competence to adequately analyze proxy
issues and the ability to make proxy voting recommendations based on materially accurate and complete information; (2) whether the Proxy Service has the ability to execute proxy votes in accordance with EIM’s instructions; (3) whether
the Proxy Service has adequately disclosed to EIM the methodologies it uses in formulating its voting recommendations, including its process for obtaining current and accurate information relevant to matters included in its research and on which it
makes recommendations, the nature of any third-party information sources that the Proxy Service uses as a basis for its voting recommendations, and how and when the Proxy Service would expect to engage with issuers and third parties; (4) the
effectiveness of the Proxy Service’s process for seeking timely input from issuers; and (5) the adequacy of the Proxy Service’s policies and procedures for identifying, disclosing and addressing actual and potential conflicts of
interest. EIM or Administrator will require the Proxy Service to update EIM or Administrator, as applicable, on an ongoing basis regarding (1) any business changes relevant to its capacity and competence to provide independent proxy voting
advice or carry out voting instructions, (2) any conflicts of interest that may arise with respect to its proxy voting recommendations, and (3) any operational or compliance issues or problems. The due diligence review will be conducted at
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least annually and may be conducted by on-site visit or written questionnaire. In the event that EIM or Administrator becomes aware of factual errors,
incompleteness or methodological weaknesses in the Proxy Service’s analysis, it will assess whether this materially affected the research or recommendations used by EIM and the Proxy Service’s efforts to correct any material deficiencies
in its analysis or methodology.
4.
Record Retention and Inspection: EIM, or Administrator on EIM’s behalf, will maintain all documentation
associated with its proxy voting decisions. Compliance is responsible for verifying that such documentation is properly maintained in accordance with the Trusts’ procedures and applicable laws and regulations.
IV.
DUE DILIGENCE AND COMPLIANCE PROGRAM
EIM, with the assistance of Administrator, will conduct a
due diligence review of each Sub-Adviser’s proxy voting policies and procedures (including any proxy voting guidelines) in connection with the initial selection of the
Sub-Adviser to manage a Sub-Advised Portfolio and on at least an annual basis thereafter. As part of its ongoing due diligence and compliance responsibilities, with
respect to the Sub-Advised Portfolios, EIM, with the assistance of Administrator, will seek to ensure that each Sub-Adviser maintains proxy voting policies and
procedures that are reasonably designed to comply with applicable laws and regulations.
V.
SUB-ADVISERS’ PROXY VOTING POLICIES AND PROCEDURES
Each Sub-Adviser will be required to maintain proxy voting policies and procedures in conformance with Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended, and that satisfy the following elements:
A.
Written Policies and Procedures: The Sub-Adviser must maintain written proxy voting policies and procedures in accordance with applicable laws and regulations and must provide to the Trusts, EIM, and
Administrator, upon request, copies of such policies and procedures.
B. Fiduciary Duty: The
Sub-Adviser’s policies and procedures must be reasonably designed to ensure that the Sub-Adviser votes client securities in the best interest of its clients.
C. Conflicts of Interest: The Sub-Adviser’s policies and procedures must include appropriate
procedures to identify and resolve as necessary, before voting client proxies, all material proxy-related conflicts of interest between the Sub-Adviser (including its affiliates) and its clients.
D. Voting Guidelines: The Sub-Adviser’s policies and procedures must address with reasonable
specificity how the Sub-Adviser will vote proxies, or what factors it will consider, when voting on particular types of matters, e.g., corporate governance proposals, compensation issues and matters
involving social or corporate responsibility. The Sub-Adviser’s policies and procedures also should describe the considerations it will take into account if it retains a Proxy Service to assist it in
discharging its proxy voting duties and its process for conducting due diligence on, and overseeing, services provided by a Proxy Service.
E.
Monitoring Proxy Voting: The Sub-Adviser must have a system and/or process that is reasonably designed to ensure that proxies are voted on behalf of its clients in a timely and efficient manner.
F. Record Retention and Inspection: The Sub-Adviser must have an established system for creating and
retaining all appropriate documentation relating to its proxy voting activities as required by applicable laws and regulations. The Sub-Adviser must provide to the Trusts, EIM, and Administrator such
information and records with respect to proxies relating to the Trust’s portfolio securities as required by law and as the Trusts, EIM, or Administrator may reasonably request.
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VI.
DISCLOSURE OF TRUSTS’ PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
EIM and
Administrator, on behalf of the Trusts, will take reasonable steps as necessary to seek to ensure that the Trusts comply with all applicable laws and regulations relating to disclosure of the Trusts’ proxy voting policies and procedures and
proxy voting records. EIM and Administrator (including, at their option, through third-party service providers) will maintain a system that is reasonably designed to ensure that its actual proxy voting record and the actual proxy voting record of
the Sub-Advisers with respect to the Trusts’ portfolio securities are collected, processed, filed with the SEC and made available to the Trusts’ shareholders as required by applicable laws and
regulations.
VII.
PROXY VOTING COMMITTEE
The Proxy Voting Committee is responsible for monitoring and administering
the Program. The Proxy Voting Committee is composed of EIM’s and Administrator’ CCO, officers of EIM and Administrator, and/or members of EIM’s or Administrator’s (as applicable) Investment Management Services, Legal and
Compliance, , or any combination thereof, who may be advisory members of the Committee. The Proxy Voting Committee holds meetings as needed, but no less frequently than annually.
VIII.
REPORTS TO TRUSTS’ BOARD OF TRUSTEES
EIM, with the assistance of Administrator, will
periodically (but no less frequently than annually) report to the Board of Trustees with respect to each Trust’s implementation of the Program, including summary information with respect to: 1) the proxy voting record of the Sub-Advisers with respect to the Sub-Advised Portfolios’ portfolio securities: 2) the proxy voting record of EIM with respect to the Fund-of-Funds Portfolios or Allocated Portions; and 3) the proxy voting record of EIM with respect to the portfolio securities of any Sub-Advised Portfolio for which
EIM has assumed proxy voting responsibility. In addition, if a material conflict of interest was reported to the CCO and/or the Legal and Compliance during the previous quarter and it was determined that a material conflict of interest did exist,
EIM, with the assistance of Administrator, will report such material conflict of interest to the Board of Trustees at the next quarterly meeting. EIM, with the assistance of Administrator, will also provide the Board of Trustees with any other
information requested by the Board.
The CCO’s annual written compliance report to the Board of Trustees will contain a summary of material
changes to these policies and procedures during the period covered by the report.
Adopted by EQ Advisors Trust (“EQAT”) Board of Trustees: March 1,2011
The U.S. research team provides proxy analyses and voting recommendations for the common shareholder meetings of U.S. — incorporated companies that
are publicly-traded on U.S. exchanges, as well as certain OTC companies, if they are held in our institutional investor clients’ portfolios. Coverage generally includes corporate actions for common equity holders, such as written consents and
bankruptcies. ISS’ U.S. coverage includes investment companies (including open-end funds, closed-end funds, exchange-traded funds, and unit investment trusts), limited partnerships (“LPs”), master limited partnerships
(“MLPs”), limited liability companies (“LLCs”), and business development companies. ISS reviews its universe of coverage on an annual basis, and the coverage is subject to change based on client need and industry trends.
Foreign-incorporated companies
In addition
to U.S. — incorporated, U.S. — listed companies, ISS’ U.S. policies are applied to certain foreign- incorporated company analyses. Like the SEC, ISS distinguishes two types of companies that list but are not incorporated in the U.S.:
•
U.S. Domestic Issuers — which have a majority of outstanding shares held in the U.S. and meet other criteria, as
determined by the SEC, and are subject to the same disclosure and listing standards as U.S. incorporated companies (e.g. they are required to file DEF14A proxy statements) – are generally covered under standard U.S. policy guidelines.
•
Foreign Private Issuers (FPIs) — which are allowed to take exemptions from most disclosure requirements (e.g.,
they are allowed to file 6-K for their proxy materials) and U.S. listing standards – are generally covered under a combination of policy guidelines:
•
FPI Guidelines (see the Americas Regional Proxy Voting Guidelines), may apply to companies incorporated in
governance havens, and apply certain minimum independence and disclosure standards in the evaluation of key proxy ballot items, such as the election of directors; and/or
•
Guidelines for the market that is responsible for, or most relevant to, the item on the ballot.
U.S. incorporated companies listed only on non-U.S. exchanges are generally covered under the ISS guidelines for the market on which they are traded.
An FPI is generally covered under ISS’ approach to FPIs outlined above, even if such FPI voluntarily files a proxy statement and/or other
filing normally required of a U.S. Domestic Issuer, so long as the company retains its FPI status.
In all cases — including with respect to
other companies with cross-market features that may lead to ballot items related to multiple markets — items that are on the ballot solely due to the requirements of another market (listing, incorporation, or national code) may be evaluated
under the policy of the relevant market, regardless of the “assigned” primary market coverage.
1.
Board of Directors
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
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Independence: Boards should be sufficiently independent from management
(and significant shareholders) to ensure that they are able and motivated to effectively supervise management’s performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with
appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership
position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of
directors.
Composition: Companies should ensure that directors add value to the board through their specific skills and expertise and by
having sufficient time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence, while ensuring active and collaborative participation by all members. Boards should be
sufficiently diverse to ensure consideration of a wide range of perspectives.
Responsiveness: Directors should respond to investor input,
such as that expressed through significant opposition to management proposals, significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority of shares are tendered.
Accountability: Boards should be sufficiently accountable to shareholders, including through transparency of the company’s governance
practices and regular board elections, by the provision of sufficient information for shareholders to be able to assess directors and board composition, and through the ability of shareholders to remove directors.
General Recommendation: Generally vote for director nominees, except under the following circumstances (with new
nominees1 considered on case-by-case basis):
Independence
Vote against2 or withhold from non-independent directors
(Executive Directors and Non-Independent Non-Executive Directors per ISS’ Classification of Directors) when:
•
Independent directors comprise 50 percent or less of the board;
•
The non-independent director serves on the audit, compensation, or nominating committee;
•
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or
•
The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the
functions of such a committee.
1
A “new nominee” is a director who is being presented for election by shareholders for the first time.
Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of their appointment and the problematic governance issue in question.
2
In general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director
elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be checked to determine the valid contrary vote option for the particular company.
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ISS Classification of Directors — U.S.
1.
Executive Director
1.1.
Current officer1 of the company or one of its
affiliates2.
2.
Non-Independent Non-Executive Director
Board Identification
2.1.
Director identified as not independent by the board.
Controlling/Significant Shareholder
2.2.
Beneficial owner of more than 50 percent of the company’s voting power (this may be aggregated if voting power is
distributed among more than one member of a group).
Current Employment at Company or Related Company
2.3.
Non-officer employee of the firm (including employee representatives).
2.4.
Officer1, former officer, or general or limited
partner of a joint venture or partnership with the company.
Former Employment
2.5.
Former CEO of the company.3,4
2.6.
Former non-CEO officer1of the company or an affiliate2within the past five years.
2.7.
Former officer1 of an acquired company within the past
five years.4
2.8.
Officer1 of a former parent or predecessor firm at the
time the company was sold or split off within the past five years.
2.9.
Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an
assessment of the interim officer’s employment agreement will be made.5
Family Members
2.10.
Immediate family member6 of a current or former
officer1 of the company or its affiliates2 within the
last five years.
2.11.
Immediate family member6 of a current employee of
company or its affiliates2 where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees; the company or
its affiliates employ relatives of numerous board members; or a non- Section 16 officer in a key strategic role).
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Professional, Transactional, and Charitable Relationships
2.12.
Director who (or whose immediate family member6)
currently provides professional services7 in excess of $10,000 per year to: the company, an affiliate2, or an
individual officer of the company or an affiliate; or who is (or whose immediate family member6 is) a partner, employee, or controlling shareholder of an organization which provides
the services.
2.13.
Director who (or whose immediate family member6)
currently has any material transactional relationship8 with the company or its affiliates2; or who is (or whose
immediate family member6 is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship8 (excluding investments in the company through a private placement).
2.14.
Director who (or whose immediate family
member6) is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or endowments8 from the company or its affiliates2.
Other Relationships
2.15.
Party to a voting agreement9 to vote in line with
management on proposals being brought to shareholder vote.
2.16.
Has (or an immediate family member6 has) an
interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee.10
2.17.
Founder11 of the company but not currently an
employee.
2.18.
Director with pay comparable to Named Executive Officers.
2.19.
Any material12 relationship with the company.
3.
Independent Director
3.1.
No material12 connection to the company other than a
board seat.
Footnotes:
1. The definition of officer will generally follow that of a “Section 16 officer” (officers subject to
Section 16 of the Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice
president in charge of a principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A non-employee director serving as an officer
due to statutory requirements (e.g. corporate secretary) will generally be classified as a Non-Independent Non-Executive Director under “Any material relationship with the company.” However, if the company provides explicit disclosure that
the director is not receiving additional compensation exceeding $10,000 per year for serving in that capacity, then the director will be classified as an Independent Director.
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2.“Affiliate” includes a subsidiary, sibling company, or parent company. ISS uses 50 percent control
ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate.
3. Includes any former CEO of the company prior to the company’s initial public offering (IPO).
4. When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company, ISS
will generally classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any operating ties to the firm; and the
existence of any other conflicting relationships or related party transactions.
5. ISS will look at the terms of the interim
officer’s employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary CEOs. ISS will also consider if a
formal search process was under way for a full-time officer at the time.
6.“Immediate family member” follows the
SEC’s definition of such and covers spouses, parents, children, step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or
significant shareholder of the company.
7. Professional services can be characterized as advisory in nature, generally
involve access to sensitive company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include but are not limited to the following: investment
banking/financial advisory services, commercial banking (beyond deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing services, legal services, property management services, realtor
services, lobbying services, executive search services, and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit services, IT tech support services, educational
services, and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to the associated materiality test) rather than a professional relationship. “Of
Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired partner of, the firm providing the professional service. The case of a
company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather than a professional relationship. Insurance services and marketing services are
assumed to be professional services unless the company explains why such services are not advisory.
8. A
material transactional relationship, including grants to non-profit organizations, exists if the company makes annual payments to, or receives annual payments from, another entity, exceeding the greater of: $200,000 or 5 percent of the
recipient’s gross revenues, for a company that follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows
neither of the preceding standards, ISS will apply the NASDAQ-based materiality test. (The recipient is the party receiving the financial proceeds from the transaction).
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9. Dissident directors who are parties to a voting agreement pursuant to a settlement or similar arrangement may
be classified as Independent Directors if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’ interests: the terms of the agreement; the duration of the standstill
provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions.
10. Interlocks include: executive officers serving as directors on each other’s compensation or similar committees (or, in
the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).
11. The operating involvement of the founder with the company will be considered; if the founder was never employed by the
company, ISS may deem him or her an Independent Director.
12. For purposes of ISS’s director
independence classification, “material” will be defined as a standard of relationship (financial, personal, or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a
manner that would have a meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
Composition
Attendance at Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who
served only part of the fiscal year3) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable
reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
•
Medical issues/illness;
•
Family emergencies; and
•
Missing only one meeting (when the total of all meetings is three or fewer).
In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor attendance, generally vote
against or withhold from appropriate members of the nominating/governance committees or the full board.
If the proxy disclosure is unclear and
insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
Overboarded Directors: Generally vote against or withhold from individual directors who:
•
Sit on more than five public company boards; or
3
Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.
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•
Are CEOs of public companies who sit on the boards of more than two public companies besides their own — withhold only
at their outside boards4.
Gender
Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) at companies where there are no women on the
company’s board. An exception will be made if there was a woman on the board at the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a year.
This policy will also apply for companies not in the Russell 3000 and S&P1500 indices, effective for meetings on or afterFeb. 1, 2023.
Racial and/or Ethnic Diversity: For companies in the Russell 3000 or S&P 1500 indices, generally vote against
or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members5. An exception
will be made if there was racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or ethnic diverse member within a year.
Responsiveness
Vote case-by-case on individual directors, committee members, or the entire board of directors as appropriate if:
•
The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the
previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are:
•
Disclosed outreach efforts by the board to shareholders in the wake of the vote;
•
Rationale provided in the proxy statement for the level of implementation;
•
The subject matter of the proposal;
•
The level of support for and opposition to the resolution in past meetings;
•
Actions taken by the board in response to the majority vote and its engagement with shareholders;
•
The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals);
and
•
Other factors as appropriate.
•
The board failed to act on takeover offers where the majority of shares are tendered;
4
Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate
boards, ISS will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards
outside the parent/subsidiary relationships.
5
Aggregate diversity statistics provided by the board will only be considered if specific to racial and/or ethnic
diversity.
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•
At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast and
the company has failed to address the issue(s) that caused the high withhold/against vote.
Vote case-by-case on Compensation
Committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
•
The company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be
considered are:
•
The company’s response, including:
•
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated);
•
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
•
Disclosure of specific and meaningful actions taken to address shareholders’ concerns;
•
Other recent compensation actions taken by the company;
•
Whether the issues raised are recurring or isolated;
•
The company’s ownership structure; and
•
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
•
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received
the plurality of votes cast.
Poison Pills: Vote against or withhold from all nominees (except new nominees1, who should be considered case- by-case) if:
•
The company has a poison pill that was not approved by
shareholders6. However, vote case-by-case on nominees if the board adopts an initial pill with a term of one year or less, depending on the disclosed rationale for the adoption, and other
factors as relevant (such as a commitment to put any renewal to a shareholder vote);
•
The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or
lowering the trigger, without shareholder approval; or
•
The pill, whether short-term7 or long-term, has a deadhand or
slowhand feature.
6
Public shareholders only, approval prior to a company’s becoming public is insufficient.
7
If the short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder
vote, ISS will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption.
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Classified Board Structure: The board is
classified, and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held
accountable.
Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to
opt out of, state laws requiring a classified board structure.
Director Performance Evaluation: The board
lacks mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder returns in the bottom half of a
company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not limited to:
•
A classified board structure;
•
A supermajority vote requirement;
•
Either a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;
•
The inability of shareholders to call special meetings;
•
The inability of shareholders to act by written consent;
•
A multi-class capital structure; and/or
•
A non-shareholder-approved poison pill.
Unilateral Bylaw/Charter Amendments and Problematic Capital Structures: Generally vote against or
withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if the board amends the company’s bylaws or charter without shareholder approval in a manner that
materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors:
•
The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification;
•
Disclosure by the company of any significant engagement with shareholders regarding the amendment;
•
The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the bylaws/charter;
•
The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment
provisions;
•
The company’s ownership structure;
•
The company’s existing governance provisions;
•
The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and
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•
Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on
director nominees. Generally vote against (except new nominees1, who should be considered case-by-case) if the directors:
•
Classified the board;
•
Adopted supermajority vote requirements to amend the bylaws or charter; or
•
Eliminated shareholders’ ability to amend bylaws.
Unequal Voting Rights
Problematic Capital Structure — Newly Public Companies: For 2022, for newly public companies8, generally vote against or withhold from the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the company or its board implemented a multi-class capital structure in which the classes have
unequal voting rights without subjecting the multi-class capital structure to a reasonable time-based sunset. In assessing the reasonableness of a time-based sunset provision, consideration will be given to the company’s lifespan, its post-IPO
ownership structure and the board’s disclosed rationale for the sunset period selected. No sunset period of more than seven years from the date of the IPO will be considered to be reasonable.
Continue to vote against or withhold from incumbent directors in subsequent years, unless the problematic capital structure is reversed, removed, or
subject to a newly added reasonable sunset.
Common Stock Capital Structure with Unequal Voting Rights:
Starting Feb 1, 2023, generally vote withhold or against directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case),
if the company employs a common stock structure with unequal voting rights9.
Exceptions
to this policy will generally be limited to:
•
Newly-public companies8 with a sunset provision of no more than
seven years from the date of going public;
•
Limited Partnerships and the Operating Partnership (OP) unit structure of REITs;
•
Situations where the unequal voting rights are considered de minimis; or
•
The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular
binding vote on whether the capital structure should be maintained.
8
Newly-public companies generally include companies that emerge from bankruptcy, SPAC transactions, spin-offs,
direct listings, and those who complete a traditional initial public offering.
9
This generally includes classes of common stock that have additional votes per share than other shares; classes of
shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”).
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Problematic Governance Structure — Newly
Public Companies: For newly public companies8, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the company or its board adopted the following bylaw or charter provisions that are
considered to be materially adverse to shareholder rights:
•
Supermajority vote requirements to amend the bylaws or charter;
•
A classified board structure; or
•
Other egregious provisions.
A reasonable sunset provision will be considered a mitigating factor.
Unless the adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.
Management Proposals to Ratify Existing Charter or Bylaw Provisions: Vote against/withhold from individual
directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
•
The presence of a shareholder proposal addressing the same issue on the same ballot;
•
The board’s rationale for seeking ratification;
•
Disclosure of actions to be taken by the board should the ratification proposal fail;
•
Disclosure of shareholder engagement regarding the board’s ratification request;
•
The level of impairment to shareholders’ rights caused by the existing provision;
•
The history of management and shareholder proposals on the provision at the company’s past meetings;
•
Whether the current provision was adopted in response to the shareholder proposal;
•
The company’s ownership structure; and
•
Previous use of ratification proposals to exclude shareholder proposals.
Restrictions on Shareholders’ Rights
Restricting Binding Shareholder Proposals: Generally vote against or withhold from the members of the governance
committee if:
•
The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such
restrictions include but are not limited to: outright prohibition on the submission of binding shareholder proposals or share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8. Vote against
or withhold on an ongoing basis.
Submission of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8
for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Generally continue to vote against or withhold on an ongoing
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basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Problematic Audit-Related Practices
Generally vote against or withhold from the members of the Audit Committee if:
•
The non-audit fees paid to the auditor are excessive;
•
The company receives an adverse opinion on the company’s financial statements from its auditor; or
•
There is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its
auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Vote case-by-case on members of the Audit Committee and potentially the full board if:
•
Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP;
and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether
withhold/against votes are warranted.
Problematic Compensation Practices
In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the
members of the Compensation Committee and potentially the full board if:
•
There is an unmitigated misalignment between CEO pay and company performance (pay for performance);
•
The company maintains significant problematic pay practices; or
•
The board exhibits a significant level of poor communication and responsiveness to shareholders.
Generally vote against or withhold from the Compensation Committee chair, other committee members, or potentially the full board
if:
•
The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s
declared frequency of say on pay; or
•
The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.
Generally vote against members of the board committee responsible for approving/setting non-employee director compensation if
there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a compelling rationale or other mitigating factors.
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Problematic Pledging of Company Stock:
Vote against the members of the committee that oversees risks related to pledging, or the full board, where a significant level of pledged company sto1ck
by executives or directors raises concerns. The following factors will be considered:
•
The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;
•
The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume;
•
Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
•
Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged
company stock; and
•
Any other relevant factors.
Climate Accountability
For companies that are significant greenhouse gas (GHG) emitters, through their operations or value
chain10, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in cases where ISS determines that the company
is not taking the minimum steps needed to understand, assess, and mitigate risks related to climate change to the company and the larger economy.
For 2022, minimum steps to understand and mitigate those risks are considered to be the following. Both minimum criteria will be required to be in
compliance:
•
Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on
Climate-related Financial Disclosures (TCFD), including:
•
Board governance measures;
•
Corporate strategy;
•
Risk management analyses; and
•
Metrics and targets.
•
Appropriate GHG emissions reduction targets.
For 2022, “appropriate GHG emissions reductions targets” will be any well-defined GHG reduction targets. Targets for Scope 3 emissions
will not be required for 2022 but the targets should cover at least a significant portion of the company’s direct emissions. Expectations about what constitutes “minimum steps to mitigate risks related to climate change” will increase
over time.
10
For 2022, companies defined as “significant GHG emitters” will be those on the current Climate Action
100+ Focus Group list.
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Governance Failures
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
•
Material failures of governance, stewardship, risk oversight11, or
fiduciary responsibilities at the company;
•
Failure to replace management as appropriate; or
•
Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her
ability to effectively oversee management and serve the best interests of shareholders at any company.
Voting on Director Nominees in Contested Elections
Vote-No Campaigns
General Recommendation: In cases where companies are targeted in connection with public “vote-no”
campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by shareholders and other publicly available information.
Proxy Contests/Proxy Access
General Recommendation: Vote case-by-case on the election of directors in contested elections, considering the
following factors:
•
Long-term financial performance of the company relative to its industry;
•
Management’s track record;
•
Background to the contested election;
•
Nominee qualifications and any compensatory arrangements;
•
Strategic plan of dissident slate and quality of the critique against management;
•
Likelihood that the proposed goals and objectives can be achieved (both slates); and
•
Stock ownership positions.
In the case of candidates nominated pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors
which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such as whether there are more candidates than board seats).
11
Examples of failure of risk oversight include but are not limited to: bribery; large or serial fines or sanctions from
regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant adverse legal judgments or settlement; or hedging of company stock.
General Recommendation: Generally vote for proposals seeking a policy that prohibits named executive officers from
engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding responsible use of
company stock will be considered.
Board Refreshment
Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of
the board are met and to bring in fresh perspectives, skills, and diversity as needed.
Term/Tenure Limits
General Recommendation: Vote case-by-case on management proposals regarding director term/tenure limits,
considering:
•
The rationale provided for adoption of the term/tenure limit;
•
The robustness of the company’s board evaluation process;
•
Whether the limit is of sufficient length to allow for a broad range of director tenures;
•
Whether the limit would disadvantage independent directors compared to non-independent directors; and
•
Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner.
Vote case-by-case on shareholder proposals asking for the company to adopt director term/tenure limits, considering:
•
The scope of the shareholder proposal; and
•
Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.
Age Limits
General Recommendation: Generally vote against management and shareholder proposals to limit the tenure of
independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits.
Board Size
General Recommendation: Vote for proposals seeking to fix the board size or designate a range for the board size.
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Vote against proposals that give management the ability to alter the size of the
board outside of a specified range without shareholder approval.
Classification/Declassification of the
Board
General Recommendation: Vote against proposals to classify (stagger) the board.
Vote for proposals to repeal classified boards and to elect all directors annually.
CEO Succession Planning
General Recommendation: Generally vote for proposals seeking disclosure on a CEO succession planning policy,
considering, at a minimum, the following factors:
•
The reasonableness/scope of the request; and
•
The company’s existing disclosure on its current CEO succession planning process.
Cumulative Voting
General Recommendation: Generally vote against management proposals to eliminate cumulate voting, and for
shareholder proposals to restore or provide for cumulative voting, unless:
•
The company has proxy access12, thereby allowing shareholders to
nominate directors to the company’s ballot; and
•
The company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are more
nominees than seats, and a director resignation policy to address failed elections.
Vote for proposals for cumulative voting at
controlled companies (insider voting power > 50%).
Director and Officer Indemnification and Liability
Protection
General Recommendation: Vote case-by-case on proposals on director and officer indemnification and liability
protection.
Vote against proposals that would:
•
Eliminate entirely directors’ and officers’ liability for monetary damages for violating the duty of care.
•
Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation
than mere carelessness.
•
Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts
that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify.
12
A proxy access right that meets the recommended guidelines.
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Vote for only those proposals providing such expanded coverage in cases when a
director’s or officer’s legal defense was unsuccessful if both of the following apply:
•
If the director was found to have acted in good faith and in a manner that s/he reasonably believed was in the best
interests of the company; and
•
If only the director’s legal expenses would be covered.
Establish/Amend Nominee Qualifications
General Recommendation: Vote case-by-case on proposals that establish or amend director qualifications. Votes
should be based on the reasonableness of the criteria and the degree to which they may preclude dissident nominees from joining the board.
Vote case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
•
The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative
to that of its peers;
•
The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is
sought;
•
The company’s disclosure and performance relating to the issue for which board oversight is sought and any significant
related controversies; and
•
The scope and structure of the proposal.
Establish Other Board Committee Proposals
General Recommendation: Generally vote against shareholder proposals to establish a new board committee, as such
proposals seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:
•
Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is
sought;
•
Level of disclosure regarding the issue for which board oversight is sought;
•
Company performance related to the issue for which board oversight is sought;
•
Board committee structure compared to that of other companies in its industry sector; and
•
The scope and structure of the proposal.
Filling Vacancies/Removal of Directors
General Recommendation: Vote against proposals that provide that directors may be removed only for cause.
Vote for proposals to restore shareholders’ ability to remove directors with or without cause.
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Vote against proposals that provide that only continuing directors may elect
replacements to fill board vacancies. Vote for proposals that permit shareholders to elect directors to fill board vacancies.
Independent Board Chair
General Recommendation: Generally vote for shareholder proposals requiring that the board chair position be filled
by an independent director, taking into consideration the following:
•
The scope and rationale of the proposal;
•
The company’s current board leadership structure;
•
The company’s governance structure and practices;
•
Company performance; and
•
Any other relevant factors that may be applicable.
The following factors will increase the likelihood of a “for” recommendation:
•
A majority non-independent board and/or the presence of non-independent directors on key board committees;
•
A weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a combined
CEO/chair role;
•
The presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of CEO and
chair, and/or departure from a structure with an independent chair;
•
Evidence that the board has failed to oversee and address material risks facing the company;
•
A material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or if the
board has materially diminished shareholder rights; or
•
Evidence that the board has failed to intervene when management’s interests are contrary to shareholders’
interests.
Majority of Independent Directors/Establishment of Independent Committees
General Recommendation: Vote for shareholder proposals asking that a majority or more of directors be independent
unless the board composition already meets the proposed threshold by ISS’ definition of Independent Director (See ISS’ Classification of Directors.)
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors
unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
General Recommendation: Generally vote for management proposals to adopt a majority of votes cast standard for
directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included.
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Generally vote for precatory and binding shareholder resolutions requesting that
the board change the company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to
allow for a carve-out for a plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a
post-election policy (also known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
Proxy Access
General Recommendation: Generally vote for management and shareholder proposals for proxy access with the
following provisions:
•
Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
•
Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member
of the nominating group;
•
Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group;
•
Cap: cap on nominees of generally twenty-five percent (25%) of the board.
Review for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are more restrictive than these
guidelines.
Require More Nominees than Open Seats
General Recommendation: Vote against shareholder proposals that would require a company to nominate more
candidates than the number of open board seats.
General Recommendation: Generally vote for shareholder proposals requesting that the board establish an internal
mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:
•
Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information
between shareholders and members of the board;
•
Effectively disclosed information with respect to this structure to its shareholders;
•
Company has not ignored majority-supported shareholder proposals, or a majority withhold vote on a director nominee; and
•
The company has an independent chair or a lead director, according to ISS’ definition. This individual must be
made available for periodic consultation and direct communication with major shareholders.
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2.
Audit-Related
Auditor Indemnification and Limitation of Liability
General Recommendation: Vote case-by-case on the issue of auditor indemnification and limitation of liability.
Factors to be assessed include, but are not limited to:
•
The terms of the auditor agreement — the degree to which these agreements impact shareholders’ rights;
•
The motivation and rationale for establishing the agreements;
•
The quality of the company’s disclosure; and
•
The company’s historical practices in the audit area.
Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Auditor Ratification
General Recommendation: Vote for proposals to ratify auditors unless any of the following apply:
•
An auditor has a financial interest in or association with the company, and is therefore not independent;
•
There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of
the company’s financial position;
•
Poor accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP;
or
•
Fees for non-audit services (“Other” fees) are excessive.
Tax compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax payment
planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other” fees.
In circumstances where “Other” fees include fees related to significant one-time capital structure events (such as initial public offerings,
bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard “non-audit fee” category, then such fees may be excluded from the non-audit fees
considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
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Shareholder Proposals Limiting Non-Audit
Services
General Recommendation: Vote case-by-case on shareholder proposals asking companies to prohibit or limit their
auditors from engaging in non-audit services.
Shareholder Proposals on Audit Firm Rotation
General Recommendation: Vote case-by-case on shareholder proposals asking for audit firm rotation, taking into
account:
•
The tenure of the audit firm;
•
The length of rotation specified in the proposal;
•
Any significant audit-related issues at the company;
•
The number of Audit Committee meetings held each year;
•
The number of financial experts serving on the committee; and
•
Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive
price.
3.
Shareholder Rights & Defenses
Advance Notice Requirements for Shareholder Proposals/Nominations
General Recommendation: Vote case-by-case on advance notice proposals, giving support to those proposals which
allow shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.
To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days
prior to the anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a 90-120-day window). The submittal window is the period under which
shareholders must file their proposals/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full
disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
General Recommendation: Vote against proposals giving the board exclusive authority to amend the bylaws.
Vote case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into account
the following:
•
Any impediments to shareholders’ ability to amend the bylaws (i.e. supermajority voting requirements);
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•
The company’s ownership structure and historical voting turnout;
•
Whether the board could amend bylaws adopted by shareholders; and
•
Whether shareholders would retain the ability to ratify any board-initiated amendments.
Control Share Acquisition Provisions
General Recommendation: Vote for proposals to opt out of control share acquisition statutes unless doing so would
enable the completion of a takeover that would be detrimental to shareholders.
Vote against proposals to amend the charter to
include control share acquisition provisions.
Vote for proposals to restore voting rights to the control shares.
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds.
Voting rights for those shares exceeding ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to put its offer
to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Control Share Cash-Out Provisions
General Recommendation: Vote for proposals to opt out of control share cash-out statutes.
Control share cash-out statutes give dissident shareholders the right to “cash-out” of their position in a company at the expense of the
shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
Disgorgement Provisions
General Recommendation: Vote for proposals to opt out of state disgorgement provisions.
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company’s stock to disgorge, or pay back,
to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24
months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.
Fair Price Provisions
General Recommendation: Vote case-by-case on proposals to adopt fair price provisions (provisions that stipulate
that an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the
mechanism for determining the fair price.
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Generally vote against fair price provisions with shareholder vote requirements
greater than a majority of disinterested shares.
Freeze-Out Provisions
General Recommendation: Vote for proposals to opt out of state freeze-out provisions. Freeze-out provisions force
an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control of the company.
Greenmail
General Recommendation: Vote for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise
restrict a company’s ability to make greenmail payments.
Vote case-by-case on anti-greenmail proposals when they are bundled
with other charter or bylaw amendments.
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups
seeking control of the company. Since only the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Shareholder Litigation Rights
Federal Forum Selection Provisions
Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal
securities law.
General Recommendation: Generally vote for federal forum selection provisions in the charter or bylaws that
specify “the district courts of the United States” as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
Vote against provisions that restrict the forum to a particular federal district court; unilateral adoption (without a shareholder vote) of such a
provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims
arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
General Recommendation: Generally vote for charter or bylaw provisions that specify courts located within the
state of Delaware as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
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For states other than Delaware, vote case-by-case on exclusive forum provisions,
taking into consideration:
•
The company’s stated rationale for adopting such a provision;
•
Disclosure of past harm from duplicative shareholder lawsuits in more than one forum;
•
The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and
the definition of key terms; and
•
Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote standard
applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections.
Generally vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate law matters, or that
specify a particular local court within the state; unilateral adoption of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee shifting
Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all litigation expenses of the
defendant corporation and its directors and officers.
General Recommendation: Generally vote against provisions that mandate fee-shifting whenever plaintiffs are not
completely successful on the merits (i.e., including cases where the plaintiffs are partially successful).
Unilateral adoption of
a fee-shifting provision will generally be considered an ongoing failure under the UnilateralBylaw/Charter Amendments policy.
Net Operating Loss (NOL) Protective Amendments
General Recommendation: Vote against proposals to adopt a protective amendment for the stated purpose of
protecting a company’s net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of three years and the exhaustion of the NOL.
Vote case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that would remain in effect for the
shorter of three years (or less) and the exhaustion of the NOL:
•
The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new
5-percent holder or increase the stock ownership percentage of an existing 5-percent holder);
•
The value of the NOLs;
•
Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon
exhaustion or expiration of the NOL);
•
The company’s existing governance structure including: board independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic governance concerns; and
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•
Any other factors that may be applicable.
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
General Recommendation: Vote for shareholder proposals requesting that the company submit its poison pill to a
shareholder vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a
shareholder rights plan if either:
•
Shareholders have approved the adoption of the plan; or
•
The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders
under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a shareholder
ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate.
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add
the caveat that a vote within 12 months would be considered sufficient implementation.
Management Proposals
to Ratify a Poison Pill
General Recommendation: Vote case-by-case on management proposals on poison pill ratification, focusing on the
features of the shareholder rights plan. Rights plans should contain the following attributes:
•
No lower than a 20 percent trigger, flip-in or flip-over;
•
A term of no more than three years;
•
No deadhand, slowhand, no-hand, or similar feature that limits the ability of a future board to redeem the pill;
•
Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a
qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into
consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
General Recommendation: Vote against proposals to adopt a poison pill for the stated purpose of protecting a
company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
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Vote case-by-case on management proposals for poison pill ratification,
considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
•
The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent);
•
The value of the NOLs;
•
Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or
expiration of NOLs);
•
The company’s existing governance structure including: board independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic governance concerns; and
•
Any other factors that may be applicable.
Proxy Voting Disclosure, Confidentiality, and Tabulation
General Recommendation: Vote case-by-case on proposals regarding proxy voting mechanics, taking into consideration
whether implementation of the proposal is likely to enhance or protect shareholder rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running
vote tallies, and the treatment of abstentions and/or broker non-votes in the company’s vote-counting methodology.
While a
variety of factors may be considered in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
•
The scope and structure of the proposal;
•
The company’s stated confidential voting policy (or other relevant policies) and whether it ensures a “level
playing field” by providing shareholder proponents with equal access to vote information prior to the annual meeting;
•
The company’s vote standard for management and shareholder proposals and whether it ensures consistency and fairness
in the proxy voting process and maintains the integrity of vote results;
•
Whether the company’s disclosure regarding its vote counting method and other relevant voting policies with respect to
management and shareholder proposals are consistent and clear;
•
Any recent controversies or concerns related to the company’s proxy voting mechanics;
•
Any unintended consequences resulting from implementation of the proposal; and
•
Any other factors that may be relevant.
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
General Recommendation: Generally vote against management proposals to ratify provisions of the company’s
existing charter or bylaws, unless these governance provisions align with best practice.
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In addition, voting against/withhold from individual directors, members of the
governance committee, or the full board may be warranted, considering:
•
The presence of a shareholder proposal addressing the same issue on the same ballot;
•
The board’s rationale for seeking ratification;
•
Disclosure of actions to be taken by the board should the ratification proposal fail;
•
Disclosure of shareholder engagement regarding the board’s ratification request;
•
The level of impairment to shareholders’ rights caused by the existing provision;
•
The history of management and shareholder proposals on the provision at the company’s past meetings;
•
Whether the current provision was adopted in response to the shareholder proposal;
•
The company’s ownership structure; and
•
Previous use of ratification proposals to exclude shareholder proposals.
Reimbursing Proxy Solicitation Expenses
General Recommendation: Vote case-by-case on proposals to reimburse proxy solicitation expenses.
When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation
expenses associated with the election.
Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in
connection with nominating one or more candidates in a contested election where the following apply:
•
The election of fewer than 50 percent of the directors to be elected is contested in the election;
•
One or more of the dissident’s candidates is elected;
•
Shareholders are not permitted to cumulate their votes for directors; and
•
The election occurred, and the expenses were incurred, after the adoption of this bylaw.
Reincorporation Proposals
General Recommendation: Management or shareholder proposals to change a company’s state of incorporation
should be evaluated case-by-case, giving consideration to both financial and corporate governance concerns including the following:
•
Reasons for reincorporation;
•
Comparison of company’s governance practices and provisions prior to and following the reincorporation; and
•
Comparison of corporation laws of original state and destination state.
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Vote for reincorporation when the economic factors outweigh any neutral or
negative governance changes.
Shareholder Ability to Act by Written Consent
General Recommendation: Generally vote against management and shareholder proposals to restrict or prohibit
shareholders’ ability to act by written consent.
Generally vote for management and shareholder proposals that provide
shareholders with the ability to act by written consent, taking into account the following factors:
•
Shareholders’ current right to act by written consent;
•
The consent threshold;
•
The inclusion of exclusionary or prohibitive language;
•
Investor ownership structure; and
•
Shareholder support of, and management’s response to, previous shareholder proposals.
Vote case-by-case on shareholder proposals if, in addition to the considerations above, the company has the following governance and antitakeover
provisions:
•
An unfettered13 right for shareholders to call special meetings at a
10 percent threshold;
•
A majority vote standard in uncontested director elections;
•
No non-shareholder-approved pill; and
•
An annually elected board.
Shareholder Ability to Call Special Meetings
General Recommendation: Vote against management or shareholder proposals to restrict or prohibit
shareholders’ ability to call special meetings.
Generally vote for management or shareholder proposals that provide
shareholders with the ability to call special meetings taking into account the following factors:
•
Shareholders’ current right to call special meetings;
•
Minimum ownership threshold necessary to call special meetings (10 percent preferred);
•
The inclusion of exclusionary or prohibitive language;
•
Investor ownership structure; and
•
Shareholder support of, and management’s response to, previous shareholder proposals.
13
“Unfettered” means no restrictions on agenda items, no restrictions on the number of shareholders who can group
together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting.
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Stakeholder Provisions
General Recommendation: Vote against proposals that ask the board to consider non-shareholder constituencies or
other non-financial effects when evaluating a merger or business combination.
State
Antitakeover Statutes
General Recommendation: Vote case-by-case on proposals to opt in or out of state takeover statutes (including fair
price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and anti-greenmail provisions).
Supermajority Vote Requirements
General Recommendation: Vote against proposals to require a supermajority shareholder vote.
•
Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for companies with
shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:
•
Ownership structure;
•
Quorum requirements; and
•
Vote requirements.
Virtual Shareholder Meetings
General Recommendation: Generally vote for management proposals allowing for the convening of shareholder meetings
by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only14 meetings would be held, and to
allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an in-person meeting.
Vote case-by-case on shareholder proposals concerning virtual-only meetings, considering:
•
Scope and rationale of the proposal; and
•
Concerns identified with the company’s prior meeting practices.
4.
Capital/Restructuring
Capital
Adjustments to Par Value of Common Stock
General Recommendation: Vote for management proposals to reduce the par value of common stock unless the action is
being taken to facilitate an anti-takeover device or some other negative corporate governance action.
Vote for management
proposals to eliminate par value.
14
Virtual-only shareholder meeting” refers to a meeting of shareholders that is held exclusively using
technology without a corresponding in-person meeting.
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Common Stock Authorization
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of common stock
that are to be used for general corporate purposes:
•
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized shares.
•
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares.
•
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.
•
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization.
Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s
prior or ongoing use of authorized shares is problematic, including, but not limited to:
•
The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights
to other share classes;
•
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it
•
would result in an excessive increase in the share authorization;
•
The company has a non-shareholder approved poison pill (including an NOL pill); or
•
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval.
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
•
In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt
about its ability to continue as a going concern;
•
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or
•
A government body has in the past year required the company to increase its capital ratios.
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all
nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific
Authorization Requests
General Recommendation: Generally vote for proposals to increase the number of authorized common shares where the
primary purpose of the increase is to issue shares in connection with
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transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such
transactions, the allowable increase will be the greater of:
•
twice the amount needed to support the transactions on the ballot, and
•
the allowable increase as calculated for general issuances above.
Dual Class Structure
General Recommendation: Generally vote against proposals to create a new class of common stock unless:
•
The company discloses a compelling rationale for the dual-class capital structure, such as:
•
The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as a
going concern; or
•
The new class of shares will be transitory;
•
The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term
and long term; and
•
The new class is not designed to preserve or increase the voting power of an insider or significant shareholder.
Issue Stock for Use with Rights Plan
General Recommendation: Vote against proposals that increase authorized common stock for the explicit purpose of
implementing a non-shareholder-approved shareholder rights plan (poison pill).
Preemptive
Rights
General Recommendation: Vote case-by-case on shareholder proposals that seek preemptive rights, taking into
consideration:
•
The size of the company;
•
The shareholder base; and
•
The liquidity of the stock.
Preferred Stock Authorization
General Authorization Requests
General Recommendation: Vote case-by-case on proposals to increase the number of authorized shares of preferred
stock that are to be used for general corporate purposes:
•
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized shares.
•
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares.
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•
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.
•
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization.
•
If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a
specific use for the shares.
Generally vote against proposed increases, even if within the above ratios, if the proposal or the
company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
•
If the shares requested are blank check preferred shares that can be used for antitakeover purposes;15
•
The company seeks to increase a class of non-convertible preferred shares entitled to more than one vote per share on
matters that do not solely affect the rights of preferred stockholders “supervoting shares”);
•
The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number
of common shares into which they are convertible (“supervoting shares”) on matters that do not solely affect the rights of preferred stockholders;
•
The stated intent of the increase in the general authorization is to allow the company to increase an existing designated
class of supervoting preferred shares;
•
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization;
•
The company has a non-shareholder approved poison pill (including an NOL pill); or
•
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval.
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
•
In, or subsequent to, the company’s most recent 10-K filing, the company discloses that there is substantial doubt
about its ability to continue as a going concern;
•
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or
•
A government body has in the past year required the company to increase its capital ratios.
15
To be acceptable, appropriate disclosure would be needed that the shares are “declawed”: i.e., representation
by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights plan.
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For companies incorporated in states that allow increases in authorized capital
without shareholder approval, generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific Authorization Requests
General Recommendation: Generally vote for proposals to increase the number of authorized preferred shares where
the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant
support. For such transactions, the allowable increase will be the greater of:
•
twice the amount needed to support the transactions on the ballot, and
•
the allowable increase as calculated for general issuances above.
Recapitalization Plans
General Recommendation: Vote case-by-case on recapitalizations (reclassifications of securities), taking into
account the following:
•
More simplified capital structure;
•
Enhanced liquidity;
•
Fairness of conversion terms;
•
Impact on voting power and dividends;
•
Reasons for the reclassification;
•
Conflicts of interest; and
•
Other alternatives considered.
Reverse Stock Splits
General Recommendation: Vote for management proposals to implement a reverse stock split if:
•
The number of authorized shares will be proportionately reduced; or
•
The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with
ISS’ Common Stock Authorization policy.
Vote case-by-case on proposals that do not meet either of the above conditions,
taking into consideration the following factors:
•
Stock exchange notification to the company of a potential delisting;
•
Disclosure of substantial doubt about the company’s ability to continue as a going concern without additional
financing;
•
The company’s rationale; or
•
Other factors as applicable.
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Share Repurchase Programs
General Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic Issuers that are
traded solely on U.S. exchanges, vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in the
absence of company-specific concerns regarding:
•
Greenmail,
•
The use of buybacks to inappropriately manipulate incentive compensation metrics,
•
Threats to the company’s long-term viability, or
•
Other company-specific factors as warranted.
Vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing the stated rationale against the possibility for the
repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
General Recommendation: Generally vote against shareholder proposals prohibiting executives from selling shares of
company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares during periods of
share buybacks.
Stock Distributions: Splits and Dividends
General Recommendation: Generally vote for management proposals to increase the common share authorization for
stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase calculated in accordance with ISS’ Common Stock Authorization policy.
Tracking Stock
General Recommendation: Vote case-by-case on the creation of tracking stock, weighing the strategic value of the
transaction against such factors as:
•
Adverse governance changes;
•
Excessive increases in authorized capital stock;
•
Unfair method of distribution;
•
Diminution of voting rights;
•
Adverse conversion features;
•
Negative impact on stock option plans; and
•
Alternatives such as spin-off.
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Restructuring
Appraisal Rights
General Recommendation: Vote for proposals to restore or provide shareholders with rights of appraisal.
Asset Purchases
General Recommendation: Vote case-by-case on asset purchase proposals, considering the following factors:
•
Purchase price;
•
Fairness opinion;
•
Financial and strategic benefits;
•
How the deal was negotiated;
•
Conflicts of interest;
•
Other alternatives for the business;
•
Non-completion risk.
Asset Sales
General Recommendation: Vote case-by-case on asset sales, considering the following factors:
•
Impact on the balance sheet/working capital;
•
Potential elimination of diseconomies;
•
Anticipated financial and operating benefits;
•
Anticipated use of funds;
•
Value received for the asset;
•
Fairness opinion;
•
How the deal was negotiated;
•
Conflicts of interest.
Bundled Proposals
General Recommendation: Vote case-by-case on bundled or “conditional” proxy proposals. In the case of
items that are conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined
effect is positive, support such proposals.
Conversion of Securities
General Recommendation: Vote case-by-case on proposals regarding conversion of securities. When evaluating these
proposals, the investor should review the dilution to existing shareholders, the conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.
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Vote for the conversion if it is expected that the company will be subject to
onerous penalties or will be forced to file for bankruptcy if the transaction is not approved.
General Recommendation: Vote case-by-case on proposals to increase common and/or preferred shares and to issue
shares as part of a debt restructuring plan, after evaluating:
•
Dilution to existing shareholders’ positions;
•
Terms of the offer — discount/premium in purchase price to investor, including any fairness opinion; termination
penalties; exit strategy;
•
Financial issues — company’s financial situation; degree of need for capital; use of proceeds; effect of the
financing on the company’s cost of capital;
•
Management’s efforts to pursue other alternatives;
•
Control issues — change in management; change in control, guaranteed board and committee seats; standstill provisions;
voting agreements; veto power over certain corporate actions; and
•
Conflict of interest — arm’s length transaction, managerial incentives.
Vote for the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
Formation of Holding Company
General Recommendation: Vote case-by-case on proposals regarding the formation of a holding company, taking into
consideration the following:
•
The reasons for the change;
•
Any financial or tax benefits;
•
Regulatory benefits;
•
Increases in capital structure; and
•
Changes to the articles of incorporation or bylaws of the company.
Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include
either of the following:
•
Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or
•
Adverse changes in shareholder rights.
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
General Recommendation: Vote case-by-case on going private transactions, taking into account the following:
•
Offer price/premium;
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Fairness opinion;
•
How the deal was negotiated;
•
Conflicts of interest;
•
Other alternatives/offers considered; and
•
Non-completion risk.
Vote case-by-case on going dark transactions, determining whether the transaction enhances shareholder value by taking into consideration:
•
Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market
research of the stock);
•
Balanced interests of continuing vs. cashed-out shareholders, taking into account the following:
•
Are all shareholders able to participate in the transaction?
•
Will there be a liquid market for remaining shareholders following the transaction?
•
Does the company have strong corporate governance?
•
Will insiders reap the gains of control following the proposed transaction?
•
Does the state of incorporation have laws requiring continued reporting that may benefit shareholders?
Joint Ventures
General Recommendation: Vote case-by-case on proposals to form joint ventures, taking into account the following:
•
Percentage of assets/business contributed;
•
Percentage ownership;
•
Financial and strategic benefits;
•
Governance structure;
•
Conflicts of interest;
•
Other alternatives; and
•
Non-completion risk.
Liquidations
General Recommendation: Vote case-by-case on liquidations, taking into account the following:
•
Management’s efforts to pursue other alternatives;
•
Appraisal value of assets; and
•
The compensation plan for executives managing the liquidation.
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Vote for the liquidation if the company will file for bankruptcy if the proposal
is not approved.
Mergers and Acquisitions
General Recommendation: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and
drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:
•
Valuation — Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While
the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction, and strategic rationale.
•
Market reaction — How has the market responded to the proposed deal? A negative market reaction should cause
closer scrutiny of a deal.
•
Strategic rationale — Does the deal make sense strategically? From where is the value derived? Cost and revenue
synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions.
•
Negotiations and process — Were the terms of the transaction negotiated at arm’s-length? Was the process
fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation “wins” can also signify the deal makers’ competency. The comprehensiveness of the sales process (e.g., full auction, partial
auction, no auction) can also affect shareholder value.
•
Conflicts of interest — Are insiders benefiting from the transaction disproportionately and inappropriately as
compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have
influenced these directors and officers to support or recommend the merger. The CIC figure presented in the “ISS Transaction Summary” section of this report is an aggregate figure that can in certain cases be a misleading indicator of the
true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
•
Governance — Will the combined company have a better or worse governance profile than the current governance
profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
General Recommendation: Vote case-by-case on proposals regarding private placements, warrants, and convertible
debentures taking into consideration:
•
Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be weighed
against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to
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existing shareholders, share price appreciation is often the necessary event to trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value
standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to trigger the dilutive event.
•
Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features,
termination penalties, exit strategy):
•
The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial
condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement.
•
When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or
premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry, and anticipation of future performance.
•
Financial issues:
•
The company’s financial condition;
•
Degree of need for capital;
•
Use of proceeds;
•
Effect of the financing on the company’s cost of capital;
•
Current and proposed cash burn rate;
•
Going concern viability and the state of the capital and credit markets.
•
Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A
fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger, or sale of part or all of the company.
•
Control issues:
•
Change in management;
•
Change in control;
•
Guaranteed board and committee seats;
•
Standstill provisions;
•
Voting agreements;
•
Veto power over certain corporate actions; and
•
Minority versus majority ownership and corresponding minority discount or majority control premium.
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•
Conflicts of interest:
•
Conflicts of interest should be viewed from the perspective of the company and the investor.
•
Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder
interests?
•
Market reaction:
•
The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be
addressed by analyzing the one-day impact on the unaffected stock price.
Vote for the private placement, or for the issuance of
warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan (Bankruptcy)
General Recommendation: Vote case-by-case on proposals to common shareholders on bankruptcy plans of
reorganization, considering the following factors including, but not limited to:
•
Estimated value and financial prospects of the reorganized company;
•
Percentage ownership of current shareholders in the reorganized company;
•
Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an
Official Equity Committee);
•
The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);
•
Existence of a superior alternative to the plan of reorganization; and
•
Governance of the reorganized company.
Special Purpose Acquisition Corporations (SPACs)
General Recommendation: Vote case-by-case on SPAC mergers and acquisitions taking into account the following:
•
Valuation — Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness
opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the
SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target if it is a private entity.
•
Market reaction — How has the market responded to the proposed deal? A negative market reaction may be a cause
for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price.
•
Deal timing — A main driver for most transactions is that the SPAC charter typically requires the deal to be
complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date.
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•
Negotiations and process — What was the process undertaken to identify potential target companies within
specified industry or location specified in charter? Consider the background of the sponsors.
•
Conflicts of interest — How are sponsors benefiting from the transaction compared to IPO shareholders?
Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter requires
that the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be
completed within the 18-24-month timeframe.
•
Voting agreements — Are the sponsors entering into enter into any voting agreements/tender offers with
shareholders who are likely to vote against the proposed merger or exercise conversion rights?
•
Governance — What is the impact of having the SPAC CEO or founder on key committees following the proposed
merger?
Special Purpose Acquisition Corporations (SPACs) — Proposals for Extensions
General Recommendation: Vote case-by-case on SPAC extension proposals taking into account the length of the
requested extension, the status of any pending transaction(s) or progression of the acquisition process, any added incentive for non-redeeming shareholders, and any prior extension requests.
•
Length of request: Typically, extension requests range from two to six months, depending on the progression of the
SPAC’s acquistion process.
•
Pending transaction(s) or progression of the acquisition process: Sometimes an intial business combination
was already put to a shareholder vote, but, for varying reasons, the transaction could not be consummated by the termination date and the SPAC is requesting an extension. Other times, the SPAC has entered into a definitive transaction agreement, but
needs additional time to consummate or hold the shareholder meeting.
•
Added incentive for non-redeeming shareholders: Sometimes the SPAC sponsor (or other insiders) will contribute,
typically as a loan to the company, additional funds that will be added to the redemption value of each public share as long as such shares are not redeemed in connection with the extension request. The purpose of the “equity kicker” is to
incentivize shareholders to hold their shares through the end of the requested extension or until the time the transaction is put to a shareholder vote, rather than electing redeemption at the extension proposal meeting.
•
Prior extension requests: Some SPACs request additional time beyond the extension period sought in prior extension
requests.
Spin-offs
General Recommendation: Vote case-by-case on spin-offs, considering:
•
Tax and regulatory advantages;
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•
Planned use of the sale proceeds;
•
Valuation of spinoff;
•
Fairness opinion;
•
Benefits to the parent company;
•
Conflicts of interest;
•
Managerial incentives;
•
Corporate governance changes;
•
Changes in the capital structure.
Value Maximization Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals seeking to maximize shareholder value by:
•
Hiring a financial advisor to explore strategic alternatives;
•
Selling the company; or
•
Liquidating the company and distributing the proceeds to shareholders.
These proposals should be evaluated based on the following factors:
•
Prolonged poor performance with no turnaround in sight;
•
Signs of entrenched board and management (such as the adoption of takeover defenses);
•
Strategic plan in place for improving value;
•
Likelihood of receiving reasonable value in a sale or dissolution; and
•
The company actively exploring its strategic options, including retaining a financial advisor.
5.
Compensation
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and
director compensation programs:
1.
Maintain appropriate pay-for-performance alignment, with emphasis on long-term shareholder value: This principle
encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over the long term. It will take into consideration, among other factors, the
link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs;
2.
Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or
indefinite contracts, excessive severance packages, and guaranteed compensation;
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3.
Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs
by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed);
4.
Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of
informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly;
5.
Avoid inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring
that compensation to outside directors is reasonable and does not compromise their independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of
generally accepted best practices.
Advisory Votes on Executive Compensation —
Management Proposals (Say-on-Pay)
General Recommendation: Vote case-by-case on ballot items related to executive pay and practices, as well as
certain aspects of outside director compensation.
Vote against Advisory Votes on Executive Compensation (Say-on-Pay or
“SOP”) if:
•
There is an unmitigated misalignment between CEO pay and company performance (pay for performance);
•
The company maintains significant problematic pay practices;
•
The board exhibits a significant level of poor communication and responsiveness to shareholders.
Vote against or withhold from the members of the Compensation Committee and potentially the full board if:
•
There is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance
misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;
•
The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes cast;
•
The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or
•
The situation is egregious.
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Primary Evaluation Factors for Executive Pay
Pay-for-Performance Evaluation
ISS annually conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period.
With respect to companies in the S&P1500, Russell 3000, or Russell 3000E Indices16, this analysis considers the following:
1.
Peer Group17 Alignment:
•
jThe degree of alignment between the company’s annualized TSR rank and the CEO’s annualized total pay rank within
a peer group, each measured over a three-year period.
•
The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year
period.
•
The multiple of the CEO’s total pay relative to the peer group median in the most recent fiscal year.
2.
Absolute Alignment18 — the absolute alignment between the trend
in CEO pay and company TSR over the prior five fiscal years — i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.
If the above analysis demonstrates significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell
indices, a misalignment between pay and performance is otherwise suggested, our analysis may include any of the following qualitative factors, as relevant to an evaluation of how various pay elements may work to encourage or to undermine long-term
value creation and alignment with shareholder interests:
•
The ratio of performance- to time-based incentive awards;
•
The overall ratio of performance-based compensation to fixed or discretionary pay;
•
The rigor of performance goals;
•
The complexity and risks around pay program design;
•
The transparency and clarity of disclosure;
•
The company’s peer group benchmarking practices;
•
Financial/operational results, both absolute and relative to peers;
•
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g.,
bi-annual awards);
•
Realizable pay19 compared to grant pay; and
•
Any other factors deemed relevant.
16
The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.
17
The revised peer group is generally comprised of 14-24 companies that are selected using market cap, revenue (or assets
for certain financial firms), GICS industry group, and company’s selected peers’ GICS industry group, with size constraints, via a process designed to select peers that are comparable to the subject company in terms of revenue/assets and
industry, and also within a market-cap bucket that is reflective of the company’s market cap. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
18
Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
19
ISS research reports include realizable pay for S&P1500 companies.
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Problematic Pay Practices
The focus is on executive compensation practices that contravene the global pay principles, including:
•
Problematic practices related to non-performance-based compensation elements;
•
Incentives that may motivate excessive risk-taking or present a windfall risk; and
•
Pay decisions that circumvent pay-for-performance, such as options backdating or waiving performance requirements.
Problematic Pay Practices related to Non-Performance-Based Compensation Elements
Pay elements that are not directly based on performance are generally evaluated case-by-case considering the context of a company’s overall pay
program and demonstrated pay-for-performance philosophy. Please refer to ISS’ U.S. Compensation Policies FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to negative
recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result in adverse
vote recommendations:
•
Repricing or replacing of underwater stock options/SARs without prior shareholder approval (including cash buyouts and
voluntary surrender of underwater options);
•
Extraordinary perquisites or tax gross-ups;
•
New or materially amended agreements that provide for:
•
Excessive termination or CIC severance payments (generally exceeding 3 times base salary and average/target/most recent
bonus);
•
CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or
“modified single” triggers) or in connection with a problematic Good Reason definition;
Multi-year guaranteed awards that are not at risk due to rigorous performance conditions;
•
Liberal CIC definition combined with any single-trigger CIC benefits;
•
Insufficient executive compensation disclosure by externally-managed issuers (EMIs) such that a reasonable assessment of
pay programs and practices applicable to the EMI’s executives is not possible;
•
Any other provision or practice deemed to be egregious and present a significant risk to investors.
Options Backdating
The following factors
should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
•
Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;
•
Duration of options backdating;
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•
Size of restatement due to options backdating;
•
Corrective actions taken by the board or compensation committee, such as canceling or re-pricing backdated options, the
recouping of option gains on backdated grants; and
•
Adoption of a grant policy that prohibits backdating and creates a fixed grant schedule or window period for equity grants
in the future.
Compensation Committee Communications and Responsiveness
Consider the following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input
and engagement on compensation issues:
•
Failure to respond to majority-supported shareholder proposals on executive pay topics; or
•
Failure to adequately respond to the company’s previous say-on-pay proposal that received the support of less than 70
percent of votes cast, taking into account:
•
Disclosure of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated);
•
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
•
Disclosure of specific and meaningful actions taken to address shareholders’ concerns;
•
Other recent compensation actions taken by the company;
•
Whether the issues raised are recurring or isolated;
•
The company’s ownership structure; and
•
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)
General Recommendation: Vote for annual advisory votes on compensation, which provide the most consistent and
clear communication channel for shareholder concerns about companies’ executive pay programs.
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
General Recommendation: Vote case-by-case on say on Golden Parachute proposals, including consideration of
existing change-in-control arrangements maintained with named executive officers but also considering new or extended arrangements.
Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude, and/or timing
of issue(s):
•
Single- or modified-single-trigger cash severance;
•
Single-trigger acceleration of unvested equity awards;
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•
Full acceleration of equity awards granted shortly before the change in control;
•
Acceleration of performance awards above the target level of performance without compelling rationale;
•
Excessive cash severance (generally >3x base salary and bonus);
•
Excise tax gross-ups triggered and payable;
•
Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or
•
Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary
equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or
•
The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute
advisory vote.
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis.
However, the presence of multiple legacy problematic features will also be closely scrutinized.
In cases where the golden parachute vote is
incorporated into a company’s advisory vote on compensation (management say-on-pay), ISS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
Please refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
General Recommendation: Vote case-by-case on certain equity-based compensation plans20 depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an “Equity Plan
Scorecard” (EPSC) approach with three pillars:
•
Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers,
measured by the company’s estimated Shareholder Value Transfer (SVT) in relation to peers and considering both:
•
SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;
and
•
SVT based only on new shares requested plus shares remaining for future grants.
20
Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for
employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated
case-by-case.
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•
Plan Features:
•
Quality of disclosure around vesting upon a change in control (CIC);
•
Discretionary vesting authority;
•
Liberal share recycling on various award types;
•
Lack of minimum vesting period for grants made under the plan;
•
Dividends payable prior to award vesting.
•
Grant Practices:
•
The company’s three-year burn rate relative to its industry/market cap peers;
•
Vesting requirements in CEO’s recent equity grants (3-year look-back);
•
The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by
the average annual shares granted in the prior three years);
•
The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
•
Whether the company maintains a sufficient claw-back policy;
•
Whether the company maintains sufficient post-exercise/vesting share-holding requirements.
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’ interests, or
if any of the following egregious factors (“overriding factors”) apply:
•
Awards may vest in connection with a liberal change-of-control definition;
•
The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly
permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a history of repricing – for non-listed companies);
•
The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain
circumstances;
•
The plan is excessively dilutive to shareholders’ holdings;
•
The plan contains an evergreen (automatic share replenishment) feature; or
•
Any other plan features are determined to have a significant negative impact on shareholder interests.
Further Information on certain EPSC Factors:
Shareholder Value Transfer (SVT)
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the
amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing
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plans, and shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus
plans, unless limitations are placed on the most expensive types of awards (for example, full-value awards), the assumption is made that all awards to be granted will be the most expensive types.
For proposals that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific
benchmark. The benchmark is determined as follows: The top quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top
performers’ historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging
the company-specific performance measures, size, and cash compensation into the industry cap equations to arrive at the company’s benchmark.21
Three-Year Burn Rate
For meetings held prior to February 1, 2023, burn-rate benchmarks (utilized in Equity Plan Scorecard evaluations) are calculated as the greater of:
(1) the mean (m) plus one standard deviation
(s) of the company’s GICS group segmented by S&P 500, Russell 3000 index (less the S&P500), and non-Russell 3000 index; and (2) two
percent of weighted common shares outstanding. In addition, year-over-year burn-rate benchmark changes will be limited to a maximum of two (2) percentage points plus or minus the prior year’s burn-rate benchmark. See the U.S. Equity
Compensation Plans FAQ for the benchmarks.
For meetings held prior to February 1, 2023, a company’s adjusted burn rate is calculated
as follows:
Burn Rate = (# of appreciation awards granted + # of full value awards granted * Volatility Multiplier) / Weighted average common shares
outstanding
The Volatility Multiplier is used to provide more equivalent valuation between stock options and full value shares, based on the
company’s historical stock price volatility.
Effective for meetings held on or after February 1, 2023, a “Value-Adjusted Burn
Rate” will instead be used for stock plan evaluations. Value-Adjusted Burn Rate benchmarks will be calculated as the greater of: (1) an industry- specific threshold based on three-year burn rates within the company’s GICS group
segmented by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell
3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year’s burn-rate benchmark.
The Value-Adjusted Burn Rate will be calculated as follows:
Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted
average common shares * stock price).
21
For plans evaluated under the Equity Plan Scorecard policy, the company’s SVT benchmark is considered along with
other factors.
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Egregious Factors
Liberal Change in Control Definition
Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal
definition of change in control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration upon a
“potential” takeover, shareholder approval of a merger or other transactions, or similar language.
Repricing Provisions
Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without prior shareholder
approval. “Repricing” typically includes the ability to do any of the following:
•
Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;
•
Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise
price of the original options or SARs;
•
Cancel underwater options in exchange for stock awards; or
•
Provide cash buyouts of underwater options.
While the above cover most types of repricing, ISS may view other provisions as akin to repricing depending on the facts and circumstances.
Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise determined by ISS),
without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote against plans that do not expressly prohibit
repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not preclude them from doing so.
Problematic Pay Practices or Significant Pay-for-Performance Disconnect
If the equity plan on the ballot is a vehicle for problematic pay practices, vote against the plan.
ISS may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment. Considerations in voting
against the equity plan may include, but are not limited to:
•
Severity of the pay-for-performance misalignment;
•
Whether problematic equity grant practices are driving the misalignment; and/or
•
Whether equity plan awards have been heavily concentrated to the CEO and/or the other NEOs.
Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
General Recommendation: Vote case-by-case on amendments to cash and equity incentive plans.
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Generally vote for proposals to amend executive cash, stock, or cash and stock
incentive plans if the proposal:
•
Addresses administrative features only; or
•
Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of
independent directors, per ISS’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time for any reason (including after the company’s initial public offering), or if the
proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below).
Vote against
proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
•
Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of
independent directors, per ISS’ Classification of Directors.
Vote case-by-case on all other proposals to amend
cash incentive plans. This includes plans presented to shareholders for the first time after the company’s IPO and/or proposals that bundle material amendment(s) other than those for Section 162(m) purposes.
Vote case-by-case on all other proposals to amend equity incentive plans, considering the following:
•
If the proposal requests additional shares and/or the amendments include a term extension or addition of full value awards
as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments.
•
If the plan is being presented to shareholders for the first time (including after the company’s IPO), whether or not
additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments.
•
If there is no request for additional shares and the amendments do not include a term extension or addition of full value
awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown only for informational purposes.
In the first two case-by-case evaluation scenarios, the EPSC evaluation/score is the more heavily weighted consideration.
Specific Treatment of Certain Award Types in Equity Plan Evaluations
Dividend Equivalent Rights
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the
binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder
equity to employees and non-employee directors and this cost should be captured.
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Operating Partnership (OP) Units in Equity Plan
Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion
of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Other Compensation Plans
401(k) Employee Benefit Plans
General Recommendation: Vote for proposals to implement a 401(k) savings plan for employees.
Employee Stock Ownership Plans (ESOPs)
General Recommendation: Vote for proposals to implement an ESOP or increase authorized shares for existing ESOPs,
unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).
Employee Stock Purchase Plans — Qualified Plans
General Recommendation: Vote case-by-case on qualified employee stock purchase plans. Vote for employee stock
purchase plans where all of the following apply:
•
Purchase price is at least 85 percent of fair market value;
•
Offering period is 27 months or less; and
•
The number of shares allocated to the plan is 10 percent or less of the outstanding shares.
Vote against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.
General Recommendation: Vote case-by-case on nonqualified employee stock purchase plans. Vote for nonqualified
employee stock purchase plans with all the following features:
•
Broad-based participation;
•
Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;
•
Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20
percent from market value; and
•
No discount on the stock price on the date of purchase when there is a company matching contribution.
Vote against nonqualified employee stock purchase plans when the plan features do not meet all of the above criteria. If the
matching contribution or effective discount exceeds the above, ISS may evaluate the SVT cost of the plan as part of the assessment.
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Option Exchange Programs/Repricing Options
General Recommendation: Vote case-by-case on management proposals seeking approval to exchange/reprice options
taking into consideration:
•
Historic trading patterns —the stock price should not be so volatile that the options are likely to be back “in-
the-money” over the near term;
•
Rationale for the re-pricing — was the stock price decline beyond management’s control?;
•
Is this a value-for-value exchange?;
•
Are surrendered stock options added back to the plan reserve?;
•
Timing — repricing should occur at least one year out from any precipitous drop in company’s stock price;
•
Option vesting — does the new option vest immediately or is there a black-out period?;
•
Term of the option — the term should remain the same as that of the replaced option;
•
Exercise price — should be set at fair market or a premium to market;
•
Participants — executive officers and directors must be excluded.
If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company’s total cost of equity
plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent, rationale, and timing of the repricing
proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the company’s stock price demonstrates poor timing
and warrants additional scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to
suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the 52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder vote.
Stock Plans in Lieu of Cash
General Recommendation: Vote case-by-case on plans that provide participants with the option of taking all or a
portion of their cash compensation in the form of stock.
Vote for non-employee director-only equity plans that provide a
dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases
where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, ISS will not make
any adjustments to carve out the in-lieu-of cash compensation.
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Transfer Stock Option (TSO) Programs
General Recommendation: One-time Transfers: Vote against or withhold from compensation committee members if they
fail to submit one-time transfers to shareholders for approval.
Vote case-by-case on one-time transfers. Vote for if:
•
Executive officers and non-employee directors are excluded from participating;
•
Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing
models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and
•
There is a two-year minimum holding period for sale proceeds (cash or stock) for all participants.
Additionally, management should provide a clear explanation of why options are being transferred to a third-party institution and whether the events
leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one
of the award types under a stock plan, the ongoing TSO program, structure, and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
•
Eligibility;
•
Vesting;
•
Bid-price;
•
Term of options;
•
Cost of the program and impact of the TSOs on company’s total option expense; and
•
Option repricing policy.
Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment
shall be transferable.
Director Compensation
Shareholder Ratification of Director Pay Programs
General Recommendation: Vote case-by-case on management proposals seeking ratification of non-employee director
compensation, based on the following factors:
•
If the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support;
and
•
An assessment of the following qualitative factors:
•
The relative magnitude of director compensation as compared to companies of a similar profile;
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•
The presence of problematic pay practices relating to director compensation;
•
Director stock ownership guidelines and holding requirements;
•
Equity award vesting schedules;
•
The mix of cash and equity-based compensation;
•
Meaningful limits on director compensation;
•
The availability of retirement benefits or perquisites; and
•
The quality of disclosure surrounding director compensation.
Equity Plans for Non-Employee Directors
General Recommendation: Vote case-by-case on compensation plans for non-employee directors, based on:
•
The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the
company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;
•
The company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and
•
The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk).
On occasion, non-employee director stock plans will exceed the plan cost or burn-rate benchmarks when combined with employee or
executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative factors:
•
The relative magnitude of director compensation as compared to companies of a similar profile;
•
The presence of problematic pay practices relating to director compensation;
•
Director stock ownership guidelines and holding requirements;
•
Equity award vesting schedules;
•
The mix of cash and equity-based compensation;
•
Meaningful limits on director compensation;
•
The availability of retirement benefits or perquisites; and
•
The quality of disclosure surrounding director compensation.
Non-Employee Director Retirement Plans
General Recommendation: Vote against retirement plans for non-employee directors. Vote for shareholder proposals
to eliminate retirement plans for non-employee directors.
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Shareholder Proposals on Compensation
Bonus Banking/Bonus Banking “Plus”
General Recommendation: Vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with
ultimate payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the named executive officers or a wider group of employees), taking into account the following factors:
•
The company’s past practices regarding equity and cash compensation;
•
Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at
least 50 percent for full tenure); and
•
Whether the company has a rigorous claw-back policy in place.
Compensation Consultants — Disclosure of Board or Company’s Utilization
General Recommendation: Generally vote for shareholder proposals seeking disclosure regarding the company, board,
or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid.
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
General Recommendation: Generally vote for shareholder proposals seeking additional disclosure of executive and
director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.
Generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or
form of compensation (such as types of compensation elements or specific metrics) to be used for executive or directors.
Generally vote against
shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to remain on the board.
Vote case-by-case on all other shareholder proposals regarding executive and director pay, taking into account relevant factors, including but not
limited to: company performance, pay level and design versus peers, history of compensation concerns or pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.
Golden Coffins/Executive Death Benefits
General Recommendation: Generally vote for proposals calling for companies to adopt a policy of obtaining
shareholder approval for any future agreements and corporate policies that could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the
continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based employee population is eligible.
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Hold Equity Past Retirement or for a
Significant Period of Time
General Recommendation: Vote case-by-case on shareholder proposals asking companies to adopt policies requiring
senior executive officers to retain a portion of net shares acquired through compensation plans. The following factors will be taken into account:
•
The percentage/ratio of net shares required to be retained;
•
The time period required to retain the shares;
•
Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness
of such requirements;
•
Whether the company has any other policies aimed at mitigating risk taking by executives;
•
Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding
period/retention ratio or the company’s existing requirements; and
•
Problematic pay practices, current and past, which may demonstrate a short-term versus long-term focus.
Pay Disparity
General Recommendation: Vote case-by-case on proposals calling for an analysis of the pay disparity between
corporate executives and other non-executive employees. The following factors will be considered:
•
The company’s current level of disclosure of its executive compensation setting process, including how the company
considers pay disparity;
•
If any problematic pay practices or pay-for-performance concerns have been identified at the company; and
•
The level of shareholder support for the company’s pay programs.
Generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio in a specific way to set or limit executive pay.
Pay for Performance/Performance-Based Awards
General Recommendation: Vote case-by-case on shareholder proposals requesting that a significant amount of future
long-term incentive compensation awarded to senior executives shall be performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
•
First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent
options or restricted stock, indexed options, or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top
executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards.
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•
Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based
program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor
design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test.
In general, vote for the shareholder proposal if the company does not meet both of the above two steps.
Pay for Superior Performance
General Recommendation: Vote case-by-case on shareholder proposals that request the board establish a
pay-for-superior performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles:
•
Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group
median;
•
Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested,
equity awards;
•
Provide the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria
used in the annual and performance-vested long-term incentive components of the plan;
•
Establish performance targets for each plan financial metric relative to the performance of the company’s peer
companies;
•
Limit payment under the annual and performance-vested long-term incentive components of the plan to when the company’s
performance on its selected financial performance metrics exceeds peer group median performance.
Consider the following factors in
evaluating this proposal:
•
What aspects of the company’s annual and long-term equity incentive programs are performance driven?
•
If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates
disclosed to shareholders or are they benchmarked against a disclosed peer group?
•
Can shareholders assess the correlation between pay and performance based on the current disclosure?
•
What type of industry and stage of business cycle does the company belong to?
Pre-Arranged Trading Plans (10b5-1 Plans)
General Recommendation: Generally vote for shareholder proposals calling for the addition of certain safeguards in
prearranged trading plans (10b5-1 plans) for executives. Safeguards may include:
•
Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K;
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•
Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary circumstances, as determined by the board;
•
Request that a certain number of days that must elapse between adoption or amendment of a 10b5-1 Plan and initial trading
under the plan;
•
Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
•
An executive may not trade in company stock outside the 10b5-1 Plan;
•
Trades under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the executive.
Prohibit Outside CEOs from Serving on Compensation Committees
General Recommendation: Generally vote against proposals seeking a policy to prohibit any outside CEO from serving
on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.
Recoupment of Incentive or Stock Compensation in Specified Circumstances
General Recommendation: Vote case-by-case on proposals to recoup incentive cash or stock compensation made to
senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly
detrimental to the company’s financial position or reputation, or if the senior executive failed to manage or monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies
that permit recoupment in cases where an executive’s fraud, misconduct, or negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be
narrow given that not all misconduct or negligence may result in significant financial restatements. Misconduct, negligence, or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may
have long-lasting impact.
In considering whether to support such shareholder proposals, ISS will take into consideration the
following factors:
•
If the company has adopted a formal recoupment policy;
•
The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock
compensation;
•
Whether the company has chronic restatement history or material financial problems;
•
Whether the company’s policy substantially addresses the concerns raised by the proponent;
•
Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; or
•
Any other relevant factors.
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Severance Agreements for Executives/Golden
Parachutes
General Recommendation: Vote for shareholder proposals requiring that golden parachutes or executive severance
agreements be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts.
Vote case-by-case on proposals to ratify or cancel golden parachutes. An acceptable parachute should include, but is not limited to, the following:
•
The triggering mechanism should be beyond the control of management;
•
The amount should not exceed three times base amount (defined as the average annual taxable W-2 compensation during the
five years prior to the year in which the change of control occurs);
•
Change-in-control payments should be double-triggered, i.e., (1) after a change in control has taken place, and
(2) termination of the executive as a result of the change in control. Change in control is defined as a change in the company ownership structure.
Share Buyback Impact on Incentive Program Metrics
General Recommendation: Vote case-by-case on proposals requesting the company exclude the impact of share buybacks
from the calculation of incentive program metrics, considering the following factors:
•
The frequency and timing of the company’s share buybacks;
•
The use of per-share metrics in incentive plans;
•
The effect of recent buybacks on incentive metric results and payouts; and
•
Whether there is any indication of metric result manipulation.
Supplemental Executive Retirement Plans (SERPs)
General Recommendation: Generally vote for shareholder proposals requesting to put extraordinary benefits
contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement
plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.
Tax Gross-Up Proposals
General Recommendation: Generally vote for proposals calling for companies to adopt a policy of not providing tax
gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax equalization policy.
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Termination of Employment Prior to Severance
Payment/Eliminating Accelerated Vesting of Unvested Equity
General Recommendation: Vote case-by-case on shareholder proposals seeking a policy requiring termination of
employment prior to severance payment and/or eliminating accelerated vesting of unvested equity.
The following factors will be
considered:
•
The company’s current treatment of equity upon employment termination and/or in change-in-control situations (i.e.,
vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.);
•
Current employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements.
Generally vote for proposals seeking a policy that prohibits automatic acceleration of the vesting of equity awards to senior
executives upon a voluntary termination of employment or in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of any related performance goals between the award date and the change in control).
6.
Routine/Miscellaneous
Adjourn Meeting
General Recommendation: Generally vote against proposals to provide management with the authority to adjourn an
annual or special meeting absent compelling reasons to support the proposal.
Vote for proposals that relate specifically to
soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against proposals if the wording is too vague or if the proposal includes “other business.”
Amend Quorum Requirements
General Recommendation: Vote against proposals to reduce quorum requirements for shareholder meetings below a
majority of the shares outstanding unless there are compelling reasons to support the proposal.
Amend Minor Bylaws
General Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates or
corrections).
Change Company Name
General Recommendation: Vote for proposals to change the corporate name unless there is compelling evidence that
the change would adversely impact shareholder value.
Change Date, Time, or Location of
Annual Meeting
General Recommendation: Vote for management proposals to change the date, time, or location of the annual meeting
unless the proposed change is unreasonable.
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Vote against shareholder proposals to change the date, time, or location of the
annual meeting unless the current scheduling or location is unreasonable.
Other Business
General Recommendation: Vote against proposals to approve other business when it appears as a voting item.
7.
Social and Environmental Issues
Global Approach
Issues covered under the policy include a wide range of topics, including consumer and product safety, environment and energy, labor standards and human
rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in
either the short or long term.
General Recommendation: Generally vote case-by-case, examining primarily whether implementation of the proposal is
likely to enhance or protect shareholder value. The following factors will be considered:
•
If the issues presented in the proposal are more appropriately or effectively dealt with through legislation or government
regulation;
•
If the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
•
Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive;
•
The company’s approach compared with any industry standard practices for addressing the issue(s) raised by the
proposal;
•
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s
environmental or social practices;
•
If the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is
currently available to shareholders from the company or from other publicly available sources; and
•
If the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or
confidential information that could place the company at a competitive disadvantage.
Endorsement
of Principles
General Recommendation: Generally vote against proposals seeking a company’s endorsement of principles that
support a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue that is beyond its own control and may limit its flexibility with respect to future developments. Management and the board
should be afforded the flexibility to make decisions on specific public policy positions based on their own assessment of the most beneficial strategies for the company.
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Animal Welfare
Animal Welfare Policies
General Recommendation: Generally vote for proposals seeking a report on a company’s animal welfare
standards, or animal welfare-related risks, unless:
•
The company has already published a set of animal welfare standards and monitors compliance;
•
The company’s standards are comparable to industry peers; and
•
There are no recent significant fines, litigation, or controversies related to the company’s and/or its
suppliers’ treatment of animals.
Animal Testing
General Recommendation: Generally vote against proposals to phase out the use of animals in product testing,
unless:
•
The company is conducting animal testing programs that are unnecessary or not required by regulation;
•
The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or
•
There are recent, significant fines or litigation related to the company’s treatment of animals.
Animal Slaughter
General Recommendation: Generally vote against proposals requesting the implementation of Controlled Atmosphere
Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.
Vote case-by-case on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier operations considering the
availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at the company.
Consumer Issues
Genetically Modified Ingredients
General Recommendation: Generally vote against proposals requesting that a company voluntarily label genetically
engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities.
Vote case-by-case on proposals asking for a report on the feasibility of labeling products containing GE ingredients, taking into account:
•
The potential impact of such labeling on the company’s business;
•
The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure
compares with industry peer disclosure; and
•
Company’s current disclosure on the feasibility of GE product labeling.
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Generally vote against proposals seeking a report on the social, health, and
environmental effects of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators and the scientific community.
Generally vote against proposals to eliminate GE ingredients from the company’s products, or proposals asking for reports outlining the steps
necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current regulations.
Reports on Potentially Controversial Business/Financial Practices
General Recommendation: Vote case-by-case on requests for reports on a company’s potentially controversial
business or financial practices or products, taking into account:
•
Whether the company has adequately disclosed mechanisms in place to prevent abuses;
•
Whether the company has adequately disclosed the financial risks of the products/practices in question;
•
Whether the company has been subject to violations of related laws or serious controversies; and
•
Peer companies’ policies/practices in this area.
Pharmaceutical Pricing, Access to Medicines, and Prescription Drug Reimportation
General Recommendation: Generally vote against proposals requesting that companies implement specific price
restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices.
Vote case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
•
The potential for reputational, market, and regulatory risk exposure;
•
Existing disclosure of relevant policies;
•
Deviation from established industry norms;
•
Relevant company initiatives to provide research and/or products to disadvantaged consumers;
•
Whether the proposal focuses on specific products or geographic regions;
•
The potential burden and scope of the requested report;
•
Recent significant controversies, litigation, or fines at the company.
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless
such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or
constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
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Product Safety and Toxic/Hazardous Materials
General Recommendation: Generally vote for proposals requesting that a company report on its policies,
initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain, unless:
•
The company already discloses similar information through existing reports such as a supplier code of conduct and/or a
sustainability report;
•
The company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and supply
chain reporting and monitoring program based on industry norms or similar standards within a specified time frame; and
•
The company has not been recently involved in relevant significant controversies, fines, or litigation.
Vote case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain
toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials, considering:
•
The company’s current level of disclosure regarding its product safety policies, initiatives, and oversight
mechanisms;
•
Current regulations in the markets in which the company operates; and
•
Recent significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company.
Generally vote against resolutions requiring that a company reformulate its products.
Tobacco-Related Proposals
General Recommendation: Vote case-by-case on resolutions regarding the advertisement of tobacco products,
considering:
•
Recent related fines, controversies, or significant litigation;
•
Whether the company complies with relevant laws and regulations on the marketing of tobacco;
•
Whether the company’s advertising restrictions deviate from those of industry peers;
•
Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and
•
Whether restrictions on marketing to youth extend to foreign countries.
Vote case-by-case on proposals regarding second-hand smoke, considering;
•
Whether the company complies with all laws and regulations;
•
The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and
•
The risk of any health-related liabilities.
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Generally vote against resolutions to cease production of tobacco-related
products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
Climate Change
Say on Climate (SoC) Management Proposals
General Recommendation: Vote case-by-case on management proposals that request shareholders to approve the
company’s climate transition action plan22, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:
•
The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other
market standards;
•
Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3);
•
The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply
chain GHG emissions (Scopes 1, 2, and 3 if relevant);
•
Whether the company has sought and received third-party approval that its targets are science-based;
•
Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1,
2, and 3) by 2050;
•
Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;
•
Whether the company’s climate data has received third-party assurance;
•
Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;
•
Whether there are specific industry decarbonization challenges; and
•
The company’s related commitment, disclosure, and performance compared to its industry peers.
Say on Climate (SoC) Shareholder Proposals
General Recommendation: Vote case-by-case on shareholder proposals that request the company to disclose a report
providing its GHG emissions levels and reduction targets and/or its upcoming/approved
22
Variations of this request also include climate transition related ambitions, or commitment to reporting on the
implementation of a climate plan.
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climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information such as the
following:
•
The completeness and rigor of the company’s climate-related disclosure;
•
The company’s actual GHG emissions performance;
•
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
its GHG emissions; and
•
Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.
Climate Change/Greenhouse Gas (GHG) Emissions
General Recommendation: Generally vote for resolutions requesting that a company disclose information on the
financial, physical, or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies, measures, and manages such risks, considering:
•
Whether the company already provides current, publicly-available information on the impact that climate change may have on
the company as well as associated company policies and procedures to address related risks and/or opportunities;
•
The company’s level of disclosure compared to industry peers; and
•
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s climate
change-related performance.
Generally vote for proposals requesting a report on greenhouse gas (GHG) emissions from company
operations and/or products and operations, unless:
•
The company already discloses current, publicly-available information on the impacts that GHG emissions may have on the
company as well as associated company policies and procedures to address related risks and/or opportunities;
•
The company’s level of disclosure is comparable to that of industry peers; and
•
There are no significant, controversies, fines, penalties, or litigation associated with the company’s GHG emissions.
Vote case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into
account:
•
Whether the company provides disclosure of year-over-year GHG emissions performance data;
•
Whether company disclosure lags behind industry peers;
•
The company’s actual GHG emissions performance;
•
The company’s current GHG emission policies, oversight mechanisms, and related initiatives; and
•
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
GHG emissions.
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Energy Efficiency
General Recommendation: Generally vote for proposals requesting that a company report on its energy efficiency
policies, unless:
•
The company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy
efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or
•
The proponent requests adoption of specific energy efficiency goals within specific timelines.
Renewable Energy
General Recommendation: Generally vote for requests for reports on the feasibility of developing renewable energy
resources unless the report would be duplicative of existing disclosure or irrelevant to the company’s line of business.
Generally vote against proposals requesting that the company invest in renewable energy resources. Such decisions are best left to management’s
evaluation of the feasibility and financial impact that such programs may have on the company.
Generally vote against proposals that call for the
adoption of renewable energy goals, taking into account:
•
The scope and structure of the proposal;
•
The company’s current level of disclosure on renewable energy use and GHG emissions; and
•
The company’s disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate
climate change risks.
Diversity
Board Diversity
General Recommendation: Generally vote for requests for reports on a company’s efforts to diversify the
board, unless:
•
The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies
of similar size and business; and
•
The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within
the company.
Vote case-by-case on proposals asking a company to increase the gender and racial minority representation on its
board, taking into account:
•
The degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
•
The level of gender and racial minority representation that exists at the company’s industry peers;
•
The company’s established process for addressing gender and racial minority board representation;
•
Whether the proposal includes an overly prescriptive request to amend nominating committee charter language;
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•
The independence of the company’s nominating committee;
•
Whether the company uses an outside search firm to identify potential director nominees; and
•
Whether the company has had recent controversies, fines, or litigation regarding equal employment practices.
Equality of Opportunity
General Recommendation: Generally vote for proposals requesting a company disclose its diversity policies or
initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data, unless:
•
The company publicly discloses equal opportunity policies and initiatives in a comprehensive manner;
•
The company already publicly discloses comprehensive workforce diversity data; and
•
The company has no recent significant EEO-related violations or litigation.
Generally vote against proposals seeking information on the diversity efforts of suppliers and service providers. Such requests may pose a significant
burden on the company.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
General Recommendation: Generally vote for proposals seeking to amend a company’s EEO statement or diversity
policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome.
Generally vote against proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions regarding benefits should be
left to the discretion of the company.
Gender, Race/Ethnicity Pay Gap
General Recommendation: Vote case-by-case on requests for reports on a company’s pay data by gender or race/
ethnicity, or a report on a company’s policies and goals to reduce any gender or race/ethnicity pay gaps, taking into account:
•
The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and
its compensation philosophy on fair and equitable compensation practices;
•
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race,
or ethnicity pay gap issues;
•
The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry
peers; and
•
Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.
Racial Equity and/or Civil Rights Audit Guidelines
General Recommendation: Vote case-by-case on proposals asking a company to conduct an independent racial equity
and/or civil rights audit, taking into account:
•
The company’s established process or framework for addressing racial inequity and discrimination internally;
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•
Whether the company has issued a public statement related to its racial justice efforts in recent years, or has committed
to internal policy review;
•
Whether the company has engaged with impacted communities, stakeholders, and civil rights experts,
•
The company’s track record in recent years of racial justice measures and outreach externally;
•
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to racial
inequity or discrimination; and
•
Whether the company’s actions are aligned with market norms on civil rights, and racial or ethnic diversity.
Environment and Sustainability
Facility and Workplace Safety
General Recommendation: Vote case-by-case on requests for workplace safety reports, including reports on accident
risk reduction efforts, taking into account:
•
The company’s current level of disclosure of its workplace health and safety performance data, health and safety
management policies, initiatives, and oversight mechanisms;
•
The nature of the company’s business, specifically regarding company and employee exposure to health and safety risks;
•
Recent significant controversies, fines, or violations related to workplace health and safety; and
•
The company’s workplace health and safety performance relative to industry peers.
Vote case-by-case on resolutions requesting that a company report on safety and/or security risks associated with its operations and/or facilities,
considering:
•
The company’s compliance with applicable regulations and guidelines;
•
The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance
monitoring; and
•
The existence of recent, significant violations, fines, or controversy regarding the safety and security of the
company’s operations and/or facilities.
General Environmental Proposals and Community
Impact Assessments
General Recommendation: Vote case-by-case on requests for reports on policies and/or the potential (community)
social and/or environmental impact of company operations, considering:
•
Current disclosure of applicable policies and risk assessment report(s) and risk management procedures;
•
The impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure
to manage the company’s operations in question, including the management of relevant community and stakeholder relations;
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•
The nature, purpose, and scope of the company’s operations in the specific region(s);
•
The degree to which company policies and procedures are consistent with industry norms; and
•
The scope of the resolution.
Hydraulic Fracturing
General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s (natural
gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations, considering:
•
The company’s current level of disclosure of relevant policies and oversight mechanisms;
•
The company’s current level of such disclosure relative to its industry peers;
•
Potential relevant local, state, or national regulatory developments; and
•
Controversies, fines, or litigation related to the company’s hydraulic fracturing operations.
Operations in Protected Areas
General Recommendation: Generally vote for requests for reports on potential environmental damage as a result of
company operations in protected regions, unless:
•
Operations in the specified regions are not permitted by current laws or regulations;
•
The company does not currently have operations or plans to develop operations in these protected regions; or
•
The company’s disclosure of its operations and environmental policies in these regions is comparable to industry
peers.
Recycling
General Recommendation: Vote case-by-case on proposals to report on an existing recycling program, or adopt a new
recycling program, taking into account:
•
The nature of the company’s business;
•
The current level of disclosure of the company’s existing related programs;
•
The timetable and methods of program implementation prescribed by the proposal;
•
The company’s ability to address the issues raised in the proposal; and
•
How the company’s recycling programs compare to similar programs of its industry peers.
Sustainability Reporting
General Recommendation: Generally vote for proposals requesting that a company report on its policies,
initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:
•
The company already discloses similar information through existing reports or policies such as an environment, health, and
safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or
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•
The company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI)
guidelines or a similar standard within a specified time frame.
Water Issues
General Recommendation: Vote case-by-case on proposals requesting a company report on, or adopt a new policy on,
water-related risks and concerns, taking into account:
•
The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;
•
Whether or not the company’s existing water-related policies and practices are consistent with relevant
internationally recognized standards and national/local regulations;
•
The potential financial impact or risk to the company associated with water-related concerns or issues; and
•
Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers.
General Corporate Issues
Charitable Contributions
General Recommendation: Vote against proposals restricting a company from making charitable contributions.
Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are in
the best interests of the company.
Data Security, Privacy, and Internet Issues
General Recommendation: Vote case-by-case on proposals requesting the disclosure or implementation of data
security, privacy, or information access and management policies and procedures, considering:
•
The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech,
information access and management, and Internet censorship;
•
Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of
information on the Internet;
•
The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other
telecommunications;
•
Applicable market-specific laws or regulations that may be imposed on the company; and
•
Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship.
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Environmental, Social, and Governance (ESG)
Compensation-Related Proposals
General Recommendation: Vote case-by-case on proposals to link, or report on linking, executive compensation to
sustainability (environmental and social) criteria, considering:
•
The scope and prescriptive nature of the proposal;
•
Whether the company has significant and/or persistent controversies or regulatory violations regarding social and/or
environmental issues;
•
Whether the company has management systems and oversight mechanisms in place regarding its social and environmental
performance;
•
The degree to which industry peers have incorporated similar non-financial performance criteria in their executive
compensation practices; and
•
The company’s current level of disclosure regarding its environmental and social performance.
Human Rights, Human Capital Management , and International Operations
Human Rights Proposals
General Recommendation: Generally vote for proposals requesting a report on company or company supplier labor
and/or human rights standards and policies unless such information is already publicly disclosed.
Vote case-by-case on proposals
to implement company or company supplier labor and/or human rights standards and policies, considering:
•
The degree to which existing relevant policies and practices are disclosed;
•
Whether or not existing relevant policies are consistent with internationally recognized standards;
•
Whether company facilities and those of its suppliers are monitored and how;
•
Company participation in fair labor organizations or other internationally recognized human rights initiatives;
•
Scope and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;
•
Recent, significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;
•
The scope of the request; and
•
Deviation from industry sector peer company standards and practices.
Vote case-by-case on proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its supply chain, or
report on its human rights risk assessment process, considering:
•
The degree to which existing relevant policies and practices are disclosed, including information on the implementation of
these policies and any related oversight mechanisms;
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•
The company’s industry and whether the company or its suppliers operate in countries or areas where there is a history
of human rights concerns;
•
Recent significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and
whether the company has taken remedial steps; and
•
Whether the proposal is unduly burdensome or overly prescriptive.
Mandatory Arbitration
General Recommendation: Vote case-by-case on requests for a report on a company’s use of mandatory
arbitration on employment-related claims, taking into account:
•
The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace
claims;
•
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of
mandatory arbitration agreements on workplace claims; and
•
The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements compared
to its peers.
Operations in High Risk Markets
General Recommendation: Vote case-by-case on requests for a report on a company’s potential financial and
reputational risks associated with operations in “high-risk” markets, such as a terrorism-sponsoring state or politically/socially unstable region, taking into account:
•
The nature, purpose, and scope of the operations and business involved that could be affected by social or political
disruption;
•
Current disclosure of applicable risk assessment(s) and risk management procedures;
•
Compliance with U.S. sanctions and laws;
•
Consideration of other international policies, standards, and laws; and
•
Whether the company has been recently involved in recent, significant controversies, fines, or litigation related to its
operations in “high-risk” markets.
Outsourcing/Offshoring
General Recommendation: Vote case-by-case on proposals calling for companies to report on the risks associated
with outsourcing/plant closures, considering:
•
Controversies surrounding operations in the relevant market(s);
•
The value of the requested report to shareholders;
•
The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and
•
The company’s existing human rights standards relative to industry peers.
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Sexual Harassment
General Recommendation: Vote case-by-case on requests for a report on company actions taken to strengthen policies
and oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace sexual harassment, taking into account:
•
The company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment;
•
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace
sexual harassment issues; and
•
The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers.
Weapons and Military Sales
General Recommendation: Vote against reports on foreign military sales or offsets. Such disclosures may involve
sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.
Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or
nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses, and withdrawal from these contracts could
have a negative impact on the company’s business.
Political Activities
Lobbying
General Recommendation: Vote case-by-case on proposals requesting information on a company’s lobbying
(including direct, indirect, and grassroots lobbying) activities, policies, or procedures, considering:
•
The company’s current disclosure of relevant lobbying policies, and management and board oversight;
•
The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage
in lobbying activities; and
•
Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities.
Political Contributions
General Recommendation: Generally vote for proposals requesting greater disclosure of a company’s political
contributions and trade association spending policies and activities, considering:
•
The company’s policies, and management and board oversight related to its direct political contributions and payments
to trade associations or other groups that may be used for political purposes;
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•
The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may
make political contributions; and
•
Recent significant controversies, fines, or litigation related to the company’s political contributions or political
activities.
Vote against proposals barring a company from making political contributions. Businesses are affected by legislation
at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote against proposals to
publish in newspapers and other media a company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Political Ties
General Recommendation: Generally vote against proposals asking a company to affirm political nonpartisanship in
the workplace, so long as:
•
There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions
or trade association spending; and
•
The company has procedures in place to ensure that employee contributions to company-sponsored political action committees
(PACs) are strictly voluntary and prohibit coercion.
Vote against proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful
information to shareholders.
8.
Mutual Fund Proxies
Election of Directors
General Recommendation: Vote case-by-case on the election of directors and trustees, following the same guidelines
for uncontested directors for public company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
General Recommendation: For closed-end management investment companies (CEFs), vote against or withhold from
nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote.
Converting Closed-end Fund to Open-end Fund
General Recommendation: Vote case-by-case on conversion proposals, considering the following factors:
•
Past performance as a closed-end fund;
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Market in which the fund invests;
•
Measures taken by the board to address the discount; and
•
Past shareholder activism, board activity, and votes on related proposals.
Proxy Contests
General Recommendation: Vote case-by-case on proxy contests, considering the following factors:
•
Past performance relative to its peers;
•
Market in which the fund invests;
•
Measures taken by the board to address the issues;
•
Past shareholder activism, board activity, and votes on related proposals;
•
Strategy of the incumbents versus the dissidents;
•
Independence of directors;
•
Experience and skills of director candidates;
•
Governance profile of the company;
•
Evidence of management entrenchment.
Investment Advisory Agreements
General Recommendation: Vote case-by-case on investment advisory agreements, considering the following factors:
•
Proposed and current fee schedules;
•
Fund category/investment objective;
•
Performance benchmarks;
•
Share price performance as compared with peers;
•
Resulting fees relative to peers;
•
Assignments (where the advisor undergoes a change of control).
Approving New Classes or Series of Shares
General Recommendation: Vote for the establishment of new classes or series of shares.
Preferred Stock Proposals
General Recommendation: Vote case-by-case on the authorization for or increase in preferred shares, considering
the following factors:
•
Stated specific financing purpose;
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Possible dilution for common shares;
•
Whether the shares can be used for antitakeover purposes.
1940 Act Policies
General Recommendation: Vote case-by-case on policies under the Investment Advisor Act of 1940, considering the
following factors:
•
Potential competitiveness;
•
Regulatory developments;
•
Current and potential returns; and
•
Current and potential risk.
Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
General Recommendation: Vote case-by-case on proposals to change a fundamental restriction to a non-fundamental
restriction, considering the following factors:
•
The fund’s target investments;
•
The reasons given by the fund for the change; and
•
The projected impact of the change on the portfolio.
Change Fundamental Investment Objective to Nonfundamental
General Recommendation: Vote against proposals to change a fund’s fundamental investment objective to
non-fundamental.
Name Change Proposals
General Recommendation: Vote case-by-case on name change proposals, considering the following factors:
•
Political/economic changes in the target market;
•
Consolidation in the target market; and
•
Current asset composition.
Change in Fund’s Subclassification
General Recommendation: Vote case-by-case on changes in a fund’s sub-classification, considering the
following factors:
•
Potential competitiveness;
•
Current and potential returns;
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Risk of concentration;
•
Consolidation in target industry.
Business Development Companies — Authorization to Sell Shares of Common Stock at a Price below Net Asset
Value
General Recommendation: Vote for proposals authorizing the board to issue shares below Net Asset Value (NAV) if:
•
The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders
approve the underlying proposal, as required under the Investment Company Act of 1940;
•
The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent
directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and
•
The company has demonstrated responsible past use of share issuances by either:
•
Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or
•
Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts
to NAV and economic dilution to existing non-participating shareholders.
Disposition of
Assets/Termination/Liquidation
General Recommendation: Vote case-by-case on proposals to dispose of assets, to terminate or liquidate,
considering the following factors:
•
Strategies employed to salvage the company;
•
The fund’s past performance;
•
The terms of the liquidation.
Changes to the Charter Document
General Recommendation: Vote case-by-case on changes to the charter document, considering the following factors:
•
The degree of change implied by the proposal;
•
The efficiencies that could result;
•
The state of incorporation;
•
Regulatory standards and implications.
Vote against any of the following changes:
•
Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series;
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Removal of shareholder approval requirement for amendments to the new declaration of trust;
•
Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be
modified by the investment manager and the trust management, as permitted by the 1940 Act;
•
Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales
charges and redemption fees that may be imposed upon redemption of a fund’s shares;
•
Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements;
•
Removal of shareholder approval requirement to change the domicile of the fund.
Changing the Domicile of a Fund
General Recommendation: Vote case-by-case on re-incorporations, considering the following factors:
•
Regulations of both states;
•
Required fundamental policies of both states;
•
The increased flexibility available.
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
General Recommendation: Vote against proposals authorizing the board to hire or terminate subadvisers without
shareholder approval if the investment adviser currently employs only one subadviser.
Distribution Agreements
General Recommendation: Vote case-by-case on distribution agreement proposals, considering the following factors:
•
Fees charged to comparably sized funds with similar objectives;
•
The proposed distributor’s reputation and past performance;
•
The competitiveness of the fund in the industry;
•
The terms of the agreement.
Master-Feeder Structure
General Recommendation: Vote for the establishment of a master-feeder structure.
Mergers
General Recommendation: Vote case-by-case on merger proposals, considering the following factors:
•
Resulting fee structure;
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Performance of both funds;
•
Continuity of management personnel;
•
Changes in corporate governance and their impact on shareholder rights.
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
General Recommendation: Generally vote against shareholder proposals that mandate a specific minimum amount of
stock that directors must own in order to qualify as a director or to remain on the board.
Reimburse Shareholder for Expenses Incurred
General Recommendation: Vote case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When
supporting the dissidents, vote for the reimbursement of the proxy solicitation expenses.
Terminate the Investment Advisor
General Recommendation: Vote case-by-case on proposals to terminate the investment advisor, considering the
following factors:
•
Performance of the fund’s Net Asset Value (NAV);
•
The fund’s history of shareholder relations;
•
The performance of other funds under the advisor’s management.
Founded in 1985, the Institutional Shareholder Services group of companies (“ISS”) is the world’s leading provider of corporate governance and
responsible investment solutions alongside fund intelligence and services, events, and editorial content for institutional investors, globally. ISS’ solutions include objective governance research and recommendations; responsible investment
data, analytics, and research; end-to-end proxy voting and distribution solutions; turnkey securities class-action claims management (provided by Securities Class Action Services, LLC); reliable global governance data and modeling tools; asset
management intelligence, portfolio execution and monitoring, fund services, and media. Clients rely on ISS’ expertise to help them make informed investment decisions.
This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the “Information”) is
the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.
The Information has not been submitted
to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a promotion or recommendation of, any
security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT
LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any
direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded
or limited.
Client Accounts for which Brandywine Global Votes Proxies
Brandywine Global shall vote proxies for each client account for which the client:
A.
has specifically authorized Brandywine Global to vote proxies in the applicable investment management agreement or
other written instrument; or
B.
without specifically authorizing Brandywine Global to vote proxies, has granted general investment discretion to
Brandywine Global in the applicable investment management agreement.
Also, Brandywine Global shall vote proxies for any employee benefit plan
client subject to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), unless the investment management agreement specifically reserves the responsibility for voting proxies to the plan trustees or other named
fiduciary.
At or prior to inception of each client account, Brandywine Global shall determine whether it has proxy voting authority over such account.
II.
General Principles
In exercising discretion to vote proxies for securities held in client accounts, Brandywine Global is guided by general fiduciary principles. Brandywine Global’s
goal in voting proxies is to act prudently and solely in the best economic interest of its clients for which it is voting proxies. In furtherance of such goal, Brandywine Global will vote proxies in a manner that Brandywine Global believes will be
consistent with efforts to maximize shareholder values.
Brandywine Global does not exercise its proxy voting discretion to further policy, political or other issues
that have no connection to enhancing the economic value of the client’s investment, but will consider environmental, social, and governance issues that may impact the value of the investment, either through introducing opportunity or by
creating risk to the value.
III.
How Brandywine Global Votes Proxies
Appendix A sets forth general guidelines considered by Brandywine Global and its portfolio management teams in voting common proxy items.
In the case of a proxy issue for which there is a stated position set forth in Appendix A, Brandywine Global generally votes in accordance with the stated position. In
the case of a proxy issue for which there is a list of factors set forth in Appendix A that Brandywine Global considers in voting on such issue, Brandywine Global considers those factors and votes on a case-by-case basis in accordance with the general principles described in Section II. In the case of a proxy issue for which there is no stated position or list of factors set forth in Appendix A that
Brandywine Global considers in voting on such issue, Brandywine Global votes on a case-by-case basis in accordance with the general principles described in Section II.
The general guidelines set forth in Appendix A are not binding on Brandywine Global and its portfolio management teams, but rather are intended to provide an
analytical framework for the review and assessment of common proxy issues. Such guidelines can always be superseded by a portfolio management team based on the team’s assessment of the proxy issue and determination that a vote that is contrary
to such general guidelines is in the best economic interests of the client accounts for which the team is responsible. Different portfolio management teams may vote differently on the same issue based on their respective assessments of the proxy
issue and determinations as to what is in the best economic interests of client accounts for which they are responsible.
In the case of Taft-Hartley clients,
Brandywine Global will comply with a client direction to vote proxies in accordance with Glass Lewis & Co. PVS Proxy Voting Guidelines, which Glass Lewis & Co. represents to be fully consistent with
AFL-CIO guidelines.
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IV.
Use of an Independent Proxy Service Firm
Brandywine Global may contract with an independent proxy service firm to provide Brandywine Global with information and/or recommendations with regard to proxy votes.
Any such information and/or recommendations will be made available to Brandywine Global’s portfolio management teams, but Brandywine Global and its portfolio management teams are not required to follow any recommendation furnished by such
service provider. The use of an independent proxy service firm to provide proxy voting information and/or recommendations does not relieve Brandywine Global of its responsibility for any proxy votes.
With respect to any independent proxy service firm engaged by Brandywine Global to provide Brandywine Global with information and/or recommendations with regard to proxy
votes, Brandywine Global’s Proxy Administrator shall periodically review and assess such firm’s policies, procedures and practices including those with respect to the disclosure and handling of conflicts of interest.
V.
Conflict of Interest Procedures
In furtherance of Brandywine Global’s goal to vote proxies in the best interests of clients, Brandywine Global follows procedures designed to identify and address
material conflicts that may arise between the interests of Brandywine Global and its employees and those of its clients before voting proxies on behalf of such clients. Conflicts of interest may arise both at the firm level and as a result of an
employee’s personal relationships or circumstances.
A.
Procedures for Identifying Conflicts of Interest
Brandywine Global relies on the procedures set forth below to seek to identify conflicts of interest with respect to proxy voting.
1. Brandywine Global’s Compliance Department annually requires each Brandywine Global employee to complete a questionnaire
designed to elicit information that may reveal potential conflicts between the employee’s interests and those of Brandywine Global clients.
2. Brandywine Global treats client and wrap sponsor relationships as creating a material conflict of interest for Brandywine
Global in voting proxies with respect to securities issued by such client or its known affiliates.
3. As a general matter,
Brandywine Global takes the position that relationships between a non-Brandywine Global Franklin Resources business unit and an issuer (e.g., investment management relationship between an issuer and a non-Brandywine Global Franklin Resources-owned asset manager) do not present a conflict of interest for Brandywine Global in voting proxies with respect to such issuer because Brandywine Global operates as an
independent business unit from other Franklin Resources business units and because of the existence of informational barriers between Brandywine Global and certain other Franklin Resources business units.
B.
Procedures for Assessing Materiality of Conflicts of Interest
1. All potential conflicts of interest identified pursuant to the procedures outlined in Section V.A.1. must be brought to the
attention of the Investment Committee for resolution.
2. The Investment Committee shall determine whether a conflict of
interest is material. A conflict of interest shall be considered material to the extent that it is determined that such conflict is likely to influence, or appear to influence, Brandywine Global’s decision-making in voting the proxy. All
materiality determinations will be based on an assessment of the particular facts and circumstances. A written record of all materiality determinations made by the Investment Committee shall be maintained.
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3. If it is determined by the Investment Committee that a conflict of interest is
not material, Brandywine Global may vote proxies following normal processes notwithstanding the existence of the conflict.
C.
Procedures for Addressing Material Conflicts of Interest
1. With the exception of those material conflicts identified in A.2. which will be voted in accordance with paragraph C.1.b., if
it is determined by the Investment Committee that a conflict of interest is material, the Investment Committee shall determine an appropriate method or combination of methods to resolve such conflict of interest before the proxy affected by the
conflict of interest is voted by Brandywine Global. Such determination shall be based on the particular facts and circumstances, including the importance of the proxy issue, the nature of the conflict of interest, etc. Such methods may include:
a.
confirming that the proxy will be voted in accordance with a stated position or positions set forth in Appendix A;
b.
confirming that the proxy will be voted in accordance with the recommendations of an independent proxy service firm
retained by Brandywine Global;
c.
in the case of a conflict of interest resulting from a particular employee’s personal relationships or
circumstances, removing such employee from the decision-making process with respect to such proxy vote;
d.
disclosing the conflict to clients and obtaining their consent before voting;
e.
suggesting to clients that they engage another party to vote the proxy on their behalf; or
f.
such other method as is deemed appropriate given the particular facts and circumstances, including the importance of the
proxy issue, the nature of the conflict of interest, etc.
2. A written record of the method used to resolve
a material conflict of interest shall be maintained.
VI.
Other Considerations
In certain situations, Brandywine Global may decide not to vote proxies on behalf of a client account for which it has discretionary voting authority because Brandywine
Global believes that the expected benefit to the client account of voting shares is outweighed by countervailing considerations (excluding the existence of a potential conflict of interest). Examples of situations in which Brandywine Global may
determine not to vote proxies are set forth below.
A.
Share Blocking
Proxy voting in certain countries requires “share blocking.” This means that shareholders wishing to vote their proxies must deposit their
shares shortly before the date of the meeting (e.g. one week) with a designated depositary. During the blocking period, shares that will be voted at the meeting cannot be sold until the meeting has taken place and the shares have been returned to
client accounts by the designated depositary. In deciding whether to vote shares subject to share blocking, Brandywine Global will consider and weigh, based on the particular facts and circumstances, the expected benefit to client accounts of voting
in relation to the potential detriment to clients of not being able to sell such shares during the applicable period.
B.
Securities on Loan
Certain clients of Brandywine Global, such as an institutional client or a registered investment company for which Brandywine Global acts as a sub-adviser, may engage in securities lending with respect to the securities in their accounts. Brandywine Global typically does not direct or oversee such securities
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lending activities. To the extent feasible and practical under the circumstances, Brandywine Global may request that the client recall shares that are on loan so that such shares can be voted if
Brandywine Global believes that the expected benefit to the client of voting such shares outweighs the detriment to the client of recalling such shares (e.g., foregone income). The ability to timely recall shares for proxy voting purposes
typically is not entirely within the control of Brandywine Global and requires the cooperation of the client and its other service providers. Under certain circumstances, the recall of shares in time for such shares to be voted may not be possible
due to applicable proxy voting record dates and administrative considerations.
VII.
Proxy Voting-Related Disclosures
A.
Proxy Voting Independence and Intent
Brandywine Global exercises its proxy voting authority independently of other Franklin Resources-owned asset managers. Brandywine Global and its
employees shall not consult with or enter into any formal or informal agreements with Brandywine Global’s ultimate parent, Franklin Resources, Inc., any other Franklin Resources business unit, or any of their respective officers, directors or
employees, regarding the voting of any securities by Brandywine Global on behalf of its clients.
Brandywine Global and its employees must not
disclose to any person outside of Brandywine Global, including without limitation another investment management firm (affiliated or unaffiliated) or the issuer of securities that are the subject of the proxy vote, how Brandywine Global intends to
vote a proxy without prior approval from Brandywine Global’s Chief Compliance Officer.
If a Brandywine Global employee receives a request to
disclose Brandywine Global’s proxy voting intentions to, or is otherwise contacted by, another person outside of Brandywine Global (including an employee of another Franklin Resources business unit) in connection with an upcoming proxy voting
matter, the employee should immediately notify Brandywine Global’s Chief Compliance Officer.
If a Brandywine Global portfolio manager wants to
take a public stance with regards to a proxy, the portfolio manager must consult with and obtain the approval of Brandywine Global’s Chief Compliance Officer before making or issuing a public statement.
B.
Disclosure of Proxy Votes and Policy and Procedures
Upon Brandywine Global’s receipt of any oral or written client request for information on how Brandywine Global voted proxies for that client’s
account, Brandywine Global must promptly provide the client with such requested information in writing.
Brandywine Global must deliver to each
client, for which it has proxy voting authority, no later than the time it accepts such authority, a written summary of this Proxy Voting policy and procedures. This summary must include information on how clients may obtain information about how
Brandywine Global has voted proxies for their accounts and must also state that a copy of Brandywine Global’s Proxy Voting policy and procedures is available upon request.
Brandywine Global must create and maintain a record of each written client request for proxy voting information. Such record must be created promptly
after receipt of the request and must include the date the request was received, the content of the request, and the date of Brandywine Global’s response. Brandywine Global must also maintain copies of written client requests and copies of all
responses to such requests.
C.
Delegation of Duties
Brandywine Global may delegate to non-investment personnel the responsibility to vote proxies in accordance with
the guidelines set forth in Appendix A. Such delegation of duties will only be made to employees deemed to be reasonably capable of performing this function in a satisfactory manner.
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VIII.
Shareholder Activism and Certain Non-Proxy Voting Matters
In no event shall Brandywine Global’s possession of proxy voting authority obligate it to undertake any shareholder activism on behalf of a
client. Brandywine Global may undertake such activism in connection with a proxy or otherwise if and to the extent that Brandywine Global determines that doing so is consistent with applicable general fiduciary principles, provided Brandywine Global
has first obtained its Chief Compliance Officer’s approval of the proposed activism.
Absent a specific contrary written agreement with a client, Brandywine
Global does not (1) render any advice to, or take any action on behalf of, clients with respect to any legal proceedings, including bankruptcies and shareholder litigation, to which any securities or other investments held in client account, or
the issuers thereof, become subject, or (2) initiate or pursue legal proceedings, including without limitation shareholder litigation, on behalf of clients with respect to transactions or securities or other investments held in client accounts,
or the issuers thereof. Except as otherwise agreed to in writing with a particular client, the right to take any action with respect to any legal proceeding, including without limitation bankruptcies and shareholder litigation, and the right to
initiate or pursue any legal proceedings, including without limitation shareholder litigation, with respect to transactions or securities or other investments held in a client account is expressly reserved to the client.
IX.
Recordkeeping
In addition to all other records required by this Policy and Procedures, Brandywine Global shall maintain the following records relating to proxy voting:
A.
a copy of this Policy and Procedures, including any and all amendments that may be adopted;
B.
a copy of each proxy statement that Brandywine Global receives regarding client securities;
C.
a record of each vote cast by Brandywine Global on behalf of a client;
D.
documentation relating to the identification and resolution of conflicts of interest;
E.
any documents created by Brandywine Global that were material to a proxy voting decision or that memorialized the
basis for that decision;
F.
a copy of each written client request for information on how Brandywine Global voted proxies on behalf of the
client, and a copy of any written response by Brandywine Global to any (written or oral) client request for information on how Brandywine Global voted proxies on behalf of the requesting client; and
G.
records showing whether or not Brandywine Global has proxy voting authority for each client account.
All required records shall be maintained and preserved in an easily accessible place for a period of not less than six years from the end of the
fiscal year during which the last entry was made on such record, the first two years in an appropriate office of Brandywine Global. Brandywine Global also shall maintain a copy of any proxy voting policies and procedures that were in effect at any
time within the last five years.
To the extent that Brandywine Global is authorized to vote proxies for a United States registered investment company, Brandywine
Global shall maintain such records as are necessary to allow such fund to comply with its recordkeeping, reporting and disclosure obligations under applicable laws, rules and regulations.
In lieu of keeping copies of proxy statements, Brandywine Global may rely on proxy statements filed on the EDGAR system as well as on third party records of proxy
statements if the third party provides an undertaking to provide copies of such proxy statements promptly upon request. Brandywine Global may rely on a third party to make and retain, on Brandywine Global’s behalf, records of votes cast by
Brandywine Global on behalf of clients if the third party provides an undertaking to provide a copy of such records promptly upon request.
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Appendix A
Proxy Voting Guidelines
Brandywine
Global Diversified Portfolio Management Team
Proxy Voting Guidelines
Below are proxy voting guidelines that Brandywine Global’s Diversified Portfolio Management Team generally follows when voting proxies for securities held in
client accounts. The Team may decide to deviate from these guidelines with respect to any one or more particular proxy votes, subject in all cases to the Team’s duty to act solely in the best interest of their client accounts holding the
applicable security.
I.
Compensation
A.
We vote for non-employee director stock options, unless we consider the number of
shares available for issue excessive. We may consider current and past stock option grants in determining whether the cumulative dilution is excessive.
B.
We vote for employee stock purchase programs. Normally, these programs allow all employees to purchase company stock at a
price equal to 85% of current market price. Usually, we will still vote for these employee programs even if we vote against a non-employee or executive-only stock purchase program because of
excessive dilution.
C.
We vote for compensation plans that are tied to the company achieving set profitability hurdles. Plans are structured
this way to comply with IRS laws allowing for deductibility of management compensation exceeding $1 million.
D.
We vote against attempts to re-price options. Also, we vote against the re-election of incumbent Directors in the event of such a re-pricing proposal.
E.
We vote against attempts to increase incentive stock options available for issuance when the shares underlying such
options would exceed 10% of the company’s outstanding shares.
F.
We vote against stock option plans allowing for stock options with exercise prices less than 100% of the stock’s
price at the time of the option grant.
G.
We vote against stock option plans allowing for very large allocations to a single individual because we generally
believe that stock option plans should provide for widespread employee participation.
H.
We vote against proposals to authorize or approve loans to company executives or Board members for personal reasons or
for the purpose of enabling such persons to purchase company shares.
II.
Governance
A.
We vote for proposals to separate the Chief Executive Officer and Chairman of the Board positions.
B.
We vote against “catch-all” authorizations permitting proxy holders to
conduct unspecified business that arises during shareholder meetings.
III.
Anti-Takeover
We vote against anti-takeover measures, including without limitation:
A.
Staggered Boards of Directors (for example, where 1/3 of a company’s Board is elected each year rather than the
entire Board each year).
B.
Super-Majority Voting Measures (for example, requiring a greater than 50% vote to approve takeovers or make certain
changes).
C.
Poison Pills, which are special stock rights that go into effect upon a takeover offer or an outsider acquiring more than
a specified percentage of a company’s outstanding shares.
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IV.
Capital Structure
We vote against attempts to increase authorized shares by more than twice the number of outstanding shares unless there is a specific purpose for such
increase given, such as a pending stock split or a corporate purchase using shares, and we determine that increasing authorized shares for such purpose is appropriate. Generally, we believe it is better to use shares to pay for acquisitions when
they are trading at higher values than when they are trading at or near historical lows. The dilution effect is less.
V.
Business Management
We generally prefer not to dictate to companies on matters of business strategy, believing that as long as the company is operating responsibly it is
management’s role to make these decisions. Business strategy includes management of environmental and social practices, as they have the potential to pose significant financial, legal, and reputational risk if not appropriately governed. In
cases where we feel management has not taken sufficient efforts to address material environmental or social risk, we may choose to support shareholder proposals aimed at enhancing shareholder value or risk mitigation in alignment with our fiduciary
principles.
Brandywine Global Fundamental Equities Portfolio Management Team
Proxy Voting Guidelines
Below are proxy voting guidelines
that Brandywine Global’s Fundamental Equities Portfolio Management Team generally follows when voting proxies for securities held in client accounts. The Team may decide to deviate from these guidelines with respect to any one or more
particular proxy votes, subject in all cases to the Team’s duty to act solely in the best interest of their client accounts holding the applicable security.
I.
Compensation
A.
We vote for non-employee director stock options, unless we consider the number of
shares available for issue excessive.
B.
We vote for employee stock purchase programs. Normally, these programs allow all employees to purchase company stock at a
price equal to 85% of current market price. Usually, we will still vote for these employee programs even if we vote against a non-employee or executive-only stock purchase program because of
excessive dilution.
C.
We vote for measures that give shareholders a vote on executive compensation.
D.
We vote for compensation plans that are tied to the company achieving set profitability hurdles. This is to comply with
IRS laws to allow for deductibility of management compensation exceeding $1 million.
E.
We vote against any attempt to re-price options. Also, we vote against the re-
election of incumbent Directors in the event of such a re-pricing proposal.
F.
We vote against attempts to increase incentive stock options when we determine they are excessive, either in total or for
one individual.
G.
We vote against stock option plans allowing for stock options with exercise prices less than 100% of the stock’s
price at the time of the option grant.
II.
Governance
A.
We vote for cumulative shareholder voting.
B.
We vote against “catch-all” authorizations permitting proxy holders to
conduct unspecified business that arises during shareholder meetings.
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C.
We vote against related-party transactions involving directors, senior members of company management or other company
insiders.
III.
Anti-Takeover
We vote against anti-takeover measures:
A.
Staggered Boards of Directors (for example, where 1/3 of a company’s Board is elected each year rather than the
entire Board each year).
B.
Super-Majority Voting Measures (for example, requiring a greater than 50% vote to approve takeovers or make certain
changes).
C.
Poison Pills, which are special stock rights that go into effect upon a takeover offer or an outsider acquiring more than
a specified percentage of a company’s outstanding shares.
D.
Change-of-Control Contracts, which grant
benefits to company personnel (typically members of senior company management) in the event the company is acquired or is otherwise subject to a change of control.
IV.
Capital Structure
We vote against attempts to increase authorized shares by more than twice the number of outstanding shares unless there is a specific purpose for such
increase given, such as a pending stock split or a corporate purchase using shares, and we determine that increasing authorized shares for such purpose is appropriate. Generally, we believe it is better to use shares to pay for acquisitions when
they are trading at higher values than when they are trading at or near historical lows. The dilution effect is less.
V.
Business Management
We generally prefer not to dictate to companies on matters of business strategy, believing that as long as the company is operating responsibly, it is
management’s role to make these decisions. Business strategy includes management of environmental and social practices, as they have the potential to pose significant financial, legal, and reputational risk if not appropriately governed. In
cases where we feel management has not taken sufficient efforts to address material environmental or social risk, we may choose to support shareholder proposals aimed at enhancing shareholder value or risk mitigation in alignment with our fiduciary
principles
Brandywine Global Fixed Income Portfolio Management Team
Proxy Voting Guidelines
Below are proxy voting guidelines
that Brandywine Global Fixed Income Portfolio Management Team generally follows when voting proxies for securities held in client accounts. The Team may decide to deviate from these guidelines with respect to any one or more particular proxy votes,
subject in all cases to the Team’s duty to act solely in the best interest of their client accounts holding the applicable security.
I.
Compensation
A.
We vote for non-employee director stock options, unless we consider the number of
shares available for issue excessive.
B.
We vote for employee stock purchase programs. Normally, these programs allow all employees to purchase company stock at a
price equal to 85% of current market price. Usually, we will still vote for these employee programs even if we vote against a non-employee or executive-only stock purchase program because of
excessive dilution.
C.
We vote for measures that give shareholders a vote on executive compensation.
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D.
We vote for compensation plans that are tied to the company achieving set profitability hurdles. This is to comply with
IRS laws to allow for deductibility of management compensation exceeding $1 million.
E.
We vote against any attempt to re-price options. Also, we vote against the re-
election of incumbent Directors in the event of such a re-pricing proposal.
F.
We vote against attempts to increase incentive stock options when we determine they are excessive, either in total or for
one individual.
G.
We vote against stock option plans allowing for stock options with exercise prices less than 100% of the stock’s
price at the time of the option grant.
II.
Governance
A.
We vote for cumulative shareholder voting.
B.
We vote against “catch-all” authorizations permitting proxy holders to
conduct unspecified business that arises during shareholder meetings.
III.
Anti-Takeover
We vote against anti-takeover measures, including without limitation:
A.
Staggered Boards of Directors (for example, where 1/3 of a company’s Board is elected each year rather than the
entire Board each year).
B.
Super-Majority Voting Measures (for example, requiring a greater than 50% vote to approve takeovers or make certain
changes).
C.
Poison Pills, which are special stock rights that go into effect upon a takeover offer or an outsider acquiring more than
a specified percentage of a company’s outstanding shares.
IV.
Capital Structure
We vote against attempts to increase authorized shares by more than twice the number of outstanding shares unless there is a specific purpose for such
increase given, such as a pending stock split or a corporate purchase using shares, and we determine that increasing authorized shares for such purpose is appropriate. Generally, we believe it is better to use shares to pay for acquisitions when
they are trading at higher values than when they are trading at or near historical lows. The dilution effect is less.
V.
Business Management
We generally prefer not to dictate to companies on matters of business strategy, believing that as long as the company is operating responsibly it is
management’s role to make these decisions. Business strategy includes management of environmental and social practices, as they have the potential to pose significant financial, legal, and reputational risk if not appropriately governed. In
cases where we feel management has not taken sufficient efforts to address material environmental or social risk, we may choose to support shareholder proposals aimed at enhancing shareholder value or risk mitigation in alignment with our fiduciary
principles.
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DOUBLELINE FUNDS TRUST
DOUBLELINE CAPITAL LP
DOUBLELINE
ALTERNATIVES LP
DOUBLELINE EQUITY LP
DOUBLELINE PRIVATE FUNDS
DOUBLELINE
OPPORTUNISTIC CREDIT FUND
DOUBLELINE INCOME SOLUTIONS FUND
DOUBLELINE YIELD OPPORTUNITIES FUND
PROXY
VOTING, CORPORATE ACTIONS AND CLASS ACTIONS
I.
BACKGROUND
This Proxy Voting, Corporate Actions and Class Actions Policy (“Policy”) is adopted by
DoubleLine Capital LP, DoubleLine Alternatives LP and DoubleLine Equity LP (each, as applicable, “DoubleLine”, the “Adviser” or the “Firm”), DoubleLine Funds Trust (the “Trust”) and each series of the Trusts
(each an “Open-End Fund”), the DoubleLine Opportunistic Credit Fund (“DBL”) the DoubleLine Income Solutions Fund (“DSL”) and the DoubleLine Yield Opportunities Fund
(“DLY” and, together with DBL, DSL and all of the Open-End Funds collectively, the “Funds”) to govern the voting of proxies related to securities held by the Funds and actions taken with
respect to corporate actions and class actions affecting such securities, and to provide a method of reporting the actions taken and overseeing compliance with regulatory requirements.
Each private investment fund (such as, but not limited to), the DoubleLine Opportunistic Income Master Fund LP (and its related entities), the DoubleLine Opportunistic
CMBS/CRE Fund LP (and its related entities), and the DoubleLine Mortgage Opportunities Master Fund LP (and its related entities), each of which is a “Private Fund” and, collectively, the “Private Funds”) managed by DoubleLine
also adopts this Policy.
DoubleLine generally will exercise voting, corporate actions and class actions authority on behalf of its separate account clients
(“Separate Account Clients” and together with the Funds and Private Funds, the “Clients”) only where a Client has expressly delegated authority in writing to DoubleLine and DoubleLine has accepted that responsibility. Separate
Account Clients that do not provide written authorization for DoubleLine to exercise voting authority are responsible for their own proxy voting, corporate actions and class actions and this Policy does not apply to them.
To the extent that voting a proxy or taking action with respect to a class action or corporate action (in each case, a “proposal”) is desirable, DoubleLine (or
its designee) will seek to take action on such proposal in a manner that it believes is most likely to enhance the economic value of the underlying securities held in Client accounts and, with respect to proposals not otherwise covered by the
Guidelines herein, DoubleLine (or its designee) will seek to consider each proposal on a case-by-case basis from the perspective of each affected Clients, taking into
consideration any relevant contractual obligations as well as other relevant facts and circumstances at the time of the vote. In the event proxy voting requests are sent on shares no longer owned by Clients, DoubleLine may choose to not vote such
shares. DoubleLine will not respond to proxy solicitor requests unless DoubleLine determines that it is in the best interest of a Client to do so.
II.
ISSUE
Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended
(the “Rule”), requires every investment adviser who exercises voting authority with respect to client securities to adopt and implement written policies and procedures reasonably designed to ensure that the adviser votes proxies in the
best interest of its clients. The procedures must address material conflicts that may arise between DoubleLine and a Client in connection with proxy voting. The Rule further requires the adviser to provide a concise summary of the adviser’s
proxy voting policies and procedures and to provide copies of the complete proxy voting policy and procedures to clients upon request. Lastly, the Rule requires that the adviser disclose to clients how they may obtain information on how the adviser
voted their proxies. The Commission clarified an investment adviser’s proxy voting responsibilities in an August 2019 release (IA-5325).
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III.
POLICY – PROXIES AND CORPORATE ACTIONS; ROLE OF THIRD-PARTY PROXY AGENT
To assist DoubleLine in carrying out
its proxy voting obligations, DoubleLine has retained a third-party proxy voting service provider, currently Glass, Lewis & Co. (“Glass Lewis”), as its proxy voting agent. Pursuant to an agreement with DoubleLine, Glass Lewis
obtains proxy ballots with respect to securities held by one or more Client accounts advised by DoubleLine, evaluates the individual facts and circumstances relating to any proposal, and, except as otherwise provided below, votes on any such
proposal in accordance with the Guidelines set forth in Attachment A hereto (the “Guidelines”).
In the event that a proposal is not adequately
addressed by the Guidelines, Glass Lewis will make a recommendation to DoubleLine as to how to vote on such proposal. The portfolio manager or other authorized person of the relevant Client account will conduct a reasonable investigation of the
proposal, including a review of the recommendation made by Glass Lewis, and will instruct Glass Lewis to vote the Client’s securities against Glass Lewis’ recommendation when DoubleLine believes doing so is in the best interests of the
applicable Client. The portfolio manager or authorized person shall record the reasons for any such instruction and shall provide that written record to the Chief Compliance Officer or his/her designee. In the absence of a timely instruction from
DoubleLine to the contrary, Glass Lewis will vote in accordance with its recommendation. In the event that Glass Lewis does not provide a recommendation with respect to a proposal, DoubleLine may vote on any such proposal in its discretion and in a
manner consistent with this Policy after conducting a reasonable investigation of the proposal.
In the event that DoubleLine determines that a recommendation of
Glass Lewis (or of any other third-party proxy voting service retained by DoubleLine) was based on a material factual error, DoubleLine will investigate the error, taking into account, among other things, the nature of the error and the related
recommendation, and seek to determine whether Glass Lewis’ recommendation was affected by the error and whether Glass Lewis (or any other third-party proxy voting service retained by DoubleLine) is taking reasonable steps to reduce similar
errors in the future. DoubleLine will also inform the Chief Compliance Officer of the error so that he can determine whether to conduct a more detailed review of Glass Lewis (or any other third-party proxy voting service retained by DoubleLine).
The Guidelines provide a basis for making decisions in the voting of proxies and taking action with respect to class actions or corporate actions for Clients. When
voting proxies or taking action with respect to class actions or corporate actions, DoubleLine’s utmost concern in exercising its duties of loyalty and care is that all decisions be made on an informed basis and in the best interests of the
Client and with the goal of maximizing the value of the Client’s investments. With this goal in mind, the Guidelines cover various categories of voting decisions and generally specify whether DoubleLine (or its designee) will vote (assuming it
votes at all) for or against a particular type of proposal. The applicable portfolio managers who are primarily responsible for evaluating the individual holdings of the relevant Client are responsible in the first instance for overseeing the voting
of proxies and taking action with respect to corporate actions for such Client (though they are not expected to conduct an independent review of each such corporate action.). Such portfolio managers may, in their discretion, vote proxies or take
action with respect to class actions or corporate actions in a manner that is inconsistent with the Guidelines (or instruct Glass Lewis to do so) when they determine, after conducting a reasonable investigation, that doing so is in the best
interests of the Client. In making any such determination, the portfolio managers may, in their discretion, take into account the recommendations of appropriate members of DoubleLine’s executive and senior management, other investment personnel
and, if desired, an outside service.
Limitations of this Policy. This Policy applies to voting and/or consent rights of securities held by Clients.
DoubleLine (or its designee) will, on behalf of each Client (including the Funds or the Private Funds) vote in circumstances such as, but not limited to, plans of reorganization, and waivers and consents under applicable indentures. This Policy does
not apply, however, to consent rights that primarily represent decisions to buy or sell investments, such as tender or exchange offers, conversions, put options, redemption and Dutch auctions. Such decisions, while considered not to be covered
within this Policy, shall be made with the Client’s best interests in mind. In certain limited circumstances, particularly in the area of structured finance,
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DoubleLine may, on behalf of Clients, enter into voting agreements or other contractual obligations that govern the voting of shares. In the event of a conflict between any such contractual
requirements and the Guidelines, DoubleLine (or its designee) will vote in accordance with its contractual obligations.
In addition, where DoubleLine determines
that there are unusual costs to the Client? and/or difficulties associated with voting on a proposal, which more typically might be the case with respect to proposals relating to non-U.S. issuers, DoubleLine
reserves the right to not vote on a proposal unless DoubleLine determines that the expected benefits of voting on such proposal exceed the expected cost to the Client, such as in situations where a jurisdiction imposes share blocking restrictions
which may affect the ability of the portfolio managers to effect trades in the related security. When contacting a client is reasonable and not cost- or time-prohibitive, DoubleLine will seek to consult with its Clients in such circumstances (where
it has determined not to vote as a result of unusual costs and/or difficulties) unless the investment management agreement or other written arrangement with the applicable Client gives DoubleLine authority to act in its own discretion.
Records of all proxies, class actions or corporate actions received shall be retained by the Chief Risk Officer or designee. Such records shall include whether
DoubleLine voted such proxy or corporate actions and, if so, how the proxy was voted [and for class actions?]. The records also shall be transcribed into a format such that any Client’s overall proxy and corporate actions voting record can be
provided upon request.
DoubleLine provides no assurance to former clients that applicable proxy, class actions or corporate actions information will be delivered to
them.
IV.
PROOFS OF CLAIM
DoubleLine does not complete
proofs-of-claim on behalf of Clients for current or historical holdings other than for the Funds and Private Funds; however, DoubleLine will provide reasonable
assistance to Clients with collecting information relevant to filing proofs-of-claim when such information is in the possession of DoubleLine. DoubleLine does not
undertake to complete or provide proofs-of-claim for securities that had been held by any former client. DoubleLine will complete proofs-of-claim for the Funds and Private Funds, or provide reasonable access to the applicable Fund’s or Private Fund’s administrator to file such proofs-of-claim when appropriate.
V.
CLASS ACTIONS POLICY
In the event that Client securities become the subject of a class action lawsuit,
DoubleLine will assess the potential value to Clients in participating in such legal action and such other factors as it deems appropriate. If DoubleLine decides that participating in the class action is in the Client’s best interest,
DoubleLine will recommend that the Client or its custodian submit appropriate documentation on the Client’s behalf, subject to contractual or other authority. DoubleLine may consider any relevant information in determining whether participation
in a class action lawsuit is in a Client’s best interest, including the costs that likely would be incurred by the Client and the resources that likely would be expended in participating in the class action, including in comparison to the
Client pursuing other legal recourse against the issuer. DoubleLine also may choose to notify Clients (other than the Funds and the Private Funds) of the class action without making a recommendation as to participation, which would allow Clients to
decide how or if to proceed.
DoubleLine provides no assurance to former clients that applicable class action information will be delivered to them.
VI.
PROCEDURES FOR LENT SECURITIES AND ISSUERS IN SHARE-BLOCKING COUNTRIES
At times, DoubleLine may not be able to
take action in respect of a proposal on behalf of a Client when the Client’s relevant securities are on loan in accordance with a securities lending program and/or are controlled by a securities lending agent or custodian acting independently
of DoubleLine. Notwithstanding this fact, in the event that DoubleLine becomes aware of a proposal on which a Client’s securities may be voted and with
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respect to which the outcome of such proposal could reasonably be expected to enhance the economic value of the Client’s position and some or a portion of that position is lent out,
DoubleLine will make reasonable efforts to inform the Client that DoubleLine will not able to take action with respect to such proposal until and unless the lent security is recalled. When such situations relate to the Funds or the Private Funds,
DoubleLine will take reasonable measures to recall the lent security in order to take action timely. There can be no assurance that any lent security will be returned timely.
In certain markets where share blocking occurs, shares must be frozen for trading purposes at the custodian or sub-custodian in
order to vote. During the time that shares are blocked, any pending trades will not settle. Depending on the market, this period can last from one day to three weeks. Any sales that must be executed will settle late and potentially will be subject
to interest charges or other punitive fees. For this reason, in blocking markets, DoubleLine retains the right to vote or not, based on the determination of DoubleLine’s investment personnel as to whether voting would be in the Client’s
best interest under the circumstances.
VII.
PROXY VOTING COMMITTEE; OVERSIGHT
DoubleLine has established a proxy voting committee (the “Committee”)
with a primary responsibility of overseeing compliance with this Policy. The Committee, made up of non-investment executive officers, the Chief Risk Officer, and the Chief Compliance Officer (or his/her
designee), meets on an as-needed basis. The Committee will (1) monitor compliance with the Policy, including by periodically sampling proxy votes for review, (2) review, no less frequently than
annually, the adequacy of this Policy to ensure that such Policy has been effectively implemented and that the Policy, including the Guidelines, continues to be designed to ensure that proxies are voted in the best interests of Clients,
(3) periodically review, as needed, the adequacy and effectiveness of Glass Lewis or other third-party proxy voting services retained by DoubleLine, including its process for seeking timely input from issuers, whether such firm has the capacity
and competency to adequately analyze voting matters, the processes and methodologies employed by such firm and instances where an issuer has challenged Glass Lewis or other third-party proxy voting service recommendations, and (4) review
potential conflicts of interest that may arise under this Policy, including changes to the businesses of DoubleLine, Glass Lewis or other third-party proxy voting services retained by DoubleLine to determine whether those changes present new or
additional conflicts of interest that should be addressed by this Policy.
The Committee shall have primary responsibility for managing DoubleLine’s
relationship with Glass Lewis and/or any other third-party proxy voting service provider, including overseeing their compliance with this Policy generally as well as reviewing periodically instances in which (i) DoubleLine overrides a
recommendation made by Glass Lewis; (ii) Glass Lewis does not provide a recommendation with respect to a proposal, or (iii) instances when Glass Lewis commits one or more material errors. The Committee shall also periodically review
DoubleLine’s relationships with such entities more generally, including for potential conflicts of interest relevant to such entities and whether DoubleLine’s relationships with such entities should continue.
VIII.
PROCEDURES FOR MATERIAL CONFLICTS OF INTEREST
The portfolio managers will seek to monitor for conflicts of
interest arising between DoubleLine and a Client with respect to proxy voting, class actions and corporate actions? and shall report any such conflict identified by the portfolio managers to the Committee. Should material conflicts of interest arise
between DoubleLine and a Client as to a proposal, the proposal shall be brought to the attention of the Committee, who shall involve other executive managers, legal counsel (which may be DoubleLine’s
in-house counsel or outside counsel) or the Chief Compliance Officer as may be deemed necessary or appropriate by the Committee to attempt to resolve such conflicts. The Committee shall determine the
materiality of such conflict if the conflict cannot be resolved. (An example of a specific conflict of interest that should be brought to the Committee is a situation where a proxy contest involves securities issued by a Client. When in doubt as to
the existence or materiality of a potential conflict, portfolio managers shall bring the proposal to the attention of the Committee.)
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If, after appropriate review, a material conflict between DoubleLine and a Client is deemed to exist, DoubleLine will seek
to resolve any such conflict in the best interest of the Client whose assets it is voting by pursuing any one of the following courses of action: (i) voting (or not voting) in accordance with the Guidelines; (ii) convening a Committee
meeting to assess available measures to address the conflict and implementing those measures; (iii) voting in accordance with the recommendation of an independent third-party service provider chosen by the Committee; (iv) voting (or not
voting) in accordance with the instructions of such Client; (v) or not voting with respect to the proposal if consistent with DoubleLine’s fiduciary obligations.
Investments in the DoubleLine Funds. In the event that DoubleLine has discretionary authority to vote shares of a Fund owned by all Clients
(including the Funds), DoubleLine will vote the shares of such Fund in the same proportion as the votes of the other beneficial shareholders of such Fund. Under this “echo voting” approach, DoubleLine’s voting of a Fund’s shares
would merely amplify the votes already received from such Fund’s other shareholders. DoubleLine’s potential conflict is therefore mitigated by replicating the voting preferences expressed by the Fund’s other shareholders.
IX.
PROCEDURES FOR PROXY SOLICITATION
In the event that any employee of DoubleLine receives a request to reveal or
disclose DoubleLine’s voting intention on a specific proxy event to a third party, the employee must forward the solicitation request to the Chief Compliance Officer or designee. Such requests shall be reviewed with the Committee or appropriate
executive and senior management. Any written requests shall be retained with the proxy files maintained by the Chief Operating Officer or designee.
X.
ADDITIONAL PROCEDURES FOR THE FUNDS
A.
Filing Form N-PX
Rule 30b1-4 under the Investment Company Act of 1940 requires open-end and closed-end management investment companies to file an annual record of proxies voted by a Fund on Form N-PX. Form N-PX must be filed
each year no later than August 31 and must contain the Funds’ proxy voting record for the most recent twelve-month period ending June 30.
The Funds rely
upon their respective fund administrator to prepare and make their filings on Form N-PX. DoubleLine shall assist the fund administrator by providing information (including by causing such information to be
provided by any third party proxy voting service for record comparison purposes as deemed necessary) regarding any proxy votes made for the Funds within the most recent twelve-month period ending June 30. DoubleLine shall retain records of any such
votes with sufficient information to make accurate annual Form N-PX filings.
B.
Providing Policies and Procedures
Mutual funds (including the Funds) that invest in voting securities are required to describe in their Statements of Additional Information (“SAIs”) the
policies and procedures that they use to determine how to vote proxies relating to securities held in their portfolios. The Funds also may choose to include these policies and procedures as part of their registration statement. Closed-end funds (such as DBL, DSL and DLY) must disclose their proxy voting policies and procedures annually on Form N-CSR.
Funds are required to disclose in shareholder reports that a description of the fund’s proxy voting policies and procedures is available (i) without charge,
upon request, by calling a specified toll-free (or collect) telephone number; (ii) on the fund’s website, if applicable; and (iii) on the Commission’s website at http://www.sec.gov. The fund administrator shall ensure that such
disclosures are included when preparing shareholder reports on the Funds’ behalf. The Funds currently do not provide the proxy policies and procedures on their website.
A Fund is required to send the description of the fund’s proxy voting policies and procedures within three business days of receipt of the request, by first-class
mail or other means designed to ensure equally prompt delivery. The Funds rely upon the fund administrator to provide this service.
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XI.
RECORDKEEPING
A.
DoubleLine must maintain the documentation described in this Policy for a period of not less than five (5) years
from the end of the fiscal year during which the last entry was made on such record, the first two (2) years at its principal place of business. DoubleLine will be responsible for the following procedures and for ensuring that the required
documentation is retained, including with respect to class action claims or corporate actions other than proxy voting. DoubleLine has engaged Glass Lewis to retain the aforementioned proxy voting records on behalf of DoubleLine (and its Clients).
B.
Client request to review proxy votes:
Any written request from a Client related to actions taken with respect to a proposal received by any employee of DoubleLine must be retained. Only written responses to
oral requests need to be maintained.
The Client Service group will record the identity of the Client, the date of the request, and the disposition (e.g.,
provided a written or oral response to Client’s request, referred to third party, not a proxy voting client, other dispositions, etc.).
In order to facilitate
the management of proxy voting record keeping process, and to facilitate dissemination of such proxy voting records to Clients, the Client Service group will distribute to any Client requesting proxy voting information DoubleLine’s complete
proxy voting record for the Client for the period requested. If deemed operationally more efficient, DoubleLine may choose to release its entire proxy voting record for the requested period, with any information identifying a particular Client
redacted. The Client Service group shall furnish the information requested, free of charge, to the Client within a reasonable time period (within 10 business days) and maintain a copy of the written record provided in response to Client’s
written (including e-mail) or oral request. A copy of the written response should be attached and maintained with the Client’s written request, if applicable, and stored in an appropriate file.
Clients can require the delivery of the proxy voting record relevant to their accounts for the five year period prior to their request.
C.
Examples of proxy voting records:
–
Documents prepared or created by DoubleLine in connection with DoubleLine’s reasonable investigation (or more
detailed analysis) of a matter, or that were material to making a decision on how to vote, or that memorialized the basis for the decision. Documentation or notes or any communications received from third parties, other industry analysts, third
party service providers, company’s management discussions, etc. that were material in the basis for the decision.
XII.
DISCLOSURE
The Chief Compliance Officer or designee will ensure that Form ADV Part 2A is updated as necessary to
reflect: (i) all material changes to this Policy; and (ii) regulatory requirements related to proxy voting disclosure.
Attachment A to
Proxy Voting, Corporate Action and Class Action Policy
Guidelines
The proxy voting decisions set forth below refer to proposals by company management except for the categories of “Shareholder Proposals” and “Social Issue
Proposals.” The voting decisions in these latter two categories refer to proposals by outside shareholders.
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Governance
•
For trustee nominees in uncontested elections
•
For management nominees in contested elections
•
For ratifying auditors, except against if the previous auditor was dismissed because of a disagreement with the company or
if the fees for non-audit services exceed 51% of total fees
•
For changing the company name
•
For approving other business
•
For adjourning the meeting
•
For technical amendments to the charter and/or bylaws
•
For approving financial statements
Capital Structure
•
For increasing authorized common stock
•
For decreasing authorized common stock
•
For amending authorized common stock
•
For the issuance of common stock, except against if the issued common stock has superior voting rights
•
For approving the issuance or exercise of stock warrants
•
For authorizing preferred stock, except against if the board has unlimited rights to set the terms and conditions of the
shares
•
For increasing authorized preferred stock, except against if the board has unlimited rights to set the terms and conditions
of the shares
•
For decreasing authorized preferred stock
•
For canceling a class or series of preferred stock
•
For amending preferred stock
•
For issuing or converting preferred stock, except against if the shares have voting rights superior to those of other
shareholders
•
For eliminating preemptive rights
•
For creating or restoring preemptive rights
•
Against authorizing dual or multiple classes of common stock
•
For eliminating authorized dual or multiple classes of common stock
•
For amending authorized dual or multiple classes of common stock
•
For increasing authorized shares of one or more classes of dual or multiple classes of common stock, except against if it
will allow the company to issue additional shares with superior voting rights
•
For a stock repurchase program
•
For a stock split
•
For a reverse stock split, except against if the company does not intend to proportionally reduce the number of authorized
shares
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Mergers and Restructuring
•
For merging with or acquiring another company
•
For recapitalization
•
For restructuring the company
•
For bankruptcy restructurings
•
For liquidations
•
For reincorporating in a different state
•
For spinning off certain company operations or divisions
•
For the sale of assets
•
Against eliminating cumulative voting
•
For adopting cumulative voting
Board of Trustees
•
For limiting the liability of trustees
•
For setting the board size
•
For allowing the trustees to fill vacancies on the board without shareholder approval
•
Against giving the board the authority to set the size of the board as needed without shareholder approval
•
For a proposal regarding the removal of trustees, except against if the proposal limits the removal of trustees to cases
where there is legal cause
•
For non-technical amendments to the company’s certificate of incorporation,
except against if an amendment would have the effect of reducing shareholders’ rights
•
For non-technical amendments to the company’s bylaws, except against if an
amendment would have the effect of reducing shareholder’s rights
Anti-Takeover Provisions
•
Against a classified board
•
Against amending a classified board
•
For repealing a classified board
•
Against ratifying or adopting a shareholder rights plan (poison pill)
•
Against redeeming a shareholder rights plan (poison pill)
•
Against eliminating shareholders’ right to call a special meeting
•
Against limiting shareholders’ right to call a special meeting
•
For restoring shareholders’ right to call a special meeting
•
Against eliminating shareholders’ right to act by written consent
•
Against limiting shareholders’ right to act by written consent
•
For restoring shareholders’ right to act by written consent
•
Against establishing a supermajority vote provision to approve a merger or other business combination
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•
For amending a supermajority vote provision to approve a merger or other business combination, except against if the
amendment would increase the vote required to approve the transaction
•
For eliminating a supermajority vote provision to approve a merger or other business combination
•
Against adopting supermajority vote requirements (lock-ins) to change certain bylaw
or charter provisions
•
Against amending supermajority vote requirements (lock-ins) to change certain bylaw
or charter provisions
•
For eliminating supermajority vote requirements (lock-ins) to change certain bylaw
or charter provisions
•
Against expanding or clarifying the authority of the board of trustees to consider factors other than the interests of
shareholders in assessing a takeover bid
•
Against establishing a fair price provision
•
Against amending a fair price provision
•
For repealing a fair price provision
•
For limiting the payment of greenmail
•
Against adopting advance notice requirements
•
For opting out of a state takeover statutory provision
•
Against opt into a state takeover statutory provision
Compensation
•
For adopting a stock incentive plan for employees, except decide on a case-by-case basis if the plan dilution is more than 5% of outstanding common stock or if the potential dilution from all company plans, including the one proposed, is more than 10% of outstanding common
stock
•
For amending a stock incentive plan for employees, except decide on a case-by-case basis if the minimum potential dilution from all company plans, including the one proposed, is more than 10% of outstanding common stock
•
For adding shares to a stock incentive plan for employees, except decide on a case-by-case basis if the plan dilution is more than 5% of outstanding common stock or if the potential dilution from all company plans, including the one proposed, is more than 10% of outstanding common
stock
•
For limiting per-employee option awards
•
For extending the term of a stock incentive plan for employees
•
Case-by-case on assuming stock incentive
plans
•
For adopting a stock incentive plan for non-employee trustees, except decide on a case-by-case basis if the plan dilution is more than 5% of outstanding common equity or if the minimum potential dilution from all plans, including the one proposed, is more
than 10% of outstanding common equity
•
For amending a stock incentive plan for non-employee trustees, except decide on a case-by-case basis if the minimum potential dilution from all plans, including the one proposed, is more than 10% of outstanding common equity
•
For adding shares to a stock incentive plan for non-employee trustees, except
decide on a case-by-case basis if the plan dilution is more than 5% of outstanding common equity or if the minimum potential dilution from all plans, including the one
proposed, is more than 10% of the outstanding common equity
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•
For adopting an employee stock purchase plan, except against if the proposed plan allows employees to purchase stock at
prices of less than 85% of the stock’s fair market value
•
For amending an employee stock purchase plan, except against if the proposal allows employees to purchase stock at prices
of less than 85% of the stock’s fair market value
•
For adding shares to an employee stock purchase plan, except against if the proposed plan allows employees to purchase
stock at prices of less than 85% of the stock’s fair market value
•
For adopting a stock award plan, except decide on a
case-by-case basis if the plan dilution is more than 5% of the outstanding common equity or if the minimum potential dilution from all plans, including the one proposed,
is more than 10% of the outstanding common equity
•
For amending a stock award plan, except against if the amendment shortens the vesting requirements or lessens the
performance requirements
•
For adding shares to a stock award plan, except decide on a
case-by-case basis if the plan dilution is more than 5% of the outstanding common equity or if the minimum potential dilution from all plans, including the one proposed,
is more than 10% of the outstanding common equity
•
For adopting a stock award plan for non-employee trustees, except decide on a case-by-case basis if the plan dilution is more than 5% of the outstanding common equity or if the minimum potential dilution from all plans, including the one proposed, is
more than 10% of the outstanding common equity
•
For amending a stock award plan for non-employee trustees, except decide on a case-by-case basis if the minimum potential dilution from all plans is more than 10% of the outstanding common equity.
•
For adding shares to a stock award plan for non-employee trustees, except decide on
a case-by-case basis if the plan dilution is more than 5% of the outstanding common equity or if the minimum potential dilution from all plans, including the one
proposed, is more than 10% of the outstanding common equity
•
For approving an annual bonus plan
•
For adopting a savings plan
•
For granting a one-time stock option or stock award, except decide on a case-by-case basis if the plan dilution is more than 5% of the outstanding common equity
•
For adopting a deferred compensation plan
•
For approving a long-term bonus plan
•
For approving an employment agreement or contract
•
For amending a deferred compensation plan
•
For amending an annual bonus plan
•
For reapproving a stock option plan or bonus plan for purposes of OBRA
•
For amending a long-term bonus plan
Shareholder Proposals
•
For requiring shareholder ratification of auditors
•
Against requiring the auditors to attend the annual meeting
•
Against limiting consulting by auditors
•
Against requiring the rotation of auditors
•
Against restoring preemptive rights
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•
For asking the company to study sales, spin-offs, or other strategic alternatives
•
For asking the board to adopt confidential voting and independent tabulation of the proxy ballots
•
Against asking the company to refrain from counting abstentions and broker
non-votes in vote tabulations
•
Against eliminating the company’s discretion to vote unmarked proxy ballots.
•
For providing equal access to the proxy materials for shareholders
•
Against requiring a majority vote to elect trustees
•
Against requiring the improvement of annual meeting reports
•
Against changing the annual meeting location
•
Against changing the annual meeting date
•
Against asking the board to include more women and minorities as trustees.
•
Against seeking to increase board independence
•
Against limiting the period of time a trustee can serve by establishing a retirement or tenure policy
•
Against requiring minimum stock ownership by trustees
•
Against providing for union or employee representatives on the board of trustees
•
For increasing disclosure regarding the board’s role in the development and monitoring of the company’s long-term
strategic plan
•
For creating a nominating committee of the board
•
Against urging the creation of a shareholder committee
•
Against asking that the chairman of the board of trustees be chosen from among the ranks of the non-employee trustees
•
Against asking that a lead trustee be chosen from among the ranks of the
non-employee trustees
•
For adopting cumulative voting
•
Against requiring trustees to place a statement of candidacy in the proxy statement
•
Against requiring the nomination of two trustee candidates for each open board seat
•
Against making trustees liable for acts or omissions that constitute a breach of fiduciary care resulting from a
trustee’s gross negligence and/or reckless or willful neglect
•
For repealing a classified board
•
Against asking the board to redeem or to allow shareholders to vote on a poison pill shareholder rights plan
•
Against repealing fair price provisions
•
For restoring shareholders’ right to call a special meeting
•
For restoring shareholders’ right to act by written consent
•
For limiting the board’s discretion to issue targeted share placements or requiring shareholder approval before such
block placements can be made
•
For seeking to force the company to opt out of a state takeover statutory provision
•
Against reincorporating the company in another state
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•
For limiting greenmail payments
•
Against advisory vote on compensation
•
Against restricting executive compensation
•
For enhancing the disclosure of executive compensation
•
Against restricting trustee compensation
•
Against capping executive pay
•
Against calling for trustees to be paid with company stock
•
Against calling for shareholder votes on executive pay
•
Against calling for the termination of trustee retirement plans
•
Against asking management to review, report on, and/or link executive compensation to
non-financial criteria, particularly social criteria
•
Against seeking shareholder approval to reprice or replace underwater stock options
•
For banning or calling for a shareholder vote on future golden parachutes
•
Against seeking to award performance-based stock options
•
Against establishing a policy of expensing the costs of all future stock options issued by the company in the
company’s annual income statement
•
Against requesting that future executive compensation be determined without regard to any pension fund income
•
Against approving extra benefits under Supplemental Executive Retirement Plans (SERPs)
•
Against requiring option shares to be held
•
For creating a compensation committee
•
Against requiring that the compensation committee hire its own independent compensation consultants-separate from the
compensation consultants working with corporate management-to assist with executive compensation issues
•
For increasing the independence of the compensation committee
•
For increasing the independence of the audit committee
•
For increasing the independence of key committees
Social Issue Proposals
•
Against asking the company to develop or report on human rights policies
•
Against asking the company to limit or end operations in Burma
•
For asking management to review operations in Burma
•
For asking management to certify that company operations are free of forced labor
•
Against asking management to implement and/or increase activity on each of the principles of the U.S. Business Principles
for Human Rights of Workers in China.
•
Against asking management to develop social, economic, and ethical criteria that the company could use to determine the
acceptability of military contracts and to govern the execution of the contracts
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•
Against asking management to create a plan of converting the company’s facilities that are dependent on defense
contracts toward production for commercial markets
•
Against asking management to report on the company’s government contracts for the development of ballistic missile
defense technologies and related space systems
•
Against asking management to report on the company’s foreign military sales or foreign offset activities
•
Against asking management to limit or end nuclear weapons production
•
Against asking management to review nuclear weapons production
•
Against asking the company to establish shareholder-designated contribution programs
•
Against asking the company to limit or end charitable giving
•
For asking the company to increase disclosure of political spending and activities
•
Against asking the company to limit or end political spending
•
For requesting disclosure of company executives’ prior government service
•
Against requesting affirmation of political nonpartisanship
•
For asking management to report on or change tobacco product marketing practices, except against if the proposal calls for
action beyond reporting
•
Against severing links with the tobacco industry
•
Against asking the company to review or reduce tobacco harm to health
•
For asking management to review or promote animal welfare, except against if the proposal calls for action beyond reporting
•
For asking the company to report or take action on pharmaceutical drug pricing or distribution, except against if the
proposal asks for more than a report
•
Against asking the company to take action on embryo or fetal destruction
•
For asking the company to review or report on nuclear facilities or nuclear waste, except against if the proposal asks for
cessation of nuclear-related activities or other action beyond reporting
•
For asking the company to review its reliance on nuclear and fossil fuels, its development or use of solar and wind power,
or its energy efficiency, except vote against if the proposal asks for more than a report.
•
Against asking management to endorse the Ceres principles
•
For asking the company to control generation of pollutants, except against if the proposal asks for action beyond reporting
or if the company reports its omissions and plans to limit their future growth or if the company reports its omissions and plans to reduce them from established levels
•
For asking the company to report on its environmental impact or plans, except against if management has issued a written
statement beyond the legal minimum
•
For asking management to report or take action on climate change, except against if management acknowledges a global
warming threat and has issued company policy or if management has issued a statement and committed to targets and timetables or if the company is not a major emitter of greenhouse gases
•
For asking management to report on, label, or restrict sales of bioengineered products, except against if the proposal asks
for action beyond reporting or calls for a moratorium on sales of bioengineered products
•
Against asking the company to preserve natural habitat
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•
Against asking the company to review its developing country debt and lending criteria and to report to shareholders on its
findings
•
Against requesting the company to assess the environmental, public health, human rights, labor rights, or other
socioeconomic impacts of its credit decisions
•
For requesting reports and/or reviews of plans and/or policies on fair lending practices, except against if the proposal
calls for action beyond reporting
•
Against asking the company to establish committees to consider issues related to facilities closure and relocation of work
•
For asking management to report on the company’s affirmative action policies and programs, including releasing its EEO-1 forms and providing statistical data on specific positions within the company, except against if the company releases its EEO-1 reports
•
Against asking management to drop sexual orientation from EEO policy
•
Against asking management to adopt a sexual orientation non-discrimination policy
•
For asking management to report on or review Mexican operations
•
Against asking management to adopt standards for Mexican operations
•
Against asking management to review or implement the MacBride principles
•
Against asking the company to encourage its contractors and franchisees to implement the MacBride principles
•
For asking management to report on or review its global labor practices or those of its contractors, except against if the
company already reports publicly using a recognized standard or if the resolution asks for more than a report
•
Against asking management to adopt, implement, or enforce a global workplace code of conduct based on the International
Labor Organization’s core labor conventions
•
For requesting reports on sustainability, except against if the company has already issued a report in GRI format
Reviewed and approved by the Boards of the DoubleLine Funds Trust, DoubleLine Equity Funds, DoubleLine Opportunistic Credit Fund and DoubleLine Income Solutions Fund:
August 20, 2015
Adopted by the DoubleLine Equity Funds Board of Trustees: March 19, 2013
Renewed, reviewed and approved by the DoubleLine Equity Funds Board: May 22, 2013
Renewed, reviewed and approved by the DoubleLine Equity Funds Board: November 20, 2013
Renewed, reviewed and approved by the DoubleLine Equity Funds Board: August 21, 2014
Adopted by the DoubleLine Income Solutions Board of Trustees: March 19, 2013
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Renewed, reviewed and approved by the DoubleLine Income Solutions Board of Trustees: May 22, 2013 Renewed, reviewed
and approved by the DoubleLine Income Solutions Board of Trustees: November 20, 2013
Renewed, reviewed and approved by the DoubleLine Income Solutions Board of
Trustees: August 21, 2014
Adopted by the DoubleLine Opportunistic Credit Fund Board of Trustees: August 24, 2011
Renewed and approved by the DoubleLine Opportunistic Credit Fund Board of Trustees: March 19, 2013
Renewed, reviewed and approved by the DoubleLine Opportunistic Credit Fund Board of Trustees: May 22, 2013
Renewed, reviewed and approved by the DoubleLine Opportunistic Credit Fund Board of Trustees: November 20, 2013
Renewed, reviewed and approved by the DoubleLine Opportunistic Credit Fund Board of Trustees: August 21, 2014
Adopted by the DoubleLine Funds Trust Board: March 25, 2010
Renewed, reviewed
and approved by the DoubleLine Funds Trust Board: March 1, 2011
Renewed, reviewed and approved by the DoubleLine Funds Trust Board: August 25, 2011
Renewed and approved by the DoubleLine Funds Trust Board of Trustees: March 19, 2013
Renewed, reviewed and approved by the DoubleLine Funds Trust Board: May 22, 2013
Renewed, reviewed and approved by the DoubleLine Funds Trust Board: November 20, 2013
Renewed, reviewed and approved by the DoubleLine Funds Trust Board: August 21, 2014
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GAMCO INVESTORS, INC. AND AFFILIATES
THE VOTING OF PROXIES ON BEHALF OF CLIENTS
Rule 206(4)-6 under the Investment Advisers Act of 1940 and Rule 30b1-4 under the Investment Company Act of 1940 require investment advisers to adopt written policies and
procedures governing the voting of proxies on behalf of their clients.
These procedures will be used by GAMCO Asset Management Inc., Gabelli Funds, LLC,
Gabelli & Company Investment Advisers, Inc., and Teton Advisors, Inc. (collectively, the “Advisers”) to determine how to vote proxies relating to portfolio securities held by their clients, including the procedures that the
Advisers use when a vote presents a conflict between the interests of the shareholders of an investment company managed by one of the Advisers, on the one hand, and those of the Advisers; the principal underwriter; or any affiliated person of the
investment company, the Advisers, or the principal underwriter. These procedures will not apply where the Advisers do not have voting discretion or where the Advisers have agreed to with a client to vote the client’s proxies in accordance with
specific guidelines or procedures supplied by the client (to the extent permitted by ERISA).
I.
Proxy Voting Committee
The Proxy Voting Committee was originally formed in April 1989 for the purpose of
formulating guidelines and reviewing proxy statements within the parameters set by the substantive proxy voting guidelines originally published in 1988 and updated periodically, a copy of which are appended as Exhibit A. The Committee will include
representatives of Research, Administration, Legal, and the Advisers. Additional or replacement members of the Committee will be nominated by the Chairman and voted upon by the entire Committee.
Meetings are held on an as needed basis to form views on the manner in which the Advisers should vote proxies on behalf of their clients.
In general, the Director of Proxy Voting Services, using the Proxy Guidelines, and the analysts of GAMCO Investors, Inc. (“GBL”), will determine how to vote on
each issue. For non-controversial matters, the Director of Proxy Voting Services may vote the proxy if the vote is: (1) consistent with the recommendations of the issuer’s Board of Directors and not
contrary to the Proxy Guidelines; (2) consistent with the recommendations of the issuer’s Board of Directors and is a non-controversial issue not covered by the Proxy Guidelines; or (3) the vote
is contrary to the recommendations of the Board of Directors but is consistent with the Proxy Guidelines. In those instances, the Director of Proxy Voting Services or the Chairman of the Committee may sign and date the proxy statement indicating how
each issue will be voted.
All matters identified by the Chairman of the Committee, the Director of Proxy Voting Services or the Legal Department as controversial,
taking into account the recommendations of the analysts of GBL, will be presented to the Proxy Voting Committee. If the Chairman of the Committee, the Director of Proxy Voting Services or the Legal Department has identified the matter as one that
(1) is controversial; (2) would benefit from deliberation by the Proxy Voting Committee; or (3) may give rise to a conflict of interest between the Advisers and their clients, the Chairman of the Committee will initially determine
what vote to recommend that the Advisers should cast and the matter will go before the Committee.
A.
Conflicts of Interest.
The Advisers have implemented these proxy voting procedures in order to
prevent conflicts of interest from influencing their proxy voting decisions. By following the Proxy Guidelines and the analysts of GBL, the Advisers are able to avoid, wherever possible, the influence of potential conflicts of interest.
Nevertheless, circumstances may arise in which one or more of the Advisers are faced with a conflict of interest or the appearance of a conflict of interest in connection with its vote. In general, a conflict of interest may arise when an Adviser
knowingly does business with an issuer, and may appear to have a material conflict between its own interests and the interests of the shareholders of an investment
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company managed by one of the Advisers regarding how the proxy is to be voted. A conflict also may exist when an Adviser has actual knowledge of a material business arrangement between an issuer
and an affiliate of the Adviser.
In practical terms, a conflict of interest may arise, for example, when a proxy is voted for a company that is a
client of one of the Advisers, such as GAMCO Asset Management Inc. A conflict also may arise when a client of one of the Advisers has made a shareholder proposal in a proxy to be voted upon by one or more of the Advisers. The Director of Proxy
Voting Services, together with the Legal Department, will scrutinize all proxies for these or other situations that may give rise to a conflict of interest with respect to the voting of proxies.
B.
Operation of Proxy Voting Committee
For matters submitted to the Committee, each member of the
Committee will receive, prior to the meeting, a copy of the proxy statement, a summary of any views provided by the Chief Investment Officer and any recommendations by GBL analysts. The Chief Investment Officer or the GBL analysts may be invited to
present their viewpoints. If the Director of Proxy Voting Services or the Legal Department believe that the matter before the committee is one with respect to which a conflict of interest may exist between the Advisers and their clients, counsel may
provide an opinion to the Committee concerning the conflict. If the matter is one in which the interests of the clients of one or more of the Advisers may diverge, counsel may so advise and the Committee may make different recommendations as to
different clients. For any matters where the recommendation may trigger appraisal rights, counsel may provide an opinion concerning the likely risks and merits of such an appraisal action.
Each matter submitted to the Committee will be determined by the vote of a majority of the members present at the meeting. Should the vote concerning one or more
recommendations be tied in a vote of the Committee, the Chairman of the Committee will cast the deciding vote. The Committee will notify the proxy department of its decisions and the proxies will be voted accordingly.
Although the Proxy Guidelines express the normal preferences for the voting of any shares not covered by a contrary investment guideline provided by the client, the
Committee is not bound by the preferences set forth in the Proxy Guidelines and will review each matter on its own merits. The Advisers subscribe to Institutional Shareholder Services Inc (“ISS”) and Glass
Lewis & Co., LLC (“Glass Lewis”), which supply current information on companies, matters being voted on, regulations, trends in proxy voting and information on corporate governance issues. The information provided by ISS and GL is
for informational purposes only.
If the vote cast either by the analyst or as a result of the deliberations of the Proxy Voting Committee runs contrary to the
recommendation of the Board of Directors of the issuer, the matter may be referred to legal counsel to determine whether an amendment to the most recently filed Schedule 13D is appropriate.
II.
Social Issues and Other Client Guidelines
If a client has provided and the Advisers have accepted special
instructions relating to the voting of proxies, they should be noted in the client’s account file and forwarded to the proxy department. This is the responsibility of the investment professional or sales assistant for the client. In accordance
with Department of Labor guidelines, the Advisers’ policy is to vote on behalf of ERISA accounts in the best interest of the plan participants with regard to social issues that carry an economic impact. Where an account is not governed by
ERISA, the Advisers will vote shares held on behalf of the client in a manner consistent with any individual investment/voting guidelines provided by the client. Otherwise the Advisers may abstain with respect to those shares.
Specific to the Gabelli ESG Fund, the Proxy Voting Committee will rely on the advice of the portfolio managers of the Gabelli ESG Fund to provide voting recommendations
on the securities held in the portfolio.
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III.
Client Retention of Voting Rights
If a client chooses to retain the right to vote proxies or if there is any
change in voting authority, the following should be notified by the investment professional or sales assistant for the client.
•
Operations
•
Proxy Department
•
Investment professional assigned to the account
In the event that the Board of Directors (or a Committee thereof) of one or more of the investment companies managed by one of the Advisers has retained direct voting
control over any security, the Proxy Voting Department will provide each Board Member (or Committee member) with a copy of the proxy statement together with any other relevant information.
IV.
Proxies of Certain Non-U.S. Issuers
Proxy voting in certain countries
requires “share-blocking.” Shareholders wishing to vote their proxies must deposit their shares shortly before the date of the meeting with a designated depository. During the period in which the shares are held with a depository, shares
that will be voted at the meeting cannot be sold until the meeting has taken place and the shares are returned to the clients’ custodian. Absent a compelling reason to the contrary, the Advisers believe that the benefit to the client of
exercising the vote is outweighed by the cost of voting and therefore, the Advisers will not typically vote the securities of non-U.S. issuers that require share-blocking.
In addition, voting proxies of issuers in non-U.S. markets may also give rise to a number of administrative issues or give rise
to circumstances under which voting would impose a cost (real or implied) on its client which may cause the Advisers to abstain from voting such proxies. For example, the Advisers may receive the notices for shareholder meetings without adequate
time to consider the proposals in the proxy or after the cut-off date for voting. Other markets require the Advisers to provide local agents with power of attorney prior to implementing their respective voting
instructions on the proxy. Other markets may require disclosure of certain ownership information in excess of what is required to vote in the U.S. market. Although it is the Advisers’ policies to vote the proxies for its clients for which they
have proxy voting authority, in the case of issuers in non-U.S. markets, we vote client proxies on a best efforts basis.
V.
Voting Records
The Proxy Voting Department will retain a record of matters voted upon by the Advisers for their
clients. The Advisers will supply information on how they voted a client’s proxy upon request from the client.
The complete voting records for each registered
investment company (the “Fund”) that is managed by the Advisers will be filed on Form N-PX for the twelve months ended June 30th, no later than August 31st of each year. A description of the
Fund’s proxy voting policies, procedures, and how the Fund voted proxies relating to portfolio securities is available without charge, upon request, by (i) calling 800-GABELLI
(800-422-3554); (ii) writing to Gabelli Funds, LLC at One Corporate Center, Rye, NY10580-1422; or (iii) visiting the SEC’s website at www.sec.gov.
The Advisers’ proxy voting records will be retained in compliance with Rule 204-2 under the Investment Advisers Act.
VI.
Voting Procedures
1.
Custodian banks, outside brokerage firms and clearing firms are responsible for forwarding proxies directly to the
Advisers.
Proxies are received in one of two forms:
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•
Shareholder Vote Instruction Forms (“VIFs”) – Issued by Broadridge Financial Solutions, Inc.
(“Broadridge”). Broadridge is an outside service contracted by the various institutions to issue proxy materials.
•
Proxy cards which may be voted directly.
2.
Upon receipt of the proxy, the number of shares each form represents is logged into the proxy system, electronically or
manually, according to security.
3.
Upon receipt of instructions from the proxy committee, the votes are cast and recorded for each account.
Records have been maintained on the ProxyEdge system.
ProxyEdge records include:
Security Name and CUSIP
Number
Date and Type of Meeting (Annual, Special, Contest)
Directors’ Recommendation (if any)
How the
Adviser voted for the client on item
4.
VIFs are kept alphabetically by security. Records for the current proxy season are located in the Proxy Voting Department
office. In preparation for the upcoming season, files are transferred to an offsite storage facility during January/February.
5.
If a proxy card or VIF is received too late to be voted in the conventional matter, every attempt is made to vote
including:
•
When a solicitor has been retained, the solicitor is called. At the solicitor’s direction, the proxy is faxed or sent
electronically.
•
In some circumstances VIFs can be faxed or sent electronically to Broadridge up until the time of the meeting.
6.
In the case of a proxy contest, records are maintained for each opposing entity.
7.
Voting in Person
a)
At times it may be necessary to vote the shares in person. In this case, a “legal proxy” is obtained in the
following manner:
•
Banks and brokerage firms using the services at Broadridge:
Broadridge is notified that we wish to vote in person. Broadridge issues individual legal proxies and sends them back via email or overnight (or the
Adviser can pay messenger charges). A lead-time of at least two weeks prior to the meeting is needed to do this. Alternatively, the procedures detailed below for banks not using Broadridge may be implemented.
•
Banks and brokerage firms issuing proxies directly:
The bank is called and/or faxed and a legal proxy is requested.
All legal proxies should appoint:
“Representative of
[Adviser name] with full power of substitution.”
b)
The legal proxies are given to the person attending the meeting along with the limited power of attorney.
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Appendix A
Proxy Guidelines
PROXY VOTING GUIDELINES
General Policy Statement
It is the policy of
GAMCO Investors, Inc, and its affiliated advisers (collectively “the Advisers”) to vote in the best economic interests of our clients. As we state in our Magna Carta of Shareholders Rights, established in May 1988, we are neither
for nor against management. We are for shareholders.
At our first proxy committee meeting in 1989, it was decided that each proxy statement should be
evaluated on its own merits within the framework first established by our Magna Carta of Shareholders Rights. The attached guidelines serve to enhance that broad framework.
We do not consider any issue routine. We take into consideration all of our research on the company, its directors, and their short and long-term goals for the company.
In cases where issues that we generally do not approve of are combined with other issues, the negative aspects of the issues will be factored into the evaluation of the overall proposals but will not necessitate a vote in opposition to the overall
proposals.
Board of Directors
We do not consider
the election of the Board of Directors a routine issue. Each slate of directors is evaluated on a case-by-case basis.
Factors taken into consideration include:
•
Historical responsiveness to shareholders
This may include such areas as:
-Paying greenmail
-Failure to adopt shareholder resolutions receiving a majority of shareholder votes
•
Qualifications
•
Nominating committee in place
•
Number of outside directors on the board
•
Attendance at meetings
•
Overall performance
Selection of Auditors
In general, we support the Board
of Directors’ recommendation for auditors.
Blank Check Preferred Stock
We oppose the issuance of blank check preferred stock.
Blank check preferred stock
allows the company to issue stock and establish dividends, voting rights, etc. without further shareholder approval.
Classified Board
A classified board is one where the directors are divided into classes with overlapping terms. A different class is elected at each annual meeting.
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While a classified board promotes continuity of directors facilitating long range planning, we feel directors should be
accountable to shareholders on an annual basis. We will look at this proposal on a case-by-case basis taking into consideration the board’s historical
responsiveness to the rights of shareholders.
Where a classified board is in place we will generally not support attempts to change to an annually elected board.
When an annually elected board is in place, we generally will not support attempts to classify the board.
Increase Authorized Common Stock
The request to
increase the amount of outstanding shares is considered on a case-by-case basis.
Factors taken into consideration include:
•
Future use of additional shares
-Stock split
-Stock option or other executive
compensation plan
-Finance growth of company/strengthen balance sheet
-Aid in restructuring
-Improve credit rating
-Implement a poison pill or other takeover defense
•
Amount of stock currently authorized but not yet issued or reserved for stock option plans
•
Amount of additional stock to be authorized and its dilutive effect
We will support this proposal if a detailed and verifiable plan for the use of the additional shares is contained in the proxy statement.
Confidential Ballot
We support the idea that a
shareholder’s identity and vote should be treated with confidentiality.
However, we look at this issue on a case-by-case basis.
In order to promote confidentiality in the voting process, we endorse the use of independent Inspectors
of Election.
Cumulative Voting
In general, we
support cumulative voting.
Cumulative voting is a process by which a shareholder may multiply the number of directors being elected by the number of shares held on
record date and cast the total number for one candidate or allocate the voting among two or more candidates.
Where cumulative voting is in place, we will vote
against any proposal to rescind this shareholder right.
Cumulative voting may result in a minority block of stock gaining representation on the board. When a
proposal is made to institute cumulative voting, the proposal will be reviewed on a case-by-case basis. While we feel that each board member should represent all
shareholders, cumulative voting provides minority shareholders an opportunity to have their views represented.
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Director Liability and Indemnification
We support efforts to attract the best possible directors by limiting the liability and increasing the indemnification of directors, except in the case of insider
dealing.
Equal Access to the Proxy
The SEC’s
rules provide for shareholder resolutions. However, the resolutions are limited in scope and there is a 500 word limit on proponents’ written arguments. Management has no such limitations. While we support equal access to the proxy, we would
look at such variables as length of time required to respond, percentage of ownership, etc.
Fair Price Provisions
Charter provisions requiring a bidder to pay all shareholders a fair price are intended to prevent two-tier tender offers that
may be abusive. Typically, these provisions do not apply to board-approved transactions.
We support fair price provisions because we feel all shareholders should be
entitled to receive the same benefits.
Reviewed on a case-by-case basis.
Golden Parachutes
Golden parachutes are severance
payments to top executives who are terminated or demoted after a takeover.
We support any proposal that would assure management of its own welfare so that they may
continue to make decisions in the best interest of the company and shareholders even if the decision results in them losing their job. We do not, however, support excessive golden parachutes. Therefore, each proposal will be decided on a case-by- case basis.
Anti-Greenmail Proposals
We do not support greenmail. An offer extended to one shareholder should be extended to all shareholders equally across the board.
Limit Shareholders’ Rights to Call Special Meetings
We support the right of shareholders to call a special meeting.
Reviewed on a case-by-case basis.
Consideration of Nonfinancial Effects of a
Merger
This proposal releases the directors from only looking at the financial effects of a merger and allows them the opportunity to consider the
merger’s effects on employees, the community, and consumers.
As a fiduciary, we are obligated to vote in the best economic interests of our clients. In
general, this proposal does not allow us to do that. Therefore, we generally cannot support this proposal.
Reviewed on a case-by-case basis.
Mergers, Buyouts, Spin-Offs, Restructurings
Each of the above is considered on a case-by-case basis. According to the Department of
Labor, we are not required to vote for a proposal simply because the offering price is at a premium to the current market price. We may take into consideration the long term interests of the shareholders.
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Military Issues
Shareholder proposals regarding military production must be evaluated on a purely economic set of criteria for our ERISA clients. As such, decisions will be made on a case-by-case basis.
In voting on this proposal for our
non-ERISA clients, we will vote according to the client’s direction when applicable. Where no direction has been given, we will vote in the best economic interests of our clients. It is not our duty to
impose our social judgment on others.
Northern Ireland
Shareholder proposals requesting the signing of the MacBride principles for the purpose of countering the discrimination of Catholics in hiring practices must be
evaluated on a purely economic set of criteria for our ERISA clients. As such, decisions will be made on a case-by-case basis.
In voting on this proposal for our non-ERISA clients, we will vote according to client direction when applicable. Where no
direction has been given, we will vote in the best economic interests of our clients. It is not our duty to impose our social judgment on others.
Opt Out of State Anti-Takeover Law
This shareholder
proposal requests that a company opt out of the coverage of the state’s takeover statutes. Example: Delaware law requires that a buyer must acquire at least 85% of the company’s stock before the buyer can exercise control unless the board
approves.
We consider this on a case-by-case basis. Our decision will be based on
the following:
•
State of Incorporation
•
Management history of responsiveness to shareholders
•
Other mitigating factors
Poison Pill
In general, we do not endorse poison
pills.
In certain cases where management has a history of being responsive to the needs of shareholders and the stock is very liquid, we will reconsider this
position.
Reincorporation
Generally, we support
reincorporation for well-defined business reasons. We oppose reincorporation if proposed solely for the purpose of reincorporating in a state with more stringent anti-takeover statutes that may negatively impact the value of the stock.
Stock Incentive Plans
Director and Employee Stock
incentive plans are an excellent way to attract, hold and motivate directors and employees. However, each incentive plan must be evaluated on its own merits, taking into consideration the following:
•
Dilution of voting power or earnings per share by more than 10%.
•
Kind of stock to be awarded, to whom, when and how much.
•
Method of payment.
•
Amount of stock already authorized but not yet issued under existing stock plans.
•
The successful steps taken by management to maximize shareholder value.
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Supermajority Vote Requirements
Supermajority vote requirements in a company’s charter or bylaws require a level of voting approval in excess of a simple majority of the outstanding shares. In
general, we oppose supermajority-voting requirements. Supermajority requirements often exceed the average level of shareholder participation. We support proposals’ approvals by a simple majority of the shares voting.
Reviewed on a case-by-case basis.
Limit Shareholders Right to Act by Written Consent
Written consent allows shareholders to initiate and carry on a shareholder action without having to wait until the next annual meeting or to call a special meeting. It
permits action to be taken by the written consent of the same percentage of the shares that would be required to effect proposed action at a shareholder meeting.
Required under the Dodd-Frank Act; these proposals are non-binding advisory votes on executive compensation. We will
generally vote with the Board of Directors’ recommendation(s) on advisory votes on executive compensation (“Say-on-Pay”), advisory votes on the frequency
of voting on executive compensation (“Say-When-on-Pay”) and advisory votes relating to extraordinary transaction
executive compensation (“Say-on-Golden-Parachutes”). In those instances when we believe that it is in our clients’ best interest, we may abstain or
vote against executive compensation and/or the frequency of votes on executive compensation and/or extraordinary transaction executive compensation advisory votes.
Proxy Access
Proxy access is a tool used to attempt to
promote board accountability by requiring that a company’s proxy materials contain not only the names of management nominees, but also any candidates nominated by long-term shareholders holding at least a certain stake in the company. We will
review proposals regarding proxy access on a case-by-case basis taking into account the provisions of the proposal, the company’s current governance structure, the
successful steps taken by management to maximize shareholder value, as well as other applicable factors.
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Essex Investment Management Company, LLC
Voting Proxies
Where a firm votes proxies on behalf of clients, the Advisers
Act Rule 206(4)-6 requires Essex to establish written policies and procedures regarding how it exercises proxy voting authority with respect to client securities
Essex will vote proxies for the portfolio securities in a client account, unless that client has retained the authority to vote proxies or delegated the authority to a
third party (e.g., in the case of an ERISA client, to another plan fiduciary Essex utilizes proxy voting policies and procedures designed to reasonably ensure that Essex acts in the best interest of clients. Proxies are considered client assets and
are managed with the same care, skill and diligence as all other client assets.
Voting Agent. Essex has contracted with an independent third party,
Institutional Shareholders Services (“ISS”), to conduct in-depth proxy research, execute proxy votes, and keep various records necessary for tracking proxy voting actions taken and proxy voting
materials for the appropriate client account. ISS specializes in providing a variety of fiduciary-level services related to proxy voting and researches proxy issues independent from Essex executed votes.
Subject to regular review by the Proxy Voting Committee, as discussed below, Essex adopts custom ISS’s proxy voting policy guidelines as its own and votes
Essex’s clients’ proxies according to those policy guidelines. Currently, Essex has adopted the ISS U. S. Sustainability Policy as its proxy voting policy guideline utilized in voting Essex’s client’s proxies. Essex may adopt
additional custom policies in the future. Essex will select the appropriate policy to align with the client’s strategy and/or client’s legal entity status. Details of the third party’s proxy voting policy guidelines shall be provided
to clients upon request.
Proxy Voting Committee.
Essex’s Proxy
Voting Committee, which is a subcommittee of the Compliance and Operating Risk Committee, is responsible for deciding what is in the best interests of clients when determining how proxies are voted. The Committee meets at least annually to review
ISS’s proxy voting policies and consider whether to continue to adopt them as Essex’s own proxy voting policies. Any changes to ISS’s voting policies must be reviewed, approved, and adopted by the Committee at the time the changes
occur. The Committee would also act in any extraordinary circumstances, e.g. in which ISS declines to recommend a proxy vote because of a conflict of interest. Documentation of the annual Committee meeting and its results, including any annual due
diligence of ISS to ensure they continue to have the capacity and competency to adequately analyze proxy issues, will recorded in the Committee’s minutes.
Securities on Loan. Essex generally does not vote proxies for securities on loan. Some clients may participate in client-directed security lending programs,
which require a recall of the loaned securities to properly assign voting rights to the lender. Because of these administrative considerations, Essex may not receive adequate notice of a proxy voting solicitation to arrange a recall of shares
through the client’s custodian or other intermediary in time to vote the proxies.
“Share Blocking.”Essex may decline to vote proxies if to
do so would cause a restriction to be placed on Essex’s ability to trade securities held in client accounts in “share blocking” countries. Accordingly, Essex may abstain from votes in a share blocking country in favor of preserving
its ability to trade any particular security at any time.
ISS recognizes the growing view among investment professionals that sustainability or environmental, social, and corporate governance (ESG) factors
could present material risks to portfolio investments. Whereas investment managers have traditionally analyzed topics such as board accountability and executive compensation to mitigate risk, greater numbers are incorporating ESG performance into
their investment making decisions in order to have a more comprehensive understanding of the overall risk profile of the companies in which they invest and ensure sustainable long-term profitability for their beneficiaries.
Investors concerned with portfolio value preservation and enhancement through the incorporation of sustainability factors can also carry out this active
ownership approach through their proxy voting activity. In voting their shares, sustainability-minded investors are concerned not only with economic returns to shareholders and good corporate governance, but also with ensuring corporate activities
and practices are aligned with the broader objectives of society. These investors seek standardized reporting on ESG issues, request information regarding an issuer’s adoption of, or adherence to, relevant norms, standards, codes of conduct or
universally recognized international initiatives including affirmative support for related shareholder resolutions advocating enhanced disclosure and transparency.
ISS’ Sustainability Proxy Voting Guidelines
ISS has, therefore, developed proxy voting guidelines that are consistent with the objectives of sustainability-minded investors and fiduciaries. On
matters of ESG import, ISS’ Sustainability Policy seeks to promote support for recognized global governing bodies promoting sustainable business practices advocating for stewardship of environment, fair labor practices, non-discrimination, and the protection of human rights. Generally, ISS’ Sustainability Policy will take as its frame of reference internationally recognized sustainability-related initiatives such as the United
Nations Environment Programme Finance Initiative (UNEP FI), United Nations Principles for Responsible Investment (UNPRI), United Nations Global Compact, Global Reporting Initiative (GRI), Carbon Principles, International Labour Organization
Conventions (ILO), Ceres Roadmap 2030, Global Sullivan Principles, MacBride Principles, and environmental and social European Union Directives. Each of these efforts promote a fair, unified and productive reporting and compliance environment which
advances positive corporate ESG actions that promote practices that present new opportunities or that mitigate related financial and reputational risks.
On matters of corporate governance, executive compensation, and corporate structure, the Sustainability Policy guidelines are based on a commitment to
create and preserve economic value and to advance principles of good corporate governance.
These guidelines provide an overview of how ISS
approaches proxy voting issues for subscribers of the Sustainability Policy. We note there may be cases in which the final vote recommendation at a particular company varies from the voting guidelines due to the fact that we closely examine the
merits of each proposal and consider relevant information and company-specific circumstances in arriving at our decisions. To that end, ISS engages with both interested shareholders as well as
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issuers to gain further insight into contentious issues facing the company. Where ISS acts as voting agent for clients, it follows each client’s voting policy, which may differ in some cases
from the policies outlined in this document. ISS updates its guidelines on an annual basis to take into account emerging issues and trends on environmental, social and corporate governance topics, as well as the evolution of market standards,
regulatory changes and client feedback.
1.
Routine/Miscellaneous
Adjourn Meeting
Sustainability Policy Recommendation: Generally vote against proposals to provide management with the authority to
adjourn an annual or special meeting absent compelling reasons to support the proposal.
Vote for proposals that relate
specifically to soliciting votes for a merger or transaction if supporting that merger or transaction. Vote against proposals if the wording is too vague or if the proposal includes “other business.”
Amend Quorum Requirements
Sustainability Policy Recommendation: Vote against proposals to reduce quorum requirements for shareholder
meetings below a majority of the shares outstanding unless there are compelling reasons to support the proposal.
Amend Minor Bylaws
Sustainability Policy Recommendation: Vote for bylaw or charter changes that are of a housekeeping nature (updates
or corrections).
Change Company Name
Sustainability Policy Recommendation: Vote for proposals to change the corporate name unless there is compelling
evidence that the change would adversely impact shareholder value.
Change Date, Time, or
Location of Annual Meeting
Sustainability Policy Recommendation: Vote for management proposals to change the date, time, or location of the
annual meeting unless the proposed change is unreasonable.
Vote against shareholder proposals to change the date, time, or
location of the annual meeting unless the current scheduling or location is unreasonable.
Other Business
Sustainability Policy Recommendation: Vote against proposals to approve other business when it appears as voting
item.
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Audit-Related
Auditor Indemnification and Limitation of Liability
Sustainability Policy Recommendation: Vote
case-by-case on the issue of auditor indemnification and limitation of liability. Factors to be assessed include, but are not limited to:
•
The terms of the auditor agreement — the degree to which these agreements impact shareholders’ rights;
•
The motivation and rationale for establishing the agreements;
•
The quality of the company’s disclosure; and
•
The company’s historical practices in the audit area.
Vote against or withhold from members of an audit committee in situations where there is persuasive evidence that the audit committee entered into an
inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Auditor Ratification
Sustainability Policy Recommendation: Vote for proposals to ratify auditors unless any of the following apply:
•
An auditor has a financial interest in or association with the company, and is therefore not independent;
•
There is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of
the company’s financial position;
•
Poor accounting practices are identified that rise to a serious level of concern, such as: fraud; misapplication of GAAP;
and material weaknesses identified in Section 404 disclosures; or
•
Fees for non-audit services (“Other” fees) are excessive.
Tax compliance and preparation include the preparation of original and amended tax returns and refund
claims, and tax payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added to “Other” fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other”
fees.
In circumstances where “Other” fees include fees related to significant one-time capital
structure events (such as initial public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and nature of those fees that are an exception to the standard
“non-audit fee” category, then such fees may be excluded from the non-audit fees considered in determining the ratio of
non-audit to audit/audit-related fees/tax compliance and preparation for purposes of determining whether non-audit fees are excessive.
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Shareholder Proposals Limiting Non-Audit Services
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals asking companies to prohibit or limit their auditors from engaging in non-audit services.
Shareholder Proposals on Audit Firm Rotation
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals asking for audit firm rotation, taking into account:
•
The tenure of the audit firm;
•
The length of rotation specified in the proposal;
•
Any significant audit-related issues at the company;
•
The number of audit committee meetings held each year;
•
The number of financial experts serving on the committee; and
•
Whether the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive
price.
2.
Board of Directors
Voting on Director Nominees in Uncontested Elections
Four fundamental principles apply when determining votes on director nominees:
Accountability: Boards should be sufficiently accountable to shareholders, including through transparency of the company’s governance
practices and regular board elections, by the provision of sufficient information for shareholders to be able to assess directors and board composition, and through the ability of shareholders to remove directors.
Responsiveness: Directors should respond to investor input, such as that expressed through significant opposition to management proposals,
significant support for shareholder proposals (whether binding or non-binding), and tender offers where a majority of shares are tendered.
Composition: Companies should seek directors who can add value to the board through specific skills or expertise and who can devote sufficient
time and commitment to serve effectively. Boards should be of a size appropriate to accommodate diversity, expertise, and independence, while ensuring active and collaborative participation by all members. Boards should be sufficiently diverse to
ensure consideration of a wide range of perspectives.
Independence: Boards should be sufficiently independent from management (and
significant shareholders) so as to ensure that they are able and motivated to effectively supervise management’s performance for the benefit of all shareholders, including in setting and monitoring the execution of corporate strategy, with
appropriate use of shareholder capital, and in setting and monitoring executive compensation programs that support that strategy. The chair of the board should ideally be an independent director, and all boards should have an independent leadership
position or a similar role in order to help provide appropriate counterbalance to executive management, as well as having sufficiently independent committees that focus on key governance concerns such as audit, compensation, and nomination of
directors.
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Sustainability Policy Recommendation: Generally vote for director nominees,
except under the following circumstances (with new nominees1 considered on a case-by-case basis):
1.
Accountability
Problematic Takeover Defenses
Classified Board Structure: The board is classified, and a continuing director responsible for a problematic governance issue at the
board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
Removal of Shareholder Discretion on Classified Boards: The company has opted into, or failed to opt out of, state laws requiring a classified
board structure.
Director Performance Evaluation: The board lacks mechanisms to promote accountability and oversight, coupled with sustained
poor performance relative to peers. Sustained poor performance is measured by one-, three-, and five-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group
(Russell 3000 companies only). Take into consideration the company’s operational metrics and other factors as warranted. Problematic provisions include but are not limited to:
•
A classified board structure;
•
A supermajority vote requirement;
•
Either a plurality vote standard in uncontested director elections or a majority vote standard with no plurality carve-out for contested elections;
•
The inability of shareholders to call special meetings;
•
The inability of shareholders to act by written consent;
•
A multi-class capital structure; and/or
•
A non–shareholder-approved poison pill.
Poison Pills: Vote against/withhold from all nominees (except new nominees, who should be considered case-by-case) if:
•
The company has a poison pill that was not approved by
shareholders2. However, vote case-by-case on nominees if the board adopts an initial pill with a term of one
year or less, depending on the disclosed rationale for the adoption, and other factors as relevant (such as a commitment to put any renewal to a shareholder vote);
•
The board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or
lowering the trigger, without shareholder approval; or
1
A “new nominee” is a director who is being presented for election by shareholders for the first time.
Recommendations on new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of their appointment and the problematic
governance issue in question.
2
Public shareholders only, approval prior to a company’s becoming public is insufficient.
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•
The pill, whether short-term3 or long-term, has a deadhand or
slowhand feature.
Restrictions on Shareholder Rights
Restricting Binding Shareholder Proposals: Generally vote against or withhold from members of the governance committee if:
•
The company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws. Such
restrictions include, but are not limited to: outright prohibition on the submission of binding shareholder proposals, or share ownership requirements, subject matter restrictions, or time holding requirement in excess of SEC Rule 14a-8. Vote against or withhold on an ongoing basis.
Submission of management proposals to
approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders’ rights. Generally
continue to vote against or withhold on an ongoing basis until shareholders are provided with an unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Problematic Audit-Related Practices
Generally vote against or withhold from the members of the audit committee if:
•
The non-audit fees paid to the auditor are excessive (see discussion under
“Auditor Ratification”);
•
The company receives an adverse opinion on the company’s financial statements from its auditor; or
•
There is persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its
auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Vote case-by-case on members of the audit committee and potentially the
full board if:
•
Poor accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP;
and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether
withhold/against votes are warranted.
Problematic Compensation Practices
In the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, vote against or withhold from the
members of the compensation committee and potentially the full board if:
•
There is a significant misalignment between CEO pay and company performance (pay for performance);
3
If the short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder
vote, Sustainability Advisory Services will generally still recommend withhold/against nominees at the next shareholder meeting following its adoption.
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•
The company maintains significant problematic pay practices;
•
The board exhibits a significant level of poor communication and responsiveness to shareholders;
•
The company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s
declared frequency of say on pay; or
•
The company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.
Generally vote against members of the board committee responsible for approving/setting
non-employee director compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without disclosing a
compelling rationale or other mitigating factors.
Problematic Pledging of Company Stock: Vote against the members of the committee that
oversees risks related to pledging, or the full board, where a significant level of pledged company stock by executives or directors raises concerns. The following factors will be considered:
•
The presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;
•
The magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading volume;
•
Disclosure of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
•
Disclosure in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged
company stock; and
•
Any other relevant factors.
Unilateral Bylaw/Charter Amendments and Problematic Capital Structures: Generally vote against or withhold from directors individually, committee
members, or the entire board (except new nominees, who should be considered case-by-case) if the board amends the company’s bylaws or charter without shareholder
approval in a manner that materially diminishes shareholders’ rights or that could adversely impact shareholders, considering the following factors:
•
The board’s rationale for adopting the bylaw/charter amendment without shareholder ratification;
•
Disclosure by the company of any significant engagement with shareholders regarding the amendment;
•
The level of impairment of shareholders’ rights caused by the board’s unilateral amendment to the bylaws/charter;
•
The board’s track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment
provisions;
•
The company’s ownership structure;
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•
The company’s existing governance provisions;
•
The timing of the board’s amendment to the bylaws/charter in connection with a significant business development; and,
•
Other factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
Unless the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case on director nominees.
Generally vote against (except new
nominees, who should be considered case-by-case) if the directors:
•
Classified the board;
•
Adopted supermajority vote requirements to amend the bylaws or charter; or
•
Eliminated shareholders’ ability to amend bylaws.
Problematic Governance Structure — Newly public companies: For newly public
companies4, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the company or its board adopted the following bylaw or charter provisions that are
considered to be materially adverse to shareholder rights:
•
Supermajority vote requirements to amend the bylaws or charter;
•
A classified board structure; or
•
Other egregious provisions.
A reasonable sunset provision will be considered a mitigating factor.
•
Unless the adverse provision is reversed or removed, vote
case-by-case on director nominees in subsequent years.
Problematic Capital Structure — Newly public companies: For 2022, for newly public companies4, generally vote against or withhold from the entire board (except new nominees1, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the company or its board implemented a multi-class capital structure in which the classes have unequal voting rights
without subjecting the multi-class capital structure to a reasonable time-based sunset. In assessing the reasonableness of a time-based sunset provision, consideration will be given to the company’s lifespan, its
post-IPO ownership structure and the board’s disclosed rationale for the sunset period selected. No sunset period of more than seven years from the date of the IPO will be considered to be reasonable.
4
Newly-public companies generally include companies that emerge from bankruptcy, SPAC transactions, spin-offs,
direct listings, and those who complete a traditional initial public offering.
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Continue to vote against or withhold from incumbent directors in subsequent years,
unless the problematic capital structure is is reversed, removed, or subject to a newly added reasonable sunset.
Common Stock Capital Structure
with Unequal Voting Rights: Starting Feb 1,2023, generally vote withhold or against directors individually, committee members, or the entire board (except new nominees1,
who should be considered case-by-case), if the company employs a common stock structure with unequal voting
rights5.
Exceptions to this policy will generally be limited to:
•
Newly public companies4 with a sunset provision of no more than
seven years from the date of going public;
•
Limited Partnerships and the Operating Partnership (OP) unit structure of REITs;
•
Situations where the unequal voting rights are considered de minimis; or
•
The company provides sufficient protections for minority shareholders, such as allowing minority shareholders a regular
binding vote on whether the capital structure should be maintained.
Management Proposals to Ratify Existing Charter or Bylaw
Provisions: Vote against/withhold from individual directors, members of the governance committee, or the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
•
The presence of a shareholder proposal addressing the same issue on the same ballot;
•
The board’s rationale for seeking ratification;
•
Disclosure of actions to be taken by the board should the ratification proposal fail;
•
Disclosure of shareholder engagement regarding the board’s ratification request;
•
The level of impairment to shareholders’ rights caused by the existing provision;
•
The history of management and shareholder proposals on the provision at the company’s past meetings;
•
Whether the current provision was adopted in response to the shareholder proposal;
•
The company’s ownership structure; and
•
Previous use of ratification proposals to exclude shareholder proposals.
5
This generally includes classes of common stock that have additional votes per share than other shares; classes of
shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights (“loyalty shares”).
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Environmental, Social and Governance (ESG) Failures
Under extraordinary circumstances, vote against or withhold from directors individually, committee members, or the entire board, due to:
•
Material failures of governance, stewardship, risk oversight6, or
fiduciary responsibilities at the company, including failure to adequately guard against or manage ESG risks;
•
A lack of sustainability reporting in the company’s public documents and/or website in conjunction with a failure to
adequately manage or mitigate ESG risks;
•
Failure to replace management as appropriate; or
•
Egregious actions related to a director’s service on other boards that raise substantial doubt about his or her
ability to effectively oversee management and serve the best interests of shareholders at any company.
Climate Accountability
For companies that are significant greenhouse gas (GHG) emitters, through their operations or value chain7, generally vote against or withhold from the incumbent chair of the responsible committee (or other directors on a
case-by-case basis) in cases where Sustainability Advisory Services determines that the company is not taking the minimum steps needed to understand, assess, and
mitigate risks related to climate change to the company and the larger economy.
For 2022, minimum steps to understand and mitigate those
risks are considered to be the following. Both minimum criteria will be required to be in compliance:
•
Detailed disclosure of climate-related risks, such as according to the framework established by the Task Force on
Climate-related Financial Disclosures (TCFD), including
•
Board governance measures;
•
Corporate strategy;
•
Risk management analyses; and
•
Metrics and targets
•
Appropriate GHG emissions reduction targets.
For 2022, “appropriate GHG emissions reductions targets” will be any well-defined GHG reduction targets. Expectations about what
constitutes “minimum steps to mitigate risks related to climate change” will increase over time
6
Examples of failure of risk oversight include, but are not limited to: bribery; large or serial fines or sanctions
from regulatory bodies; demonstrably poor risk oversight of environmental and social issues, including climate change; significant environmental incidents including spills and pollution; large scale or repeat workplace fatalities or injuries;
significant adverse legal judgments or settlements; or hedging of company stock.
7
For 2022, companies defines as “significant GHG emitters” will be those on the current Climate Action
100+ Focus Group list.
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2.
Responsiveness
Vote case-by-case on individual directors, committee members, or the
entire board of directors as appropriate if:
•
The board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the
previous year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received opposition of a majority of the shares cast in the previous year. Factors that will be considered are:
•
Disclosed outreach efforts by the board to shareholders in the wake of the vote;
•
Rationale provided in the proxy statement for the level of implementation;
•
The subject matter of the proposal;
•
The level of support for and opposition to the resolution in past meetings;
•
Actions taken by the board in response to the majority vote and its engagement with shareholders;
•
The continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals);
and
•
Other factors as appropriate.
•
The board failed to act on takeover offers where the majority of shares are tendered;
•
At the previous board election, any director received more than 50 percent withhold/against votes of the shares cast
and the company has failed to address the issue(s) that caused the high withhold/against vote.
Vote
case-by-case on compensation committee members (or, in exceptional cases, the full board) and the Say on Pay proposal if:
•
The company’s previous say-on-pay
received the support of less than 70 percent of votes cast. Factors that will be considered are:
•
The company’s response, including:
•
Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level
of support (including the timing and frequency of engagements and whether independent directors participated);
•
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
•
Disclosure of specific and meaningful actions taken to address shareholders’ concerns;
•
Other recent compensation actions taken by the company;
•
Whether the issues raised are recurring or isolated;
•
The company’s ownership structure; and
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•
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
•
The board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received
the plurality of votes cast.
3.
Composition
Attendance at Board and Committee Meetings: Generally vote against or withhold from directors (except nominees who served only part of the fiscal
year8) who attend less than 75 percent of the aggregate of their board and committee meetings for the period for which they served, unless an acceptable reason for absences is
disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
•
Medical issues/illness;
•
Family emergencies; and
•
Missing only one meeting (when the total of all meetings is three or fewer).
•
In cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with
poor attendance, generally vote against or withhold from appropriate members of the nominating/governance committees or the full board.
If the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board
and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
Overboarded Directors:
Generally, vote against or withhold from individual directors who:
•
Sit on more than five public company boards; or
•
Are CEOs of public companies who sit on the boards of more than two public companies besides their own—withhold only
at their outside boards9.
Gender Diversity
Sustainability Policy Recommendation: Generally vote against or withhold from the chair of the nominating
committee, or other nominees on a case-by-case basis, if the board lacks at least one director of an underrepresented gender identity10.
8
Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.
9
Although all of a CEO’s subsidiary boards will be counted as separate boards, Sustainability Advisory Services will
not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent, but may do so at subsidiaries that are less than 50 percent controlled and boards outside
the parent/subsidiary relationships.
10
Underrepresented gender identity includes directors who identify as women or as non -binary.
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Racial and/or Ethnic Diversity
Sustainability Policy Recommendation: Generally vote against or withhold from the chair of the nominating
committee (or other directors on a case-by-case basis) where the board has no apparent racially or ethnically diverse members11.
4.
Independence
Vote against or withhold from non-independent directors (Executive Directors and
Non-Independent Non- Executive Directors per Sustainability Advisory Services’ Classification of Directors) when:
•
Independent directors comprise 50 percent or less of the board;
•
The non-independent director serves on the audit, compensation, or nominating
committee;
•
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee; or
•
The company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the
functions of such a committee.
11
Aggregate diversity statistics provided by the board will only be considered if specific to racial and/or ethnic
diversity .
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Sustainability Policy Classification of Directors
— U.S.
1.
Executive Director
1.1.
Current officer[1] of the company or one of its
affiliates[2].
2.
Non-Independent Non-Executive
Director
Board Identification
2.1.
Director identified as not independent by the board.
Controlling/Significant Shareholder
2.2.
Beneficial owner of more than 50 percent of the company’s voting power (this may be aggregated if voting power
is distributed among more than one member of a group).
Current Employment at Company or Partnership
2.3.
Non-officer employee of the firm (including employee representatives).
2.4.
Officer[1], former officer, or general or limited
partner of a joint venture or partnership with the company.
Former Employment
2.5.
Former CEO of the company.[3],[4]
2.6.
Former non-CEO
officer[1] of the company or an affiliate[2] within the past five years.
2.7.
Former officer[1] of an acquired company within the past five
years[4].
2.8.
Officer [1]of a former parent or predecessor firm at
the time the company was sold or split off within the past five years.
2.9.
Former interim officer if the service was longer than 18 months. If the service was between 12 and 18 months an
assessment of the interim officer’s employment agreement will be made.[5]
Family Members
2.10.
Immediate family member[6]of a current or
former officer[1]of the company or its affiliates[2] within the last five years.
2.11.
Immediate family member[6]of a current
employee of company or its affiliates[2] where additional factors raise concern (which may include, but are not limited to, the following: a director related to numerous employees;
the company or its affiliates employ relatives of numerous board members; or a non-Section 16 officer in a key strategic role).
Professional, Transactional, and Charitable Relationships
2.12.
Director who (or whose immediate family member[6])
currently provides professional services[7]inexcess of $10,000 per yearto: the company, an
affiliate[2],
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or an individual officer of the company or an affiliate; either directly or is (or whose family member is) a partner, employee, or controlling shareholder of an organization which provides the services.
2.13.
Director who (or whose immediate family member[6])
currently has any material transactional relationship[8]with the company or its affiliates[2]; or who is (or whose
immediately family member[6] is) a partner in, or a controlling shareholder or an executive officer of, an organization which has the material transactional relationship[8] (excluding investments in the company through a private placement).
2.14.
Director who (or whose immediate family member[6])is a trustee, director, or employee of a charitable or non-profit organization that receives material grants or endowments[8]from
the company or its affiliates[2].
Other Relationships
2.15.
Party to a voting agreement[9]to vote in line
with management on proposals being brought to shareholder vote.
2.16.
Has (or an immediate family member[6]has) an
interlocking relationship as defined by the SEC involving members of the board of directors or its Compensation Committee[10].
2.17.
Founder[11]of the company but not currently an
employee.
2.18.
Director with pay comparable to Named Executive Officers.
2.19.
Any material[12] relationship with the company.
3.
Independent Director
3.1.
No material[12]connection to the company other
than a board seat.
Footnotes:
[1] The definition of officer will generally follow that of a “Section 16 officer” (officers subject to
Section 16 of the Securities and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting officers of a company (including the president, treasurer, secretary, controller, or any vice
president in charge of a principal business unit, division, or policy function). Current interim officers are included in this category. For private companies, the equivalent positions are applicable. A
non-employee director serving as an officer due to statutory requirements (e.g. corporate secretary) will be classified as an Affiliated Outsider under “Any material relationship with the company.”
However, if the company provides explicit disclosure that the director is not receiving additional compensation in excess of $10,000 per year for serving in that capacity, then the director will be classified as an Independent Outsider.
[2]“Affiliate” includes a subsidiary, sibling company, or parent company. Sustainability Advisory Services uses
50 percent control ownership by the parent company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer (EMI) is considered an affiliate.
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[3] Includes any former CEO of the company prior to the company’s initial public offering (IPO).
[4] When there is a former CEO of a special purpose acquisition company (SPAC) serving on the board of an acquired company,
Sustainability Advisory Services will generally classify such directors as independent unless determined otherwise taking into account the following factors: the applicable listing standards determination of such director’s independence; any
operating ties to the firm; and the existence of any other conflicting relationships or related party transactions.
[5]
Sustainability Advisory Services will look at the terms of the interim officer’s employment contract to determine if it contains severance pay, long-term health and pension benefits, or other such standard provisions typically contained in
contracts of permanent, non-temporary CEOs. Sustainability Advisory Services will also consider if a formal search process was under way for a full-time officer at the time.
[6]“Immediate family member” follows the SEC’s definition of such and covers spouses, parents, children,
step-parents, step-children, siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee for director, executive officer, or significant shareholder of
the company.
[7] Professional services can be characterized as advisory in nature, generally involve access to sensitive
company information or to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally include, but are not limited to the following: investment
banking/financial advisory services; commercial banking (beyond deposit services); investment services; insurance services; accounting/audit services; consulting services; marketing services; legal services; property management services; realtor
services; lobbying services; executive search services; and IT consulting services. The following would generally be considered transactional relationships and not professional services: deposit services; IT tech support services; educational
services; and construction services. The case of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to the associated materiality test) rather than
a professional relationship. “Of Counsel” relationships are only considered immaterial if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired partner of, the firm providing the
professional service. The case of a company providing a professional service to one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather than a professional relationship. Insurance
services and marketing services are assumed to be professional services unless the company explains why such services are not advisory.
[8] A material transactional relationship, including grants to
non-profit organizations, exists if the company makes annual payments to, or receives annual payments from, another entity exceeding the greater of $200,000 or 5 percent of the recipient’s gross
revenues, in the case of a company which follows NASDAQ listing standards; or the greater of $1,000,000 or 2 percent of the recipient’s gross revenues, in the case of a company which follows NYSE listing standards. In the case of a company
which follows neither of the preceding standards, Sustainability Advisory Services will apply the NASDAQ-based materiality test. (The recipient is the party receiving the financial proceeds from the transaction).
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[9] Dissident directors who are parties to a voting agreement pursuant to a settlement or similar arrangement
may be classified as independent outsiders if an analysis of the following factors indicates that the voting agreement does not compromise their alignment with all shareholders’ interests: the terms of the agreement; the duration of the
standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions.
[10] Interlocks include: executive officers serving as directors on each other’s compensation or similar
committees (or, in the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one serves on the other’s compensation or similar committees (or, in the absence of such a committee, on
the board).
[11] The operating involvement of the founder with the company will be considered; if the founder was
never employed by the company, Sustainability Advisory Services may deem him or her an independent outsider.
[12] For purposes of Sustainability Advisory Services’ director independence classification,
“material” will be defined as a standard of relationship (financial, personal or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in the boardroom in a manner that would have a
meaningful impact on an individual’s ability to satisfy requisite fiduciary standards on behalf of shareholders.
Other Board-Related Proposals
Board Refreshment
Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted annually, to ensure the evolving needs of
the board are met and to bring in fresh perspectives, skills, and diversity as needed.
Term/Tenure Limits
Sustainability Policy Recommendation: Vote
case-by-case on management proposals regarding director term/tenure limits, considering:
•
The rationale provided for adoption of the term/tenure limit;
•
The robustness of the company’s board evaluation process;
•
Whether the limit is of sufficient length to allow for a broad range of director tenures;
•
Whether the limit would disadvantage independent directors compared to
non-independent directors; and
•
Whether the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner.
Vote case-by-case on shareholder proposals asking
for the company to adopt director term/tenure limits, considering:
•
The scope of the shareholder proposal; and
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•
Evidence of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.
Age Limits
Sustainability Policy Recommendation: Generally vote against management and shareholder proposals to limit the
tenure of independent directors through mandatory retirement ages. Vote for proposals to remove mandatory age limits.
Board Size
Sustainability Policy Recommendation: Vote for proposals seeking to fix the board size or designate a range for
the board size.
Vote against proposals that give management the ability to alter the size of the board outside of a specified
range without shareholder approval.
Classification/Declassification of the Board
Sustainability Policy Recommendation: Vote against proposals to classify (stagger) the board.
Vote for proposals to repeal classified boards and to elect all directors annually.
CEO Succession Planning
Sustainability Policy Recommendation: Generally vote for proposals seeking disclosure on a CEO succession planning
policy, considering, at a minimum, the following factors:
•
The reasonableness/scope of the request; and
•
The company’s existing disclosure on its current CEO succession planning process.
Cumulative Voting
Sustainability Policy Recommendation: Generally vote against management proposals to eliminate cumulate voting,
and for shareholder proposals to restore or provide for cumulative voting, unless:
•
The company has proxy access, thereby allowing shareholders to nominate directors to the company’s ballot; and
•
The company has adopted a majority vote standard, with a carve-out for plurality
voting in situations where there are more nominees than seats, and a director resignation policy to address failed elections.
Vote
for proposals for cumulative voting at controlled companies (insider voting power > 50%).
Director and
Officer Indemnification and Liability Protection
Sustainability Policy Recommendation: Vote
case-by-case on proposals on director and officer indemnification and liability protection.
Vote against proposals that would:
•
Eliminate entirely directors’ and officers’ liability for monetary damages for violating the duty of care.
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•
Expand coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation
than mere carelessness.
•
Expand the scope of indemnification to provide for mandatory indemnification of company officials in connection with acts
that previously the company was permitted to provide indemnification for, at the discretion of the company’s board (i.e., “permissive indemnification”), but that previously the company was not required to indemnify.
Vote for only those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was
unsuccessful if both of the following apply:
•
If the director was found to have acted in good faith and in a manner that s/he reasonably believed was in the best
interests of the company; and
•
If only the director’s legal expenses would be covered.
Establish/Amend Nominee Qualifications
Sustainability Policy Recommendation: Vote
case-by-case on proposals that establish or amend director qualifications. Votes should be based on the reasonableness of the criteria and the degree to which they may
preclude dissident nominees from joining the board.
Vote
case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise, considering:
•
The company’s board committee structure, existing subject matter expertise, and board nomination provisions relative
to that of its peers;
•
The company’s existing board and management oversight mechanisms regarding the issue for which board oversight is
sought;
•
The company’s disclosure and performance relating to the issue for which board oversight is sought and any significant
related controversies; and
•
The scope and structure of the proposal.
Establish Other Board Committee Proposals
Sustainability Policy Recommendation: Generally vote against shareholder proposals to establish a new board
committee, as such proposals seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an appropriate oversight mechanism for itself. However, the following factors will be considered:
•
Existing oversight mechanisms (including current committee structure) regarding the issue for which board oversight is
sought;
•
Level of disclosure regarding the issue for which board oversight is sought;
•
Company performance related to the issue for which board oversight is sought;
•
Board committee structure compared to that of other companies in its industry sector; and
•
The scope and structure of the proposal.
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Filling Vacancies/Removal of Directors
Sustainability Policy Recommendation: Vote against proposals that provide that directors may be removed only for
cause.
•
Vote for proposals to restore shareholders’ ability to remove directors with or without cause.
•
Vote against proposals that provide that only continuing directors may elect replacements to fill board vacancies.
•
Vote for proposals that permit shareholders to elect directors to fill board vacancies.
Independent Board Chair
One of the principal functions of the board is to monitor and evaluate the performance of the CEO and other executive officers. The board chair’s
duty to oversee management may be compromised when he/she is connected to or a part of the management team. Generally, Sustainability Advisory Services recommends supporting shareholder proposals that would require that the position of board chair
be held by an individual with no materials ties to the company other than their board seat.
Sustainability Policy Recommendation: Generally, support shareholder proposals that would require the board chair
to be independent of management.
Majority of Independent Directors/Establishment of
Independent Committees
Sustainability Policy Recommendation: Vote for shareholder proposals asking that a majority or more of directors
be independent unless the board composition already meets the proposed threshold by the Sustainability policy’s definition of independent outsider. (See Sustainability Policy Classification of Directors — U.S.)
Vote for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively of independent directors
unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
Sustainability Policy Recommendation: Generally vote for management proposals to adopt a majority of votes cast
standard for directors in uncontested elections. Vote against if no carve-out for a plurality vote standard in contested elections is included.
Generally vote for precatory and binding shareholder resolutions requesting that the board change the company’s bylaws to stipulate that directors
need to be elected with an affirmative majority of votes cast, provided it does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out for a
plurality vote standard when there are more nominees than board seats.
Companies are strongly encouraged to also adopt a post-election policy (also
known as a director resignation policy) that will provide guidelines so that the company will promptly address the situation of a holdover director.
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Proxy Access
Sustainability Policy Recommendation: Generally vote for management and shareholder proposals for proxy access
with the following provisions:
•
Ownership threshold: maximum requirement not more than three percent (3%) of the voting power;
•
Ownership duration: maximum requirement not longer than three (3) years of continuous ownership for each member
of the nominating group;
•
Aggregation: minimal or no limits on the number of shareholders permitted to form a nominating group;
•
Cap: cap on nominees of generally twenty-five percent (25%) of the board.
Review for reasonableness any other restrictions on the right of proxy access.
Generally vote against proposals that are more restrictive than these guidelines.
Require More Nominees than Open Seats
Sustainability Policy Recommendation: Vote against shareholder proposals that would require a company to nominate
more candidates than the number of open board seats.
Sustainability Policy Recommendation: Generally vote for shareholder proposals requesting that the board establish
an internal mechanism/process, which may include a committee, in order to improve communications between directors and shareholders, unless the company has the following features, as appropriate:
•
Established a communication structure that goes beyond the exchange requirements to facilitate the exchange of information
between shareholders and members of the board;
•
Effectively disclosed information with respect to this structure to its shareholders;
•
Company has not ignored majority-supported shareholder proposals or a majority withhold vote on a director nominee; and
•
The company has an independent chair or a lead director, according to ISS’ Sustainability policy definition. This
individual must be made available for periodic consultation and direct communication with major shareholders.
Proxy Contests/Proxy Access -Voting for Director Nominees in Contested Elections
Sustainability Policy Recommendation: Vote
case-by-case on the election of directors in contested elections, considering the following factors:
•
Long-term financial performance of the company relative to its industry;
•
Management’s track record;
•
Background to the contested election;
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•
Nominee qualifications and any compensatory arrangements;
•
Strategic plan of dissident slate and quality of the critique against management;
•
Likelihood that the proposed goals and objectives can be achieved (both slates); and
•
Stock ownership positions.
In the case of candidates nominated pursuant to proxy access, vote
case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the
nominee(s) and/or to the nature of the election (such as whether or not there are more candidates than board seats).
Vote-No Campaigns
Sustainability Policy Recommendation: In cases where companies are targeted in connection with public “vote-no” campaigns, evaluate director nominees under the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the arguments submitted by
shareholders and other publicly available information.
3.
Shareholder Rights & Defenses
Advance Notice Requirements for Shareholder Proposals/Nominations
Sustainability Policy Recommendation: Vote
case-by-case on advance notice proposals, giving support to those proposals which allow shareholders to submit proposals/nominations as close to the meeting date as
reasonably possible and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.
To be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120 days prior to the anniversary
of the previous year’s meeting and have a submittal window of no shorter than 30 days from the beginning of the notice period (also known as a 90-120 day window). The submittal window is the period under
which shareholders must file their proposal/nominations prior to the deadline.
In general, support additional efforts by companies to ensure full
disclosure in regard to a proponent’s economic and voting position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
Sustainability Policy Recommendation: Vote against proposals giving the board exclusive authority to amend the
bylaws.
Vote for proposals giving the board the ability to amend the bylaws in addition to shareholders.
Control Share Acquisition Provisions
Control share acquisition statutes function by denying shares their voting rights when they contribute to ownership in excess of certain thresholds.
Voting rights for those shares exceeding
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ownership limits may only be restored by approval of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require a hostile bidder to
put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying up a large block of shares.
Sustainability Policy Recommendation: Vote for proposals to opt out of control share acquisition statutes unless
doing so would enable the completion of a takeover that would be detrimental to shareholders.
Vote against proposals to amend the
charter to include control share acquisition provisions.
Vote for proposals to restore voting rights to the control shares.
Control Share Cash-Out Provisions
Control share cash-out statutes give dissident shareholders the right to
“cash-out” of their position in a company at the expense of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold level, remaining shareholders
are given the right to sell their shares to the acquirer, who must buy them at the highest acquiring price.
Sustainability Policy Recommendation: Vote for proposals to opt out of control share cash-out statutes.
Disgorgement Provisions
Disgorgement provisions require an acquirer or potential acquirer of more than a certain percentage of a company’s stock to disgorge, or pay back,
to the company any profits realized from the sale of that company’s stock purchased 24 months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of time (between 18 months and 24
months) prior to the investor’s gaining control status are subject to these recapture-of-profits provisions.
Sustainability Policy Recommendation: Vote for proposals to opt out of state disgorgement provisions.
Fair Price Provisions
Sustainability Policy Recommendation: Vote
case-by-case on proposals to adopt fair price provisions (provisions that stipulate that an acquirer must pay the same price to acquire all shares as it paid to acquire
the control shares), evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and the mechanism for determining the fair price.
Generally vote against fair price provisions with shareholder vote requirements greater than a majority of disinterested shares.
Freeze-Out Provisions
Sustainability Policy Recommendation: Vote for proposals to opt out of state
freeze-out provisions. Freeze-out provisions force an investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining
control of the company.
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Greenmail
Greenmail payments are targeted share repurchases by management of company stock from individuals or groups seeking control of the company. Since only
the hostile party receives payment, usually at a substantial premium over the market value of its shares, the practice discriminates against all other shareholders.
Sustainability Policy Recommendation: Vote for proposals to adopt anti-greenmail charter or bylaw amendments or
otherwise restrict a company’s ability to make greenmail payments.
Vote case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
Shareholder Litigation Rights
Federal Forum Selection Provisions
Federal forum selection provisions require that U.S. federal courts be the sole forum for shareholders to litigate claims arising under federal
securities law.
Sustainability Policy Recommendation: Generally vote for federal forum selection provisions in the charter or
bylaws that specify “the district courts of the United States” as the exclusive forum for federal securities law matters, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
Vote against provisions that restrict the forum to a particular federal district court; unilateral adoption (without a shareholder
vote) of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the company, for claims
arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
Sustainability Policy Recommendation: Generally vote for charter or bylaw provisions that specify courts located
within the state of Delaware as the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate governance or board responsiveness to shareholders.
For states other than Delaware, vote case-by-case on exclusive forum
provisions, taking into consideration:
•
The company’s stated rationale for adopting such a provision;
•
Disclosure of past harm from duplicative shareholder lawsuits in more than one forum;
•
The breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply and
the definition of key terms; and
•
Governance features such as shareholders’ ability to repeal the provision at a later date (including the vote standard
applied when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through annual director elections and a majority vote standard in uncontested elections.
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Generally vote against provisions that specify a state other than the state of
incorporation as the exclusive forum for corporate law matters, or that specify a particular local court within the state; unilateral adoption of such a provision will generally be considered a one-time
failure under the Unilateral Bylaw/Charter Amendments policy.
Fee shifting
Fee-shifting provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay
all litigation expenses of the defendant corporation and its directors and officers.
Sustainability Policy Recommendation: Generally vote against provisions that mandate fee-shifting whenever plaintiffs are not completely successful on the merits (i.e., including cases where the plaintiffs are partially successful).
Unilateral adoption of a fee-shifting provision will generally be considered an ongoing failure under the
Unilateral Bylaw/Charter Amendments and Problematic Capital Structures policy.
Net Operating
Loss (NOL) Protective Amendments
Sustainability Policy Recommendation: Vote against proposals to adopt a protective amendment for the stated
purpose of protecting a company’s net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of three years and the exhaustion of the NOL.
Vote case-by-case, considering the following factors, for management
proposals to adopt an NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of the NOL:
•
The ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder);
•
The value of the NOLs;
•
Shareholder protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon
exhaustion or expiration of the NOL);
•
The company’s existing governance structure including: board independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic governance concerns; and
•
Any other factors that may be applicable.
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
Sustainability Policy Recommendation: Vote for shareholder proposals requesting that the company submit its poison
pill to a shareholder vote or redeem it unless the company has: (1) A shareholder approved poison pill in place; or (2) The company has adopted a policy concerning the adoption of a pill in the future specifying that the board will only
adopt a shareholder rights plan if either:
•
Shareholders have approved the adoption of the plan; or
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The board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders
under the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval (i.e., the “fiduciary out” provision). A poison pill adopted under this fiduciary out will be put to a
shareholder ratification vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on this issue, the plan will immediately terminate.
If the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, vote for the proposal, but add
the caveat that a vote within 12 months would be considered sufficient implementation.
Management Proposals to
Ratify a Poison Pill
Sustainability Policy Recommendation: Vote
case-by-case on management proposals on poison pill ratification, focusing on the features of the shareholder rights plan. Rights plans should contain the following
attributes:
•
No lower than a 20% trigger, flip-in or flip-over;
•
A term of no more than three years;
•
No dead-hand, slow-hand, no-hand or similar feature that limits the ability of a
future board to redeem the pill;
•
Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a
qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill.
In addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for the pill, take into
consideration the company’s existing governance structure, including: board independence, existing takeover defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
Sustainability Policy Recommendation: Vote against proposals to adopt a poison pill for the stated purpose of
protecting a company’s net operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
Vote case-by-case on management proposals for poison pill ratification,
considering the following factors, if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
•
The ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent);
•
The value of the NOLs;
•
Shareholder protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or
expiration of NOLs);
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•
The company’s existing governance structure including: board independence, existing takeover defenses, track record of
responsiveness to shareholders, and any other problematic governance concerns; and
•
Any other factors that may be applicable.
Proxy Voting Disclosure, Confidentiality, and Tabulation
Sustainability Policy Recommendation: Vote
case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder
rights. Specific issues covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company’s vote-counting methodology.
While a variety of factors may be
considered in each analysis, the guiding principles are: transparency, consistency, and fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
•
The scope and structure of the proposal;
•
The company’s stated confidential voting policy (or other relevant policies) and whether it ensures a “level
playing field” by providing shareholder proponents with equal access to vote information prior to the annual meeting;
•
The company’s vote standard for management and shareholder proposals and whether it ensures consistency and fairness
in the proxy voting process and maintains the integrity of vote results;
•
Whether the company’s disclosure regarding its vote counting method and other relevant voting policies with respect to
management and shareholder proposals are consistent and clear;
•
Any recent controversies or concerns related to the company’s proxy voting mechanics;
•
Any unintended consequences resulting from implementation of the proposal; and
•
Any other factors that may be relevant.
Ratification Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
Sustainability Policy Recommendation: Generally vote against management proposals to ratify provisions of the
company’s existing charter or bylaws, unless these governance provisions align with best practice.
In addition, voting
against/withhold from individual directors, members of the governance committee, or the full board may be warranted, considering:
•
The presence of a shareholder proposal addressing the same issue on the same ballot;
•
The board’s rationale for seeking ratification;
•
Disclosure of actions to be taken by the board should the ratification proposal fail;
•
Disclosure of shareholder engagement regarding the board’s ratification request;
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The level of impairment to shareholders’ rights caused by the existing provision;
•
The history of management and shareholder proposals on the provision at the company’s past meetings;
•
Whether the current provision was adopted in response to the shareholder proposal;
•
The company’s ownership structure; and
•
Previous use of ratification proposals to exclude shareholder proposals.
Reimbursing Proxy Solicitation Expenses
Sustainability Policy Recommendation: Vote
case-by-case on proposals to reimburse proxy solicitation expenses.
When voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation expenses associated with
the election.
Generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in connection with nominating one
or more candidates in a contested election where the following apply:
•
The election of fewer than 50% of the directors to be elected is contested in the election;
•
One or more of the dissident’s candidates is elected;
•
Shareholders are not permitted to cumulate their votes for directors; and
•
The election occurred, and the expenses were incurred, after the adoption of this bylaw.
Reincorporation Proposals
Sustainability Policy Recommendation: Management or shareholder proposals to change a company’s state of
incorporation should be evaluated case-by-case, giving consideration to both financial and corporate governance concerns including the following:
•
Reasons for reincorporation;
•
Comparison of company’s governance practices and provisions prior to and following the reincorporation; and
•
Comparison of corporation laws of original state and destination state.
•
Vote for reincorporation when the economic factors outweigh any neutral or negative governance changes.
Shareholder Ability to Act by Written Consent
Sustainability Policy Recommendation: Generally vote against management and shareholder proposals to restrict or
prohibit shareholders’ ability to act by written consent.
Generally vote for management and shareholder proposals
that provide shareholders with the ability to act by written consent, taking into account the following factors:
•
Shareholders’ current right to act by written consent;
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The consent threshold;
•
The inclusion of exclusionary or prohibitive language;
•
Investor ownership structure; and
•
Shareholder support of, and management’s response to, previous shareholder proposals.
Vote case-by-case on shareholder proposals if, in addition to the
considerations above, the company has the following governance and antitakeover provisions:
•
An unfettered12 right for shareholders to call special meetings at a
10 percent threshold;
•
A majority vote standard in uncontested director elections;
•
No non-shareholder-approved pill; and
•
An annually elected board.
Shareholder Ability to Call Special Meetings
Sustainability Policy Recommendation: Vote against management or shareholder proposals to restrict or prohibit
shareholders’ ability to call special meetings.
Generally vote for management or shareholder proposals that provide
shareholders with the ability to call special meetings taking into account the following factors:
•
Shareholders’ current right to call special meetings;
•
Minimum ownership threshold necessary to call special meetings (10% preferred);
•
The inclusion of exclusionary or prohibitive language;
•
Investor ownership structure; and
•
Shareholder support of, and management’s response to, previous shareholder proposals.
Stakeholder Provisions
Sustainability Policy Recommendation: Vote against proposals that ask the board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination.
State Antitakeover Statutes
Sustainability Policy Recommendation: Vote
case-by-case on proposals to opt in or out of state takeover statutes (including fair price provisions, stakeholder laws, poison pill endorsements, severance pay and
labor contract provisions, and anti-greenmail provisions).
12
“Unfettered” means no restrictions on agenda items, no restrictions on the number of shareholders who can group
together to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than 30 days after the last annual meeting and no greater than 90 prior to the next annual meeting.
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Supermajority Vote Requirements
Sustainability Policy Recommendation: Vote against proposals to require a supermajority shareholder vote.
Vote for management or shareholder proposals to reduce supermajority vote requirements. However, for companies with shareholder(s)
who have significant ownership levels, vote case-by-case, taking into account:
•
Ownership structure;
•
Quorum requirements; and
•
Vote requirements.
Virtual Shareholder Meetings
Sustainability Policy Recommendation: Generally vote for management proposals allowing for the convening of
shareholder meetings by electronic means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances under which virtual-only13 meetings would be held, and to allow for comparable rights and opportunities for shareholders to participate electronically as they would have during an
in-person meeting.
Vote
case-by-case on shareholder proposals concerning virtual-only meetings, considering:
•
Scope and rationale of the proposal; and
•
Concerns identified with the company’s prior meeting practices.
4.
Capital/Restructuring
Capital
Adjustments to Par Value of Common Stock
Sustainability Policy Recommendation: Vote for management proposals to reduce the par value of common stock unless
the action is being taken to facilitate an anti-takeover device or some other negative corporate governance action.
Vote for
management proposals to eliminate par value.
Common Stock Authorization
General Authorization Requests
Sustainability Policy Recommendation: Vote
case-by-case on proposals to increase the number of authorized shares of common stock that are to be used for general corporate purposes:
•
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized shares.
13
Virtual-only shareholder meeting” refers to a meeting of shareholders that is held exclusively using
technology without a corresponding in-person meeting.
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•
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares.
•
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.
•
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization.
Generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s
prior or ongoing use of authorized shares is problematic, including, but not limited to:
•
The proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting rights
to other share classes;
•
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization;
•
The company has a non-shareholder approved poison pill (including an NOL pill); or
•
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval.
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
•
In, or subsequent to, the company’s most recent 10-K filing, the company
discloses that there is substantial doubt about its ability to continue as a going concern;
•
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or
•
A government body has in the past year required the company to increase its capital ratios.
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all
nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific
Authorization Requests
Sustainability Policy Recommendation: Generally vote for proposals to increase the number of authorized common
shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar transactions) on the same ballot, or disclosed in the proxy statement,
that warrant support. For such transactions, the allowable increase will be the greater of:
•
twice the amount needed to support the transactions on the ballot, and
•
the allowable increase as calculated for general issuances above.
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Dual Class Structure
Sustainability Policy Recommendation: Generally vote against proposals to create a new class of common stock
unless:
•
The company discloses a compelling rationale for the dual-class capital structure, such as:
•
The company’s auditor has concluded that there is substantial doubt about the company’s ability to continue as a
going concern; or
•
The new class of shares will be transitory;
•
The new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short term
and long term; and
•
The new class is not designed to preserve or increase the voting power of an insider or significant shareholder.
Issue Stock for Use with Rights Plan
Sustainability Policy Recommendation: Vote against proposals that increase authorized common stock for the
explicit purpose of implementing a non-shareholder- approved shareholder rights plan (poison pill).
Preemptive Rights
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals that seek preemptive rights, taking into consideration:
•
The size of the company;
•
The shareholder base; and
•
The liquidity of the stock.
Preferred Stock Authorization
General Authorization Requests
Sustainability Policy Recommendation: Vote
case-by-case on proposals to increase the number of authorized shares of preferred stock that are to be used for general corporate purposes:
•
If share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of up to
50% of current authorized shares.
•
If share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized
shares.
•
If share usage is greater than current authorized shares, vote for an increase of up to the current share usage.
•
In the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted
authorization.
•
If no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a
specific use for the shares.
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Generally vote against proposed increases, even if within the above ratios, if the
proposal or the company’s prior or ongoing use of authorized shares is problematic, including, but not limited to:
•
If the shares requested are blank check preferred shares that can be used for antitakeover purposes;14
•
The company seeks to increase a class of non-convertible preferred shares entitled
to more than one vote per share on matters that do not solely affect the rights of preferred stockholders “supervoting shares”);
•
The company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the number
of common shares into which they’re convertible (“supervoting shares”) on matters that do not solely affect the rights of preferred stockholders;
•
The stated intent of the increase in the general authorization is to allow the company to increase an existing designated
class of supervoting preferred shares;
•
On the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization;
•
The company has a non-shareholder approved poison pill (including an NOL pill); or
•
The company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval.
However, generally vote for proposed increases
beyond the above ratios or problematic situations when there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
•
In, or subsequent to, the company’s most recent 10-K filing, the company
discloses that there is substantial doubt about its ability to continue as a going concern;
•
The company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve the
increase in authorized capital; or
•
A government body has in the past year required the company to increase its capital ratios.
For companies incorporated in states that allow increases in authorized capital without shareholder approval, generally vote withhold or against all
nominees if a unilateral capital authorization increase does not conform to the above policies.
Specific
Authorization Requests
Sustainability Policy Recommendation: Generally vote for proposals to increase the number of authorized preferred
shares where the primary purpose of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private placements, or similar
14
To be acceptable, appropriate disclosure would be needed that the shares are “declawed”: i.e.,
representation by the board that it will not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover purpose or for the purpose of implementing any stockholder rights plan.
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transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For such transactions, the allowable increase will be the greater of:
•
twice the amount needed to support the transactions on the ballot, and
•
the allowable increase as calculated for general issuances above.
Recapitalization Plans
Sustainability Policy Recommendation: Vote
case-by-case on recapitalizations (reclassifications of securities), taking into account the following:
•
More simplified capital structure;
•
Enhanced liquidity;
•
Fairness of conversion terms;
•
Impact on voting power and dividends;
•
Reasons for the reclassification;
•
Conflicts of interest; and
•
Other alternatives considered.
Reverse Stock Splits
Sustainability Policy Recommendation: Vote for management proposals to implement a reverse stock split if:
•
The number of authorized shares will be proportionately reduced; or
•
The effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with
Sustainability Advisory Services’ Common Stock Authorization policy.
Vote case-by-case on proposals that do not meet either of the above conditions, taking into consideration the following factors:
•
Stock exchange notification to the company of a potential delisting;
•
Disclosure of substantial doubt about the company’s ability to continue as a going concern without additional
financing;
•
The company’s rationale; or
•
Other factors as applicable.
Share Repurchase Programs
Sustainability Policy Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic
Issuers that are traded solely on U.S. exchanges,vote for management proposals to institute open-market share repurchase plans in which all shareholders may participate on equal terms, or to grant the board authority to conduct open-market
repurchases, in the absence of company-specific concerns regarding:
•
Greenmail,
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The use of buybacks to inappropriately manipulate incentive compensation metrics,
•
Threats to the company’s long-term viability, or
•
Other company-specific factors as warranted.
Vote case-by-case on proposals to repurchase shares directly from
specified shareholders, balancing the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares from insiders at a premium to market price.
Stock Distributions: Splits and Dividends
Sustainability Policy Recommendation: Generally vote for management proposals to increase the common share
authorization for stock split or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase calculated in accordance with Sustainability Advisory Services’ Common Stock
Authorization policy.
Tracking Stock
Sustainability Policy Recommendation: Vote
case-by-case on the creation of tracking stock, weighing the strategic value of the transaction against such factors as:
•
Adverse governance changes;
•
Excessive increases in authorized capital stock;
•
Unfair method of distribution;
•
Diminution of voting rights;
•
Adverse conversion features;
•
Negative impact on stock option plans; and
•
Alternatives such as spin-off.
Restructuring
Appraisal Rights
Sustainability Policy Recommendation: Vote for proposals to restore or provide shareholders with rights of
appraisal.
Asset Purchases
Sustainability Policy Recommendation: Vote
case-by-case on asset purchase proposals, considering the following factors:
•
Purchase price;
•
Fairness opinion;
•
Financial and strategic benefits;
•
How the deal was negotiated;
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•
Conflicts of interest;
•
Other alternatives for the business;
•
Non-completion risk.
Asset Sales
Sustainability Policy Recommendation: Vote
case-by-case on asset sales, considering the following factors:
•
Impact on the balance sheet/working capital;
•
Potential elimination of diseconomies;
•
Anticipated financial and operating benefits;
•
Anticipated use of funds;
•
Value received for the asset;
•
Fairness opinion;
•
How the deal was negotiated;
•
Conflicts of interest.
Bundled Proposals
Sustainability Policy Recommendation: Vote
case-by-case on bundled or “conditional” proxy proposals. In the case of items that are conditioned upon each other, examine the benefits and costs of the
packaged items. In instances when the joint effect of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect is positive, support such proposals.
Conversion of Securities
Sustainability Policy Recommendation: Vote
case-by-case on proposals regarding conversion of securities. When evaluating these proposals, the investor should review the dilution to existing shareholders, the
conversion price relative to market value, financial issues, control issues, termination penalties, and conflicts of interest.
Vote for the conversion if it is expected that the company will be subject to onerous penalties or will be forced to file for bankruptcy if the
transaction is not approved.
Sustainability Policy Recommendation: Vote
case-by-case on proposals to increase common and/or preferred shares and to issue shares as part of a debt restructuring plan, after evaluating:
•
Dilution to existing shareholders’ positions;
•
Terms of the offer — discount/premium in purchase price to investor, including any fairness opinion; termination
penalties; exit strategy;
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•
Financial issues — company’s financial situation; degree of need for capital; use of proceeds; effect of the
financing on the company’s cost of capital;
•
Management’s efforts to pursue other alternatives;
•
Control issues — change in management; change in control, guaranteed board and committee seats; standstill provisions;
voting agreements; veto power over certain corporate actions; and
•
Conflict of interest — arm’s length transaction, managerial incentives.
Vote for the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
Formation of Holding Company
Sustainability Policy Recommendation: Vote
case-by-case on proposals regarding the formation of a holding company, taking into consideration the following:
•
The reasons for the change;
•
Any financial or tax benefits;
•
Regulatory benefits;
•
Increases in capital structure; and
•
Changes to the articles of incorporation or bylaws of the company.
Absent compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if the transaction would include
either of the following:
•
Increases in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”); or
•
Adverse changes in shareholder rights.
Going Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
Sustainability Policy Recommendation: Vote
case-by-case on going private transactions, taking into account the following:
•
Offer price/premium;
•
Fairness opinion;
•
How the deal was negotiated;
•
Conflicts of interest;
•
Other alternatives/offers considered; and
•
Non-completion risk.
Vote case-by-case on going dark transactions, determining whether the
transaction enhances shareholder value by taking into consideration:
•
Whether the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and market
research of the stock);
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•
Balanced interests of continuing vs. cashed-out shareholders, taking into account
the following:
•
Are all shareholders able to participate in the transaction?
•
Will there be a liquid market for remaining shareholders following the transaction?
•
Does the company have strong corporate governance?
•
Will insiders reap the gains of control following the proposed transaction?
•
Does the state of incorporation have laws requiring continued reporting that may benefit shareholders?
Joint Ventures
Sustainability Policy Recommendation: Vote
case-by-case on proposals to form joint ventures, taking into account the following:
•
Percentage of assets/business contributed;
•
Percentage ownership;
•
Financial and strategic benefits;
•
Governance structure;
•
Conflicts of interest;
•
Other alternatives; and
•
Non-completion risk.
Liquidations
Sustainability Policy Recommendation: Vote
case-by-case on liquidations, taking into account the following:
•
Management’s efforts to pursue other alternatives;
•
Appraisal value of assets; and
•
The compensation plan for executives managing the liquidation.
Vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
Mergers and Acquisitions
Sustainability Policy Recommendation: Vote
case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing
factors including:
•
Valuation — Is the value to be received by the target shareholders (or paid by the acquirer) reasonable?
While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on the offer premium, market reaction and strategic rationale.
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Market reaction — How has the market responded to the proposed deal? A negative market reaction should
cause closer scrutiny of a deal.
•
Strategic rationale — Does the deal make sense strategically? From where is the value derived? Cost and
revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable track record of successful integration of historical acquisitions.
•
Negotiations and process — Were the terms of the transaction negotiated at arm’s-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation “wins” can also signify the deal makers’ competency. The
comprehensiveness of the sales process (e.g., full auction, partial auction, no auction) can also affect shareholder value.
•
Conflicts of interest — Are insiders benefiting from the transaction disproportionately and
inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more likely to vote to approve a merger than if they did not hold
these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger.
•
Governance — Will the combined company have a better or worse governance profile than the current
governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
Sustainability Policy Recommendation: Vote
case-by-case on proposals regarding private placements, warrants, and convertible debentures taking into consideration:
•
Dilution to existing shareholders’ position: The amount and timing of shareholder ownership dilution should be weighed
against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is often the necessary event to
trigger the exercise of “out of the money” warrants and convertible debt. In these instances from a value standpoint, the negative impact of dilution is mitigated by the increase in the company’s stock price that must occur to trigger
the dilutive event.
•
Terms of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features,
termination penalties, exit strategy):
•
The terms of the offer should be weighed against the alternatives of the company and in light of company’s financial
condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be at a premium to the then prevailing stock price at the time of private placement.
•
When evaluating the magnitude of a private placement discount or premium, consider factors that influence the discount or
premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information asymmetry and anticipation of future performance.
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•
Financial issues:
•
The company’s financial condition;
•
Degree of need for capital;
•
Use of proceeds;
•
Effect of the financing on the company’s cost of capital;
•
Current and proposed cash burn rate;
•
Going concern viability and the state of the capital and credit markets.
•
Management’s efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A
fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint ventures, partnership, merger or sale of part or all of the company.
•
Control issues:
•
Change in management;
•
Change in control;
•
Guaranteed board and committee seats;
•
Standstill provisions;
•
Voting agreements;
•
Veto power over certain corporate actions; and
•
Minority versus majority ownership and corresponding minority discount or majority control premium
•
Conflicts of interest:
•
Conflicts of interest should be viewed from the perspective of the company and the investor.
•
Were the terms of the transaction negotiated at arm’s length? Are managerial incentives aligned with shareholder
interests?
•
Market reaction:
•
The market’s response to the proposed deal. A negative market reaction is a cause for concern. Market reaction may be
addressed by analyzing the one day impact on the unaffected stock price.
Vote for the private placement, or for the issuance of
warrants and/or convertible debentures in a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
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Reorganization/Restructuring Plan (Bankruptcy)
Sustainability Policy Recommendation: Vote
case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering the following factors including, but not limited to:
•
Estimated value and financial prospects of the reorganized company;
•
Percentage ownership of current shareholders in the reorganized company;
•
Whether shareholders are adequately represented in the reorganization process (particularly through the existence of an
official equity committee);
•
The cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);
•
Existence of a superior alternative to the plan of reorganization; and
•
Governance of the reorganized company.
Special Purpose Acquisition Corporations (SPACs)
Sustainability Policy Recommendation: Vote
case-by-case on SPAC mergers and acquisitions taking into account the following:
•
Valuation — Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness
opinion and the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to the
SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may be applied to the target, if it is a private entity.
•
Market reaction — How has the market responded to the proposed deal? A negative market reaction may be a
cause for concern. Market reaction may be addressed by analyzing the one-day impact on the unaffected stock price.
•
Deal timing — A main driver for most transactions is that the SPAC charter typically requires the deal
to be complete within 18 to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts of interest for deals that are announced close to the liquidation date.
•
Negotiations and process — What was the process undertaken to identify potential target companies within
specified industry or location specified in charter? Consider the background of the sponsors.
•
Conflicts of interest — How are sponsors benefiting from the transaction compared to IPO shareholders?
Potential conflicts could arise if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if management is encouraged to pay a higher price for the target because of an 80% rule (the charter requires that the
fair market value of the target is at least equal to 80% of net assets of the SPAC). Also, there may be sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a transaction to be completed within
the 18-24 month timeframe.
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•
Voting agreements — Are the sponsors entering into enter into any voting agreements/ tender offers with
shareholders who are likely to vote against the proposed merger or exercise conversion rights?
•
Governance — What is the impact of having the SPAC CEO or founder on key committees following the
proposed merger?
Special Purpose Acquisition Corporations (SPACs) — Proposals for
Extensions
Sustainability Policy Recommendation: Vote
case-by-case on SPAC extension proposals taking into account the length of the requested extension, the status of any pending transaction(s) or progression of the
acquisition process, any added incentive for non-redeeming shareholders, and any prior extension requests.
•
Length of request: Typically, extension requests range from two to six months, depending on the progression
of the SPAC’s acquistion process.
•
Pending transaction(s) or progression of the acquisition process: Sometimes an intial business combination
was already put to a shareholder vote, but, for varying reasons, the transaction could not be consummated by the termination date and the SPAC is requesting an extension. Other times, the SPAC has entered into a definitive transaction agreement, but
needs additional time to consummate or hold the shareholder meeting.
•
Added incentive for non-redeeming shareholders: Sometimes the SPAC
sponsor (or other insiders) will contribute, typically as a loan to the company, additional funds that will be added to the redemption value of each public share as long as such shares are not redeemed in connection with the extension request. The
purpose of the “equity kicker” is to incentivize shareholders to hold their shares through the end of the requested extension or until the time the transaction is put to a shareholder vote, rather than electing redeemption at the extension
proposal meeting.
•
Prior extension requests: Some SPACs request additional time beyond the extension period sought in prior
extension requests.
Spin-offs
Sustainability Policy Recommendation: Vote
case-by-case on spin-offs, considering:
•
Tax and regulatory advantages;
•
Planned use of the sale proceeds;
•
Valuation of spinoff;
•
Fairness opinion;
•
Benefits to the parent company;
•
Conflicts of interest;
•
Managerial incentives;
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•
Corporate governance changes;
•
Changes in the capital structure.
Value Maximization Shareholder Proposals
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals seeking to maximize shareholder value by:
•
Hiring a financial advisor to explore strategic alternatives;
•
Selling the company; or
•
Liquidating the company and distributing the proceeds to shareholders.
These proposals should be evaluated based on the following factors:
•
Prolonged poor performance with no turnaround in sight;
•
Signs of entrenched board and management (such as the adoption of takeover defenses);
•
Strategic plan in place for improving value;
•
Likelihood of receiving reasonable value in a sale or dissolution; and
•
The company actively exploring its strategic options, including retaining a financial advisor.
5.
Compensation
Executive Pay Evaluation
Underlying all evaluations are five global principles that most investors expect corporations to adhere to in designing and administering executive and
director compensation programs:
1.
Maintain appropriate pay-for-performance
alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder value creation over
the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs;
2.
Avoid arrangements that risk “pay for failure”: This principle addresses the appropriateness of long or
indefinite contracts, excessive severance packages, and guaranteed compensation;
3.
Maintain an independent and effective compensation committee: This principle promotes oversight of executive pay programs
by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making (e.g., including access to independent expertise and advice when needed);
4.
Provide shareholders with clear, comprehensive compensation disclosures: This principle underscores the importance of
informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly;
5.
Avoid inappropriate pay to non-executive directors: This principle recognizes the
interests of shareholders in ensuring that compensation to outside directors does not compromise their
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independence and ability to make appropriate judgments in overseeing managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.
Advisory Votes on Executive Compensation — Management Proposals (Management Say-on-Pay)
Sustainability Policy Recommendation: Vote
case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.
Vote against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”) if:
•
There is an unmitigated misalignment between CEO pay and company performance (pay for performance);
•
The company maintains significant problematic pay practices;
•
The board exhibits a significant level of poor communication and responsiveness to shareholders.
Vote against or withhold from the members of the compensation committee and potentially the full board if:
•
There is no SOP on the ballot, and an against vote on an SOP is warranted due to pay for performance misalignment,
problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;
•
The board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes
cast;
•
The company has recently practiced or approved problematic pay practices, such as option repricing or option backdating; or
•
The situation is egregious.
Primary Evaluation Factors for Executive Pay
Pay-for-Performance Evaluation
Sustainability Advisory Services annually conducts a pay-for-performance
analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the Russell 3000 or Russell 3000E Indices15, this analysis
considers the following:
1.
Peer Group16 Alignment:
15
The Russell 3000E Index includes approximately 4,000 of the largest U.S. equity securities.
16
The revised peer group is generally comprised of 14-24 companies that are
selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company’s selected peers’ GICS industry group, with size constraints, via a process designed to select peers that are comparable to the
subject company in terms of revenue/assets and industry, and also within a market cap bucket that is reflective of the company’s. For Oil, Gas & Consumable Fuels companies, market cap is the only size determinant.
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The degree of alignment between the company’s annualized TSR rank and the CEO’s annualized total pay rank within
a peer group, each measured over a three-year period.
•
The rankings of CEO total pay and company financial performance within a peer group, each measured over a three-year
period.
•
The multiple of the CEO’s total pay relative to the peer group median in the most recent fiscal year.
2.
Absolute Alignment17 — the absolute alignment between the trend
in CEO pay and company TSR over the prior five fiscal years — i.e., the difference between the trend in annual pay changes and the trend in annualized TSR during the period.
If the above analysis demonstrates significant unsatisfactory long-term
pay-for-performance alignment or, in the case of companies outside the Russell indices, misaligned pay and performance are otherwise suggested, our analysis may include
any of the following qualitative factors, as relevant to evaluating how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
•
The ratio of performance- to time-based incentive awards;
•
The overall ratio of performance-based compensation;
•
The rigor of performance goals;
•
The complexity and risks around pay program design;
•
The transparency and clarity of disclosure;
•
The company’s peer group benchmarking practices;
•
Financial/operational results, both absolute and relative to peers;
•
Special circumstances related to, for example, a new CEO in the prior FY or anomalous equity grant practices (e.g., bi-annual awards);
•
Realizable pay18 compared to grant pay; and
•
Any other factors deemed relevant.
Problematic Pay Practices
The focus is on executive compensation practices that contravene the global pay principles, including:
•
Problematic practices related to non-performance-based compensation elements;
•
Incentives that may motivate excessive risk-taking or present a windfall risk; and
•
Pay decisions that circumvent
pay-for-performance, such as options backdating or waiving performance requirements.
17
Only Russell 3000 Index companies are subject to the Absolute Alignment analysis.
18
Sustainability Advisory Services research reports include realizable pay for S&P1500 companies.
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Problematic Pay Practices related to
Non-Performance-Based Compensation Elements
Pay elements that are not directly based on performance are
generally evaluated case-by-case considering the context of a company’s overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS’ Compensation Policies FAQ document for detail on specific pay practices that have been identified as potentially problematic and may lead to
negative recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that carry significant weight in this overall consideration and may result
in adverse vote recommendations:
•
Repricing or replacing of underwater stock options/SARS without prior shareholder approval (including cash buyouts and
voluntary surrender of underwater options);
•
Excessive perquisites or tax gross-ups;
•
New or materially amended agreements that provide for:
•
Excessive termination or CIC severance payments exceeding 3 times base salary and average/target/most recent bonus;
•
CIC severance payments without involuntary job loss or substantial diminution of duties (“single” or
“modified single” triggers); or in connection with a problematic Good Reason definition;
Multi-year guaranteed awards that are not at risk due to rigorous performance conditions;
•
Liberal CIC definition combined with any single-trigger CIC benefits;
•
Insufficient executive compensation disclosure by externally- managed issuers (EMIs) such that a reasonable assessment of
pay programs and practices applicable to the EMI’s executives is not possible.
•
Any other provision or practice deemed to be egregious and present a significant risk to investors.
Options Backdating
The following factors
should be examined case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
•
Reason and motive for the options backdating issue, such as inadvertent vs. deliberate grant date changes;
•
Duration of options backdating;
•
Size of restatement due to options backdating;
•
Corrective actions taken by the board or compensation committee, such as canceling or
re-pricing backdated options, the recouping of option gains on backdated grants; and
•
Adoption of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants
in the future.
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Compensation Committee Communications and
Responsiveness
Consider the following factors case-by-case when
evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
•
Failure to respond to majority-supported shareholder proposals on executive pay topics; or
•
Failure to adequately respond to the company’s previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account:
•
The company’s response, including:
•
Disclosure of engagement efforts with major institutional investors regarding the issues that contributed to the low level
of support (including the timing and frequency of engagements and whether independent directors participated);
•
Disclosure of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
•
Disclosure of specific and meaningful actions taken to address shareholders’ concerns;
•
Other recent compensation actions taken by the company;
•
Whether the issues raised are recurring or isolated;
•
The company’s ownership structure; and
•
Whether the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
Frequency of Advisory Vote on Executive Compensation (“Say When on Pay”)
Sustainability Policy Recommendation: Vote for annual advisory votes on compensation, which provide the most
consistent and clear communication channel for shareholder concerns about companies’ executive pay programs.
Voting on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
Sustainability Policy Recommendation: Vote
case-by-case on say on Golden Parachute proposals, including consideration of existing
change-in-control arrangements maintained with named executive officers rather than focusing primarily on new or extended arrangements.
Features that may result in an “against” recommendation include one or more of the following, depending on the number, magnitude, and/or timing
of issue(s):
•
Single- or modified-single-trigger cash severance;
•
Single-trigger acceleration of unvested equity awards;
•
Full acceleration of equity awards granted shortly before the change in control;
•
Acceleration of performance awards above the target level of performance without compelling rationale;
•
Excessive cash severance (>3x base salary and bonus);
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Excise tax gross-ups triggered and payable;
•
Excessive golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or
•
Recent amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary
equity grants) that may make packages so attractive as to influence merger agreements that may not be in the best interests of shareholders; or
•
The company’s assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute
advisory vote.
Recent amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis.
However, the presence of multiple legacy problematic features will also be closely scrutinized.
In cases where the golden parachute vote is
incorporated into a company’s advisory vote on compensation (management say-on-pay), the
say-on-pay proposal will be evaluated in accordance with these guidelines, which may give higher weight to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
Please refer to ISS’ U.S. Equity Compensation Plans FAQ document for additional details on the Equity Plan Scorecard policy.
Sustainability Policy Recommendation: Vote
case-by-case on certain equity-based compensation plans19 depending on a combination of certain plan features and
equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an “Equity Plan Scorecard” (EPSC) approach with three pillars:
•
Plan Cost: The total estimated cost of the company’s equity plans relative to industry/market cap peers,
measured by the company’s estimated Shareholder Value Transfer (SVT) in relation to peers and considering both:
•
SVT based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;
and
•
SVT based only on new shares requested plus shares remaining for future grants.
•
Plan Features:
•
Quality of disclosure around vesting upon a change in control (CIC);
•
Discretionary vesting authority;
•
Liberal share recycling on various award types;
•
Lack of minimum vesting period for grants made under the plan;
19
Proposals evaluated under the EPSC policy generally include those to approve or amend (1) stock option plans for
employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated
case -by-case.
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•
Dividends payable prior to award vesting.
•
Grant Practices:
•
The company’s three year burn rate relative to its industry/market cap peers;
•
Vesting requirements in CEO’S recent equity grants (3-year look-back);
•
The estimated duration of the plan (based on the sum of shares remaining available and the new shares requested, divided by
the average annual shares granted in the prior three years);
•
The proportion of the CEO’s most recent equity grants/awards subject to performance conditions;
•
Whether the company maintains a sufficient claw-back policy;
•
Whether the company maintains sufficient post exercise/vesting share-holding requirements.
Generally vote against the plan proposal if the combination of above factors indicates that the plan is not, overall, in shareholders’ interests, or
if any of the following egregious factors (“overriding factors”) apply:
•
Awards may vest in connection with a liberal
change-of-control definition;
•
The plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly
permitting it — for NYSE and Nasdaq listed companies — or by not prohibiting it when the company has a history of repricing — for non-listed companies);
•
The plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances;
•
The plan is excessively dilutive to shareholders’ holdings;
•
The plan contains an evergreen (automatic share replenishment) feature; or
•
Any other plan features are determined to have a significant negative impact on shareholder interests.
Further Information on certain EPSC Factors
Shareholder Value Transfer (SVT)
The cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option pricing model that assesses the
amount of shareholders’ equity flowing out of the company to employees and directors. SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed, shares available under existing plans, and
shares granted but unexercised (using two measures, in the case of plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans, unless limitations are placed on the most expensive types of
awards (for example, full value awards), the assumption is made that all awards to be granted will be the most expensive types.
For proposals
subject to Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if it falls below a company-specific benchmark. The benchmark is determined as follows: The top
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quartile performers in each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for each industry are established based on these top
performers’ historic SVT. Regression analyses are run on each industry group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted upwards or downwards for the specific company by plugging
the company-specific performance measures, size and cash compensation into the industry cap equations to arrive at the company’s benchmark.20
Three-Year Burn Rate
For meetings held prior to February 1, 2023, burn-rate benchmarks (utilized in Equity Plan Scorecard evaluations) are calculated as the greater of:
(1) the mean (µ) plus one standard deviation (s) of the company’s GICS group segmented by S&P 500, Russell 3000 index (less the
S&P500) and non-Russell 3000 index; and (2) two percent of weighted common shares outstanding. In addition, year-over-year burn-rate benchmark changes will be limited to a maximum of two
(2) percentage points plus or minus the prior year’s burn-rate benchmark. See the U.S. Equity Compensation Plans FAQ for the benchmarks.
For meetings held prior to February 1, 2023, a company’s adjusted burn rate is calculated as follows:
Burn Rate = (# of appreciation awards granted + # of full value awards granted * Volatility Multiplier) / Weighted average common shares outstanding
The Volatility Multiplier is used to provide more equivalent valuation between stock options and full value shares, based on the company’s
historical stock price volatility.
Effective for meetings held on or after February 1, 2023, a “Value-Adjusted Burn Rate” will
instead be used for stock plan evaluations. Value-Adjusted Burn Rate benchmarks will be calculated as the greater of: (1) an industry-specific threshold based on three-year burn rates within the company’s GICS group segmented by S&P
500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold established separately for each of the S&P 500, the Russell 3000 index less the S&P 500,
and the non-Russell 3000 index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior year’s burn-rate benchmark.
The Value-Adjusted Burn Rate will be calculated as follows:
Value-Adjusted Burn Rate = ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards * stock price)) / (Weighted
average common shares * stock price).
Egregious Factors
Liberal Change in Control Definition
Generally vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest upon such liberal
definition of change-in-control, even though an actual change in control may not occur. Examples of such a definition include, but are not limited to, announcement or
commencement of a tender offer, provisions for acceleration upon a “potential” takeover, shareholder approval of a merger or other transactions, or similar language.
20
For plans evaluated under the Equity Plan Scorecard policy, the company’s SVT benchmark is considered along with
other factors.
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Repricing Provisions
Vote against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs) without prior shareholder
approval. “Repricing” includes the ability to do any of the following:
•
Amend the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;
•
Cancel outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise
price of the original options or SARs;
•
Cancel underwater options in exchange for stock awards; or
•
Provide cash buyouts of underwater options.
While the above cover most types of repricing, Sustainability Advisory Services may view other provisions as akin to repricing depending on the facts and
circumstances.
Also, vote against or withhold from members of the Compensation Committee who approved repricing (as defined above or otherwise
determined by Sustainability Advisory Services) without prior shareholder approval, even if such repricings are allowed in their equity plan.
Vote
against plans that do not expressly prohibit repricing or cash buyout of underwater options without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards would not
preclude them from doing so.
Problematic Pay Practices or Significant Pay-for-Performance Disconnect
If the equity plan on the ballot is a vehicle for problematic pay
practices, vote against the plan.
If a significant portion of the CEO’s misaligned pay is attributed to
non-performance-based equity awards, and there is an equity plan on the ballot with the CEO as one of the participants, Sustainability Advisory Services may recommend a vote against the equity plan.
Considerations in voting against the equity plan may include, but are not limited to:
•
Magnitude of pay misalignment;
•
Contribution of non–performance-based equity grants to overall pay; and
•
The proportion of equity awards granted in the last three fiscal years concentrated at the named executive officer
level.
Specific Treatment of Certain Award Types in Equity Plan Evaluations
Dividend Equivalent Rights
Options that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than those without DERs under the
binomial model, based on the value of these dividend streams. The higher value will be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan specifications. DERS transfer more shareholder
equity to employees and non-employee directors and this cost should be captured.
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Operating Partnership (OP) Units in Equity Plan
Analysis of Real Estate Investment Trusts (REITs)
For Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion
of outstanding Operating Partnership (OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Other Compensation Plans
401(k) Employee Benefit Plans
Sustainability Policy Recommendation: Vote for proposals to implement a 401(k) savings plan for employees.
Employee Stock Ownership Plans (ESOPs)
Sustainability Policy Recommendation: Vote for proposals to implement an ESOP or increase authorized shares for
existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of outstanding shares).
Employee Stock Purchase Plans — Qualified Plans
Sustainability Policy Recommendation: Vote
case-by-case on qualified employee stock purchase plans. Vote for employee stock purchase plans where all of the following apply:
•
Purchase price is at least 85 percent of fair market value;
•
Offering period is 27 months or less; and
•
The number of shares allocated to the plan is 10 percent or less of the outstanding shares.
Vote against qualified employee stock purchase plans where any of the following apply:
•
Purchase price is less than 85 percent of fair market value; or
•
Offering period is greater than 27 months; or
•
The number of shares allocated to the plan is more than ten percent of the outstanding shares.
Sustainability Policy Recommendation: Vote
case-by-case on nonqualified employee stock purchase plans. Vote for nonqualified employee stock purchase plans with all the following features:
•
Broad-based participation (i.e., all employees of the company with the exclusion of individuals with 5 percent
or more of beneficial ownership of the company);
•
Limits on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;
•
Company matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of
20 percent from market value;
•
No discount on the stock price on the date of purchase when there is a company matching contribution.
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Vote against nonqualified employee stock purchase plans when any of the plan
features do not meet the above criteria. If the company matching contribution or effective discount exceeds the above, Sustainability Advisory Services may evaluate the SVT cost as part of the assessment.
Amending Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
Sustainability Policy Recommendation: Vote
case-by-case on amendments to cash and equity incentive plans.
Generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
•
Addresses administrative features only; or
•
Seeks approval for Section 162(m) purposes only, and the plan administering committee consists entirely of
independent outsiders, per Sustainability Advisory Services’ Classification of Directors. Note that if the company is presenting the plan to shareholders for the first time after the company’s initial public offering (IPO), or if the
proposal is bundled with other material plan amendments, then the recommendation will be case-by-case (see below).
Vote against such proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
•
Seeks approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of
independent outsiders, per Sustainability Advisory Services’ Classification of Directors.
Vote case-by-case on all other proposals to amend cash incentive plans. This includes plans presented to shareholders for the first time after the company’s IPO and/or
proposals that bundle material amendment(s) other than those for Section 162(m) purposes
Vote case-by-case on all other proposals to amend equity incentive plans, considering the following:
•
If the proposal requests additional shares and/or the amendments may potentially increase the transfer of shareholder value
to employees, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of the amendments.
•
If the plan is being presented to shareholders for the first time after the company’s IPO, whether or not additional
shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as well as an analysis of the overall impact of any amendments.
•
If there is no request for additional shares and the amendments are not deemed to potentially increase the transfer of
shareholder value to employees, then the recommendation will be based entirely on an analysis of the overall impact of the amendments, and the EPSC evaluation will be shown for informational purposes.
Option Exchange Programs/Repricing Options
Sustainability Policy Recommendation: Vote
case-by-case on management proposals seeking approval to exchange/reprice options taking into consideration:
•
Historic trading patterns--the stock price should not be so volatile that the
options are likely to be back “in-the-money” over the near term;
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•
Rationale for the re-pricing — was the stock price decline beyond
management’s control?
•
Is this a value-for-value exchange?
•
Are surrendered stock options added back to the plan reserve?
•
Timing — repricing should occur at least one year out from any precipitous drop in company’s stock price;
•
Option vesting — does the new option vest immediately or is there a black-out
period?
•
Term of the option — the term should remain the same as that of the replaced option;
•
Exercise price — should be set at fair market or a premium to market;
•
Participants — executive officers and directors must be excluded.
If the surrendered options are added back to the equity plans for re-issuance, then also take into consideration
the company’s total cost of equity plans and its three-year average burn rate.
In addition to the above considerations, evaluate the intent,
rationale, and timing of the repricing proposal. The proposal should clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater options after a recent precipitous drop in the
company’s stock price demonstrates poor timing. and warrants additional scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting schedule. Grant dates of surrendered options should be far
enough back (two to three years) so as not to suggest that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise price of surrendered options should be above the
52-week high for the stock price.
Vote for shareholder proposals to put option repricings to a shareholder
vote.
Stock Plans in Lieu of Cash
Sustainability Policy Recommendation: Vote
case-by-case on plans that provide participants with the option of taking all or a portion of their cash compensation in the form of stock.
Vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is not
dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial option pricing model. In an effort to capture
the total cost of total compensation, no adjustments will be made to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
Sustainability Policy Recommendation: One-time Transfers: Vote against or
withhold from compensation committee members if they fail to submit one-time transfers to shareholders for approval.
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Vote
case-by-case on one-time transfers. Vote for if:
•
Executive officers and non-employee directors are excluded from participating;
•
Stock options are purchased by third-party financial institutions at a discount to their fair value using option pricing
models such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models;
•
There is a two-year minimum holding period for sale proceeds (cash or stock) for
all participants.
Additionally, management should provide a clear explanation of why options are being transferred to a
third-party institution and whether the events leading up to a decline in stock price were beyond management’s control. A review of the company’s historic stock price volatility should indicate if the options are likely to be back “in-the-money” over the near term.
Ongoing TSO program: Vote
against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure and mechanics must be disclosed to shareholders.
The specific criteria to be considered in evaluating these proposals include, but not limited, to the following:
•
Eligibility;
•
Vesting;
•
Bid-price;
•
Term of options;
•
Cost of the program and impact of the TSOs on company’s total option expense
•
Option repricing policy.
Amendments to existing plans that allow for introduction of transferability of stock options should make clear that only options granted post-amendment
shall be transferable.
Director Compensation
Shareholder Ratification of Director Pay Programs
Sustainability Policy Recommendation: Vote
case-by-case on management proposals seeking ratification of non- employee director compensation, based on the following factors:
•
If the equity plan under which non-employee director grants are made is on the
ballot, whether or not it warrants support; and
•
An assessment of the following qualitative factors:
•
The relative magnitude of director compensation as compared to companies of a similar profile;
•
The presence of problematic pay practices relating to director compensation;
•
Director stock ownership guidelines and holding requirements;
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•
Equity award vesting schedules;
•
The mix of cash and equity-based compensation;
•
Meaningful limits on director compensation;
•
The availability of retirement benefits or perquisites; and
•
The quality of disclosure surrounding director compensation.
Equity Plans for Non-Employee Directors
Sustainability Policy Recommendation: Vote
case-by-case on compensation plans for non-employee directors, based on:
•
The total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the
company’s estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;
•
The company’s three-year burn rate relative to its industry/market cap peers; and
•
The presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk).
On occasion, director stock plans will exceed the plan cost or burn rate benchmarks when combined with employee or executive stock
plans. In such cases, vote case-by-case on the plan taking into consideration the following qualitative factors:
•
The relative magnitude of director compensation as compared to companies of a similar profile;
•
The presence of problematic pay practices relating to director compensation;
•
Director stock ownership guidelines and holding requirements;
•
Equity award vesting schedules;
•
The mix of cash and equity-based compensation;
•
Meaningful limits on director compensation;
•
The availability of retirement benefits or perquisites; and
•
The quality of disclosure surrounding director compensation.
Non-Employee Director Retirement Plans
Sustainability Policy Recommendation: Vote against retirement plans for
non-employee directors.
Vote for shareholder proposals to eliminate retirement plans for non-employee directors.
Sustainability Policy Recommendation: Generally vote for proposals seeking a policy that prohibits named executive
officers from engaging in derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding
responsible use of company stock will be considered.
Bonus Banking/Bonus Banking
“Plus”
Sustainability Policy Recommendation: Vote
case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate payout linked to sustained results for the performance metrics on which the
bonus was earned (whether for the named executive officers or a wider group of employees), taking into account the following factors:
•
The company’s past practices regarding equity and cash compensation;
•
Whether the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio (at
least 50 percent for full tenure); and
•
Whether the company has a rigorous claw-back policy in place.
Compensation Consultants—Disclosure of Board or Company’s Utilization
Sustainability Policy Recommendation: Generally vote for shareholder proposals seeking disclosure regarding the
company, board, or compensation committee’s use of compensation consultants, such as company name, business relationship(s), and fees paid.
Disclosure/Setting Levels or Types of Compensation for Executives and Directors
Sustainability Policy Recommendation: Generally vote for shareholder proposals seeking additional disclosure of
executive and director pay information, provided the information requested is relevant to shareholders’ needs, would not put the company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.
Vote against shareholder proposals seeking to set absolute levels on compensation or otherwise dictate the amount or form of
compensation.
Vote against shareholder proposals seeking to eliminate stock options or any other equity grants to employees or directors.
Vote against shareholder proposals requiring director fees be paid in stock only.
Generally vote against shareholder proposals that mandate a minimum amount of stock that directors must own in order to qualify as a director or to
remain on the board.
Vote case-by-case on all other shareholder
proposals regarding executive and director pay, taking into account company performance, pay level versus peers, pay level versus industry, and long-term corporate outlook.
Golden Coffins/Executive Death Benefits
Sustainability Policy Recommendation: Generally vote for proposals calling companies to adopt a policy of
obtaining shareholder approval for any future agreements and corporate policies that
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could oblige the company to make payments or awards following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force of
unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not apply to any benefit programs or equity plan proposals that the broad-based employee population is eligible.
Hold Equity Past Retirement or for a Significant Period of Time
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals asking companies to adopt policies requiring senior executive officers to retain a portion of net shares acquired through
compensation plans. The following factors will be taken into account:
•
The percentage/ratio of net shares required to be retained;
•
The time period required to retain the shares;
•
Whether the company has equity retention, holding period, and/or stock ownership requirements in place and the robustness
of such requirements;
•
Whether the company has any other policies aimed at mitigating risk taking by executives;
•
Executives’ actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding
period/retention ratio or the company’s existing requirements; and
Pay Disparity
Sustainability Policy Recommendation: Generally vote case-by-case on proposals calling for an analysis of the pay disparity between corporate executives and other non-executive employees.
Pay for Performance/Performance-Based Awards
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals requesting that a significant amount of future long-term incentive compensation awarded to senior executives shall be
performance-based and requesting that the board adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
•
First, vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent
options or restricted stock, indexed options or premium-priced options, unless the proposal is overly restrictive or if the company has demonstrated that it is using a “substantial” portion of performance-based awards for its top
executives. Standard stock options and performance-accelerated awards do not meet the criteria to be considered as performance-based awards. Further, premium-priced options should have a meaningful premium to be considered performance-based awards.
•
Second, assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based
program is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore, if target performance results in an above target payout, vote for the shareholder proposal due to program’s poor
design. If the company does not disclose the performance metric of the performance-based equity program, vote for the shareholder proposal regardless of the outcome of the first step to the test.
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In general, vote for the shareholder proposal if the company does not meet both of
the above two steps.
Pay for Superior Performance
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals that request the board establish a pay-for-superior
performance standard in the company’s executive compensation plan for senior executives. These proposals generally include the following principles:
•
Set compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group
median;
•
Deliver a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested,
equity awards;
•
Provide the strategic rationale and relative weightings of the financial and
non-financial performance metrics or criteria used in the annual and performance-vested long-term incentive components of the plan;
•
Establish performance targets for each plan financial metric relative to the performance of the company’s peer
companies;
•
Limit payment under the annual and performance-vested long-term incentive components of the plan to when the company’s
performance on its selected financial performance metrics exceeds peer group median performance.
Consider the following factors in
evaluating this proposal:
•
What aspects of the company’s annual and long-term equity incentive programs are performance driven?
•
If the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle rates
disclosed to shareholders or are they benchmarked against a disclosed peer group?
•
Can shareholders assess the correlation between pay and performance based on the current disclosure?
•
What type of industry and stage of business cycle does the company belong to?
Pre-Arranged Trading Plans (10b5-1
Plans)
Sustainability Policy Recommendation: Generally vote for shareholder proposals calling for the addition of certain
safeguards in prearranged trading plans (10b5-1 plans) for executives. Safeguards may include:
•
Adoption, amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K;
•
Amendment or early termination of a 10b5-1 Plan allowed only under extraordinary
circumstances, as determined by the board;
•
Request that a certain number of days that must elapse between adoption or amendment of a
10b5-1 Plan and initial trading under the plan;
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•
Reports on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
•
An executive may not trade in company stock outside the 10b5-1 Plan;
•
Trades under a 10b5-1 Plan must be handled by a broker who does not handle other
securities transactions for the executive.
Prohibit Outside CEOs from Serving on
Compensation Committees
Sustainability Policy Recommendation: Generally vote against proposals seeking a policy to prohibit any outside
CEO from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices that raise concerns about the performance and composition of the committee.
Recoupment of Incentive or Stock Compensation in Specified Circumstances
Sustainability Policy Recommendation: Vote
case-by-case on proposals to recoup incentive cash or stock compensation made to senior executives if it is later determined that the figures upon which incentive
compensation is earned turn out to have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be significantly detrimental to the company’s financial position or reputation, or if the senior
executive failed to manage or monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have adopted policies that permit recoupment in cases where an executive’s fraud, misconduct, or
negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such policies may be narrow given that not all misconduct or negligence may result in significant
financial restatements. Misconduct, negligence or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational damage that may have long-lasting impact.
In considering whether to support such shareholder proposals, the following factors will be taken into consideration:
•
If the company has adopted a formal recoupment policy;
•
The rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive or stock
compensation;
•
Whether the company has chronic restatement history or material financial problems;
•
Whether the company’s policy substantially addresses the concerns raised by the proponent;
•
Disclosure of recoupment of incentive or stock compensation from senior executives or lack thereof; or
•
Any other relevant factors.
Severance Agreements for Executives/Golden Parachutes
Sustainability Policy Recommendation: Vote for shareholder proposals requiring that golden parachutes or executive
severance agreements be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts.
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Vote
case-by-case on proposals to ratify or cancel golden parachutes. An acceptable parachute should include, but is not limited to, the following:
•
The triggering mechanism should be beyond the control of management;
•
The amount should not exceed three times base amount (defined as the average annual taxable
W-2 compensation during the five years prior to the year in which the change of control occurs);
•
Change-in-control payments should be
double-triggered, i.e., (1) after a change in control has taken place, and (2) termination of the executive as a result of the change in control. Change in control is defined as a change in the company ownership structure.
Share Buyback Proposals
Sustainability Policy Recommendation: Generally vote against shareholder proposals prohibiting executives from
selling shares of company stock during periods in which the company has announced that it may or will be repurchasing shares of its stock. Vote for the proposal when there is a pattern of abuse by executives exercising options or selling shares
during periods of share buybacks.
Vote
case-by-case on proposals requesting the company exclude the impact of share buybacks from the calculation of incentive program metrics, considering the following
factors:
•
The frequency and timing of the company’s share buybacks;
•
The use of per-share metrics in incentive plans;
•
The effect of recent buybacks on incentive metric results and payouts; and
•
Whether there is any indication of metric result manipulation.
Supplemental Executive Retirement Plans (SERPs)
Sustainability Policy Recommendation: Generally vote for shareholder proposals requesting to put extraordinary
benefits contained in SERP agreements to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond what is offered under employee-wide plans.
Generally vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental executive retirement
plan (SERP) by limiting covered compensation to a senior executive’s annual salary or those pay elements covered for the general employee population.
Tax Gross-Up Proposals
Sustainability Policy Recommendation: Generally vote for proposals calling for companies to adopt a policy of not
providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable to management
employees of the company, such as a relocation or expatriate tax equalization policy.
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Termination of Employment Prior to Severance
Payment/Eliminating Accelerated Vesting of Unvested Equity
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals seeking a policy requiring termination of employment prior to severance payment and/or eliminating accelerated vesting of unvested
equity.
The following factors will be considered:
•
The company’s current treatment of equity in
change-of-control situations (i.e. is it double triggered, does it allow for the assumption of equity by acquiring company, the treatment of performance shares, etc.);
•
Current employment agreements, including potential poor pay practices such as
gross-ups embedded in those agreements.
Generally vote for proposals seeking a policy
that prohibits acceleration of the vesting of equity awards to senior executives in the event of a change in control (except for pro rata vesting considering the time elapsed and attainment of any related performance goals between the award date and
the change in control).
6.
Social and Environmental Issues
Global Approach
Socially responsible shareholder resolutions receive a great deal more attention from institutional shareholders today than in the past. While focusing
on value enhancement through risk mitigation and exposure to new sustainability-related opportunities, these resolutions also seek standardized reporting on ESG issues, request information regarding an issuer’s adoption of, or adherence to,
relevant norms, standards, codes of conduct or universally recognized international initiatives to promote disclosure and transparency. ISS’ Sustainability Policy generally supports standards-based ESG shareholder proposals that enhance
long-term shareholder and stakeholder value while aligning the interests of the company with those of society at large. In particular, the policy will focus on resolutions seeking greater transparency and/or adherence to internationally recognized
standards and principles.
Sustainability Policy Recommendation: In determining our vote recommendation on standardized ESG reporting
shareholder proposals, we also analyze the following factors:
•
Whether the proposal itself is well framed and reasonable;
•
Whether adoption of the proposal would have either a positive or negative impact on the company’s short- term or
long-term share value;
•
The percentage of sales, assets and earnings affected;
•
Whether the company has already responded in some appropriate manner to the request embodied in a proposal;
•
Whether the company’s analysis and voting recommendation to shareholders is persuasive;
•
Whether there are significant controversies, fines, penalties, or litigation associated with the company’s
environmental or social practices;
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•
What other companies have done in response to the issue addressed in the proposal;
•
Whether implementation of the proposal would achieve the objectives sought in the proposal; and
•
The degree to which the company’s stated position on the issues raised in the proposal could affect its reputation or
sales, or leave it vulnerable to a boycott or selective purchasing.
Animal Welfare
Animal Welfare Policies
Sustainability Policy Recommendation: Generally vote for proposals seeking a report on a company’s animal
welfare standards, or animal welfare-related risks, unless:
•
The company has already published a set of animal welfare standards and monitors compliance;
•
The company’s standards are comparable to industry peers; and
•
There are no recent significant fines, litigation, or controversies related to the company’s and/or its
suppliers’ treatment of animals.
Animal Testing
Sustainability Policy Recommendation: Generally vote against proposals to phase out the use of animals in product
testing, unless:
•
The company is conducting animal testing programs that are unnecessary or not required by regulation;
•
The company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers; or
•
There are recent, significant fines or litigation related to the company’s treatment of animals.
Animal Slaughter
Sustainability Policy Recommendation: Generally vote against proposals requesting the implementation of Controlled
Atmosphere Killing (CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted as the industry standard.
Vote case-by-case on proposals requesting a report on the feasibility of
implementing CAK methods at company and/or supplier operations considering the availability of existing research conducted by the company or industry groups on this topic and any fines or litigation related to current animal processing procedures at
the company.
Consumer Issues
Genetically Modified Ingredients
Sustainability Policy Recommendation: Generally vote against proposals requesting that a company voluntarily label
genetically engineered (GE) ingredients in its products. The labeling of products with GE ingredients is best left to the appropriate regulatory authorities.
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Vote
case-by-case on proposals asking for a report on the feasibility of labeling products containing GE ingredients, taking into account:
•
The potential impact of such labeling on the company’s business;
•
The quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure
compares with industry peer disclosure; and
•
Company’s current disclosure on the feasibility of GE product labeling.
Generally vote FOR proposals seeking a report on the social, health, and environmental effects of genetically modified organism (GMOs).
Generally vote against proposals to eliminate GE ingredients from the company’s products, or proposals asking for reports outlining the steps
necessary to eliminate GE ingredients from the company’s products. Such decisions are more appropriately made by management with consideration of current regulations.
Reports on Potentially Controversial Business/Financial Practices
Sustainability Policy Recommendation: Vote
case-by-case on requests for reports on a company’s potentially controversial business or financial practices or products, taking into account:
•
Whether the company has adequately disclosed mechanisms in place to prevent abuses;
•
Whether the company has adequately disclosed the financial risks of the products/practices in question;
•
Whether the company has been subject to violations of related laws or serious controversies; and
•
Peer companies’ policies/practices in this area.
Consumer Lending
Sustainability Policy Recommendation: Vote
case-by-case on requests for reports on the company’s lending guidelines and procedures taking into account:
•
Whether the company has adequately disclosed mechanisms in place to prevent abusive lending practices;
•
Whether the company has adequately disclosed the financial risks of the lending products in question;
•
Whether the company has been subject to violations of lending laws or serious lending controversies; and
•
Peer companies’ policies to prevent abusive lending practices.
Pharmaceutical Pricing, Access to Medicines, Product Reimportation and Health Pandemics
Sustainability Policy Recommendation: Generally vote against proposals requesting that companies implement
specific price restraints on pharmaceutical products unless the company fails to adhere to legislative guidelines or industry norms in its product pricing practices.
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Vote
case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
•
The potential for reputational, market, and regulatory risk exposure;
•
Existing disclosure of relevant policies;
•
Deviation from established industry norms;
•
Relevant company initiatives to provide research and/or products to disadvantaged consumers;
•
Whether the proposal focuses on specific products or geographic regions;
•
The potential burden and scope of the requested report; and
•
Recent significant controversies, litigation, or fines at the company.
Generally vote for proposals requesting that a company report on the financial and legal impact of its prescription drug reimportation policies unless
such information is already publicly disclosed.
Generally vote against proposals requesting that companies adopt specific policies to encourage or
constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and may place the company at a competitive disadvantage relative to its peers.
Health Pandemics
Sustainability Policy Recommendation: Vote
case-by-case on requests for reports outlining the impact of health pandemics (such as HIV/AIDS, malaria, tuberculosis, and avian flu) on the company’s operations
and how the company is responding to the situation, taking into account:
•
The scope of the company’s operations in the affected/relevant area(s);
•
The company’s existing healthcare policies, including benefits and healthcare access; and
•
Company donations to relevant healthcare providers.
Vote against proposals asking companies to establish, implement, and report on a standard of response to health pandemics (such as HIV/AIDS, malaria,
tuberculosis, and avian flu), unless the company has significant operations in the affected markets and has failed to adopt policies and/or procedures to address these issues comparable to those of industry peers.
Product Safety and Toxic/Hazardous Materials
Sustainability Policy Recommendation: Generally vote for proposals requesting that a company report on its
policies, initiatives/procedures, and oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain.
Generally vote for resolutions requesting that companies develop a feasibility assessment to phase-out of certain
toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials.
Generally
vote against resolutions requiring that a company reformulate its products.
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Tobacco-Related Proposals
Sustainability Policy Recommendation: Vote
case-by-case on resolutions regarding the advertisement of tobacco products, considering:
•
Recent related fines, controversies, or significant litigation;
•
Whether the company complies with relevant laws and regulations on the marketing of tobacco;
•
Whether the company’s advertising restrictions deviate from those of industry peers;
•
Whether the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth; and
•
Whether restrictions on marketing to youth extend to foreign countries.
Vote case-by-case on proposals regarding second-hand smoke, considering;
•
Whether the company complies with all laws and regulations;
•
The degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and
•
The risk of any health-related liabilities.
Generally vote against resolutions to cease production of tobacco-related products, to avoid selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such business decisions are better left to company management or portfolio managers.
Generally vote against proposals regarding tobacco product warnings. Such decisions are better left to public health authorities.
Climate Change
Climate Change/Greenhouse Gas (GHG) Emissions
Climate change has emerged as the most significant environmental threat to the planet to date. Scientists agree that gases released by chemical reactions
including the burning of fossil fuels contribute to a “greenhouse effect” that traps the planet’s heat. Environmentalists claim that the greenhouse gases produced by the industrial age have caused recent weather crises such as heat
waves, rainstorms, melting glaciers, rising sea levels and receding coastlines. With notable exceptions, business leaders have described the rise and fall of global temperatures as naturally occurring phenomena and depicted corporate impact on
climate change as minimal. Shareholder proposals asking a company to issue a report to shareholders, “at reasonable cost and omitting proprietary information,” on greenhouse gas emissions ask that the report include descriptions of efforts
within companies to reduce emissions, their financial exposure and potential liability from operations that contribute to global warming, their direct or indirect efforts to promote the view that global warming is not a threat and their goals in
reducing these emissions from their operations. Proponents argue that there is scientific proof that the burning of fossil fuels causes global warming, that future legislation may make companies financially liable for their contributions to global
warming, and that a report on the company’s role in global warming can be assembled at reasonable cost.
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Sustainability Policy Recommendation:
•
Vote for shareholder proposals seeking information on the financial, physical, or regulatory risks it faces related to
climate change- on its operations and investments, or on how the company identifies, measures, and manage such risks.
•
Vote for shareholder proposals calling for the reduction of GHG emissions.
•
Vote for shareholder proposals seeking reports on responses to regulatory and public pressures surrounding climate change,
and for disclosure of research that aided in setting company policies around climate change.
•
Vote for shareholder proposals requesting a report/disclosure of goals on GHG emissions from company operations and/or
products.
Say on Climate (SoC) Management Proposals
Sustainability Policy Recommendation: Vote
case-by-case on management proposals that request shareholders to approve the company’s climate transition action plan21, taking into account the completeness and rigor of the plan. Information that will be considered where available includes the following:
•
The extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other
market standards;
•
Disclosure of its operational and supply chain GHG emissions (Scopes 1, 2, and 3);
•
The completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply
chain GHG emissions (Scopes 1, 2, and 3 if relevant);
•
Whether the company has sought and approved third-party approval that its targets are science-based;
•
Whether the company has made a commitment to be “net zero” for operational and supply chain emissions (Scopes 1,
2, and 3) by 2050;
•
Whether the company discloses a commitment to report on the implementation of its plan in subsequent years;
•
Whether the company’s climate data has received third-party assurance;
•
Disclosure of how the company’s lobbying activities and its capital expenditures align with company strategy;
•
Whether there are specific industry decarbonization challenges; and
•
The company’s related commitment, disclosure, and performance compared to its industry peers.
Say on Climate (SoC) Shareholder Proposals
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals that request the company to disclose a report providing its GHG emissions levels and reduction targets and/or its
21
Variations of this request also include climate transition related ambitions, or commitment to reporting on the
implementation of a climate plan.
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upcoming/approved climate transition action plan and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking into account information
such as the following:
•
The completeness and rigor of the company’s climate-related disclosure;
•
The company’s actual GHG emissions performance;
•
Whether the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
its GHG emissions; and
•
Whether the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.
Energy Efficiency
Sustainability Policy Recommendation: Generally vote for proposals requesting that a company report on its energy
efficiency policies.
Renewable Energy
Sustainability Policy Recommendation: Generally vote for requests for reports on the feasibility of developing
renewable energy resources.
Generally vote for proposals requesting that the company invest in renewable energy resources.
Diversity
Board Diversity
Sustainability Policy Recommendation: Generally vote for requests for reports on a company’s efforts to
diversify the board, unless:
•
The gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies
of similar size and business; and
•
The board already reports on its nominating procedures and gender and racial minority initiatives on the board and within
the company.
Generally vote for shareholder proposals that ask the company to take reasonable steps to increase the levels of
underrepresented gender identities and racial minorities on the board.
Equality of Opportunity
Sustainability Policy Recommendation: Generally vote for proposals requesting a company disclose its diversity
policies or initiatives, or proposals requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data.
Generally vote for proposals seeking information on the diversity efforts of suppliers and service providers.
Gender Identity, Sexual Orientation, and Domestic Partner Benefits
Sustainability Policy Recommendation: Generally vote for proposals seeking to amend a company’s EEO statement
or diversity policies to prohibit discrimination based on sexual orientation and/or gender identity, unless the change would be unduly burdensome.
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Generally vote for proposals to extend company benefits to domestic partners.
Gender, Race/Ethnicity Pay Gap
Sustainability Policy Recommendation: Vote
case-by-case on requests for reports on a company’s pay data by gender or race/ethnicity or a report on a company’s policies and goals to reduce any gender or
race/ethnicity pay gaps, taking into account:
•
The company’s current policies and disclosure related to both its diversity and inclusion policies and practices and
its compensation philosophy and fair and equitable compensation practices;
•
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race,
or ethnicity pay gap issues;
•
The company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives compared to its industry
peers; and
•
Local laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.
Racial Equity and/or Civil Rights Audits
Sustainability Policy Recommendation: Generally vote for proposals requesting that a company conduct an
independent racial equity and/or civil rights audit, considering company disclosures, policies, actions, and engagements.
Environment and Sustainability
Facility and Workplace Safety
Sustainability Policy Recommendation: Vote
case-by-case on resolutions requesting that a company report on safety and/or security risks associated with its operations and/or facilities, considering:
•
The company’s compliance with applicable regulations and guidelines;
•
The company’s current level of disclosure regarding its security and safety policies, procedures, and compliance
monitoring; and
•
The existence of recent, significant violations, fines, or controversy regarding the safety and security of the
company’s operations and/or facilities.
Hydraulic Fracturing
Sustainability Policy Recommendation: Generally vote for proposals requesting greater disclosure of a
company’s (natural gas) hydraulic fracturing operations, including measures the company has taken to manage and mitigate the potential community and environmental impacts of those operations.
Operations in Protected Areas
Sustainability Policy Recommendation: Generally vote for requests for reports on potential environmental damage as
a result of company operations in protected regions, unless:
•
Operations in the specified regions are not permitted by current laws or regulations;
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•
The company does not currently have operations or plans to develop operations in these protected regions; or
•
The company’s disclosure of its operations and environmental policies in these regions is comparable to industry
peers.
Recycling
Sustainability Policy Recommendation: Vote FOR proposals to adopt a comprehensive recycling strategy, taking into
account:
•
The nature of the company’s business;
•
The current level of disclosure of the company’s existing related programs;
•
The timetable and methods of program implementation prescribed by the proposal;
•
The company’s ability to address the issues raised in the proposal; and
•
How the company’s recycling programs compare to similar programs of its industry peers.
Sustainability Reporting
The concept of sustainability is commonly understood as meeting the needs of the present generation without compromising the ability of future
generations to meet their own needs. Indeed, the term sustainability is complex and poses significant challenges for companies on many levels. Many in the investment community have termed this broader responsibility the “triple bottom
line,” referring to the triad of performance goals related to economic prosperity, social responsibility and environmental quality. In essence, the concept requires companies to balance the needs and interests of their various stakeholders
while operating in a manner that sustains business growth for the long-term, supports local communities and protects the environment and natural capital for future generations.
Shareholders may request general environmental reports or reports on a specific location/operation, often requesting that the company detail the
environmental risks and potential liabilities of a specific project. Companies have begun to report on environmental and sustainability issues using the Global Reporting Initiative (GRI) standards. The GRI was established in 1997 with the
mission of developing globally applicable guidelines for reporting on economic, environmental, and social performance. The GRI was developed by Ceres (formerly known as the Coalition for Environmentally Responsible Economies, CERES) in
partnership with the United Nations Environment Programme (UNEP).
Sustainability Policy Recommendation:
•
Vote for shareholder proposals seeking greater disclosure on the company’s environmental and social practices, and/or
associated risks and liabilities.
•
Vote for shareholder proposals asking companies to report in accordance with the Global Reporting Initiative (GRI).
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•
Vote for shareholder proposals to prepare a sustainability report.
Water Issues
Sustainability Policy Recommendation: Generally vote for on proposals requesting a company to report on, or to
adopt a new policy on, water-related risks and concerns, taking into account:
•
The company’s current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;
•
Whether or not the company’s existing water-related policies and practices are consistent with relevant
internationally recognized standards and national/local regulations;
•
The potential financial impact or risk to the company associated with water-related concerns or issues; and
•
Recent, significant company controversies, fines, or litigation regarding water use by the company and its suppliers.
Equator Principles
The Equator Principles are the financial industry’s benchmark for determining, assessing and managing social and environmental risk in project
financing. First launched in June 2003, the Principles were ultimately adopted by over forty financial institutions over a three-year implementation period. Since its adoption, the Principles have undergone a number of revisions, expanding the use
of performance standards and signatory banks’ banks’ commitments to social responsibility, including human rights, climate change, and transparency. The fourth iteration of the Principles was launched in November 2019, incorporating
amendments and new commitment to human rights, climate change, Indigenous Peoples and biodiversity related topics. Financial institutions adopt these principles to ensure that the projects they finance are developed in a socially responsible manner
and reflect sound environmental management practices. As of 2019, 101 financial institutions have officially adopted the Equator Principles.
Sustainability Policy Recommendation: Vote for shareholder proposals to study or implement the Equator Principles.
General Corporate Issues
Charitable Contributions
Sustainability Policy Recommendation: Vote against proposals restricting a company from making charitable
contributions. Charitable contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if,
contributions are in the best interests of the company.
Data Security, Privacy, and Internet
Issues
Sustainability Policy Recommendation: Vote
case-by-case on proposals requesting the disclosure or implementation of data security, privacy, or information access and management policies and procedures,
considering:
•
The level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech,
information access and management, and Internet censorship;
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•
Engagement in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow of
information on the Internet;
•
The scope of business involvement and of investment in countries whose governments censor or monitor the Internet and other
telecommunications;
•
Applicable market-specific laws or regulations that may be imposed on the company; and
•
Controversies, fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship.
Environmental, Social, and Governance (ESG) Compensation-Related Proposals
Sustainability Policy Recommendation: Generally vote for proposals to link, or report on linking, executive
compensation to environmental and social criteria (such as corporate downsizings, customer or employee satisfaction, community involvement, human rights, environmental performance, or predatory lending).
Human Rights, Labor Issues, and International Operations
Investors, international human rights groups, and labor advocacy groups have long been making attempts to safeguard worker rights in the international
marketplace. In instances where companies themselves operate factories in developing countries for example, these advocates have asked that the companies adopt global corporate human rights standards that guarantee sustainable wages and safe working
conditions for their workers abroad. Companies that contract out portions of their manufacturing operations to foreign companies have been asked to ensure that the products they receive from those contractors have not been made using forced labor,
child labor, or sweatshop labor. These companies are asked to adopt formal vendor standards that, among other things, include monitoring or auditing mechanisms. Globalization, relocation of production overseas, and widespread use of subcontractors
and vendors, often make it difficult to obtain a complete picture of a company’s labor practices in global markets. Many Investors believe that companies would benefit from adopting a human rights policy based on the Universal Declaration of
Human Rights and the International Labor Organization’s Core Labor Standards. Efforts that seek greater disclosure on a company’s labor practices and that seek to establish minimum standards for a company’s operations will be
supported. In addition, requests for independent monitoring of overseas operations will be supported.
The Sustainability Policy generally supports
proposals that call for the adoption and/or enforcement of principles or codes relating to countries in which there are systematic violations of human rights; such as the use of slave, child, or prison labor; a government that is illegitimate; or
there is a call by human rights advocates, pro-democracy organizations, or legitimately-elected representatives for economic sanctions. The use of child, sweatshop, or forced labor is unethical and can damage
corporate reputations. Poor labor practices can lead to litigation against the company, which can be costly and time consuming.
Human Rights Proposals
Sustainability Policy Recommendation:
Generally vote for proposals requesting a report on company or company supplier labor and/or human rights standards and policies.
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•
Vote for shareholder proposals to implement human rights standards and workplace codes of conduct.
•
Vote for shareholder proposals calling for the implementation and reporting on ILO codes of conduct, SA 8000 Standards, or
the Global Sullivan Principles.
•
Vote for shareholder proposals that call for the adoption and/or enforcement of principles or codes relating to countries
in which there are systematic violations of human rights.
•
Vote for shareholder proposals that call for independent monitoring programs in conjunction with local and respected
religious and human rights groups to monitor supplier and licensee compliance with codes.
•
Vote for shareholder proposals that seek publication of a “Code of Conduct” to the company’s foreign
suppliers and licensees, requiring they satisfy all applicable standards and laws protecting employees’ wages, benefits, working conditions, freedom of association, and other rights.
•
Vote for shareholder proposals seeking reports on, or the adoption of, vendor standards including: reporting on incentives
to encourage suppliers to raise standards rather than terminate contracts and providing public disclosure of contract supplier reviews on a regular basis.
•
Vote for shareholder proposals to adopt labor standards for foreign and domestic suppliers to ensure that the company will
not do business with foreign suppliers that manufacture products for sale using forced labor, child labor, or that fail to comply with applicable laws protecting employee’s wages and working conditions.
•
Vote for proposals requesting that a company conduct an assessment of the human rights risks in its operations or in its
supply chain, or report on its human rights risk assessment process.
Mandatory Arbitration
Sustainability Policy Recommendation: Vote
case-by-case on requests for a report on a company’s use of mandatory arbitration on employment-related claims, taking into account:
•
The company’s current policies and practices related to the use of mandatory arbitration agreements on workplace
claims;
•
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to the use of
mandatory arbitration agreements on workplace claims; and
•
The company’s disclosure of its policies and practices related to the use of mandatory arbitration agreements compared
to its peers.
MacBride Principles
These resolutions have called for the adoption of the MacBride Principles for operations located in Northern Ireland. They request companies operating
abroad to support the equal employment opportunity policies that apply in facilities they operate domestically. The principles were established to address the sectarian hiring problems between Protestants and Catholics in Northern Ireland. It is
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well documented that Northern Ireland’s Catholic community faced much higher unemployment figures than the Protestant community. In response to this problem, the U.K. government instituted
the New Fair Employment Act of 1989 (and subsequent amendments) to address the sectarian hiring problems.
Many companies believe that the Act
adequately addresses the problems and that further action, including adoption of the MacBride Principles, only duplicates the efforts already underway. In evaluating a proposal to adopt the MacBride Principles, shareholders must decide whether the
principles will cause companies to divest, and therefore worsen the unemployment problem, or whether the principles will promote equal hiring practices. Proponents believe that the Fair Employment Act does not sufficiently address the sectarian
hiring problems. They argue that the MacBride Principles serve to stabilize the situation and promote further investment.
Sustainability Policy Recommendation: Support the MacBride Principles for operations in Northern Ireland that
request companies to abide by equal employment opportunity policies.
Community Social and
Environmental Impact Assessments
Sustainability Policy Recommendation: Generally vote for requests for reports outlining policies and/or the
potential (community) social and/or environmental impact of company operations considering:
•
Current disclosure of applicable policies and risk assessment report(s) and risk management procedures;
•
The impact of regulatory non-compliance, litigation, remediation, or reputational
loss that may be associated with failure to manage the company’s operations in question, including the management of relevant community and stakeholder relations;
•
The nature, purpose, and scope of the company’s operations in the specific region(s);
•
The degree to which company policies and procedures are consistent with industry norms; and
•
Scope of the resolution.
Operations in High Risk Markets
Sustainability Policy Recommendation: Vote
case-by-case on requests for a report on a company’s potential financial and reputational risks associated with operations in “high-risk” markets, such as
a terrorism-sponsoring state or politically/socially unstable region, taking into account:
•
The nature, purpose, and scope of the operations and business involved that could be affected by social or political
disruption;
•
Current disclosure of applicable risk assessment(s) and risk management procedures;
•
Compliance with U.S. sanctions and laws;
•
Consideration of other international policies, standards, and laws; and
•
Whether the company has been recently involved in recent, significant controversies, fines or litigation related to its
operations in “high-risk” markets.
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Outsourcing/Offshoring
Sustainability Policy Recommendation: Vote
case-by-case on proposals calling for companies to report on the risks associated with outsourcing/plant closures, considering:
•
Controversies surrounding operations in the relevant market(s);
•
The value of the requested report to shareholders;
•
The company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and
•
The company’s existing human rights standards relative to industry peers.
Sexual Harassment
Sustainability Policy Recommendation: Vote
case-by-case on requests for a report on company actions taken to strengthen policies and oversight to prevent workplace sexual harassment, or a report on risks posed by
a company’s failure to prevent workplace sexual harassment, taking into account:
•
The company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment;
•
Whether the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace
sexual harassment issues; and
•
The company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers.
Weapons and Military Sales
Sustainability Policy Recommendation: Vote against reports on foreign military sales or offsets. Such disclosures
may involve sensitive and confidential information. Moreover, companies must comply with government controls and reporting on foreign military sales.
Generally vote against proposals asking a company to cease production or report on the risks associated with the use of depleted uranium munitions or
nuclear weapons components and delivery systems, including disengaging from current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and non-military uses,
and withdrawal from these contracts could have a negative impact on the company’s business.
Political
Activities
Lobbying
Sustainability Policy Recommendation: Vote
case-by-case on proposals requesting information on a company’s lobbying (including direct, indirect, and grassroots lobbying) activities, policies, or procedures,
considering:
•
The company’s current disclosure of relevant lobbying policies, and management and board oversight;
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•
The company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage
in lobbying activities; and
•
Recent significant controversies, fines, or litigation regarding the company’s lobbying-related activities.
Political Contributions
Sustainability Policy Recommendation: Generally vote for proposals requesting greater disclosure of a
company’s political contributions and trade association spending policies and activities, considering:
•
The company’s policies, and management and board oversight related to its direct political contributions and payments
to trade associations or other groups that may be used for political purposes;
•
The company’s disclosure regarding its support of, and participation in, trade associations or other groups that may
make political contributions; and
•
Recent significant controversies, fines, or litigation related to the company’s political contributions or political
activities.
Vote against proposals barring a company from making political contributions. Businesses are affected by legislation
at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote against proposals to
publish in newspapers and other media a company’s political contributions. Such publications could present significant cost to the company without providing commensurate value to shareholders.
Political Ties
Sustainability Policy Recommendation: Generally vote against proposals asking a company to affirm political
nonpartisanship in the workplace, so long as:
•
There are no recent, significant controversies, fines, or litigation regarding the company’s political contributions
or trade association spending; and
•
The company has procedures in place to ensure that employee contributions to company-sponsored political action committees
(PACs) are strictly voluntary and prohibit coercion.
Vote against proposals asking for a list of company executives, directors,
consultants, legal counsels, lobbyists, or investment bankers that have prior government service and whether such service had a bearing on the business of the company. Such a list would be burdensome to prepare without providing any meaningful
information to shareholders.
7.
Mutual Fund Proxies
Election of Directors
Sustainability Policy Recommendation: Vote
case-by-case on the election of directors and trustees, following the same guidelines for uncontested directors for public company shareholder meetings. However, mutual
fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
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Closed End Funds- Unilateral Opt-In to Control Share Acquisition Statutes
Sustainability Policy Recommendation: For closed-end management investment
companies (CEFs), vote against or withhold from nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided a
compelling rationale for opting-in to a Control Share Acquisition statute, nor submitted a by-law amendment to a shareholder vote.
Converting Closed-end Fund to
Open-end Fund
Sustainability Policy Recommendation: Vote
case-by-case on conversion proposals, considering the following factors:
•
Past performance as a closed-end fund;
•
Market in which the fund invests;
•
Measures taken by the board to address the discount; and
•
Past shareholder activism, board activity, and votes on related proposals.
Proxy Contests
Sustainability Policy Recommendation: Vote
case-by-case on proxy contests, considering the following factors:
•
Past performance relative to its peers;
•
Market in which fund invests;
•
Measures taken by the board to address the issues;
•
Past shareholder activism, board activity, and votes on related proposals;
•
Strategy of the incumbents versus the dissidents;
•
Independence of directors;
•
Experience and skills of director candidates;
•
Governance profile of the company;
•
Evidence of management entrenchment.
Investment Advisory Agreements
Sustainability Policy Recommendation: Vote
case-by-case on investment advisory agreements, considering the following factors:
•
Proposed and current fee schedules;
•
Fund category/investment objective;
•
Performance benchmarks;
•
Share price performance as compared with peers;
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•
Resulting fees relative to peers;
•
Assignments (where the advisor undergoes a change of control).
Approving New Classes or Series of Shares
Sustainability Policy Recommendation: Vote for the establishment of new classes or series of shares.
Preferred Stock Proposals
Sustainability Policy Recommendation: Vote
case-by-case on the authorization for or increase in preferred shares, considering the following factors:
•
Stated specific financing purpose;
•
Possible dilution for common shares;
•
Whether the shares can be used for antitakeover purposes.
1940 Act Policies
Sustainability Policy Recommendation: Vote
case-by-case on policies under the Investment Advisor Act of 1940, considering the following factors:
•
Potential competitiveness;
•
Regulatory developments;
•
Current and potential returns; and
•
Current and potential risk.
Generally vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus of the fund and do comply with the
current SEC interpretation.
Changing a Fundamental Restriction to a Nonfundamental Restriction
Sustainability Policy Recommendation: Vote
case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction, considering the following factors:
•
The fund’s target investments;
•
The reasons given by the fund for the change; and
•
The projected impact of the change on the portfolio.
Change Fundamental Investment Objective to Nonfundamental
Sustainability Policy Recommendation: Vote against proposals to change a fund’s fundamental investment
objective to non-fundamental.
Name Change Proposals
Sustainability Policy Recommendation: Vote
case-by-case on name change proposals, considering the following factors:
•
Political/economic changes in the target market;
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•
Consolidation in the target market; and
•
Current asset composition.
Change in Fund’s Subclassification
Sustainability Policy Recommendation: Vote
case-by-case on changes in a fund’s sub-classification, considering the following factors:
•
Potential competitiveness;
•
Current and potential returns;
•
Risk of concentration;
•
Consolidation in target industry.
Business Development Companies — Authorization to Sell Shares of Common Stock at a Price below Net Asset Value
Sustainability Policy Recommendation: Vote for proposals authorizing the board to issue shares below Net Asset
Value (NAV) if:
•
The proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders
approve the underlying proposal, as required under the Investment Company Act of 1940;
•
The sale is deemed to be in the best interests of shareholders by (1) a majority of the company’s independent
directors and (2) a majority of the company’s directors who have no financial interest in the issuance; and
•
The company has demonstrated responsible past use of share issuances by either:
•
Outperforming peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or
•
Providing disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts
to NAV and economic dilution to existing non-participating shareholders.
Disposition of Assets/Termination/Liquidation
Sustainability Policy Recommendation: Vote
case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the following factors:
•
Strategies employed to salvage the company;
•
The fund’s past performance;
•
The terms of the liquidation.
Changes to the Charter Document
Sustainability Policy Recommendation: Vote
case-by-case on changes to the charter document, considering the following factors:
•
The degree of change implied by the proposal;
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•
The efficiencies that could result;
•
The state of incorporation;
•
Regulatory standards and implications.
Vote against any of the following changes:
•
Removal of shareholder approval requirement to reorganize or terminate the trust or any of its series;
•
Removal of shareholder approval requirement for amendments to the new declaration of trust;
•
Removal of shareholder approval requirement to amend the fund’s management contract, allowing the contract to be
modified by the investment manager and the trust management, as permitted by the 1940 Act;
•
Allow the trustees to impose other fees in addition to sales charges on investment in a fund, such as deferred sales
charges and redemption fees that may be imposed upon redemption of a fund’s shares;
•
Removal of shareholder approval requirement to engage in and terminate subadvisory arrangements;
•
Removal of shareholder approval requirement to change the domicile of the fund.
Changing the Domicile of a Fund
Sustainability Policy Recommendation: Vote
case-by-case on re-incorporations, considering the following factors:
•
Regulations of both states;
•
Required fundamental policies of both states;
•
The increased flexibility available.
Authorizing the Board to Hire and Terminate Subadvisers Without Shareholder Approval
Sustainability Policy Recommendation: Vote against proposals authorizing the board to hire or terminate
subadvisers without shareholder approval if the investment adviser currently employs only one subadviser.
Distribution Agreements
Sustainability Policy Recommendation: Vote
case-by-case on distribution agreement proposals, considering the following factors:
•
Fees charged to comparably sized funds with similar objectives;
•
The proposed distributor’s reputation and past performance;
•
The competitiveness of the fund in the industry;
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•
The terms of the agreement.
Master-Feeder Structure
Sustainability Policy Recommendation: Vote for the establishment of a master-feeder structure.
Mergers
Sustainability Policy Recommendation: Vote
case-by-case on merger proposals, considering the following factors:
•
Resulting fee structure;
•
Performance of both funds;
•
Continuity of management personnel;
•
Changes in corporate governance and their impact on shareholder rights.
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
Sustainability Policy Recommendation: Generally vote against shareholder proposals that mandate a specific minimum
amount of stock that directors must own in order to qualify as a director or to remain on the board.
Reimburse Shareholder for Expenses Incurred
Sustainability Policy Recommendation: Vote
case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When supporting the dissidents, vote for the reimbursement of the proxy solicitation
expenses.
Terminate the Investment Advisor
Sustainability Policy Recommendation: Vote
case-by-case on proposals to terminate the investment advisor, considering the following factors:
•
Performance of the fund’s Net Asset Value (NAV);
•
The fund’s history of shareholder relations;
•
The performance of other funds under the advisor’s management.
8.
Foreign Private Issuers Listed on U.S. Exchanges
Sustainability Policy Recommendation: Vote against (or withhold from)
non-independent director nominees at companies which fail to meet the following criteria: a majority-independent board, and the presence of an audit, a compensation, and a nomination committee, each of which
is entirely composed of independent directors.
Where the design and disclosure levels of equity compensation plans are comparable
to those seen at U.S. companies, U.S. compensation policy will be used to evaluate the compensation plan proposals. Otherwise, they, and all other voting items, will be evaluated using the relevant regional or market approach under the
Sustainability proxy voting guidelines.
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We empower investors and companies to build for long-term and sustainable growth by
providing high-quality data, analytics, and insight.
Founded in 1985, the Institutional Shareholder Services group of companies (“ISS”) is the world’s leading provider of corporate governance and
responsible investment solutions alongside fund intelligence and services, events, and editorial content for institutional investors, globally. ISS’ solutions include objective governance research and recommendations; responsible investment
data, analytics, and research; end-to-end proxy voting and distribution solutions; turnkey securities class-action claims management (provided by Securities
Class Action Services, LLC); reliable global governance data and modeling tools; asset management intelligence, portfolio execution and monitoring, fund services, and media. Clients rely on ISS’ expertise to help them make informed
investment decisions.
This document and all of the information contained in it, including without limitation all text, data, graphs, and charts (collectively, the
“Information”) is the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party suppliers.
The
Information has not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of an offer to buy), or a
promotion or recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or
instruments or trading strategies.
The user of the Information assumes the entire risk of any use it may make or permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT
LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS, MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any
direct, indirect, special, punitive, consequential (including lost profits), or any other damages even if notified of the possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded
or limited.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF
SECURITIES
Equitable Investment Management Group, LLC, a wholly owned subsidiary of
Equitable Financial Life Insurance Company may be deemed to be a control person with respect to the 1290 Funds by virtue of its ownership of a substantial majority of the 1290 Funds’ shares as of January 31, 2022. Shareholders owning more than 25% of the outstanding shares of a
Fund may be able to determine the outcome of most issues that are submitted to shareholders for a vote.
To the 1290 Funds’ knowledge, as of January 31, 2022, the following persons owned shares of record
and/or beneficially in the following Funds entitling such persons to give voting instructions regarding 5% or more of the outstanding shares of any class of such Funds:
Item 29. Persons Controlled by or Under Common Control with the Trust
None.
Item
30. Indemnification
The Registrant’s Second Amended and Restated Agreement and Declaration of Trust
(“Declaration of Trust”).
Article VII, Section 7.2 of the Declaration of Trust of 1290
Funds states, in relevant part, that a “Trustee or officer of the Trust, when acting in such capacity, shall not be personally liable to any Person, other than to
the Trust, a Series or a Shareholder to the extent expressly provided in this Article VII. No person who is or has been a Trustee or officer of the Trust shall be liable
to the Trust, or a Series, or a Shareholder for any action or failure to act or for any other reason except solely for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office of Trustee or officer as described herein, and shall not be liable for errors of judgment or mistakes of fact or law. A Trustee or officer of the Trust shall not be responsible or liable in any event for any neglect or wrongdoing of any person, including any other Trustee, officer, agent, employee, Manager, adviser, sub-adviser or Principal Underwriter of the Trust or any Series.” Article VII, Section 7.4 of 1290 Funds’ Declaration of Trust further states, in relevant part, that the “Trustees shall be entitled and empowered to the fullest extent permitted by law to
purchase with Trust assets insurance for liability and for all expenses reasonably incurred or paid or expected to be paid by a Trustee, officer, employee or agent of the Trust in connection with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or her capacity or former capacity with the Trust.”
Article VII, Section 7.5, subsection (a) of the Declaration of Trust of 1290 Funds further states, in relevant part, that subject to the exceptions and limitations contained in subsection (b) below every person who is, or has been, a Trustee or an officer or employee of the Trust or is or was serving at the request of the Trust as a trustee, director, officer, employee or agent of another organization in which the Trust has any interest as a shareholder,
creditor or otherwise (“Covered Person”) shall be indemnified by the Trust and each Series to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or her in connection with any claim, action, suit or proceeding in which he or she becomes involved as a party or otherwise by virtue of his or her being or having been a Covered Person and against amounts paid or incurred by him or her in the settlement thereof.” Article VII, Section 7.5, subsection (b) of 1290 Funds’ Declaration of Trust states, in relevant part, that “no indemnification shall be provided hereunder to a Covered Person: (i) who shall have been adjudicated by a court or body before which the proceeding was brought to be liable to the Trust, a Series or any Shareholder by reason of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office as described herein; or (ii) in the event of a settlement, unless there has been a determination that such Covered Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office as described herein: (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who are neither Interested Persons of the Trust nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type inquiry).” Article VII, Section 7.5,
subsection (c) of 1290 Funds’ Declaration of Trust also states, in relevant part, that the “rights of indemnification herein provided may be insured against by policies maintained by the Trust shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled and shall inure to the benefit of the heirs, executors and administrators of a Covered Person.”
The Registrant’s Amended and Restated Investment Advisory Agreement states:
Limitations on Liability. The Adviser will exercise its best judgment in
rendering its services to the Trust, and the Trust agrees, as an inducement to the Adviser’s undertaking to do so, that the Adviser will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to which this Agreement relates, but will be liable only for willful
misconduct, bad faith, gross negligence, reckless disregard of its duties or its failure to exercise due care in rendering its services to the Trust as specified in this Agreement.
The Registrant’s Investment Sub-Advisory Agreements generally state:
5. LIABILITY AND INDEMNIFICATION
A. Except as may otherwise be provided by the Investment Company Act or any other federal securities law (whose
provisions may not be waived or altered by contract), the Sub-Adviser shall not be liable for any losses, claims, damages, liabilities or litigation (including reasonable attorneys’ fees) incurred or suffered by the Fund(s), the Trust or the Adviser as a result of any error of judgment, mistake of law, or other action or omission by the Sub-Adviser; provided, however, that nothing in this Agreement shall operate or purport to
5
operate in any way to exculpate, waive or limit the
liability of the Sub-Adviser for, and the Sub-Adviser shall indemnify and hold harmless the Adviser and the Trust, all affiliated persons thereof (as defined in Section
2(a)(3) of the Investment Company Act) and all controlling persons thereof (as described in Section 15 of the Securities Act of 1933, as amended (“Securities
Act”)) (collectively, “Adviser Indemnitees”) against, any and all losses, claims, damages, liabilities or litigation (including reasonable legal and
other expenses) to which any of the Adviser Indemnitees may become subject under the Securities Act, the Investment Company Act, the Advisers Act or any other statute, or at common law or otherwise, arising out of or based on (i) any willful misconduct, bad faith, reckless disregard or gross negligence of the Sub-Adviser in the performance of any of its duties or obligations hereunder or (ii) any untrue statement of a material fact contained in the Prospectus, proxy materials, reports, advertisements, sales literature or other materials pertaining to the Fund(s), the Trust or the Adviser, or the omission to state therein a material fact known to the Sub-Adviser which was required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance
upon information furnished to the Adviser or the Trust by the Sub-Adviser Indemnitees (as defined below) for use therein.
B. Except as may otherwise be provided by the Investment Company Act or any other federal securities law (whose
provisions may not be waived or altered by contract), the Adviser shall not be liable for any losses, claims, damages, liabilities or litigation (including reasonable attorneys’ fees) incurred or suffered by the Sub-Adviser as a result of any error of judgment, mistake of law, or other action or omission by the Adviser; provided, however, that nothing in this Agreement shall operate or purport to operate in any way to exculpate, waive or limit the liability of the Adviser for, and the Adviser shall indemnify and hold harmless the Sub-Adviser, all affiliated persons thereof (as defined in Section 2(a) (3) of the Investment Company Act) and all controlling persons thereof (as described in Section 15 of the Securities Act) (collectively, “Sub-Adviser Indemnitees”) against, any and all losses, claims, damages, liabilities or litigation
(including reasonable legal and other expenses) to which any of the Sub-Adviser Indemnitees may become subject under the Securities Act, the Investment Company Act, the Advisers Act or any other statute, or at common law or otherwise, arising out of or based on (i) any willful misconduct, bad faith, reckless disregard or gross negligence of the Adviser in the performance of any of its duties or obligations hereunder or (ii) any untrue statement of a material fact contained in the Prospectus, proxy materials, reports, advertisements, sales literature or other materials pertaining to the Fund(s), the Trust or the Adviser, or the omission to state therein a material fact known to the Adviser that was required to be stated therein or necessary to make the statements therein not misleading, unless such statement or omission
was made in reliance upon information furnished to the Adviser or the Trust by the Sub-Adviser Indemnitees.
Section 7(b) of the Registrant’s Distribution Agreement states:
In the absence of willful misfeasance, bad faith, negligence or reckless disregard by ALPS in the performance of
its duties, obligations or responsibilities set forth in this Agreement, ALPS and its affiliates, including their respective officers, directors, agents and employees,
shall not be liable for, and the Trust agrees to indemnify, defend and hold harmless such persons from, all taxes, charges, expenses, assessments, claims and liabilities (including, without limitation, reasonable attorneys’ fees and disbursements and liabilities arising under applicable federal and state laws) arising directly or indirectly from the following:
(i) any untrue statement of a material fact or omission of a material fact required to be stated or necessary in order to make the statements not misleading under the 1933 Act, the 1940 Act or any other statute or the common law, in any registration statement, prospectus, statement of additional information, shareholder report or other information filed or made public by the Trust (as amended from time to time), except to the extent the statement or omission was made in reliance upon, and in conformity with, information furnished to the Trust by or on behalf of ALPS;
(ii) any
wrongful act of the Trust or any of its officers;
(iii) any error of judgment or mistake of law or for any loss suffered by the Funds in connection with
the matters to which this Agreement relates;
(iv) ALPS’s
reliance on any instruction, direction, notice, instrument or other information from the Trust or its duly appointed agents that ALPS reasonably believes to be genuine;
or
(v) loss of data or service interruptions caused by equipment failure.
Section 6 of the Registrant’s Mutual Funds Service Agreement states:
(a) Administrator
shall not be liable for any error of judgment or mistake of law or for any loss or expense suffered by the Trust, in connection with the matters to which this Agreement
relates, except for a loss or expense caused by or resulting from or attributable to willful misfeasance, bad faith or gross negligence on Administrator’s part (or
on the part of any third party to whom Administrator has delegated any of its duties and obligations pursuant to Section 4(c) hereunder) in the performance of its (or
such third party’s) duties or from reckless disregard by Administrator (or by such third party) of its obligations and duties under this Agreement (in the case of
Administrator) or under an agreement with Administrator (in the case of such third party) or, subject to Section 10 below, Administrator’s (or such third party) refusal or failure to comply with the terms of this Agreement (in the case of Administrator) or an agreement with Administrator (in the case of such third party) or its breach of any representation or warranty under this Agreement (in
6
the case of Administrator) or under an agreement with
Administrator (in the case of such third party). In no event shall Administrator (or such third party) be liable for any indirect, incidental, special or consequential
losses or damages of any kind whatsoever (including but not limited to lost profits), even if Administrator (or such third party) has been advised of the likelihood of
such loss or damage and regardless of the form of action.
(b) Except
to the extent that Administrator may be held liable pursuant to Section 6(a) above, Administrator shall not be responsible for, and the Trust shall indemnify and hold
Administrator harmless from and against, any and all losses, damages, costs, reasonable attorneys’ fees and expenses, payments, expenses and liabilities including,
but not limited to, those arising out of or attributable to:
(i) any
and all actions of Administrator or its officers or agents required to be taken pursuant to this Agreement;
(ii) the
reliance on or use by Administrator or its officers or agents of information, records, or documents which are received by Administrator or its officers or agents and
furnished to it or them by or on behalf of the Trust, and which have been prepared or maintained by the Trust or any third party on behalf of the Trust;
(iii)
the Trust’s refusal or failure to comply with the terms of this Agreement or the Trust’s lack of good faith, or its actions, or lack thereof, involving gross negligence or willful misfeasance;
(iv) the
breach of any representation or warranty of the Trust hereunder;
(v) the reliance on or the carrying out by Administrator or its officers or agents of any proper
instructions reasonably believed to be duly authorized, or requests of the Trust;
(vi) any
delays, inaccuracies, errors in or omissions from information or data provided to Administrator by data services, including data services providing information in
connection with any third-party computer system licensed to Administrator, and by any corporate action services, pricing services or securities brokers and
dealers;
(vii) the offer or sale of shares by the Trust in violation of any requirement under the Federal
securities laws or regulations or the securities laws or regulations of any state, or in violation of any stop order or other determination or ruling by any Federal
agency or any state agency with respect to the offer or sale of such shares in such state (1) resulting from activities, actions, or omissions by the Trust or its other service providers and agents, or (2) existing or arising out of activities, actions or omissions by or on behalf of the Trust prior to the effective date of this Agreement;
(i) any
failure of the Trust’s Registration Statement to comply with the 1933 Act and the 1940 Act (including the rules and regulations thereunder) and any other
applicable laws, or any untrue statement of a material fact or omission of a material fact necessary to make any statement therein not misleading in a Trust’s
prospectus;
(ii) except as provided for in Schedule B.III., the actions taken by the Trust, its Adviser, its
investment sub-advisers, and its distributor in compliance with applicable securities, tax, commodities and other laws, rules and regulations, or the failure to so
comply; and
(iii) all actions, inactions, omissions, or errors caused by third parties to whom Administrator or the Trust has assigned any rights and/or delegated any duties under this Agreement at the specific request of or as required by the Trust, its Fund, investment sub-advisers, or Trust distributors.
The Trust
shall not be liable for any indirect, incidental, special or consequential losses or damages of any kind whatsoever (including, but not limited to, lost profits) even if
the Trust has been advised of the likelihood of such loss or damage and regardless of the form of action, except when the Trust is required to indemnify Administrator
pursuant to this Agreement.
(c) Until such time as Administrator becomes the investment adviser to the Trust, in connection with
the indemnity provided to the Trust by the Administrator pursuant to Section 6(a) hereof, and solely in the event that Administrator fails to pay any indemnity properly
due and owing to the Trust after the passage of a reasonable amount of time after the Trust’s written demand upon Administrator in accordance with Section 9 hereof, upon a written demand upon EIM pursuant to Section 9 hereof setting forth in detail the basis for an indemnity being required of EIM, EIM shall reimburse the Trust for any shortfall properly due and owing to the Trust by Administrator.
The Registrant’s Global Custody Agreement.
Section 3.2 of 1290 Funds’ Global Custody Agreement states, in relevant part, that the “Customer
authorizes J.P. Morgan to accept, rely upon and/or act upon any Instructions received by it without inquiry. The Customer will indemnify [J.P. Morgan, its Affiliates, its
Subcustodians, and their respective nominees, directors, officers, employees and agents] against, and hold each of them harmless from, any Liabilities that may be imposed on, incurred by, or asserted against [J.P. Morgan, its Affiliates, its Subcustodians, and their respective nominees, directors, officers, employees and agents] as a result of any action or omission taken in accordance with any Instruction.”
7
Section 6.1 of 1290 Funds’ Global Custody
Agreement states, in relevant part, that “J.P. Morgan may rely upon the certification of such other facts as may be required to administer J.P. Morgan’s
obligations under this Agreement and the Customer shall indemnify J.P. Morgan against all losses, liability, claims or demands arising directly or indirectly from any
such certifications.”
Section 7.1 of 1290 Funds’ Global Custody Agreement states, in
relevant part, that the “Customer will indemnify [J.P. Morgan, its Affiliates, its Subcustodians, and their respective nominees, directors, officers, employees and
agents] against, and hold them harmless from, any Liabilities that may be imposed on, incurred by or asserted against any of [J.P. Morgan, its Affiliates, its
Subcustodians, and their respective nominees, directors, officers, employees and agents] in connection with or arising out of (i) J.P. Morgan’s performance under this Agreement, provided [J.P. Morgan, its Affiliates, its Subcustodians, and their respective nominees, directors, officers, employees and agents] have not acted with negligence or engaged in fraud or willful misconduct in connection with the Liabilities in question or (ii) [J.P. Morgan, its Affiliates, its Subcustodians, and their respective nominees, directors, officers, employees and agents] status as a holder of record of the Customer’s Financial Assets. Nevertheless, the Customer will not be obligated to indemnify [J.P. Morgan, its Affiliates, its Subcustodians, and their respective nominees, directors, officers, employees and agents] under the preceding sentence
with respect to any Liability for which J.P. Morgan is liable under Section 5.2(a) of this Agreement.”
UNDERTAKING
Insofar as indemnification for liability arising under the Securities Act of 1933 (the “Act”) may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 31. Business and Other Connections of the Adviser and
Sub-Advisers
EIM is a registered investment adviser and serves as investment manager for all funds
of the Registrant. The descriptions of EIM and each of the sub-advisers, as applicable, under the caption “Management of the Funds – The Adviser” and
“Management of the Funds – The Sub-Advisers,” respectively, or “About the Funds” in the Prospectus and under the caption “Investment
Management and Other Services” in the Statement of Additional Information constituting Parts A and B, respectively, of 1290 Funds’ Registration Statement are
incorporated herein by reference.
Information as to the directors and officers of EIM, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers in the last two years, is set forth in its Form ADV filed with the Securities and Exchange Commission (File No. 801-72220) and is incorporated herein by reference.
EIM, with the approval of the Registrant’s Board of Trustees, selects sub-advisers for certain funds of the Registrant. The following companies, all of which are registered investment advisers, serve as sub-advisers for such funds.
Information as to the
directors and officers of GAMCO, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers in the last two years, is set forth in its Form ADV filed with the Securities and Exchange Commission (File No. 801-14132) and is incorporated herein by reference.
Information as to the directors and officers of AXA IM, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers in the last two years, is set forth in its Form ADV filed with the Securities and Exchange Commission (File No. 801-60374) and is incorporated
herein by reference.
Information as to the directors and officers of DoubleLine, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers in the last two years, is set forth in its Form ADV filed with the Securities and Exchange Commission (File No. 801-70942) and is incorporated herein by reference.
Information as to the directors and officers of Brandywine Global, together with information as to any other business, profession, vocation or employment of a substantial nature engaged in by the directors and officers in the last two years, is set forth in its Form ADV filed with the Securities and Exchange Commission (File No. 801-27797) and is
incorporated herein by reference.
Item 32. Principal Underwriters.
(a) ALPS Distributors, Inc. acts as the distributor for the Registrant and the following
investment companies: 1WS Credit Income Fund, Aberdeen Standard Investments ETFs, Alpha Alternative Assets Fund, ALPS Series Trust, Alternative Credit Income Fund, The
8
Arbitrage Funds, AQR Funds, Axonic Alternative Income Fund, Axonic Funds, BBH Trust, Bluerock Total Income + Real Estate Fund,
Brandes Investment Trust, Bridge Builder Trust, Broadstone Real Estate Access Fund, Brown Advisory Funds, Brown Capital Management Mutual Funds, Cambria ETF Trust, Centre Funds, CIM Real Assets & Credit Fund, CION Ares Diversified Credit Fund, Columbia ETF Trust, Columbia ETF Trust I, Columbia ETF Trust II., CRM Mutual Fund Trust, Cullen Funds Trust, DBX ETF Trust, ETF Series Solutions (Vident Series), Flat Rock Opportunity Fund, Financial Investors Trust, Firsthand Funds, FS Credit Income Fund, FS Energy Total Return Fund, FS Series Trust, FS Multi-Alternative Income Fund, Goehring & Rozencwajg Investment Funds, Goldman Sachs ETF Trust, GraniteShares ETF Trust, Griffin Institutional Access Credit Fund, Griffin Institutional Access Real Estate Fund, Hartford Funds Exchange-Traded Trust, Heartland Group,
Inc., IndexIQ Active ETF Trust, Index IQ ETF Trust, Infusive US Trust, James Advantage Funds, Janus Detroit Street Trust, Lattice Strategies Trust, Litman Gregory Funds Trust, Longleaf Partners Funds Trust, MassMutual (MassMutual Premier Funds and MassMutual Advantage Funds) fka Barings Funds Trust, Meridian Fund, Inc., Natixis ETF Trust, Natixis ETF Trust II, PRIMECAP Odyssey Funds, Principal Exchange-Traded Funds, Reaves Utility Income Fund, RiverNorth Funds, RiverNorth Opportunities Fund, Inc., RiverNorth/DoubleLine Strategic Opportunity Fund, Inc., SPDR Dow Jones Industrial Average ETF Trust, SPDR S&P 500 ETF Trust, SPDR S&P MidCap 400 ETF Trust, Sprott Funds Trust, Stone Harbor Investment Funds, Stone Ridge Residential Real Estate Income Fund I, Inc., Stone Ridge Trust, Stone Ridge Trust II, Stone Ridge Trust III,
Stone Ridge Trust IV, Stone Ridge Trust V, Stone Ridge Trust VI, USCF ETF Trust, Wasatch Funds, WesMark Funds, Wilmington Funds and XAI Octagon Credit Trust, X-Square Balanced Fund, LLC and YieldStreet Prism Fund.
(b) To the best of Registrant’s knowledge, the directors and executive officers of ALPS Distributors, Inc., are as follows:
Name*
Position with Underwriter
Positions with Fund
Stephen Kyllo
President, Chief Operating Officer, Director, and Chief
Compliance Officer
None
Eric T. Parsons
Vice President, Controller and Assistant Treasurer
None
Joseph J. Frank**
Secretary
None
Patrick J. Pedonti**
Vice President, Treasurer and Assistant Secretary
None
Richard C. Noyes
Senior Vice President, General Counsel, Assistant Secretary
None
Liza Orr
Vice President, Senior Counsel
None
Jed Stahl
Vice President, Senior Counsel
None
James Stegall
Vice President
None
Gary Ross
Senior Vice President
None
Kevin Ireland
Senior Vice President
None
Hilary Quinn
Vice President
None
*
Except as otherwise noted, the principal business address for each of the above directors and executive officers is 1290 Broadway, Suite 1000, Denver, Colorado80203.
**
The principal business address for Messrs. Pedonti and Frank is 333 W. 11th Street, 5th Floor, Kansas City, Missouri64105.
(c) None.
Item 33. Location of Accounts and Records
Books or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, and
the Rules promulgated thereunder, are maintained as follows:
(a) With
respect to Rules 31a-1(a); 31a-1(b)(1); (2)(a) and (b); (3); (6); (8); (12); and 31a-1(d), the required books and records are maintained at the offices of
Registrant’s Custodian:
(b)
With respect to Rules 31a-1(a); 31a-1(b)(1), (4); (2)(C) and (D); (4); (5); (6); (8); (9); (10); (11) and 31a-1(f), the required books and records are currently maintained at the offices of the Registrant’s Adviser, Administrator or Sub-Administrator:
J.P. Morgan Chase Bank, N.A.
70 Fargo Street Boston, MA02210
Equitable Investment Management
Group, LLC* Equitable Investment Management, LLC 1290 Avenue of the Americas
New York, NY10104
(c) With respect to Rules 31a-1(b)(5), (6), (9) and (10) and 31a-1(f), the required books and records are maintained at the principal offices of the Registrant’s Adviser or Sub-Advisers:
9
Equitable Investment Management Group,
LLC* 1290 Avenue of the Americas New York, NY10104
AXA Investment Managers US Inc. 100 West Putnam Avenue Greenwich, CT06830
GAMCO Asset Management Inc.
One Corporate Center Rye, NY10580
DoubleLine Capital, LP 333 South Grand Avenue, 18th Fl. Los Angeles, CA90071
(d) With respect to Rules 31a-1(a); 31a-1(b)(1); 31a-1(c) and 31a-1(d), the required books and
records are currently maintained at the offices of the Registrant’s Distributor:
ALPS Distributors, Inc. 1290 Broadway, Suite # 1000 Denver, CO80203
(e) With respect to Rules 31a-1(a), 31a-1(b)(1), (2), the required books and records are currently maintained at the offices of the Registrant’s Transfer Agent:
DST Asset Manager Solutions, Inc. (f/k/a Boston Financial Data Services) 2000 Crown
Colony Drive Quincy, MA02169
Item 34. Management Services
None.
Item 35. Undertakings
Inapplicable.
*
Equitable Investment Management Group, LLC may maintain certain books and records at the offices of its parent Equitable Financial Life Insurance Company, at 525 Washington Blvd., Jersey City, NJ07310 and at offsite storage facilities, including: (1) EDM Americas, 109 Lakeside Avenue, Delano, PA18220, W.W.
Scranton Office Park, 100 Ernie Preate Dr., Moosic, PA18507, 199 South St., West Pittston, PA18643 and 151-15 East Market St., Wilkes-Barre, PA18701;
(2) Iron Mountain, 6667 Deere Road, Syracuse, NY13206-1724, 4500 Steelway Blvd., Liverpool, NY13090-3514, and 220 Wavel St., Syracuse, NY13206-1312.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the “1933 Act”), and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Post-Effective Amendment No. 49 to its Registration Statement on Form N-1A (“Post-Effective Amendment”) to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and the State of New York on the 25th day of April, 2022.
Pursuant to the requirements of the 1933 Act, this Post-Effective Amendment has been signed below by the following persons in the capacities and on the dates indicated.
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