STATEMENT OF ADDITIONAL INFORMATION
THE HILLMAN FOCUSED ADVANTAGE FUND
NO LOAD SHARES
NASDAQ Symbol
HCMAX
A series of the
HILLMAN CAPITAL MANAGEMENT INVESTMENT TRUST
116 South Franklin Street, Post Office Box 69
Rocky Mount, North Carolina 27802-0069
Telephone
1-800-773-3863
January 28, 2013
Table of Contents
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
|
2
|
INVESTMENT LIMITATIONS
|
7
|
PORTFOLIO TRANSACTIONS
|
8
|
NET ASSET VALUE
|
10
|
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
|
11
|
DESCRIPTION OF THE TRUST
|
12
|
ADDITIONAL INFORMATION CONCERNING TAXES
|
13
|
MANAGEMENT AND OTHER SERVICE PROVIDERS
|
15
|
SPECIAL SHAREHOLDER SERVICES
|
22
|
DISCLOSURE OF PORTFOLIO HOLDINGS
|
24
|
FINANCIAL STATEMENTS
|
25
|
APPENDIX A – DESCRIPTION OF RATINGS
|
26
|
APPENDIX B – PROXY VOTING POLICIES
|
30
|
This Statement of Additional Information (“SAI”) is meant to be read in conjunction with the Prospectus, dated the same date as this SAI, for the No Load Shares of The Hillman Focused Advantage Fund (the “Fund”) and is incorporated by reference in its entirety into the Prospectus. Because this SAI is not itself a prospectus, no investment in shares of the Fund should be made solely upon the information contained herein. Information from the Annual Report to shareholders is incorporated by reference into this SAI. Copies of the Fund’s Prospectus and Annual Report may be obtained at no charge by writing or calling the Fund at the address and phone number shown above. Capitalized terms used but not defined herein have the same meanings as in the Prospectus.
ADDITIONAL INFORMATION ABOUT INVESTMENT POLICIES
The Hillman Focused Advantage Fund (“Fund”) is a non-diversified series of the Hillman Capital Management Investment Trust (“Trust”). Prior to July 7, 2005, the Fund was known as “The Hillman Aggressive Equity Fund.” The Trust is an open-end management investment company registered with the Securities and Exchange Commission (“SEC”) and was organized on July 14, 2000 as a Delaware statutory trust. The following policies supplement the Fund’s investment objective and policies as set forth in the Prospectus for the Fund. Attached to this SAI is Appendix A, which contains descriptions of the rating symbols used by nationally recognized statistical rating organizations for certain securities in which the Fund may invest. Appendix B contains copies of the Trust’s Proxy Voting and Disclosure Policy and the Advisor’s Proxy Voting Policy and Procedures.
General Investment Risks.
All investments in securities and other financial instruments involving a risk of financial loss. No assurance can be given that the Fund’s investment program will be successful. Investors should carefully review the descriptions of the Fund’s investments and their risks in this SAI and the Prospectus.
Repurchase Agreements.
The Fund may acquire U.S. government securities or corporate debt securities subject to repurchase agreements. A repurchase transaction occurs when, at the time the Fund purchases a security (normally a U.S. Treasury obligation), it also resells it to the vendor (normally a member bank of the Federal Reserve or a registered government securities dealer) and must deliver the security (and/or securities substituted for them under the repurchase agreement) to the vendor on an agreed upon date in the future. The repurchase price exceeds the purchase price by an amount which reflects an agreed upon market interest rate effective for the period of time during which the repurchase agreement is in effect. Delivery pursuant to the resale generally will normally occur within one to seven days of the purchase.
Repurchase agreements are considered “loans” under the Investment Company Act of 1940, as amended (“1940 Act”), collateralized by the underlying security. The Trust’s Board of Trustees (each a “Trustee” and collectively, “Trustees”) has implemented procedures to monitor on a continuous basis the value of the collateral serving as security for any repurchase obligations. Hillman Capital Management, Inc. (“Advisor”), the Fund’s investment advisor, will consider the creditworthiness of the vendor. If the vendor fails to pay the agreed upon resale price on the delivery date, the Fund will retain or attempt to dispose of the collateral. The Fund’s risk is that such default may include any decline in value of the collateral to an amount which is less than 100% of the repurchase price, any costs of disposing of such collateral, and any loss resulting from any delay in foreclosing on the collateral. The Fund will not enter into any repurchase agreement that would cause more than 10% of its net assets to be invested in repurchase agreements which extend beyond seven days.
Money Market Instruments.
The Fund may invest in money market instruments which may include U.S. government securities or corporate debt securities (including those subject to repurchase agreements), provided that they mature in thirteen months or less from the date of acquisition and are otherwise eligible for purchase by the Fund. Money market instruments also may include Banker’s Acceptances and Certificates of Deposit of domestic branches of U.S. banks, Commercial Paper and Variable Amount Demand Master Notes (“Master Notes”).
Banker’s Acceptances
are time drafts drawn on and “accepted” by a bank. When a bank “accepts” such a time draft, it assumes liability for its payment. When the Fund acquires a Banker’s Acceptance the bank which “accepted” the time draft is liable for payment of interest and principal when due. The Banker’s Acceptance carries the full faith and credit of such bank. A
Certificate of Deposit
(“CD”) is an unsecured interest-bearing debt obligation of a bank.
Commercial Paper
is an unsecured, short-term debt obligation of a bank, corporation or other borrower. Commercial Paper maturities generally range from 2 to 270 days and it is usually sold on a discounted basis rather than as an interest-bearing instrument. The Fund will invest in Commercial Paper only if it is rated one of the top two rating categories by Moody’s Investors Service, Inc. (“Moody’s”), Standard & Poor’s Ratings Services (“S&P”), or Fitch Investors Service, Inc. (“Fitch”) or, if not rated, is of equivalent quality in the Advisor’s opinion. Commercial Paper may include Master Notes of the same quality.
Master Notes
are unsecured obligations which are redeemable upon demand of the holder and which permit the investment of fluctuating amounts at varying rates of interest. Master Notes will be acquired by the Fund only through the Master Note program of the Fund’s custodian bank, acting as administrator thereof. The Advisor will monitor, on an ongoing basis, the earnings power, cash flow, and other liquidity ratios of the issuer of a Master Note held by the Fund.
Investment Companies.
Federal securities laws limit the extent to which the Fund can invest in other investment companies. Consequently, the Fund will not acquire securities of any one investment company if, immediately thereafter, the Fund would own more than 3% of such company’s total outstanding voting securities, securities issued by such company would have an aggregate value in excess of 5% of the Fund’s total assets, or securities issued by such company and securities held by the Fund issued by other investment companies would have an aggregate value in excess of 10% of the Fund’s total
assets, except as otherwise permitted by SEC rules. To the extent the Fund invests in other investment companies, the shareholders of the Fund would indirectly pay a portion of the operating costs of the underlying investment companies. These costs include management, brokerage, shareholder servicing and other operational expenses. Shareholders of the Fund would then indirectly pay higher operational costs than if they owned shares of the underlying investment companies directly.
Illiquid Investments.
The Fund may invest up to 15% of its net assets in illiquid securities, which are investments that cannot be sold or disposed of in the ordinary course of business within seven days at approximately the prices at which they are valued. This restriction is not limited to the time of purchase. Under the supervision of the Trustees, the Advisor determines the liquidity of the Fund’s investments and, through reports from the Advisor, the Trustees monitor investments in illiquid instruments. In determining the liquidity of the Fund’s investments, the Advisor may consider various factors including (i) the frequency of trades and quotations; (ii) the number of dealers and prospective purchasers in the marketplace; (iii) dealer undertakings to make a market; (iv) the nature of the security (including any demand or tender features); and (v) the nature of the marketplace for trades (including the ability to assign or offset the Fund’s rights and obligations relating to the investment). Investments currently considered by the Fund to be illiquid include repurchase agreements not entitling the holder to payment of principal and interest within seven days. If, through a change in values, net assets, or other circumstances, the Fund were in a position where more than 10% of its net assets were invested in illiquid securities, it would seek to take appropriate steps to protect liquidity. Investment in illiquid securities poses risks of potential delays on resale and uncertainty in valuation. Limitations on resale may have an adverse effect on the marketability of portfolio securities and the Fund may be unable to dispose of illiquid securities promptly or at reasonable prices.
Corporate and Municipal Debt Securities.
The Fund may invest in fixed income investments, including corporate, municipal, or other government debt securities. Corporate and municipal debt obligations purchased by the Fund may be any credit quality, maturity, or yield. Accordingly, the Fund’s debt securities may include “investment grade” securities (those rated at least Baa by Moody’s, BBB by S&P or Fitch or, if not rated, of equivalent quality in the Advisor’s opinion). In addition, the Fund’s debt securities may include lower-rated debt securities including, without limitation, junk bonds. Debt obligations rated Baa by Moody’s or BBB by S&P or Fitch may be considered speculative and are subject to risks of non-payment of interest and principal. Debt obligations rated lower than Baa by Moody’s or lower than BBB by S&P or Fitch are generally considered speculative and subject to significant risks of non-payment of interest and principal. Descriptions of the quality ratings of Moody’s, S&P, and Fitch are attached as Appendix A to this SAI. While the Advisor utilizes the ratings of various credit rating services as one factor in establishing creditworthiness, it relies primarily upon its own analysis of factors establishing creditworthiness.
U.S. Government Securities.
The Fund may invest in U.S. Government securities, defined to be U.S. Government obligations such as U.S. Treasury notes, U.S. Treasury bonds, and U.S. Treasury bills, obligations guaranteed by the U.S. Government such as Government National Mortgage Association (“GNMA”) as well as obligations of U.S. Government authorities, agencies, and instrumentalities such as Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”), Federal Housing Administration (“FHA”), Federal Farm Credit Bank (“FFCB”), Federal Home Loan Bank (“FHLB”), Student Loan Marketing Association (“SLMA”), and The Tennessee Valley Authority. U.S. Government securities may also be acquired subject to repurchase agreements. While obligations of some U.S. Government sponsored entities are supported by the full faith and credit of the U.S. Government, others are not. No assurance can be given that the U.S. Government will provide financial support to U.S. Government agencies or instrumentalities that are not supported by the full faith and credit of the U.S. government, since it is not obligated to do so by law. The guarantee of the U.S. Government does not extend to the yield or value of the Fund’s shares.
Options.
The Fund may purchase and write put and call options on securities. The purchase and writing of options involves certain risks. During the option period, a call writer that holds the underlying security has, in return for the premium on the option, given up the opportunity to profit from a price increase in the underlying securities above the exercise price, but, as long as its obligation as a writer continues, has retained the risk of loss should the price of the underlying security decline. The writer of an option has no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option and must deliver the underlying securities at the exercise price. If a put or call option purchased by the Fund is not sold when it has remaining value, and if the market price of the underlying security, in the case of a put, remains equal to or greater than the exercise price or, in the case of a call, remains less than or equal to the exercise price, the Fund will lose its entire investment in the option. Also, where a put or call option on a particular security is purchased to hedge against price movements in a related security, the price of the put or call option may move more or less than the price of the related security. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. Furthermore, if trading restrictions or suspensions are imposed on the options market, the Fund may be unable to close out a position.
To the extent that the Fund invests in
options,
the Fund will comply with the applicable requirements of the Investment Company Act of 1940 and the guidance of no-action letters issued by the Securities and Exchange Commission, including Investment Company Act Release No. 10666 (Apr. 18, 1979). The Fund may write a call or put option only if the option is “covered” by holding a position in the underlying securities or by other means which would permit immediate satisfaction of the Fund’s obligation as writer of the option. A written call option creates a potential obligation to sell the underlying security. In order to make sure that this obligation can be met, the Fund could (i) hold the security underlying the written option; (ii) hold an offsetting call option (one with a strike price that is the same or lower than the strike price of the written option); or (iii) segregate cash and liquid securities (which can be cash, U.S. Government securities, and other liquid debt or equity securities) that when added to collateral on deposit equals the market value of the underlying security. A written put option creates a potential obligation to buy the underlying security. In order to make sure that this obligation can be met, the Fund could (i) sell short the underlying security at the same or higher price than the strike price of the written put option; (ii) hold an offsetting put option (one with a strike price that is the same or higher than the strike price of the written option); or (iii) segregate cash and liquid securities that when added to collateral on deposit equals the strike price of the option.
Short Sales.
The Fund may sell securities short. A short sale is a transaction in which the Fund sells a security it does not own or have the right to acquire (or that it owns but does not wish to deliver) in anticipation that the market price of that security will decline. When the Fund makes a short sale, the broker-dealer through which the short sale is made must borrow the security sold short and deliver it to the party purchasing the security. The Fund is required to make a margin deposit in connection with such short sales; the Fund may have to pay a fee to borrow particular securities and will often be obligated to pay over any dividends and accrued interest on borrowed securities.
If the price of the security sold short increases between the time of the short sale and the time the Fund covers the short position, the Fund will incur a loss; conversely, if the price declines, the Fund will realize a capital gain. Any gain will be decreased, and any loss increased, by the transaction costs described above. The successful use of short selling may be adversely affected by imperfect correlation between movements in the price of the security sold short and the securities being hedged.
To the extent the Fund sells securities short, the Fund will take measures that assure its obligation to purchase the security in the future will be met, including (i) holding the security sold short (selling short “against the box”); (ii) holding an offsetting call option (one with a strike price that is the same or lower than the price at which the security was sold short); or (iii) segregating liquid assets (which can be cash, U.S. Government securities, and other liquid debt or equity securities) on the Fund’s books or in a segregated account at the Fund’s custodian in an amount sufficient to cover the current value of the securities to be replaced as well as any dividends, interest, and transaction costs due to the broker-dealer lender. In determining the amount to be segregated, any securities that have been sold short by the Fund will be marked to market daily. To the extent the market price of the securities sold short increases and more assets are required to meet the Fund’s short sale obligations, additional assets will be segregated to ensure adequate coverage of the Fund’s short position obligations. If the Fund does not have the assets to cover a short sale, then the Fund’s potential losses on the short will be unlimited because the security’s price may appreciate indefinitely. .Under no circumstances will the Advisor commit more than 25% of the Fund’s assets to short sales “against the box.”
Futures Contracts.
A futures contract is a bilateral agreement to buy or sell a security (or deliver a cash settlement price, in the case of a contract relating to an index 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 designated by boards of trade which have been designated “contracts markets” by the Commodities Futures Trading Commission (“CFTC”). No purchase price is paid or received when the contract is entered into. Instead, the Fund, upon entering into a futures contract (and to maintain the Fund’s open positions in futures contracts), would be required to deposit with its custodian in a segregated account in the name of the futures broker an amount of cash, U.S. government securities, suitable money market instruments, or liquid, high-grade debt securities, known as “initial margin.” The 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. 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 margin requirements, the broker will require an increase in the margin. 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 broker will pay the excess to the Fund. These subsequent payments, called “variation margin,” to and from the futures broker, are made on a daily basis as the price of the underlying assets fluctuates, making the long and short positions in the futures contract more or less valuable, a process known as “marking to the market.” The Fund expects to earn interest income on its initial and variation margin deposits.
The Fund will incur brokerage fees when they purchase and sell 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 that may result in a gain or a loss. While futures positions taken by the 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.
In addition to the margin restrictions discussed above, transactions in futures contracts may involve the segregation of funds pursuant to requirements imposed by the Securities and Exchange Commission. Under those requirements, where the Fund has a long position in a futures contract, it may be required to establish a segregated account (not with a futures commission merchant or broker) containing cash or certain liquid assets equal to the purchase price of the contract (less any margin on deposit). However, segregation of assets is not required if the Fund “covers” a long position. For a short position in futures or forward contracts held by the Fund, those requirements may mandate the establishment of a segregated account (not with a futures commission merchant or broker) with cash or certain liquid assets that, when added to the amounts deposited as margin, equal the market value of the instruments underlying the futures contracts (but are not less than the price at which the short positions were established).
Securities Index Futures Contracts.
Purchases or sales of securities index futures contracts may be used in an attempt to protect the Fund’s current or intended investments from broad fluctuations in securities prices. 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, the 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, the 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, the Fund will be affected to a lesser degree by adverse overall market price movements than would otherwise be the case.
Options on Futures Contracts.
The Fund may purchase and write exchange-traded call and put options on futures contracts. 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.
The Fund will write only options on futures contracts that are “covered.” the 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 with its custodian cash, U.S. government securities or 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). the 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. the 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, securities the price changes of which are, in the opinion of the Advisor, expected to replicate substantially the movement of the index upon which the futures contract is based.
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 the 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 particular 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 on futures contracts can be used by the Fund to hedge substantially the same risks as might be addressed by the direct purchase or sale of the underlying futures contracts. If the 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.
The purchase of put options on futures contracts is a means of hedging against a general decline in market prices. The purchase of a call option on a futures contract represents a means of hedging against a market advance when the particular Fund is not fully invested.
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, the 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 the Fund intends to acquire. However, the hedge is limited to the amount of premium received for writing the put.
Limitations on Purchase and Sale of Futures Contracts and Options on Futures Contracts.
Futures contracts and options on futures contracts can be volatile instruments and involve certain risks. If the Advisor applies a hedge at an inappropriate time or judges market movements incorrectly, options and futures strategies may lower the Fund’s return. The Fund could also experience losses if the prices of its options and futures positions were poorly correlated with its other investments, or if it could not close out its position because of an illiquid market. The Fund will not engage in transactions in futures contracts and related options for speculation. In addition, the Fund will not purchase or sell futures contracts or related options unless either (i) the futures contracts or options thereon are purchased for “bona fide hedging” purposes (as defined under the CFTC regulations) or (ii) if purchased for other purposes, the sum of the amounts of initial margin deposits on the Fund’s existing futures and premiums required to establish non-hedging positions, less the amount by which any such options positions are “in-the-money” (as defined under CFTC regulations) would not exceed 5% of the liquidation value of the Fund’s total assets. In instances involving the purchase of futures contracts or the writing of put options thereon
by the 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 deposited in a segregated account with the Fund’s custodian, thereby ensuring 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 the Fund, the securities underlying such futures contracts or options will at all times be maintained by the Fund or, in the case of index futures and related options, the Fund will own securities the price changes of which are, in the opinion of the Advisor, expected to replicate substantially the movement of the index upon which the futures contract or option is based.
Forward Commitment & When-Issued Securities.
The Fund may purchase securities on a when-issued basis or for settlement at a future date if the Fund holds sufficient assets to meet the purchase price. In such purchase transactions, the Fund will not accrue interest on the purchased security until the actual settlement. Similarly, if a security is sold for a forward date, the Fund will accrue the interest until the settlement of the sale. When-issued security purchases and forward commitments have a higher degree of risk of price movement before settlement due to the extended time period between the execution and settlement of the purchase or sale. As a result, the exposure to the counterparty of the purchase or sale is increased. Although the Fund would generally purchase securities on a forward commitment or when-issued basis with the intention of taking delivery, the Fund may sell such a security prior to the settlement date if the Advisor feels such action is appropriate. In such a case, the Fund could incur a short-term gain or loss.
Foreign Securities.
The Fund may invest directly in foreign securities traded on U.S. national exchanges or over-the-counter domestic exchanges; foreign securities represented by American Depository Receipts (“ADRs”), as described below; and foreign securities traded on foreign exchanges. The Fund may also invest in foreign currency-denominated fixed-income securities. Investing in securities issued by companies whose principal business activities are outside the United States may involve significant risks not present in domestic investments. For example, there is generally less publicly available information about foreign companies, particularly those not subject to the disclosure and reporting requirements of the U.S. securities laws. Foreign issuers are generally not bound by uniform accounting, auditing, and financial reporting requirements and standards of practice comparable to those applicable to domestic issuers. Investments in foreign securities also involve the risk of possible adverse changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitation on the removal of cash or other assets of the Fund, political or financial instability, or diplomatic and other developments which could affect such investments. Further, economies of particular countries or areas of the world may differ favorably or unfavorably from the economy of the United States. Foreign securities often trade with less frequency and volume than domestic securities and therefore may exhibit greater price volatility. Additional costs associated with an investment in foreign securities may include higher custodial fees than would apply to domestic custodial arrangements, and transaction costs of foreign currency conversions. Certain foreign governments levy withholding taxes on dividend and interest income. Although in some countries it is possible for the Fund to recover a portion of these taxes, the portion that cannot be recovered will reduce the income that the Fund receives from its investments.
ADRs provide a method whereby the Fund may invest in securities issued by companies whose principal business activities are outside the United States. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying securities, and may be issued as sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have its securities trade in the form of ADRs. In unsponsored programs, the issuer may not be directly involved in the creation of the program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases it may be easier to obtain financial information from an issuer that has participated in the creation of a sponsored program.
Defensive Investments.
As a temporary defensive measure in response to adverse market, economic, political, or other conditions, the Fund may determine from time to time that market conditions warrant investing in investment-grade bonds, U.S. government securities, repurchase agreements, money market instruments, and, to the extent permitted by applicable law and the Fund’s investment restrictions, shares of other investment companies. To the extent that the Fund invests in such securities as a defensive position, it will not be pursuing and may not achieve its investment objectives. Under normal circumstances, however, the Fund will also hold money market or repurchase agreement instruments for funds awaiting investment to accumulate cash for anticipated purchases of portfolio securities, allow for shareholder redemptions, and provide for the Fund’s operating expenses.
INVESTMENT LIMITATIONS
The Fund has adopted the following fundamental investment limitations, which cannot be changed without approval by holders of a majority of the outstanding voting shares of the Fund. A “majority” for this purpose, means, with respect to the Fund, the lesser of (i) 67% of the Fund’s outstanding shares represented in person or by proxy at a meeting at which more than 50% of its outstanding shares are represented or (ii) more than 50% of its outstanding shares. Unless otherwise indicated, percentage limitations apply at the time of purchase.
As a matter of fundamental policy, the Fund may not:
(1)
|
Invest for the purpose of exercising control or management of another issuer;
|
(2)
|
Invest in interests in real estate, real estate mortgage loans, real estate limited partnerships, oil, gas or other mineral exploration or development programs or leases, except that the Fund may invest in the readily marketable securities of companies which own or deal in such things; purchase or sell commodities or commodities contracts (although it may purchase put options on stock index futures, put options on financial futures, stock index futures contracts, and put options on portfolio securities, and may write covered call options);
|
(3)
|
Underwrite securities issued by others except to the extent the Fund may be deemed to be an underwriter under the federal securities laws, in connection with the disposition of portfolio securities;
|
(4)
|
Purchase securities on margin (but the Fund may obtain such short-term credits as may be necessary for the clearance of transactions);
|
(5)
Participate on a joint or joint and several basis in any trading account in securities;
(6)
|
Invest 25% or more of the value of its total assets in any one industry or group of industries (except that securities of the U.S. government, its agencies and instrumentalities are not subject to these limitations), but the Fund MAY invest more than 25% of the value of its total assets in one or more sectors as described under the non-fundamental operating restrictions below;
|
(7) Make loans of money or securities, except that the Fund may invest in repurchase agreements; or
(8) Issue senior securities, borrow money, or pledge its assets.
The Fund has adopted a number of non-fundamental operating restrictions. These restrictions may be changed by the Trustees without shareholder approval. Under these non-fundamental operating restrictions, the Fund may not
(1)
|
Invest more than 25% of the value of its total assets in any one sector, EXCEPT that the Fund may invest more than 25% of the value of its total assets in one or more of the following sectors: financial sector, healthcare sector, retail sector, and technology sector.
|
(2)
|
Invest in the securities of any issuer if any of the officers or Trustees of the Trust or its investment advisor own beneficially more than 1/2 of 1% of the outstanding securities of such issuer or together own more than 5% of the outstanding securities of such issuer; or
|
(3)
|
Invest more than 10% of the value of its net assets in repurchase agreements having a maturity of longer than seven days or other not readily marketable securities; included in this category are any assets for which an active and substantial market does not exist at the time of purchase or subsequent valuation.
|
Percentage restrictions stated as an investment policy or investment limitation (other than those involving illiquid securities and borrowings) apply at the time of investment; if a later increase or decrease in percentage beyond the specified limits results from a change in securities values or total assets, it will not be considered a violation.
With respect to fundamental investment limitation #6 above, the Fund cannot invest more than 25% of its total assets in any one industry or group of industries, but may invest more than 25% of its total assets in the sectors described above. For example, the Fund might invest more than 25% of its total assets in the financial sector, but would not invest more than 25% of its total assets in a particular industry in the financial sector, such as banking or insurance.
The Fund will not make additional investments in securities when outstanding borrowings exceed 5% of the Fund’s total assets.
Senior securities generally include any obligation or instrument issued by a fund evidencing indebtedness. The Investment Company Act of 1940 generally prohibits funds from issuing senior securities, although it does not treat certain transactions as senior securities, such as certain borrowings, short sales, written options, firm commitment agreements, and standby commitments, with appropriate earmarking or segregation of assets to cover such obligations. The Fund’s specific policies for segregation of assets are described in “Additional Information About Investment Policies” above.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Trustees, the Advisor is responsible for, makes decisions with respect to, and places orders for all purchases and sales of portfolio securities for the Fund.
The annualized portfolio turnover rate for the Fund is calculated by dividing the lesser of purchases or sales of portfolio securities for the reporting period by the monthly average value of the portfolio securities owned during the reporting period. The calculation excludes all securities whose maturities or expiration dates at the time of acquisition are one year or less. Portfolio turnover of the Fund may vary greatly from year to year as well as within a particular year, and may be affected by cash requirements for redemption of shares and by requirements that enable the Fund to receive favorable tax
treatment. Portfolio turnover will not be a limiting factor in making Fund decisions, and the Fund may engage in short-term trading to achieve its investment objectives. High rates of portfolio turnover could lower performance of the Fund due to increased transaction costs and may also result in the realization of short-term capital gains taxed at ordinary income tax rates.
Purchases of money market instruments by the Fund are made from dealers, underwriters and issuers. The Fund currently does not expect to incur any brokerage commission expense on such transactions because money market instruments are generally traded on a “net” basis by a dealer acting as principal for its own account without a stated commission. The price of the security, however, usually includes a profit to the dealer. Securities purchased in underwritten offerings include a fixed amount of compensation to the underwriter, generally referred to as the underwriter’s concession or discount. When securities are purchased directly from or sold directly to an issuer, no commissions or discounts are paid.
Transactions on U.S. stock exchanges involve the payment of negotiated brokerage commissions. On exchanges on which commissions are negotiated, the cost of transactions may vary among different brokers. Transactions in the over-the-counter market are generally on a net basis (i.e., without commission) through dealers, which may include a dealer mark-up, or otherwise involve transactions directly with the issuer of an instrument.
Normally, most of the Fund’s fixed income portfolio transactions will be principal transactions executed in over-the-counter markets and will be executed on a “net” basis, which may include a dealer mark-up. With respect to securities traded only in the over-the-counter market, orders will be executed on a principal basis with primary market makers in such securities except where better prices or executions may be obtained on an agency basis or by dealing with other than a primary market maker.
The Fund may participate, if and when practicable, in bidding for the purchase of Fund securities directly from an issuer in order to take advantage of the lower purchase price available to members of a bidding group. The Fund will engage in this practice, however, only when the Advisor, in its sole discretion, believes such practice to be otherwise in the Fund’s interest.
The Fund has adopted, and the Trustees have approved, policies and procedures relating to the direction of mutual fund portfolio securities transactions to broker-dealers. In accordance with the these policies and procedures, in executing Fund transactions and selecting brokers or dealers, the Advisor will seek to obtain the best overall terms available for the Fund. In assessing the best overall terms available for any transaction, the Advisor shall consider factors it deems relevant, including the breadth of the market in the security, the price of the security, the financial condition and execution capability of the broker or dealer, and the reasonableness of the commission, if any, both for the specific transaction and on a continuing basis. The Advisor may not give consideration to sales of shares of the Fund as a factor in selecting broker-dealers to execute portfolio securities transactions. The Advisor may, however, place portfolio transactions with broker-dealers that promote or sell the Fund’s shares so long as such transactions are done in accordance with the policies and procedures established by the Board that are designed to ensure that the selection is based on the quality of the broker-dealer’s execution and not on its sales efforts. The Advisor is authorized to cause the Fund to pay a broker-dealer which furnishes brokerage and research services a higher commission than that which might be charged by another broker-dealer for effecting the same transaction, provided that the Advisor determines in good faith that such commission is reasonable in relation to the value of the brokerage and research services provided by such broker-dealer, viewed in terms of either the particular transaction or the overall responsibilities of the Advisor to the Fund. Such brokerage and research services might consist of reports and statistics relating to specific companies or industries, general summaries of groups of stocks or bonds and their comparative earnings and yields, or broad overviews of the stock, bond and government securities markets and the economy.
Supplementary research information so received is in addition to, and not in lieu of, services required to be performed by the Advisor and does not reduce the advisory fees payable by the Fund. The Trustees will periodically review any commissions paid by the Fund to consider whether the commissions paid over representative periods of time appear to be reasonable in relation to the benefits inuring to the Fund. It is possible that certain of the supplementary research or other services received will primarily benefit one or more other investment companies or other accounts for which investment discretion is exercised by the Advisor. Conversely, the Fund may be the primary beneficiary of the research or services received as a result of securities transactions effected for such other account or investment company.
The Advisor may also utilize a brokerage firm affiliated with the Trust or the Advisor if it believes it can obtain the best execution of transactions from such broker. The Fund will not execute portfolio transactions through, acquire securities issued by, make savings deposits in or enter into repurchase agreements with the Advisor or an affiliated person of the Advisor (as such term is defined in the 1940 Act) acting as principal, except to the extent permitted by the SEC. In addition, the Fund will not purchase securities during the existence of any underwriting or selling group relating thereto of which the Advisor, or an affiliated person of the Advisor, is a member, except to the extent permitted by the SEC. Under certain circumstances, the Fund may be at a disadvantage because of these limitations in comparison with other investment companies that have similar investment objectives but are not subject to such limitations.
Investment decisions for the Fund will be made independently from those for the other Fund and any other series of the Trust, and for any other investment companies and accounts advised or managed by the Advisor. Such other investment companies and accounts may also invest in the same securities as the Fund. To the extent permitted by law, the Advisor may aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for another Fund or other investment companies or accounts in executing transactions. When a purchase or sale of the same security is made at substantially the same time on behalf of the Fund and another investment company or account, the transaction will be averaged as to price and available investments allocated as to amount, in a manner which the Advisor believes to be equitable to the Fund and such other investment company or account. In some instances, this investment procedure may adversely affect the price paid or received by the Fund or the size of the position obtained or sold by the Fund.
For the fiscal years ended September 30, 2012, 2011, and 2010, the Fund paid brokerage commissions of $9,810, $3,392, and $5,462, respectively. The increase in brokerage commissions paid by the Fund for the fiscal year ended September 30, 2012 from the prior year was primarily due to inflows that increased the Fund’s assets under management .
NET ASSET VALUE
The net asset value per share of the Fund is normally determined at the time regular trading closes on the New York Stock Exchange (“NYSE”). The net asset value per share of the Fund is not calculated on business holidays when the NYSE is closed. The NYSE generally recognizes the following holidays: New Year’s Day, Martin Luther King, Jr., Day, President’s Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Any other holiday recognized by the NYSE will be deemed a business holiday on which the net asset value per share of the Fund will not be calculated.
The net asset value per share of the Fund is calculated separately by adding the value of the Fund’s securities and other assets belonging to the Fund, subtracting the liabilities charged to the Fund, and dividing the result by the number of outstanding shares of the Fund. “Assets belonging to” the Fund consist of the consideration received upon the issuance of shares of the Fund together with all net investment income, realized gains/losses and proceeds derived from the investment thereof, including any proceeds from the sale of such investments, any Fund or payments derived from any reinvestment of such proceeds, and a portion of any general assets of the Trust not belonging to a particular Fund. Assets belonging to the Fund are charged with the direct liabilities of the Fund and with a share of the general liabilities of the Trust, which are normally allocated in proportion to the number of or the relative net asset values of all of the Trust’s series at the time of allocation or in accordance with other allocation methods approved by the Trustees. Subject to the provisions of the Trust Instrument, determinations by the Trustees as to the direct and allocable liabilities, and the allocable portion of any general assets, with respect to the Fund are conclusive.
The pricing and valuation of portfolio securities is determined in good faith in accordance with procedures established by, and under the direction of, the Trustees. Using methods approved by the Trustees, the assets of the Fund are generally valued as follows:
·
|
Securities that are listed on a securities exchange are valued at the last quoted sales price at the time the valuation is made. Price information on listed securities is taken from the exchange where the security is primarily traded by the Fund.
|
·
|
Securities that are listed on an exchange and which are not traded on the valuation date are valued at the bid price.
|
·
|
Unlisted securities for which market quotations are readily available are valued at the latest quoted sales price, if available, at the time of valuation, otherwise, at the latest quoted bid price.
|
·
|
Temporary cash investments with maturities of 60 days or less will be valued at amortized cost, which approximates market value.
|
·
|
Options are valued at their last quoted sales price at the valuation time. If an option is not traded on the valuation date, the option is priced at the mean of the last quoted bid and ask prices at the valuation time. Options will be valued on the basis of prices provided by pricing services when such prices are reasonably believed to reflect the market value of such options and may include the use of composite or NBBO pricing information provided by the pricing services. An option may be fair valued when (i) the option does not trade on the valuation date and a reliable last quoted bid and ask price at the valuation time are not readily available or (ii) the Fund’s investment advisor or Fund management does not believe the prices provided by the pricing services reflect the market value of such option.
|
·
|
Securities for which no current quotations are readily available are valued at fair value as determined in good faith using methods approved by the Trustees. Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities.
|
·
|
Securities may be valued on the basis of prices provided by a pricing service when such prices are believed to reflect the fair market value of such securities.
|
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Reference is made to “Purchasing Shares” and “Redeeming Your Shares” in the Prospectus for more information concerning how to purchase and redeem shares. The following information supplements the information regarding share purchases and share redemptions in the Prospectus:
Purchases.
Shares of the Fund are offered and sold on a continuous basis and may be purchased through authorized investment dealers or directly by contacting the Fund’s distributor, Capital Investment Group, Inc. (“Distributor”), or the Fund directly. Selling dealers have the responsibility of transmitting orders promptly to the Fund. The purchase price of shares of the Fund is based on the net asset value next determined after the order is received, subject to the order being accepted by the Fund in good form. Net asset value is normally determined at the time regular trading closes on the NYSE on days the NYSE is open for regular trading, as described under “Net Asset Value” above. The net asset value per share of the Fund is not calculated on business holidays when the NYSE is closed. An order received prior to the time regular trading closes on the NYSE will be executed at the price calculated on the date of receipt and an order received after the time regular trading closes on the NYSE will be executed at the price calculated as of that time on the next business day.
The Fund reserves the right in its sole discretion to (i) suspend the offering of its shares; (ii) reject purchase orders when in the judgment of management such rejection is in the best interest of the Fund and its shareholders; and (iii) reduce or waive the minimum for initial and subsequent investments under circumstances where certain economies can be achieved in sales of Fund shares.
Dealers.
The Distributor, at its expense, may also provide additional compensation to dealers in connection with sales of shares of the Fund. Compensation may include financial assistance to dealers in connection with conferences, sales, or training programs for their employees, seminars for the public, advertising campaigns regarding the Fund, and/or other dealer-sponsored special events. In some instances, this compensation may be made available only to certain dealers whose representatives have sold or are expected to sell a significant amount of such shares. Compensation may include payment for travel expenses, including lodging, incurred in connection with trips taken by invited registered representatives and members of their families to locations within or outside of the United States for meetings or seminars of a business nature. Dealers may not use sales of the Fund shares to qualify for this compensation to the extent such may be prohibited by the laws of any state or any self-regulatory organization, such as the Financial Industries Regulatory Authority. None of the aforementioned compensation is paid for by the Fund or its shareholders, although the Distributor may use a portion of the payment it receives under the Plan of Distribution pursuant to Rule 12b-1 to pay these expenses.
Plan Under Rule 12b-1.
The Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act (the “Distribution Plan”) for the Fund (see “Management of the Fund – The Distributor – Distribution Plan” in the Fund’s Prospectus). Under the Distribution Plan, the Fund annually may expend a percentage of the Fund’s average net asset value to finance any activity which is primarily intended to result in the sale of Fund shares and the servicing of shareholder accounts with respect to those shares, provided the Trustees have approved the category of expenses for which payment is being made. The Fund may expend up to 0.25% of the Fund’s average daily net assets. The 0.25% fee is a service fee. Such expenditures paid as service fees to any person who sells shares of the Fund may not exceed 0.25% of the average annual net asset value of such shares. Potential benefits of the Distribution Plan to the Fund include improved shareholder servicing, savings to the Fund in transfer agency costs, benefits to the investment process from growth and stability of assets, and maintenance of a financially healthy management organization.
All of the distribution expenses incurred by the Distributor and others, such as broker-dealers, in excess of the amount paid by the Fund will be borne by such persons without any reimbursement from the Fund. Subject to policies and procedures established by the Board, the Fund may, from time to time, buy or sell portfolio securities from or to firms which receive payments under the Distribution Plan.
From time to time, the Distributor may pay additional amounts from its own resources to dealers for aid in distribution or for aid in providing administrative services to shareholders.
The Distribution Plan and the distribution agreement with the Distributor (“Distribution Agreement”) have been approved by the Trustees, including a majority of the Trustees who are not “interested persons” (as defined in the 1940 Act) of the Trust and who have no direct or indirect financial interest in the Distribution Plan or any related agreements, by vote cast in person at a meeting duly called for the purpose of voting on the Distribution Plan and such Agreement. Continuation of the Distribution Plan and the Distribution Agreement must be approved annually by the Trustees in the same manner as specified above.
Each year the Trustees must determine whether continuation of each of the Distribution Plan is in the best interest of shareholders of the Fund and that there is a reasonable likelihood of its providing a benefit to the Fund. The Trustees have made such a determination for the current year of operations under the Distribution Plan. The Distribution Plan, the Distribution Agreement, and any dealer agreement with any broker/dealers (each, a “Dealer Agreement”) may be terminated at any time without penalty by a majority of those Trustees who are not “interested persons” or by a majority vote of the outstanding voting stock of the Fund. Any amendment materially increasing the maximum percentage payable under the Distribution Plan must likewise be approved by a majority vote of the outstanding shares of the Fund, as well as by a majority vote of those Trustees who are not “interested persons.” Any other material amendment to the Distribution Plan must be approved by a majority vote of the Trustees including a majority of the noninterested Trustees having no interest in the Distribution Plan. In order for the Distribution Plan to remain effective, the selection and nomination of Trustees who are not “interested persons” of the Trust must be effected by the Trustees who themselves are not “interested persons” and who have no direct or indirect financial interest in the Distribution Plan. Persons authorized to make payments under the Distribution Plan must provide written reports at least quarterly to the Trustees for their review.
The Fund formerly operated Class A Shares, Class B Shares, and Class C Shares. Class B Shares were discontinued for sale as of the close of business on May 15, 2009, and were converted to Class C Shares of the corresponding Fund on June 15, 2009. Class A Shares and Class C Shares which were discontinued for sale as of the close of business on May 18, 2012 and were converted to No Load Shares of the corresponding Fund on June 15, 2012. While the Class A Shares, Class B Shares, and Class C Shares were in operation, they were also part of the Fund’s 12b-1 Plans, and the payments under the Fund’s 12b-1 Plans for these classes are included below.
Payments under the Fund’s 12b-1 Plans for the fiscal year ended September 30, 2012 totaled $37,127, $1,094, and $2,187 for the No Load Shares, Class A Shares, and Class C Shares, respectively, of the Fund. Payments under the Fund’s 12b-1 Plans for the fiscal year ended September 30, 2011 totaled
$34,049, $797, and $4,204
for the No Load Shares, Class A Shares, and Class C Shares, respectively, of the Fund. Payments under the Fund’s 12b-1 Plans for the fiscal year ended September 30, 2010 totaled
$41,149 (of which $3,713 were waived), $1,044 (of which $14 were waived), and $3,753 (of which $99 were waived)
for the No Load Shares, Class A Shares, and Class C Shares, respectively, of the Fund.
Redemptions.
Under the 1940 Act, the Fund may suspend the right of redemption or postpone the date of payment for
shares during any period when (i) trading on the NYSE is restricted by applicable rules and regulations of the SEC; (ii) the NYSE is closed for other than customary weekend and holiday closings; (iii) the SEC has by order permitted such suspension; or (iv) an emergency exists as determined by the SEC. The Fund may also suspend or postpone the recordation of the transfer of shares upon the occurrence of any of the foregoing conditions.
In addition to the situations described in the Prospectus under “Investing in the Fund – Redeeming Your Shares,” the Fund may redeem shares involuntarily to reimburse the Fund for any loss sustained by reason of the failure of a shareholder to make full payment for shares purchased by the shareholder, to collect any charge relating to a transaction effected for the benefit of a shareholder which is applicable to Fund shares as provided in the Prospectus from time to time, or to close a shareholder’s account if the Fund is unable to verify the shareholder’s identity. Such redemptions will not be subject to an otherwise applicable contingent deferred sales charge.
DESCRIPTION OF THE TRUST
The Trust, which is an unincorporated statutory trust organized under Delaware law on July 14, 2000, is an open-end investment management company. The Trust Instrument of the Trust authorizes the Trustees to divide shares into series, each series relating to a separate portfolio of investments, and to classify and reclassify any unissued shares into one or more classes of shares of each such series. The Trust Instrument currently provides for the shares of one series, The Hillman Focused Advantage Fund, managed by Hillman Capital Management, Inc. of Bethesda, Maryland. The Fund offers a single class of shares: No Load Shares. The number of shares of each series shall be unlimited. The Trust normally does not issue share certificates.
In the event of a liquidation or dissolution of the Trust or an individual series, such as the Fund, shareholders of a particular series would be entitled to receive the assets available for distribution belonging to such series. Shareholders of a series are entitled to participate equally in the net distributable assets of the particular series involved on liquidation, based on the number of shares of the series that are held by each shareholder. If there are any assets, income, earnings, proceeds, funds, or payments that are not readily identifiable as belonging to any particular series, the Trustees shall allocate them among any one or more of the series as they, in their sole discretion, deem fair and equitable.
Shareholders of all of the series of the Trust, including the Fund, will vote together and not separately on a series-by-series or class-by-class basis, except as otherwise required by law or when the Trustees determine that the matter to be voted upon affects only the interests of the shareholders of a particular series or class. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted to the holders of the outstanding voting securities of an investment company such as the Trust shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each series or class affected by the matter. A series or class is affected by a matter unless it is clear that the interests of each series or class in the matter are substantially identical or that the matter does not affect any interest of the series or class. Under Rule 18f-2, the approval of an investment advisory agreement or any change in a fundamental investment policy would be effectively acted upon with respect to a series only if approved by a majority of the outstanding shares of such series. However, the Rule also provides that the ratification of the appointment of independent accountants, the approval of principal underwriting contracts and the election of Trustees may be effectively acted upon by shareholders of the Trust voting together, without regard to a particular series or class. Rights of shareholders can only be modified by a majority vote.
When used in the Prospectus or this SAI, a “majority” of shareholders means the vote of the lesser of (i) 67% of the shares of the Trust or the applicable series or class present at a meeting if the holders of more than 50% of the outstanding shares are present in person or by proxy or (ii) more than 50% of the outstanding shares of the Trust or the applicable series or class.
When issued for payment as described in the Prospectus and this SAI, shares of the Fund will be fully paid and non-assessable.
The Trust Instrument provides that the Trustees of the Trust will not be liable in any event in connection with the affairs of the Trust, except as such liability may arise from a Trustee’s bad faith, willful misfeasance, gross negligence, or reckless disregard of duties. It also provides that all third parties shall look solely to the Trust property for satisfaction of claims arising in connection with the affairs of the Trust. With the exceptions stated, the Trust Instrument provides that a Trustee or officer is entitled to be indemnified against all liability in connection with the affairs of the Trust.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional tax considerations generally affecting the Fund and its shareholders that are not described in the Prospectus. No attempt is made to present a detailed explanation of the tax treatment of the Fund or its shareholders. The discussions here and in the Prospectus are not intended as a substitute for careful tax planning and are based on tax laws and regulations that are in effect on the date hereof, and which may be changed by legislative, judicial, or administrative action. Investors are advised to consult their tax advisors with specific reference to their own tax situations.
Each series of the Trust, including the Fund, will be treated as a separate corporate entity under the Internal Revenue Code of 1986, as amended (“Code”), and intends to qualify or remain qualified as a regulated investment company under Subchapter M of the Code. In order to so qualify, each series must elect to be a regulated investment company or have made such an election for a previous year and must satisfy certain requirements relating to the amount of distributions and source of its income for a taxable year. At least 90% of the gross income of each series must be derived from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stocks, securities or foreign currencies, and other income derived with respect to the series’ business of investing in such stock, securities or currencies. Any income derived by a series from a partnership or trust is treated as derived with respect to the series’ business of investing in stock, securities or currencies only to the extent that such income is attributable to items of income that would have been qualifying income if realized by the series in the same manner as by the partnership or trust.
An investment company may not qualify as a regulated investment company for any taxable year unless it satisfies certain requirements with respect to the diversification of its investments at the close of each quarter of the taxable year. In general, at least 50% of the value of its total assets must be represented by cash, cash items, government securities, securities of other regulated investment companies and other securities which, with respect to any one issuer, do not represent more than 5% of the total assets of the fund nor more than 10% of the outstanding voting securities of such issuer. In addition, not more than 25% of the value of the fund’s total assets may be invested in the securities (other than government securities or the securities of other regulated investment companies) of any one issuer; the securities of two or more issuers (other than securities of another regulated investment company) if the issuers are controlled by the Fund and they are, pursuant to Internal Revenue Service Regulations, engaged in the same or similar or related trades or businesses; or the securities of one or more publicly traded partnerships. The Fund intends to satisfy all requirements on an ongoing basis for continued qualification as a regulated investment company.
The 2003 Jobs and Growth Tax Relief Reconciliation Act reduced the federal tax rate on most dividends paid by U.S. corporations to individuals after December 31, 2002. Through December 31, 2012, these qualifying corporate dividends are taxable at long-term capital gains tax rates. Some, but not all, of the dividends paid by the Fund may be taxable at the reduced long-term capital gains tax rate for individual shareholders. If the Fund designates a dividend as qualified dividend income, it generally will be taxable to individual shareholders at the long-term capital gains tax rate, provided certain holding period requirements are met.
Taxable dividends paid by the Fund to corporate shareholders will be taxed at corporate income tax rates. Corporate shareholders may be entitled to a dividends received deduction (“DRD”) for a portion of the dividends paid and designated by the Fund as qualifying for the DRD.
If the Fund designates a dividend as a capital gains distribution, it generally will be taxable to shareholders as long-term capital gains, regardless of how long the shareholders have held their Fund shares or whether received in cash or reinvested in additional shares. All taxable dividends paid by the Fund other than those designated as qualified dividend income or capital gains distributions will be taxable as ordinary income to shareholders, whether received in cash or reinvested in additional shares. To the extent the Fund engages in increased portfolio turnover, short-term capital gains may be realized, and any distribution resulting from such gains will be considered ordinary income for federal tax purposes.
Shareholders who hold Fund shares in a tax-deferred account, such as a retirement plan, generally will not have to pay tax on Fund distributions until they receive distributions from their account.
Each series of the Trust, including the Fund, will designate (i) any dividend of qualified dividend income as qualified dividend income; (ii) any tax-exempt dividend as an exempt-interest dividend; (iii) any distribution of long-term capital gains as a capital gain dividend; and (iv) any dividend eligible for the corporate DRD as such in a written notice mailed to shareholders within 60 days after the close of the series’ taxable year. Shareholders should note that, upon the sale or exchange of series shares, if the shareholder has not held such shares for at least six months, any loss on the sale or exchange of those shares will be treated as long-term capital loss to the extent of the capital gain dividends received with respect to the shares.
To the extent that a distribution from the Fund is taxable, it is generally included in a shareholder’s gross income for the taxable year in which the shareholder receives the distribution. However, if the Fund declares a dividend in October, November, or December but pays it in January, it will be taxable to shareholders as if they received it in the year it was declared. Every year, each shareholder will receive a statement detailing the tax status of any Fund distributions for that year.
A 4% nondeductible excise tax is imposed on regulated investment companies that fail to currently distribute an amount equal to specified percentages of their ordinary taxable income and capital gain net income (excess of capital gains over capital losses). Each series of the Trust, including the Fund, intends to make sufficient distributions or deemed distributions of its ordinary taxable income and any capital gain net income prior to the end of each calendar year to avoid liability for this excise tax.
If for any taxable year a series does not qualify for the special federal income tax treatment afforded regulated investment companies, all of its taxable income will be subject to federal income tax at regular corporate rates (without any deduction for distributions to its shareholders). In such event, dividend distributions (whether or not derived from interest on tax-exempt securities) would be taxable as qualified dividends to individual shareholders in taxable years beginning on or before December 31, 2012, to the extent of the Fund’s current and accumulated earnings and profits, and would be eligible for the DRD for corporations, provided in each case that certain holding period and other requirements are met.
In general, a shareholder who sells or redeems shares will realize a capital gain or loss, which will be long-term or short-term, depending upon the shareholder’s holding period for the Fund shares. An exchange of shares may be treated as a sale and any gain may be subject to tax.
The Fund will be required in certain cases to withhold and remit to the U.S. Treasury a percentage equal to the fourth lowest tax rate for unmarried individuals (presently 28%) of taxable dividends or of gross proceeds realized upon sale paid to shareholders who have failed to provide a correct taxpayer identification number in the manner required, or who are subject to withholding by the Internal Revenue Service for failure to include properly on their return payments of taxable interest or dividends, or who have failed to certify to the Fund that they are not subject to backup withholding when required to do so, or that they are “exempt recipients.”
Depending upon the extent of the Fund’s activities in states and localities in which its offices are maintained, in which its agents or independent contractors are located, or in which it is otherwise deemed to be conducting business, the Fund may be subject to the tax laws of such states or localities. In addition, in those states and localities that have income tax laws, the treatment of the Fund and its shareholders under such laws may differ from their treatment under federal income tax laws.
Dividends paid by the Fund to non-U.S. shareholders may be subject to U.S. withholding tax at the rate of 30% unless reduced by treaty (and the shareholder files a valid Internal Revenue Service Form W-8BEN, or other applicable form, with the Fund certifying foreign status and treaty eligibility) or the non-U.S. shareholder files an Internal Revenue Service Form W-8ECI, or other applicable form, with the Fund certifying that the investment to which the distribution relates is effectively connected to a United States trade or business of such non-U.S. shareholder (and, if certain tax treaties apply, is attributable to a United States permanent establishment maintained by such non-U.S. shareholder). The Fund may elect not to withhold the applicable withholding tax on any distribution representing a capital gain dividend to a non-U.S. shareholder. Special rules may apply to non-U.S. shareholders with respect to the information reporting requirements and withholding taxes and non-U.S. shareholders should consult their tax advisors with respect to the application of such reporting requirements and withholding taxes.
The Fund will send shareholders information each year on the tax status of dividends and distributions. A dividend or capital gains distribution paid shortly after shares have been purchased, although in effect a return of investment, is subject to federal income taxation. Dividends from net investment income, along with capital gains, will be taxable to shareholders, whether received in cash or Fund shares and no matter how long the shareholder has held Fund shares, even if they reduce the net asset value of shares below the shareholder’s cost and thus, in effect, result in a return of a part of the shareholder’s investment.
MANAGEMENT AND OTHER SERVICE PROVIDERS
This section of the SAI provides information about the persons who serve as Trustees and officers to the Trust and Fund, respectively, as well as the entities that provide services to the Fund.
Trustees and Officers
The Trustees are responsible for the management and supervision of the Fund. The Trustees set broad policies for the Fund and choose the Fund’s officers. The Trustees also approve all significant agreements between the Trust, on behalf of the Fund, and those companies that furnish services to the Fund; review performance of the Advisor and the Fund; and oversee activities of the Fund. Generally, each Trustee and officer serves an indefinite term or until certain circumstances such as their resignation, death, or otherwise as specified in the Trust’s organizational documents. Any Trustee may be removed at a meeting of shareholders by a vote meeting the requirements of the Trust’s organizational documents. The following chart shows information for the Trustees who are not “interested persons” as defined in the 1940 Act (“Independent Trustees”), the Trustee who is an “interested person” as defined in the 1940 Act (“Interested Trustee”), and each officer of the Trust. The address of each Trustee and officer, unless otherwise indicated, is 116 South Franklin Street, Rocky Mount, North Carolina 27802.
Name, Age,
and Address
|
Position(s)
held with
Fund/Trust
|
Length of
Time Served
|
Principal Occupation(s)
During Past 5 Years
|
Number of
Portfolios in
Fund
Complex
Overseen by
Trustee
|
Other Directorships
Held by Trustee
During Past 5 Years
|
Independent Trustees
|
Jack E. Brinson, 80
|
Independent Trustee
|
Since 12/2000
|
Retired since January 2000; Previously, President, Brinson Investment Co. (personal investments) and President, Brinson Chevrolet, Inc. (auto dealership).
|
1
|
Independent Trustee of the following: The Brown Capital Management Funds for the three series of the trust; DGHM Investment Trust for the two series of that trust; Gardner Lewis Investment Trust for the two series of that trust; Giordano Investment Trust; Starboard Investment Trust for the twenty -two series of that trust; and Tilson Investment Trust for the two series of that trust (all registered investment companies); previously, Independent Trustee of New Providence Investment Trust for its one series from inception until 2011.
|
James H. Speed, Jr., 59
|
Independent Trustee
|
Since 3/2009
|
President and CEO of NC Mutual Insurance Company (insurance company) since May 2003; President of Speed Financial Group, Inc. (consulting/private investments) from March 2000 to April 2003.
|
1
|
Independent Trustee of the following The Brown Capital Management Funds for the three series of the trust; Starboard Investment Trust for the twenty -two series of that trust; and Tilson Investment Trust for the two series of that trust (all registered investment companies). Member of Board of Directors of NC Mutual Life Insurance Company. Member of Board of Directors of M&F Bancorp. Previously, Independent Trustee of New Providence Investment Trust for its one series from 2009 until 2011 (registered investment company).
|
Interested Trustee*
|
Mark A. Hillman, 50
4350 East West Highway
Suite 502
Bethesda, MD 20814
|
Trustee and President (Principal Executive Officer)
|
S ince 12/2000
|
President, Hillman Capital Management, Inc. (investment advisor to the Fund); previously, Chief Investment Officer, Menocal Capital Management, Inc. (investment advisor).
|
1
|
None
|
* Basis of Interestedness.
Mr. Hillman is an Interested Trustee because he is an officer of Hillman Capital Management, Inc., the investment advisor to the Fund.
|
Other Officers
|
C. Frank Watson III, 42
1330 St. Mary’s Street
Suite 400
Raleigh, NC 27605
|
Treasurer (Principal Financial Officer)
|
Since 10/2011
|
President, Fairview Investment Services, LLC since 2005; previously, President and Chief Operating Officer, The Nottingham Company (administrator to the Fund).
|
n/a
|
n/a
|
Greyson L. Davis, 34
|
Chief Compliance Officer
|
Since 11/2011
|
Relationship Manager for The Nottingham Company since 2012; previously Fund Accounting Team Manager since 2001.
|
n/a
|
n/a
|
T. Lee Hale, Jr. 34
|
Assistant Secretary
|
Since 1/2011
|
Relationship Manager for The Nottingham Company since 2012 ; previously, Fund Accounting Team Manager, The Nottingham Company from 2011-2012, Director of Financial Reporting , The Nottingham Company from 2009-2011; principal of Lee Hale Contracting (marine industry consulting).
|
n/a
|
n/a
|
A. Vason Hamrick, 35
|
Secretary and Assistant Treasurer
|
Since 3/2007
|
Corporate Counsel, The Nottingham Company since 2004.
|
n/a
|
n/a
|
Board Structure.
The Board includes two Independent Trustees and one Interested Trustee. Mr. Speed , one of the Independent Trustees, is Chairman of the Board. The Board believes its current leadership structure is appropriate given the Trust’s and the Board’s current and historical small size and the fact that this size permits Trust management to communicate with each Independent Trustee as and when needed, and permits each Independent Trustee to be involved in each committee of the Board as well as each Board function. The Board may consider electing additional Independent Trustees in the future, particularly if the Trust’s size or complexity materially increases.
With respect to risk oversight, the Board holds four regular meetings each year to consider and address matters involving the Trust and its Fund. During these meetings, the Board receives reports from Trust management, including the Trust’s principal officers and chief compliance officer, and the Fund’s service providers on regular quarterly items and, where appropriate and as needed, on specific issues. As part of its oversight function, the Board also may hold special meetings or communicate directly with the Trust’s officers to address matters arising between regular meetings. The Board has established a committee structure that includes an Audit Committee, Nominating Committee, Proxy Voting Committee, and Qualified Legal Compliance Committee (discussed in more detail below). Each committee is comprised entirely of Independent Trustees.
Qualification of Trustees.
The Board has considered each Trustee's experience, qualifications, attributes, and skills in light of the Board’s function and the Trust’s business and structure, and has determined that each Trustee possesses experience, qualifications, attributes, and skills that enable the Trustee to be an effective member of the Board.
Mr. Brinson has experience as an investor, including his role as Trustee of several other investment companies and business experience as President of a company in the business of private investing. Mr. Speed also has experience as an investor as Trustee of several other investment companies and business experience as President and CEO of an insurance company and as President of a company in the business of consulting and private investing. Mr. Hillman has experience as an investor, including his role as President and Principal Executive Officer of the Trust and founder, controlling shareholder, and President of the Advisor.
The Board has determined that each of the Trustees’ careers and background, combined with their interpersonal skills and general understanding of financial and other matters, enable the Trustees to effectively participate in and contribute to the Board’s functions and oversight of the Trust. References to the qualifications, attributes, and skills of Trustees are pursuant to requirements of the Securities and Exchange Commission, do not constitute holding out the Board or any Trustee as having any special expertise or experience, and shall not impose any greater responsibility on any such person or on the Board by reason thereof.
The Board met five times during the fiscal year ended September 30, 2012 . Each Trustee attended all of the Board meetings.
Trustee Standing Committees.
The Board of Trustees has established the following standing committees:
Audit Committee:
The Independent Trustees are the current members of the Audit Committee. The Audit Committee oversees the Fund’s accounting and financial reporting policies and practices, reviews the results of the annual audits of the Fund’s financial statements, and interacts with the Fund’s independent auditors on behalf of all the Trustees. The Audit Committee operates pursuant to an Audit Committee Charter and meets periodically as necessary. The Audit Committee met two times during the Fund’s last fiscal year.
Governance Committee:
The Independent Trustees are the current members of the Governance Committee. The Governance Committee assists the Board of Trustees in adopting fund governance practices and meeting certain fund governance standards. The Governance Committee operates pursuant to a Governance Committee Charter and normally meets annually, but may also meet as often as necessary to carry out its purpose. The Governance Committee met once during the Fund’s last fiscal year .
Nominating Committee:
The Independent Trustees are the current members of the Nominating Committee. The Nominating Committee nominates, selects, and appoints independent trustees to fill vacancies on the Board of Trustees and to stand for election at meetings of the shareholders of the Trust. The nomination of Independent Trustees is in the sole and exclusive discretion of the Nominating Committee. The Nominating Committee meets only as necessary and did not meet during the Fund’s last fiscal year. The Nominating Committee will not consider nominees recommended by shareholders of the Trust.
Proxy Voting Committee:
The Independent Trustees are the current members of the Proxy Voting Committee. The Proxy Voting Committee will determine how the Fund should cast its vote, if called upon by the Board or the Advisor, when a matter with respect to which the Fund is entitled to vote presents a conflict between the interests of the Fund’s shareholders, on the one hand, and those of the Fund’s Advisor, principal underwriter or an affiliated person of the Fund, its investment advisor, or principal underwriter, on the other hand. The Proxy Voting Committee will review the Trust’s
Proxy Voting Policy and recommend any changes to the Board as it deems necessary or advisable. The Proxy Voting Committee will also decide if the Fund should participate in a class action settlement, if called upon by the Advisor, in cases where a class action settlement with respect to which the Fund is eligible to participate presents a conflict between the interests of the Fund’s shareholders, on the one hand, and those of the Advisor, on the other hand. The Proxy Voting Committee meets only as necessary and did not meet during the Fund’s last fiscal year.
Qualified Legal Compliance Committee:
The Independent Trustees are the current members of the Qualified Legal Compliance Committee. The Qualified Legal Compliance Committee receives, investigates, and makes recommendations as to appropriate remedial action in connection with any report of evidence of a material violation of securities laws or breach of fiduciary duty or similar violation by the Trust, its officers, trustees, or agents. The Qualified Legal Compliance Committee meets only as necessary and did not meet during the Fund’s last fiscal year.
Beneficial Equity Ownership Information.
The table below shows the amount of the Fund’s equity securities beneficially owned by the Trustees and the aggregate value of all of the Trustee’s investments in equity securities of the Trust complex as of a valuation date of December 31, 2012 . The values are stated using the following ranges: A = none; B = $1-$10,000; C = $10,001-$50,000; D = $50,001-$100,000; and E = over $100,000.
Name of Trustee
|
Dollar Range of Equity
Securities in the Fund
|
Aggregate Dollar Range of
Equity Securities in All Funds
Overseen or to be Overseen
by Trustee in Family of
Investment Companies*
|
I
ndependent Trustees
|
Jack E. Brinson
|
A
|
A
|
James H. Speed, Jr.
|
A
|
A
|
Interested Trustee
|
Mark A. Hillman
|
E
|
E
|
Ownership of Securities of Advisor, Distributor, or Related Entities.
As of December 31, 2012 , the Independent Trustees and/or their immediate family members owned no securities of the Advisor, Distributor, or any entity controlling, controlled by, or under common control with the Advisor or Distributor.
Compensation.
The officers of the Trust will not receive compensation from the Trust for performing the duties of their offices. Each Trustee who is not an “interested person” of the Trust receives a fee of $4,000 each year plus $250 per series of the Trust per meeting attended in person and $100 per series of the Trust per meeting attended by telephone. All Trustees and officers are reimbursed for any out-of-pocket expenses incurred in connection with attendance at meetings. The following table reflects the amount of compensation received by each Trustee for the fiscal year ended September 30, 2012 .
Name of Trustee
|
Aggregate
Compensation
from the Fund
|
Pension
Retirement
Benefits Accrued
As Part of Fund
Expenses
|
Estimated Annual
Benefits Upon
Retirement
|
Total
Compensation
from the Trust Paid
to Trustees
|
Jack E. Brinson
|
$ 3,350
|
None
|
None
|
$ 6,200
|
James H. Speed, Jr.
|
$ 3,350
|
None
|
None
|
$ 6,200
|
Code of Ethics.
The Trust and the Advisor each has adopted a code of ethics, as required by applicable law, which is designed to prevent affiliated persons of the Trust and the Advisor from engaging in deceptive, manipulative, or fraudulent activities in connection with securities held or to be acquired by the Fund (which securities may also be held by persons subject to a code). There can be no assurance that the codes will be effective in preventing such activities.
Anti-Money Laundering Program.
The Trust has adopted an anti-money laundering program, as required by applicable law, that is designed to prevent the Fund from being used for money laundering or the financing of terrorist activities. The Trust’s Chief Compliance Officer is responsible for implementing and monitoring the operations and internal controls of the program. Compliance officers at certain of the Fund’s service providers are also responsible for monitoring the program. The anti-money laundering program is subject to the continuing oversight of the Trustees.
Proxy Voting Policies.
The Trust has adopted a proxy voting and disclosure policy that delegates to the Advisor the authority to vote proxies for the Fund, subject to oversight of the Trustees. A copy of the Trust’s Proxy Voting and Disclosure Policy and the Advisor’s Proxy Voting Policy and Procedures are included as Appendix B to this SAI.
No later than August 31 of each year, the Fund files Form N-PX with the SEC. Form N-PX states how an investment company voted proxies for the prior twelve-month period ended June 30. The Fund’s proxy voting records, as set forth in the most recent Form N-PX filing, are available upon request, without charge, by calling the Fund at 1-800-773-3863. This information is also available on the SEC’s website at www.sec.gov.
Control Persons and Principal Holders of Voting Securities.
As of December 31 , 2012, the Trustees and officers of the Trust, as a group, owned beneficially (i.e., had voting and/or investment power) 4.66 % of the then outstanding shares of the No Load Shares of the Fund. On that same date, the following shareholder(s) owned of record more than 5% of the outstanding shares of the Fund. Except as provided below, no person is known by the Trust to be the beneficial owner of more than 5% of the outstanding shares of the Fund as of December 31 , 2012.
FOCUSED ADVANTAGE FUND
No Load Shares
Name and Address of
Beneficial Owner
|
Amount and Nature of
Beneficial Ownership
|
P
ercent
|
Charles Schwab & Co, Inc.
Special Custody Account For The
Benefit Of Our Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
|
310,095.271
Shar
es
|
15.66 %
1
|
NFS LLC FEBO
NFS/FMTC IRA FBO
James David Nicoll
2497 Woodthrush Drive
Sandy, UT 84093
|
185,198.477 Shares
|
9. 35 %
|
|
1.
|
The Fund believes that such entity does not have a beneficial ownership interest in such shares.
|
Investment Advisor.
Information about Hillman Capital Management, Inc., 4350 East West Highway, Suite 502 Bethesda, Maryland 20814, and its duties and compensation as Advisor is contained in the Prospectus. The Advisor is controlled by Mark A. Hillman, who founded the firm and serves as President and Chief Investment Officer . The Advisor supervises the Fund’s investments pursuant to the investment advisory agreement for the Fund (“Advisory Agreement”). The Advisory Agreement was effective for an initial two-year period and is currently renewed for a period of one year only so long as such renewal and continuance is specifically approved at least annually by the Trustees or by vote of a majority of the Fund’s outstanding voting securities, provided the continuance is also approved by a majority of the Independent Trustees of the Trust by vote cast in person at a meeting called for the purpose of voting on such approval. The Advisory Agreement is terminable without penalty on 60-days’ notice by the Fund (as approved by the Trustees or by vote of a majority of the Fund’s outstanding voting securities) or by the Advisor. The Advisory Agreement provides that it will terminate automatically in the event of its assignment.
The Advisor manages the Fund’s investments in accordance with the stated policies of the Fund, subject to the approval of the Trustees. The Advisor is responsible for investment decisions, and provides the Fund with portfolio managers who are authorized by the Trustees to execute purchases and sales of securities. The portfolio manager for the Fund is Mark A. Hillman, President of the Advisor.
Under the Advisory Agreement, the Advisor is not liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the performance of such agreement, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Advisor in the performance of its duties or from its reckless disregard of its duties and obligations under the Advisory Agreement.
Monthly compensation of the Advisor with regards to the Fund, based upon the Fund’s average daily net assets, is at the annual rate of 1.00%. For the fiscal years ended September 30, 2012, 2011, and 2010, the Advisor received $155,070, $143,681, and
$28,777 (after waivers of $120,992 and reimbursements of $22,754)
, respectively, for its services to the Fund.
Portfolio Manager
Compensation.
Mark A. Hillman is the Fund’s portfolio manager. He is a principal of the Advisor and his compensation consists of a fixed annual salary, plus additional remuneration based on the Advisor’s assets under management. Compensation is not directly linked to the Fund’s performance, although positive performance and growth in managed assets are factors that may contribute to the Advisor’s distributable profits and assets under management.
Ownership of Fund Shares.
The table below shows the amount of Fund equity securities beneficially owned by the portfolio manager as of the end of the Fund’s fiscal year ended September 30, 2012 and stated as one of the following ranges: A = None; B = $1-$10,000; C = $10,001-$50,000; D = $50,001-$100,000; E = $100,001-$500,000; F = $500,001-$1,000,000; and G = over $1,000,000.
Name of Portfolio Manager
|
Dollar Range of
Equity Securities in the Fund
|
Mark A. Hillman
|
E
|
Other Accounts.
In addition to the Fund, the portfolio manager is responsible for the day-to-day management of certain other accounts. The table below shows the number of, and total assets in, such other accounts as of the end of the Fund’s fiscal year ended September 30, 2012 .
Portfolio Manager
|
Registered Investment
Companies
|
Other Pooled Investment
Vehicles
|
Other Accounts
|
Number of Accounts
|
Total Assets
|
Number of Accounts
|
Total Assets
|
Number of Accounts
|
Total Assets
|
Mark A. Hillman
|
0
|
$0
|
0
|
$0
|
134
|
$ 87,715,271
|
Accounts where advisory fee is based upon account performance
|
0
|
$0
|
0
|
$0
|
0
|
$0
|
Conflicts of Interests.
The portfolio manager’s management of “other accounts” may give rise to potential conflicts of interest in connection with management of the Fund’s investments, on the one hand, and the investments of the other accounts, on the other. The other accounts consist of separately managed private clients (“Other Accounts”). The Other Accounts might have similar investment objectives as the Fund, be compared to the same index as the Fund, or otherwise hold, purchase, or sell securities that are eligible to be held, purchased, or sold by the Fund.
Knowledge of the Timing and Size of Fund Trades:
A potential conflict of interest may arise as a result of the portfolio manager’s day-to-day management of the Fund. The portfolio manager knows the size and timing of trades for the Fund and the Other Accounts, and may be able to predict the market impact of Fund trades. It is theoretically possible that the portfolio manager could use this information to the advantage of Other Accounts it manages and to the possible detriment of the Fund, or vice versa.
Investment Opportunities:
The Advisor provides investment supervisory services for a number of investment products that have varying investment guidelines. The portfolio manager works across different investment products. Differences in the compensation structures of the Advisor’s investment products may give rise to a conflict of interest by creating an incentive for the Advisor to allocate the investment opportunities it believes might be the most profitable to the client accounts where it might benefit the most from the investment gains.
Fund Accountant and Administrator.
The Trust has entered into a Fund Accounting and Administration Agreement with The Nottingham Company, a North Carolina corporation whose address is 116 South Franklin Street, Post Office Box 69, Rocky Mount, North Carolina 27802- 0069.
The Administrator assists the Trust in the performance of its administrative responsibilities to the Fund, coordinates and pays for the services of each vendor and the operating expense to the Fund, and provides the Fund with certain administrative, fund accounting, and compliance services. As part of its services and consolidated fee arrangement, the Administrator receives compensation based on the Fund’s average daily net assets. The annual rate is 0.249% if the average daily net assets are under $ 120 million and gradually decreases to an annual rate of 0. 097 % if the average daily net assets are $ 2 billion or more. The fee paid to the Administrator is calculated by multiplying the average daily net assets of the Fund by the applicable annual rate.
The Advisor has entered into an Operating Plan with the Fund’s administrator, through January 31, 2014, under which it has agreed to make payments to the Administrator when the Fund is at lower asset levels and assume certain expenses of the Fund in order to help limit the Fund’s operating expenses. These measures are intended to limit the Fund’s operating expenses to 1.50% of the average daily net assets, exclusive of brokerage fees and commissions, taxes, borrowing costs (such as interest or dividend expenses on securities sold short), acquired fund fees and expenses, extraordinary expenses, and distribution and/or service (12b-1) fees. The Fund’s net expense ratio will be higher than 1.50% to the extent the Fund incurs expenses excluded from this arrangement. The Operating Plan may be terminated by either party at the conclusion of the then current term upon (i) written notice of non-renewal to the other party not less than sixty days prior to the end of the term, or (ii) mutual written agreement of the parties. The Operating Plan can only be terminated prior to the conclusion of the current term with the approval of the Fund’s Board of Trustees. The Advisor cannot recoup from the Fund any amounts paid by the Advisor to the Administrator under the Operating Plan. In part because of the Advisor’s obligations under the Operating Plan, the Trustees review the financial condition of the Advisor, including its stability and profitability, when considering the approval of the Operating Plan.
The Administrator pays all expenses not assumed by the Advisor or Fund , including : (i) compensation and expenses of any employees of the Trust and of any other persons rendering any services to the Fund; (ii) compensation for a chief compliance officer for the Trust; (iii) clerical and shareholder service staff salaries; (iv) office space and other office expenses; (v) fees and expenses incurred by the Fund in connection with membership in investment company organizations; (vi) fees and expenses of counsel to the Trustees who are not interested persons of the Fund and Trust; (vii) fees and expenses of counsel to the Fund and Trust engaged to assist with preparation of Fund and Trust documents and filings and provide other ordinary legal services; (viii) fees and expenses of independent public accountants to the Fund, including fees and expense for tax preparation; (ix) expenses of registering shares under federal and state securities laws; (x) insurance expenses; (xi) fees and expenses of the custodian, shareholder servicing, dividend disbursing and transfer agent, administrator, distributor, and accounting and pricing services agents of the Fund; (xii) expenses, including clerical expenses, of issue, sale, redemption, or repurchase of shares of the Fund; (xiii) the cost of preparing and distributing reports and notices to shareholders; (xiv) the cost of printing or preparing prospectuses and statements of additional information for delivery to the Fund’s current shareholders; (xv) the cost of printing or preparing documents, statements or reports to shareholders; and (xvi) other expenses not specifically assumed by the Fund or Advisor. All of the Fund’s service providers, other than the Advisor, are paid by the Administrator.
The Administrator’s responsibilities include the following services for the Fund: (i) procures on behalf of the Trust, and coordinates with, the custodian and monitors the services it provides to the Fund; (ii) coordinates with and monitors any other third parties furnishing services to the Fund; (iii) provides the Fund with necessary office space, telephones, and other communications facilities and personnel competent to perform administrative and clerical functions for the Fund; (iv) assists or supervises the maintenance by third parties of such books and records of the Fund as may be required by applicable federal or state law; (v) assists or supervises the preparation by third parties of all federal, state, and local tax returns and reports of the Fund required by applicable law; (vi) assists in the preparation and, after approval by the Trust, files and arranges for the distribution of proxy materials and periodic reports to shareholders of the Fund as required by applicable law; (vii) assists in the preparation of and, after approval by the Trust, arranges for the filing of such registration statements and other documents with the SEC and other federal and state regulatory authorities as may be required by applicable law; (viii) reviews and submits to the officers of the Trust for their approval invoices or other requests for payment of Fund expenses and instructs the custodian to issue checks in payment thereof; and (ix) takes such other action with respect to the Fund as may be necessary in the opinion of the Administrator to perform its duties under the agreement. The Administrator also provides certain accounting and pricing services for the Fund.
For the fiscal year ended September 30, 2012, the Administrator received $38,151 in general administration fees from the Fund. For the fiscal year ended September 30, 2011, the Administrator received $35,777 in general administration fees from the Fund.
Prior to the implementation of the current fee arrangements, the Administrator’s compensation, based upon the average daily net assets of the Fund for fund administration, was at the annual rate of 0.125% on the first $50 million of the Fund’s net assets; 0.10% on the next $50 million; and 0.075% on all assets over $100 million with a minimum fund administration fee of $2,000 per month per fund. The Administrator also received a monthly fund accounting fee of $2,250 for accounting and recordkeeping services for the Fund, with an additional $750 per month for each additional class of shares of the Fund, and an annual asset based fee of one basis point for the Fund. For the fiscal year ended September 30, 2010, the Administrator received $24,000 in fund administration fees and $48,214 in fund accounting fees from the Fund. The Administrator also received the following to procure and pay the custodian for the Trust: 0.020% on the first $100 million of the Fund’s net assets and 0.009% on all assets over $100 million plus transaction fees with a minimum aggregate annual fee of $4,800 ($400 per month). The Administrator also charged the Fund for certain costs involved with the daily valuation of investment securities and was reimbursed for out-of-pocket expenses.
Transfer Agent.
The Trust has entered into a Dividend Disbursing and Transfer Agent Agreement with Nottingham Shareholder Services, LLC (“Transfer Agent”), a North Carolina limited liability company, to serve as transfer, dividend paying, and shareholder servicing agent for the Fund. The address of the Transfer Agent is 116 South Franklin Street, Post Office Box 4365, Rocky Mount, North Carolina 27803-0365. The Transfer Agent is compensated based upon a $15 fee per shareholder per year, subject to a minimum fee of $1,750 per month per fund, plus an additional $500 per month for each additional class of shares.
Distributor.
Capital Investment Group, Inc., Post Office Box 32249, Raleigh, North Carolina 27622, acts as an underwriter and distributor of the Fund’s shares for the purpose of facilitating the registration of shares of the Fund under state securities laws and to assist in sales of Fund shares pursuant to the Distribution Agreement approved by the Trustees. In this regard, the Distributor has agreed, at its own expense, to qualify as a broker-dealer under all applicable federal or state laws in those states which either Fund shall from time to time identify to the Distributor as states in which it wishes to offer its shares for sale, in order that state registrations may be maintained for that Fund. The Distributor is a broker-dealer registered with the SEC and a member in good standing of the Financial Industry Regulatory Authority, Inc. The Distribution Agreement may be terminated by either party upon 60 days’ prior written notice to the other party.
Custodian.
UMB Bank, n.a., with its principal place of business located in Kansas City, Missouri, serves as custodian for the Fund’s assets. The custodian acts as the depository for the Fund, safekeeps portfolio securities, collects all income and other payments with respect to portfolio securities, disburses monies at the Fund’s request, and maintains records in connection with its duties as custodian. For its services, the custodian is entitled to receive a monthly fee from the Administrator based on the average net assets of the Fund plus additional out-of-pocket and transaction expenses as incurred by the Fund. The custodian’s compensation is subject to a minimum annual amount of $5,000 for the Fund.
Compliance Services Administrator.
The Trust has entered into a compliance services arrangement with Nottingham Compliance Services, LLC (“NCS”), 116 South Franklin Street, Post Office Box 69, Rocky Mount, North Carolina 27802-0069, in which NCS, a wholly-owned affiliate of the Administrator, will assist the Trust’s Chief Compliance Officer in preparing and updating the Trust’s compliance manual, and in monitoring and testing compliance with the policies and procedures under the Trust’s compliance manual.
Independent Registered Public Accounting Firm.
BBD, LLP, 1835 Market Street, 26th Floor, Philadelphia, PA 19103, serves as the independent registered public accounting firm for the Fund, audits the annual financial statements of the Fund, and prepares the Fund’s federal, state and excise tax returns. The independent registered public accounting firm will audit the financial statements of the Fund at least once each year. Shareholders will receive annual audited and semi-annual (unaudited) reports when published and written confirmation of all transactions in their account. A copy of the most recent Annual Report will accompany the SAI whenever a shareholder or a prospective investor requests it.
Legal Counsel.
Baker, Donelson, Bearman, Caldwell & Berkowitz, PC serves as legal counsel to the Trust and the Fund.
SPECIAL SHAREHOLDER SERVICES
The Fund offers the following shareholder services:
Regular Account.
The regular account allows for voluntary investments to be made at any time. Available to individuals, custodians, corporations, trusts, estates, corporate retirement plans, and others, investors are free to make additions and withdrawals to or from their accounts. When an investor makes an initial investment in the Fund, a shareholder account is opened in accordance with the investor’s registration instructions. Each time there is a transaction in a shareholder account, such as an additional investment or the reinvestment of a dividend or distribution, the shareholder will receive a confirmation statement showing the current transaction and all prior transactions in the shareholder account during the calendar year-to-date, along with a summary of the status of the account as of the transaction date. As stated in the Prospectus, share certificates are generally not issued.
Automatic Investment Plan.
The automatic investment plan enables shareholders to make regular monthly or quarterly investments in shares through automatic charges to their checking accounts. With shareholder authorization and bank approval, the relevant Fund will automatically charge the checking account for the amount specified ($100 minimum), which will be automatically invested in shares at the public offering price on or about the 21st day of the month. The shareholder may change the amount of the investment or discontinue the plan at any time by writing to the Fund.
Systematic Withdrawal Plan.
Shareholders owning shares of the Fund with a value of $10,000 or more may establish a systematic withdrawal plan. A shareholder may receive monthly or quarterly payments, in amounts of not less than $100 per payment, by authorizing the Fund to redeem the necessary number of shares periodically (each month, or quarterly in the months of March, June, September, and December) in order to make the payments requested. The Fund has the capacity to electronically deposit the proceeds of the systematic withdrawal directly to the shareholder’s personal bank account ($5,000 minimum per bank wire). Instructions for establishing this service are included in the Fund Shares Application or available by calling the Fund. If the shareholder prefers to receive his systematic withdrawal proceeds in cash, or if such proceeds are less than the $5,000 minimum for a bank wire, checks will be made payable to the designated recipient and mailed within seven days of the valuation date. If the designated recipient is other than the registered shareholder, the signature of each shareholder must be guaranteed on the application (see “Investing in the Fund – Redeeming Your Shares – Signature Guarantees” in the Prospectus). A corporation (or partnership) must also submit a “Corporate Resolution” (or “Certification of Partnership”) indicating the names, titles, and required number of signatures authorized to act on its behalf. The application must be signed by a duly authorized officer(s) and the corporate seal affixed. No redemption fees are charged to shareholders under this plan. Costs in conjunction with the administration of the plan are borne by the Fund. Shareholders should be aware that such systematic withdrawals may deplete or use up entirely their initial investment and may result in realized long-term or short-term capital gains or losses. The systematic withdrawal plan may be terminated at any time by the Fund upon 60 days’ written notice or by a shareholder upon written notice to the Fund. Applications and further details may be obtained by calling the Fund at
1-800-773-3863
, or by writing to:
Hillman Focused Advantage Fund
c/o Nottingham Shareholder Services
116 South Franklin Street
Post Office Box 4365
Rocky Mount, North Carolina 27803-0365
Purchases in Kind.
The Fund may accept securities in lieu of cash in payment for the purchase of shares in the particular Fund. The acceptance of such securities is at the sole discretion of the Advisor, based upon the suitability of the securities accepted for inclusion as a long term investment of the Fund, the marketability of such securities, and other factors which the Advisor may deem appropriate. If accepted, the securities will be valued using the same criteria and methods as described in “Investing in the Fund – Purchase and Redemption Price” in the Prospectus.
Redemptions in Kind.
The Fund does not intend, under normal circumstances, to redeem its securities by payment in kind. It is possible, however, that conditions may arise in the future which would, in the opinion of the Trustees, make it undesirable for the Fund to pay for all redemptions in cash. In such case, the Trustees may authorize payment to be made in readily marketable portfolio securities of the Fund. Securities delivered in payment of redemptions would be valued at the same value assigned to them in computing the net asset value per share. Shareholders receiving securities would incur brokerage costs when these securities are sold. An irrevocable election has been filed under Rule 18f-1 of the 1940 Act, wherein the Fund committed itself to pay redemptions in cash, rather than in kind, to any shareholder of record of the Fund who redeems during any 90-day period, the lesser of (i) $250,000 or (ii) 1% of the Fund’s net asset value at the beginning of such period.
Transfer of Registration.
To transfer shares to another owner, send a written request to the applicable Fund at the address shown herein. Your request should include the following: (i) the Fund’s name and existing account registration; (ii) signature(s) of the registered owner(s) exactly as the signature(s) appear(s) on the account registration; (iii) the new account registration, address, social security or taxpayer identification number, and how dividends and capital gains are to be distributed; (iv) signature guarantees (See the Prospectus under the heading “Signature Guarantees”); and (v) any additional documents which are required for transfer by corporations, administrators, executors, trustees, guardians, etc. If you have any questions about transferring shares, call or write the Fund.
DISCLOSURE OF PORTFOLIO HOLDINGS
The Trustees have adopted a policy that governs the disclosure of portfolio holdings. This policy is intended to ensure that such disclosure is in the best interests of the shareholders of the Fund and to address possible conflicts of interest. Under the Fund’s policy, the Fund generally will not disclose portfolio holdings to a third party unless such information is made available to the public. The policy provides that the Fund may disclose non-public portfolio holdings information as required by law and under other limited circumstances that are set forth in more detail below.
The Fund will make available to the public a complete schedule of portfolio holdings, as reported on a fiscal quarter basis. This information is generally available within 60 days of the Fund’s fiscal quarter end and will remain available until the next fiscal quarter’s portfolio holdings report becomes available. You may obtain a copy of these quarterly portfolio holdings reports by calling the Fund at 1-800-773-3863. The Fund will also file these quarterly portfolio holdings reports with the Securities and Exchange Commission on Form N-CSR or Form N-Q, as applicable. The Fund’s Form N-CSR and Form N-Q are available on the Securities and Exchange Commission’s website at http://www.sec.gov and may be reviewed and copied at the Securities and Exchange Commission’s Public Reference Room in Washington, DC. The first and third quarter portfolio holdings reports will be filed with the Securities and Exchange Commission on Form N-Q and the second and fourth fiscal quarter portfolio holdings reports will be included with the semi-annual and annual financial statements, respectively, which are sent to shareholders and filed with the Securities and Exchange Commission on Form N-CSR.
To the extent that the Fund’s portfolio holdings have previously been disclosed publicly either through a filing made with the Securities and Exchange Commission on Form N-CSR or Form N-Q, or by being posted to the Fund ’s website, such holdings may also be disclosed to any third party that requests them.
Consistent with policies approved by the Board, the officers of the Fund will share non-public portfolio holdings information with the Fund’s service providers that require such information for legitimate business and Fund oversight purposes. Recipients of non-public portfolio holdings information have a duty not to trade on that confidential information. The Fund has not (and does not intend to) enter into any arrangement providing for the receipt of compensation or other consideration in exchange for the disclosure of non-public portfolio holdings information, other than the benefits that result to the Fund and its shareholders from providing such information, which include the publication of Fund ratings and rankings.
The Advisor, as well as the custodian, fund accountant and administrator, and compliance services administrator, have full daily access to the Fund ’s portfolio holdings. These service providers are subject to obligations requiring them to keep non-public portfolio holdings information confidential. In some, but not all, cases these confidentiality obligations are established by written agreements. The Board of Trustees has concluded that the confidentiality obligations in place for these parties are adequate to safeguard the Fund from unauthorized disclosure of non-public portfolio holdings information. In addition, the Advisor has a code of ethics that prohibits covered persons from disclosing or trading based on non-public portfolio holdings information.
The Fund’s distributor, transfer agent, independent public accountants, and legal counsel have access to the Fund ’s portfolio holdings on an ad hoc, as needed basis. The distributor and transfer agent are subject to written agreements that establish confidentiality obligations with respect to the Fund ’s portfolio holdings. The independent public accountants and legal counsel are subject to professional obligations that require them to keep non-public portfolio holdings information confidential. The Board of Trustees has concluded that the confidentiality obligations in place for these parties are adequate to safeguard the Fund from unauthorized disclosure of non-public portfolio holdings information.
V.G. Reed & Sons, PrintGrafix (a division of Sunbelt Graphic Systems, Inc.), Riverside Printing, Inc., and PrinterLink Communications Group, Inc. are financial printers the Fund may engage for, among other things, the printing and/or distribution of regulatory and compliance documents. These service providers are subject to written agreements that establish confidentiality obligations with respect to the Fund ’s portfolio holdings.
The Fund and its service providers may also provide non-public portfolio holdings information to appropriate regulatory agencies as required by applicable laws and regulations.
The Fund currently does not provide non-public portfolio holdings information to any other third parties. In the future, the Advisor may establish ongoing arrangements with other third parties if the Advisor determines that the Fund has a legitimate business purpose for doing so, determines that the disclosure is in the shareholders' best interest, and the recipient is subject to a duty of confidentiality. These parties could include, by way of example, financial data processing companies that provide automated data scanning and monitoring services for the Fund, research companies that allow the Advisor to perform attribution analysis for the Fund; and the Advisor’s proxy voting agent to assess and vote proxies on behalf of the Fund. The Advisor is responsible for determining which other third parties have a legitimate business purpose for receiving the Fund’s portfolio holdings information.
The Fund’s policy regarding disclosure of portfolio holdings is subject to the continuing oversight and direction of the Trustees. Oversight includes: (i) review and approval of the policy on disclosure of portfolio holdings as necessary, including review of the parties receiving non-public portfolio holdings information; (ii) periodic assessment of compliance in connection with a report from the Trust’s Chief Compliance Officer, (iii) receipt of reports on any conflicts of interest where disclosure of information about portfolio holdings may conflict or appear to conflict with the interests of the Fund ’s investment advisor, investment sub-advisor, any principal underwriter for the Trust, or an affiliated person of the Trust, and (iv) receipt of reports on any known disclosure of the Fund’s portfolio holdings to unauthorized third parties. The Fund and Advisor are obligated to report issues that arise under the policy on disclosure of portfolio holdings to the Chief Compliance Officer. Material compliance matters are then reported to the Board of Trustees.
FINANCIAL STATEMENTS
The audited financial statements of the Fund for the fiscal year ended September 30, 2012 , including the financial highlights appearing in the Annual Reports to shareholders, are incorporated by reference and made a part of this document.
APPENDIX A – DESCRIPTION OF RATINGS
The various ratings used by the nationally recognized statistical rating organizations (each a “NRSRO”) are described below. A rating by a NRSRO represents the organization’s opinion as to the credit quality of the security being rated. However, the ratings are general and are not absolute standards of quality or guarantees as to the creditworthiness of an issuer. Consequently, the Advisor believes that the quality of the securities in which the Fund may invest should be reviewed quarterly and that individual analysts give different weightings to the various factors involved in credit analysis. A rating is not a recommendation to purchase, sell, or hold a security, because it does not take into account market value or suitability for a particular investor. When a security has received a rating from more than one NRSRO, each rating is evaluated independently. Ratings are based on current information furnished by the issuer or obtained by the NRSRO from other sources that they consider reliable. Ratings may be changed, suspended, or withdrawn as a result of changes in or unavailability of such information, or for other reasons.
STANDARD & POOR’S
®
RATINGS SERVICES
.
The following summarizes the highest four ratings used by Standard & Poor’s Ratings Services (“S&P”), a division of McGraw-Hill Companies, Inc., for bonds which are deemed to be Investment-Grade Debt Securities by the Advisor:
AAA – This is the highest rating assigned by S&P to a debt obligation and indicates an extremely strong capacity of the obligor to meet its financial commitment on the obligation.
AA – Debt rated AA differs from AAA issues only in a small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.
A – Debt rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
BBB – Debt rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
To provide more detailed indications of credit quality, the AA, A and BBB ratings may be modified by the addition of a plus or minus sign to show relative standing within these major rating categories.
Bonds rated BB, B, CCC, CC, and C are not considered by the Advisor to be Investment-Grade Debt Securities and are regarded as having significant speculative characteristics. BB indicates the lowest degree of speculation and C the highest degree of speculation. While such bonds may have some quality and protective characteristics, these may be outweighed by large uncertainties or major risk exposures to adverse conditions.
Commercial paper rated A-1 by S&P indicates that the degree of safety regarding timely payment is strong. Those issues determined to possess extremely strong safety characteristics are denoted A-1+. Capacity for timely payment on commercial paper rated A-2 is satisfactory, but the relative degree of safety is not as high as for issues designated A-1.
The rating SP-1 is the highest rating assigned by S&P to short term notes and indicates strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation. The rating SP-2 indicates a satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes. The rating SP-3 indicates a speculative capacity to pay principal and interest.
MOODY’S INVESTOR SERVICE, INC.
The following summarizes the highest four ratings used by Moody’s Investors Service, Inc. (“Moody’s”) for fixed-income obligations with an original maturity of one year or more, which are deemed to be Investment-Grade Securities by the Advisor:
Aaa – Bond obligations rated Aaa are judged to be of the highest quality, with minimal credit risk.
Aa – Bond obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A – Bond obligations rated A are considered upper-medium grade and are subject to low credit risk.
Baa – Bond obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative characteristics.
Ba – Obligations rated Ba are judged to have speculative elements and are subject to substantial credit risk.
B – Obligations rated B are considered speculative and are subject to high credit risk.
Caa – Obligations rated Caa are judged to be of poor standing and are subject to very high credit risk.
Ca – Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C – Obligations rated C are the lowest rated class of bonds and are typically in default, with little prospect for recovery of principal or interest.
Note: Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Short-Term Ratings.
Moody’s short-term ratings are opinions of the ability of issuers to honor short-term financial obligations. Ratings may be assigned to issuers, short-term programs or to individual short-term debt instruments. Such obligations generally have an original maturity not exceeding thirteen months, unless explicitly noted.
Moody’s employs the following designations to indicate the relative repayment ability of rated issuers:
P-1 – Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2 – Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3 – Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP – Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Note: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor, or support-provider.
US Municipal Short-Term Debt And Demand Obligation Ratings.
Short-Term Debt Ratings
. There are three rating categories for short-term municipal obligations that are considered investment grade. These ratings are designated as Municipal Investment Grade (MIG) and are divided into three levels – MIG 1 through MIG 3. In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade. MIG ratings expire at the maturity of the obligation.
MIG 1 – This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2 – This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3 – This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG – This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
Demand Obligation Ratings
.
In the case of variable rate demand obligations (VRDOs), a two-component rating is assigned; a long or short-term debt rating and a demand obligation rating. The first element represents Moody’s evaluation of the degree of risk associated with scheduled principal and interest payments. The second element represents Moody’s evaluation of the degree of risk associated with the ability to receive purchase price upon demand ("demand feature"), using a variation of the MIG rating scale, the Variable Municipal Investment Grade or VMIG rating.
When either the long- or short-term aspect of a VRDO is not rated, that piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
VMIG rating expirations are a function of each issue’s specific structural or credit features.
VMIG 1 – This designation denotes superior credit quality. Excellent protection is afforded by the superior short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
VMIG 2 – This designation denotes strong credit quality. Good protection is afforded by the strong short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
VMIG 3 – This designation denotes acceptable credit quality. Adequate protection is afforded by the satisfactory short-term credit strength of the liquidity provider and structural and legal protections that ensure the timely payment of purchase price upon demand.
SG – This designation denotes speculative-grade credit quality. Demand features rated in this category may be supported by a liquidity provider that does not have an investment grade short-term rating or may lack the structural and/or legal protections necessary to ensure the timely payment of purchase price upon demand.
FITCH RATINGS
.
The following summarizes the highest four ratings used by Fitch, Inc. (“Fitch”):
Long-Term Ratings.
AAA – Highest credit quality. The rating AAA denotes that the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA – Very high credit quality. The rating AA denotes a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A – High credit quality. The rating A denotes a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to changes in circumstances or in economic conditions than is the case for higher rating.
BBB – Good credit quality. The rating BBB indicates that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment grade category.
Long-term securities rated below BBB by Fitch are not considered by the Advisor to be investment-grade securities. Securities rated BB and B are regarded as speculative with regard to a possible credit risk developing. BB is considered speculative and B is considered highly speculative. Securities rated CCC, CC, and C are regarded as a high default risk. A rating CC indicates that default of some kind appears probable, while a rating C signals imminent default. Securities rated DDD, D, and D indicate a default has occurred.
Short-Term Ratings.
F1 – Highest credit quality. The rating F1 indicates the strongest capacity for timely payment of financial commitments; may have an added (+) to denote any exceptionally strong credit feature.
F2 – Good credit quality. The rating F2 indicates a satisfactory capacity for timely payment of financial commitment, but the margin of safety is not as great as in the case of the higher ratings.
F3 – Fair credit quality. The rating F3 indicates the capacity for timely payment of financial commitments is adequate; however, near-term adverse changes could result in a reduction to non-investment grade.
B – Speculative. The rating B indicates minimal capacity for timely payment of financial commitments, plus vulnerability to near-term adverse changes in financial and economic conditions.
Short-term rates B, C, and D by Fitch are considered by the Advisor to be below investment-grade securities. Short-term securities rated B are considered speculative, securities rated C have a high default risk and securities rated D denote actual or imminent payment default.
(+) or (-) suffixes may be appended to a rating to denote relative status within major rating categories. Such suffixes are not added to long-term ratings “AAA” category or to the categories below “CCC”, nor to short-term ratings other than “F1”. The suffix “NR” indicates that Fitch does not publicly rate the issuer or issue in question.
APPENDIX B – PROXY VOTING POLICIES
|
The following proxy voting policies are provided:
|
(1)
|
the Trust’s Proxy Voting and Disclosure Policy; and
|
(2)
|
the Advisor’s Proxy Voting and Disclosure Policy, including a detailed description of the Advisor’s specific proxy voting guidelines.
|
HILLMAN CAPITAL MANAGEMENT INVESTMENT TRUST
PROXY VOTING AND DISCLOSURE POLICY
I. Introduction
Effective April 14, 2003, the Securities and Exchange Commission (“SEC”) adopted rule and form amendments under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940 (“Investment Company Act”) to require registered management investment companies to provide disclosure about how they vote proxies for their portfolio securities (collectively, the rule and form amendments are referred to herein as the “IC Amendments”).
The IC Amendments require that the Hillman Capital Management Investment Trust (“Trust”) and each of its series of shares, the Hillman Focused Advantage Fund and the Hillman Advantage Equity Fund (individually “Fund” and collectively “Funds”), disclose the policies and procedures used to determine how to vote proxies for portfolio securities. The IC Amendments also require the Funds to file with the SEC and to make available to their shareholders the specific proxy votes cast for portfolio securities.
This Proxy Voting and Disclosure Policy (“Policy”) is designed to ensure that the Funds comply with the requirements of the IC Amendments, and otherwise fulfills its obligations with respect to proxy voting, disclosure, and recordkeeping. The overall goal is to ensure that each Fund’s proxy voting is managed in an effort to act in the best interests of its shareholders. While decisions about how to vote must be determined on a case-by-case basis, proxy voting decisions will be made considering these guidelines and following the procedures recited herein.
II. Specific Proxy Voting Policies and Procedures
The Trust’s Board of Trustees (“Board”) believes that the voting of proxies is an important part of portfolio management as it represents an opportunity for shareholders to make their voices heard and to influence the direction of a company. The Trust and the Funds are committed to voting corporate proxies in the manner that best serves the interests of the Funds’ shareholders.
|
B.
|
Delegation to Fund’s Advisor
|
The Board believes that Hillman Capital Management, Inc. (“Advisor”), as the Funds’ investment Advisor, is in the best position to make individual voting decisions for each Fund consistent with this Policy. Therefore, subject to the oversight of the Board, the Advisor is hereby delegated the following duties:
(i)
|
to make the proxy voting decisions for each Fund; and
|
(ii)
|
to assist each Fund in disclosing the Fund’s proxy voting record as required by Rule 30b1-4 under the Investment Company Act, including providing the following information for each matter with respect to which the Fund was entitled to vote: (a) information identifying the matter voted on; (b) whether the matter was proposed by the issuer or by a security holder; (c) whether and how the Fund cast its vote; and (d) whether the Fund cast its vote for or against management.
|
The Board, including a majority of the independent trustees of the Board, must approve the Advisor’s Proxy Voting and Disclosure Policy (“Advisor’s Voting Policy”) as it relates to each Fund. The Board must also approve any material changes to the Advisor’s Voting Policy no later than four (4) months after adoption by Advisor.
C. Conflicts
In cases where a matter with respect to which a Fund is entitled to vote presents a conflict between the interest of the Fund’s shareholders, on the one hand, and those of the Fund’s Advisor, principal underwriter, or an affiliated person of the Fund, its Advisor or principal underwriter, on the other hand, the Fund shall always vote in the best interest of the Fund’s shareholders. For purposes of this Policy, a vote shall be considered in the best interest of the Fund’s shareholders (i) when a vote is cast consistent with a specific voting policy as set forth in the Advisor’s
Voting Policy, provided such specific voting policy was approved by the Board or (ii) when a vote is cast consistent with the decision of the Trust’s Proxy Voting Committee (as defined below). In addition, provided the Advisor is not affiliated with a Fund’s principal underwriter or an affiliated person of the principal underwriter and neither the Fund’s principal underwriter nor an affiliated person of the principal underwriter has influenced the Advisor with respect to a matter to which the Fund is entitled to vote, a vote by the Advisor shall not be considered a conflict between the Fund’s shareholders and the Fund’s principal underwriter or affiliated person of the principal underwriter.
III. Fund Disclosure
|
A.
|
Disclosure of Fund Policies and Procedures With Respect to Voting Proxies Relating to Portfolio Securities
|
|
Beginning with a Fund’s next annual update to its Statement of Additional Information (“SAI”) on Form N-1A after July 1, 2003, the Fund shall disclose this Policy, or a description of the policies and procedures of this Policy, to its shareholders. The Fund will notify shareholders in the SAI and the Fund’s shareholder reports that a description of this Policy is available upon request, without charge, by calling a specified toll-free telephone number, by reviewing the Fund’s website, if applicable, and by reviewing filings available on the SEC’s website at
http://www.sec.gov
. The Fund will send this description of the Fund’s Policy within three business days of receipt of any shareholder request, by first-class mail or other means designed to ensure equally prompt delivery.
|
|
B.
|
Disclosure of the Fund’s Complete Proxy Voting Record
|
|
In accordance with Rule 30b1-4 of the Investment Company Act, beginning after June 30, 2004, each Fund shall disclose to its shareholders on Form N-PX the Fund’s complete proxy voting record for the twelve-month period ended June 30 by no later than August 31 of each year.
|
|
Each Fund shall disclose the following information on Form N-PX for each matter relating to a portfolio security considered at any shareholder meeting held during the period covered by the report and with respect to which to the Fund was entitled to vote:
|
|
(i)
|
The name of the issuer of the portfolio security;
|
|
(ii)
|
The exchange ticker symbol of the portfolio security (if available through reasonably practicable means);
|
|
(iii)
|
The Council on Uniform Security Identification Procedures (“CUSIP”) number for the portfolio security (if available through reasonably practicable means);
|
|
(iv)
|
The shareholder meeting date;
|
|
(v)
|
A brief identification of the matter voted on;
|
|
(vi)
|
Whether the matter was proposed by the issuer or by a security holder;
|
|
(vii)
|
Whether the Fund cast its vote on the matter;
|
|
(viii)
|
How the Fund cast its vote (e.g., for or against proposal, or abstain; for or withhold regarding election of directors); and
|
|
(ix)
|
Whether the Fund cast its vote for or against management.
|
Each Fund shall make its proxy voting record available to shareholders either upon request or by making available an electronic version on or through the Fund’s website, if applicable. If the Fund discloses its proxy voting record on or through its website, the Fund shall post the information disclosed in the Fund’s most recently filed report on Form N-PX on the website beginning the same day it files such information with the SEC.
Each Fund shall also include in its annual reports, semi-annual reports and SAI a statement that information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available (1) without charge upon request, by calling a specified toll-free (or collect) telephone number, or (if applicable) on or through the Fund’s website at a specified Internet address; and (2) on the SEC’s website. If the Fund discloses that its proxy voting record is available by calling a toll-free (or collect) telephone number, it shall send the information disclosed in the Fund’s most recently filed report on Form N-PX within three business days of receipt of a request for this information, by first-class mail or other means designed to ensure equally prompt delivery.
IV. Recordkeeping
The Trust shall keep the following records for a period of at least five years, the first two in an easily accessible place:
(i)
|
A copy of this Policy;
|
(ii)
|
Proxy statements received regarding each Fund’s securities;
|
(iii)
|
Records of votes cast on behalf of each Fund; and
|
(iv)
|
A record of each shareholder request for proxy voting information and the Fund’s response, including the date of the request, the name of the shareholder, and the date of the response.
|
The foregoing records may be kept as part of the Advisor’s records.
A Fund may rely on proxy statements filed on the SEC EDGAR system instead of keeping its own copies, and may rely on proxy statements and records of proxy votes cast by the Fund’s Advisor that are maintained with a third party such as a proxy voting service, provided that an undertaking is obtained from the third party to provide a copy of the documents promptly upon request.
V. Proxy Voting Committee
The proxy voting committee of the Trust (“Proxy Voting Committee”) shall be composed entirely of independent trustees of the Board and may be comprised of one or more such independent trustees as the Board may, from time to time, decide. The purpose of the Proxy Voting Committee shall be to determine how a Fund should cast its vote, if called upon by the Board or the Advisor, when a matter with respect to which the Fund is entitled to vote presents a conflict between the interest of the Fund’s shareholders, on the one hand, and those of the Fund’s Advisor, principal underwriter, or an affiliated person of the Fund, its Advisor or principal underwriter, on the other hand.
|
B.
|
Powers and Methods of Operation
|
The Proxy Voting Committee shall have all the powers necessary to fulfill its purpose as set forth above and such other powers and perform such other duties as the Board may, from time to time, grant and/or assign the Proxy Voting Committee. The Proxy Voting Committee shall meet at such times and places as the Proxy Voting Committee or the Board may, from time to time, determine. The act of a majority of the members of the Proxy Voting Committee in person, by telephone conference or by consent in writing without a meeting shall be the act of the Proxy Voting Committee. The Proxy Voting Committee shall have the authority to utilize Trust counsel at the expense of the Trust if necessary. The Proxy Voting Committee shall prepare minutes of each meeting and keep such minutes with the Trust’s records. The Proxy Voting Committee shall review this Policy and recommend any changes to the Board as it deems necessary or advisable.
VI. Other
This Policy may be amended, from time to time, as determined by the Board.
Adopted as of this 17th day of June, 2003.
Hillman Capital Management, Inc.
Proxy Voting Policies and Procedures
Hillman Capital Management, Inc. (the “Adviser”) shall vote proxies related to securities held in our clients’ portfolios, including the portfolios of mutual funds for which we serve as the investment adviser, in the best interest of our clients. All references in these Proxy Voting Policies and Procedures are limited solely to clients for which we have agreed to vote such proxies. A client may reserve to itself the right to vote proxies.
The Adviser’s authority to vote the proxies of certain clients is established by advisory contracts or comparable documents. In addition to requirements of the Securities and Exchange Commission (“SEC”) governing advisers, our proxy voting policies reflect the fiduciary standards and responsibilities for ERISA accounts.
The Investment Advisers Act of 1940, as amended (the “Advisers Act”), requires us to act solely in the best interest of our clients at all times. We have adopted and implemented these Proxy Voting Policies and Procedures which we believe are reasonably designed to ensure that proxies are voted in the best interest of clients, in accordance with our fiduciary duties and Rule 206(4)-6 under the Advisers Act.
Reflecting a basic investment philosophy that good management is shareholder focused, proxy votes will generally be cast in support of management on routine corporate matters and in support of any management proposal that is plainly in the interest of all shareholders. Specifically, proxy votes generally will be cast in favor of proposals that:
•
|
maintain or increase shareholder rights generally.
|
|
maintain or strengthen the shared interests of stockholders and management; and
|
|
increase shareholder value.
|
Proxy votes will generally be cast against proposals having the opposite effect of the above interests. Where we perceive that a management proposal, if approved, would tend to limit or reduce the market value of the company’s securities, we will generally vote against it. We believe that means for ensuring management accountability to shareholders, in the rare cases where the means are threatened, must not be compromised.
We generally support shareholder rights and recapitalization measures undertaken unilaterally by boards of directors properly exercising their responsibilities and authority, unless such measures could have the effect of reducing shareholder rights or potential shareholder value. In cases where shareholder proposals challenge such actions, our voting position will generally favor not interfering with the directors’ proper function in the interest of all shareholders.
We believe that proposals addressing strictly social or political issues are not relevant to the goal of maximizing the return on funds under our management. We will generally vote against such proposals, but will consider supporting proposals that seek to protect shareholder rights or minimize risks to shareholder value.
We may delegate our responsibilities under these Proxy Voting Policies and Procedures to a third party, provided that we retain final authority and fiduciary responsibility for proxy voting. If we so delegate our responsibilities, we shall monitor the delegate’s compliance with these Proxy Voting Policies and Procedures.
We have contracted with Broadridge Financial Solutions and will use their Proxy Edge proxy voting platform (“PE”) for proxy voting support related to voting and recordkeeping. The proxy voting recommendations are provided by Glass-Lewis. Under the terms of our arrangement with PE, we inform PE, in advance, as to how we intend for certain issues to be voted. PE has categorized common proxy voting issues and we can instruct PE to vote either for or against a particular type of proposal or we can instruct PE to seek specific instruction from us with respect to that particular type of proposal on a case-by-case basis (“Voting Instructions”). We have carefully considered each of the categories of issues presented by PE and have determined which issues we will generally support, which we will generally oppose and which we will vote on a case by case basis after careful evaluation of the issue(s) presented. A basic discussion of our proxy voting philosophies is incorporated into these Proxy Voting Policies and Procedures. We will review our standing Voting Instructions annually. We may alter our standing Voting Instructions at any time and, from time to time, PE may ask us to provide Voting Instructions for additional categories of proxy issues.
Votes will be cast by PE in a timely fashion. PE receives all proxy statements, sorts the proposals according to their categories and votes the proxies according to our Voting Instructions. Proposals for which a voting decision has been predetermined are automatically voted by PE pursuant to the Voting Instructions. We inform PE as to how other proposals are to be voted through PE’s website.
To the extent that a proxy contains a “case-by-case” issue which will not be voted by PE according to our pre-determined Voting Instructions, we review the proxy to assess the extent, if any, to which there may be a material conflict between the interests of our clients on the one hand and our interests (including those of our affiliates, directors, officers, employees and other similar persons) on the other hand (a “potential conflict”). We perform this assessment on a proposal-by-proposal basis, and a potential conflict with respect to one proposal in a proxy shall not indicate that a potential conflict exists with respect to any other proposal in such proxy. If we determine that a potential conflict may exist, it shall be reported to our Proxy Voting Committee, consisting of Mark A. Hillman, Fletcher D. Perkins, Robert David and Trevor Lee, The Proxy Voting Committee shall determine whether a potential conflict exists and is authorized to resolve any such conflict in a manner that is in the collective best interests of our clients (excluding any client that may have a potential conflict). Without limiting the generality of the foregoing, the Proxy Voting Committee may resolve a potential conflict in any of the following manners:
•
|
We may disclose the potential conflict to our clients and obtain the consent of each of our clients before voting such securities pro-rata in accordance with the interests of our clients; or
|
•
|
We may engage an independent third-party to determine how the proxy should be voted.
|
We will use commercially reasonable efforts to determine whether a potential conflict may exist, and a potential conflict shall be deemed to exist if and only if one or more of our senior portfolio managers actually knew or reasonably should have known of the potential conflict.
We may abstain from voting a client proxy if we conclude that the effect on shareholders’ economic interests or the value of the portfolio holding is indeterminable or insignificant
We may abstain from voting a client proxy for cost reasons (e.g, costs associated with voting proxies of non-U.S. securities). In accordance with our fiduciary duties, we will weigh the costs and benefits of voting proxy proposals and make an informed decision with respect to whether voting a given proxy proposal is prudent. Our decision takes into account the effect that the vote of our clients, either by itself or together with other votes, is expected to have on the value of our client’s investment and whether this expected effect would outweigh the cost of voting.
To the extent each of The Hillman Focused Advantage Fund or The Hillman Advantage Equity Fund invests in shares of other investment companies in accordance with the safe harbor provisions of Section 12(d)(1)(F) of the Investment Company Act of 1940, as amended, the Adviser will vote proxies with respect to such investment company securities in the same proportion as the vote of all other holders of such securities.
Unless otherwise directed by a client in writing, we are responsible for voting all proxies related to securities that we manage for clients with respect to which we have accepted proxy voting responsibility in writing. A client may from time to time direct us in writing to vote proxies in a manner that is different from the guidelines set forth in these Proxy Voting Policies and Procedures. We will follow such written direction for proxies received after our receipt of such written direction.
We shall maintain certain records required by applicable law in connection with proxy voting activities and shall provide proxy voting information to a client for which we are responsible for voting proxies upon written request. We shall keep the following records in an easily accessible place for a period of at least five years, the first two years in our offices:
•
|
Proxy statements received for client securities (we may rely on filings made on the Securities and Exchange Commission’s EDGAR system to maintain this record);
|
•
|
Records of each vote cast on behalf of clients;
|
•
|
Records of written client requests for proxy voting information and any written responses by us to any client requests for such information; and
|
•
|
Documents prepared by us that were material to making a proxy voting decision or that memorialized the basis for a voting decision.
|
Clients should contact us in writing to obtain information about how we voted proxies with respect to their securities and to request a copy of our Proxy Voting Policies and Procedures at:
Hillman Capital Management, Inc.
4350 East West Highway
Suite 502
Bethesda, MD 20814
Our Proxy Voting Policies and Procedures will be reviewed annually. The Proxy Voting Committee will review present procedures and past decisions with the aim of developing the most coherent and understandable proxy voting policy possible. We believe that a careful and continually evolving policy is indispensable to the task of discharging our fiduciary duties as an investment advisor.
These Proxy Voting Policies and Procedures may be amended at any time by the Adviser, provided that material changes that affect proxy voting for The Hillman Focused Advantage Fund or The Hillman Equity Advantage Fund shall be ratified by the Board of Trustees of such fund within four (4) months of adoption by the Adviser.
Adopted as of this 8th day of June 2006
Amended this 18th day of June 2009
Amended this 8th day of June 2011
Amended this 30th day of January 2012
Mark A. Hillman, President
Glass Lewis & Co.
PROXY PAPER
TM
GUIDELINES
2013 Proxy Season
An Overview of the Glass Lewis Approach to Proxy Advice
United States
I.
A Board Of Directors That Serves The Interests Of Shareholders
ELECTION OF DIRECTORS
The purpose of Glass Lewis’ proxy research and advice is to facilitate shareholder voting in favor of
governance structures that will drive performance, create shareholder value and maintain a proper
tone at the top. Glass Lewis looks for talented boards with a record of protecting shareholders and
delivering value over the medium- and long-term. We believe that boards working to protect and
enhance the best interests of shareholders are independent, have directors with diverse backgrounds,
have a record of positive performance, and have members with a breadth and depth of relevant
experience.
Independence
The independence of directors, or lack thereof, is ultimately demonstrated through the decisions they
make. In assessing the independence of directors, we will take into consideration, when appropriate,
whether a director has a track record indicative of making objective decisions. Likewise, when assessing
the independence of directors we will also examine when a director’s service track record on multiple
boards indicates a lack of objective decision-making. Ultimately, we believe the determination of
whether a director is independent or not must take into consideration both compliance with the
applicable independence listing requirements as well as judgments made by the director.
We look at each director nominee to examine the director’s relationships with the company, the
company’s executives, and other directors. We do this to evaluate whether personal, familial, or
financial relationships (not including director compensation) may impact the director’s decisions. We
believe that such relationships make it difficult for a director to put shareholders’ interests above the
director’s or the related party’s interests. We also believe that a director who owns more than 20% of
a company can exert disproportionate influence on the board and, in particular, the audit committee.
Thus, we put directors into three categories based on an examination of the type of relationship they
have with the company:
Independent Director
– An independent director has no material financial, familial or other current
relationships with the company, its executives, or other board members, except for board service
and standard fees paid for that service. Relationships that existed within three to five years before
the inquiry are usually considered “current” for purposes of this test.
Affiliated Director
– An affiliated director has a material financial, familial or other relationship with
the company or its executives, but is not an employee of the company. This includes directors whose
employers have a material financial relationship with the company. In addition, we view a director
who owns or controls 20% or more of the company’s voting stock as an affiliate.
Inside Director
– An inside director simultaneously serves as a director and as an employee of
the company. This category may include a chairman of the board who acts as an employee of the
company or is paid as an employee of the company.
Performance
The most crucial test of a board’s commitment to the company and its shareholders lies in the actions
of the board and its members. We look at the performance of these individuals as directors and
executives of the company and of other companies where they have served.
Voting Recommendations on the Basis of Performance
We disfavor directors who have a record of not fulfilling their responsibilities to shareholders at any
company where they have held a board or executive position. We typically recommend voting against:
•
|
A director who fails to attend a minimum of 75% of board and applicable committee meetings,
|
|
calculated in the aggregate.
|
•
|
A director who belatedly filed a significant form(s) 4 or 5, or who has a pattern of late filings if the
|
|
late filing was the director’s fault (we look at these late filing situations on a case-by-case basis).
|
•
|
A director who is also the CEO of a company where a serious and material restatement has
|
|
occurred after the CEO had previously certified the pre-restatement financial statements.
|
Board Responsiveness to a Significant Shareholder Vote
Glass Lewis believes that any time 25% or more of shareholders vote against the recommendation of
management, the board should demonstrate some level of engagement and responsiveness to address
the shareholder concerns. These include instances when 25% or more of shareholders (excluding
abstentions and broker non-votes): WITHOLD votes from (or vote AGAINST) a director nominee,
vote AGAINST a management-sponsored proposal, or vote FOR a shareholder proposal. In our view,
a 25% threshold is significant enough to warrant a close examination of the underlying issues and an
evaluation of whether or not the board responded appropriately following the vote. While the 25%
threshold alone will not automatically generate a negative vote recommendation from Glass Lewis on
a future proposal (e.g. to recommend against a director nominee, against a say-on-pay proposal, etc.),
it will bolster our argument to vote against management’s recommendation in the event we determine
that the board did not respond appropriately.
As a general framework, our evaluation of board responsiveness involves a review of publicly available
disclosures (e.g. the proxy statement, annual report, 8-Ks, company website, etc.) released following
the date of the company’s last annual meeting up through the publication date of our most current
Proxy Paper. Depending on the specific issue, our focus typically includes, but is not limited to, the
following:
|
•
|
At the board level, any changes in directorships, committee memberships, disclosure of related
|
|
party transactions, meeting attendance, or other responsibilities.
|
|
•
|
Any revisions made to the company’s articles of incorporation, bylaws or other governance
|
|
•
|
Any press or news releases indicating changes in, or the adoption of, new company policies,
|
|
business practices or special reports.
|
|
•
|
Any modifications made to the design and structure of the company’s compensation program.
|
Our Proxy Paper analysis will include a case-by-case assessment of the specific elements of board
responsiveness that we examined along with an explanation of how that assessment impacts our
current vote recommendations.
Audit Committees and Performance
Audit committees play an integral role in overseeing the financial reporting process. When assessing
an audit committee’s performance, we are aware that an audit committee does not prepare financial
statements, is not responsible for making the key judgments and assumptions that affect the financial
statements, and does not audit the numbers or the disclosures provided to investors. Rather, an audit
committee member monitors and oversees the process and procedures that management and auditors
perform.
Glass Lewis generally assesses audit committees against the decisions they make with respect to
their oversight and monitoring role. The quality and integrity of the financial statements and earnings
reports, the completeness of disclosures necessary for investors to make informed decisions, and the
effectiveness of the internal controls should provide reasonable assurance that the financial statements
are materially free from errors. The independence of the external auditors and the results of their work
all provide useful information by which to assess the audit committee.
Compensation Committee Performance
Compensation committees have the final say in determining the compensation of executives. This
includes deciding the basis on which compensation is determined, as well as the amounts and types of
compensation to be paid. This process begins with the hiring and initial establishment of employment
agreements, including the terms for such items as pay, pensions and severance arrangements. It is
important in establishing compensation arrangements that compensation be consistent with, and
based on the long-term economic performance of, the business’s long-term shareholders returns.
Compensation committees are also responsible for the oversight of the transparency of compensation.
This oversight includes disclosure of compensation arrangements, the matrix used in assessing pay
for performance, and the use of compensation consultants. In order to ensure the independence
of the compensation consultant, we believe the compensation committee should only engage a
compensation consultant that is not also providing any services to the company or management apart
from their contract with the compensation committee. It is important to investors that they have clear
and complete disclosure of all the significant terms of compensation arrangements in order to make
informed decisions with respect to the oversight and decisions of the compensation committee.
Finally, compensation committees are responsible for oversight of internal controls over the executive
compensation process. This includes controls over gathering information used to determine
compensation, establishment of equity award plans, and granting of equity awards. Lax controls
can and have contributed to conflicting information being obtained, for example through the use of
nonobjective consultants. Lax controls can also contribute to improper awards of compensation such
as through granting of backdated or spring-loaded options, or granting of bonuses when triggers for
bonus payments have not been met.
Central to understanding the actions of a compensation committee is a careful review of the
Compensation Discussion and Analysis (CD&A) report included in each company’s proxy. We review
the CD&A in our evaluation of the overall compensation practices of a company, as overseen by the
compensation committee. The CD&A is also integral to the evaluation of compensation proposals at
companies, such as advisory votes on executive compensation, which allow shareholders to vote on
the compensation paid to a company’s top executives.
Nominating and Governance Committee Performance
The nominating and governance committee, as an agency for the shareholders, is responsible for
the governance by the board of the company and its executives. In performing this role, the board
is responsible and accountable for selection of objective and competent board members. It is also
responsible for providing leadership on governance policies adopted by the company, such as
decisions to implement shareholder proposals that have received a majority vote.
Consistent with Glass Lewis’ philosophy that boards should have diverse backgrounds and members
with a breadth and depth of relevant experience, we believe that nominating and governance
committees should consider diversity when making director nominations within the context of each
specific company and its industry. In our view, shareholders are best served when boards make an
effort to ensure a constituency that is not only reasonably diverse on the basis of age, race, gender and
ethnicity, but also on the basis of geographic knowledge, industry experience and culture.
Board-level Risk Management Oversight
Glass Lewis evaluates the risk management function of a public company board on a strictly case-by-
case basis. Sound risk management, while necessary at all companies, is particularly important at
financial firms which inherently maintain significant exposure to financial risk. We believe such financial
firms should have a chief risk officer reporting directly to the board and a dedicated risk committee
or a committee of the board charged with risk oversight. Moreover, many non-financial firms maintain
strategies which involve a high level of exposure to financial risk. Similarly, since many non-financial
firms have significant hedging or trading strategies, including financial and non-financial derivatives,
those firms should also have a chief risk officer and a risk committee.
When analyzing the risk management practices of public companies, we take note of any significant
losses or writedowns on financial assets and/or structured transactions. In cases where a company
has disclosed a sizable loss or writedown, and where we find that the company’s board-level risk
committee contributed to the loss through poor oversight, we would recommend that shareholders
vote against such committee members on that basis. In addition, in cases where a company maintains
a significant level of financial risk exposure but fails to disclose any explicit form of board-level risk
oversight (committee or otherwise), we will consider recommending to vote against the chairman of
the board on that basis. However, we generally would not recommend voting against a combined
chairman/CEO except in egregious cases.
Mutual Fund Boards
Mutual funds, or investment companies, are structured differently from regular public companies (i.e.,
operating companies). Typically, members of a fund’s adviser are on the board and management takes
on a different role from that of regular public companies. Thus, we focus on a short list of requirements,
although many of our guidelines remain the same.
The following differences from regular public companies apply at mutual funds:
|
•
|
Independence of the board:
We believe that three-fourths of an investment company’s board
|
|
should be made up of independent directors.
|
|
•
|
Non-independent chairman:
We recommend voting against the chairman of an investment
|
|
company’s nominating committee as well as the chairman of the board if the chairman and CEO
|
|
of a mutual fund are the same person and the fund does not have an independent lead or
|
DECLASSIFIED BOARDS
Glass Lewis favors the repeal of staggered boards and the annual election of directors. We believe
staggered boards are less accountable to shareholders than boards that are elected annually.
Furthermore, we feel the annual election of directors encourages board members to focus on
shareholder interests.
II.
Transparency And Integrity Of Financial Reporting
AUDITOR RATIFICATION
The auditor’s role as gatekeeper is crucial in ensuring the integrity and transparency of the financial
information necessary for protecting shareholder value. Shareholders should demand an objective,
competent and diligent auditor who performs at or above professional standards at every company
in which the investors hold an interest. Like directors, auditors should be free from conflicts of interest
and should avoid situations requiring a choice between the auditor’s interests and the public’s interests.
Almost without exception, shareholders should be able to annually review an auditor’s performance
and to annually ratify a board’s auditor selection.
Voting Recommendations on Auditor Ratification
We generally support management’s choice of auditor except when we believe the auditor’s
independence or audit integrity has been compromised. Where a board has not allowed shareholders
to review and ratify an auditor, we typically recommend voting against the audit committee chairman.
When there have been material restatements of annual financial statements or material weakness in
internal controls, we usually recommend voting against the entire audit committee.
Reasons why we may not recommend ratification of an auditor include:
|
•
|
When audit fees plus audit-related fees total less than the tax fees and/or other non-audit fees.
|
|
•
|
Recent material restatements of annual financial statements, including those resulting in the
|
|
reporting of material weaknesses in internal controls and including late filings by the company
|
|
where the auditor bears some responsibility for the restatement or late filing.
|
|
•
|
When the auditor performs prohibited services such as tax-shelter work, tax services for the CEO
|
|
or CFO, or contingent-fee work, such as a fee based on a percentage of economic benefit to the
|
|
•
|
When the company has aggressive accounting policies.
|
|
•
|
When the company has poor disclosure or lack of transparency in its financial statements.
|
|
•
|
We also look for other relationships or concerns with the auditor that might suggest a conflict
|
|
between the auditor’s interests and shareholder interests.
|
PENSION ACCOUNTING ISSUES
A pension accounting question often raised in proxy proposals is what effect, if any, projected returns
on employee pension assets should have on a company’s net income. This issue often arises in the
executive-compensation context in a discussion of the extent to which pension accounting should be
reflected in business performance for purposes of calculating payments to executives.
Glass Lewis believes that pension credits should not be included in measuring income that is used to
award performance-based compensation. Because many of the assumptions used in accounting for
retirement plans are subject to the company’s discretion, management would have an obvious conflict
of interest if pay were tied to pension income.
III.
The Link Between Compensation And Performance
Glass Lewis carefully reviews the compensation awarded to senior executives, as we believe that this is
an important area in which the board’s priorities are revealed. Glass Lewis strongly believes executive
compensation should be linked directly with the performance of the business the executive is charged
with managing. We believe the most effective compensation arrangements provide for an appropriate
mix of performance-based short- and long-term incentives in addition to base salary.
Glass Lewis believes that comprehensive, timely and transparent disclosure of executive pay is critical
to allowing shareholders to evaluate the extent to which the pay is keeping pace with company performance.
When reviewing proxy materials, Glass Lewis examines whether the company discloses the
performance metrics used to determine executive compensation. We recognize performance metrics
must necessarily vary depending on the company and industry, among other factors, and may include
items such as total shareholder return, earning per share growth, return on equity, return on assets
and revenue growth. However, we believe companies should disclose why the specific performance
metrics were selected and how the actions they are designed to incentivize will lead to better corporate
performance.
Moreover, it is rarely in shareholders’ interests to disclose competitive data about individual salaries
below the senior executive level. Such disclosure could create internal personnel discord that would
be counterproductive for the company and its shareholders. While we favor full disclosure for senior
executives and we view pay disclosure at the aggregate level (e.g., the number of employees being
paid over a certain amount or in certain categories) as potentially useful, we do not believe shareholders
need or will benefit from detailed reports about individual management employees other than
the most senior executives.
ADVISORY VOTE ON EXECUTIVE COMPENSATION (“SAY-ON-PA Y”)
Given the complexity of most companies’ compensation programs, Glass Lewis applies a highly nuanced
approach when analyzing advisory votes on executive compensation. We review each company’s
compensation on a case-by-case basis, recognizing that each company must be examined in the
context of industry, size, maturity, performance, financial condition, its historic pay for performance
practices, and any other relevant internal or external factors.
We believe that each company should design and apply specific compensation policies and practices
that are appropriate to the circumstances of the company and, in particular, will attract and retain
competent executives and other staff, while motivating them to grow the company’s long-term
shareholder value.
Where we find those specific policies and practices serve to reasonably align compensation with
performance, and such practices are adequately disclosed, Glass Lewis will recommend supporting
the company’s approach. If, however, those specific policies and practices fail to demonstrably link
compensation with performance, Glass Lewis will generally recommend voting against the say-on-pay
proposal.
Glass Lewis focuses on four main areas when reviewing Say-on-Pay proposals:
|
•
|
The overall design and structure of the Company’s executive compensation program including
|
|
•
|
The quality and content of the Company’s disclosure;
|
|
•
|
The quantum paid to executives; and
|
|
•
|
The link between compensation and performance
|
We also review any significant changes or modifications, and rationale for such changes, made to the
Company’s compensation structure or award amounts, including base salaries.
Say-on-Pay Voting Recommendations
In cases where we find deficiencies in a company’s compensation program’s design, implementation or
management, we will recommend that shareholders vote against the Say-on-Pay proposal. Although not
an exhaustive list, the following issues when weighed together may cause Glass Lewis to recommend
voting against a say-on-pay vote:
|
•
|
Inappropriate peer group and/or benchmarking issues
|
|
•
|
Inadequate or no rationale for changes to peer groups
|
|
•
|
Egregious or excessive bonuses, equity awards or severance payments, including golden
|
|
handshakes and golden parachutes
|
|
•
|
Targeting overall levels of compensation at higher than median without adequate justification
|
|
•
|
Bonus or long-term plan targets set at less than mean or negative performance levels
|
|
•
|
Performance targets not sufficiently challenging, and/or providing for high potential payouts
|
|
•
|
Performance targets lowered, without justification
|
|
•
|
Discretionary bonuses paid when short- or long-term incentive plan targets were not met
|
|
•
|
Executive pay high relative to peers not justified by outstanding company performance
|
|
•
|
The terms of the long-term incentive plans are inappropriate
|
In the instance that a company has simply failed to provide sufficient disclosure of its policies, we
may recommend shareholders vote against this proposal solely on this basis, regardless of the
appropriateness of compensation levels.
Additional Scrutiny for Companies with Significant Opposition in 2012
At companies that received a significant shareholder vote (anything greater than 25%) against their
say on pay proposal in 2012, we believe the board should demonstrate some level of engagement
and responsiveness to the shareholder concerns behind the discontent. We will look for disclosure in
the proxy statement and other publicly-disclosed filings that indicates the compensation committee
is responding to the prior year’s vote results including engaging with large shareholders to identify
the concerns causing the substantial vote against. In the absence of any evidence that the board is
actively engaging shareholders on this issue and responding accordingly, we will recommend holding
compensation committee members accountable for a failure to respond in consideration of the level
of the vote against and the severity and history of the compensation problems.
Pay for Performance
Glass Lewis believes an integral part of a well-structured compensation package is a successful link
between pay and performance. Therefore, Glass Lewis developed a proprietary pay-for-performance
model to evaluate the link between pay and performance of the top five executives at US companies.
Our model benchmarks these executives’ pay and company performance against peers selected by
Equilar’s market-based peer groups and across five performance metrics. By measuring the magnitude
of the gap between two weighted-average percentile rankings (executive compensation and
performance), we grade companies from a school letter system: “A”, “B”, “F”, etc. The grades guide
our evaluation of compensation committee effectiveness and we generally recommend voting against
compensation committee of companies with a pattern of failing our pay-for-performance analysis.
We also use this analysis to inform our voting decisions on say-on-pay proposals. As such, if a company
receives a failing grade from our proprietary model, we are likely to recommend shareholders to vote
against the say-on-pay proposal. However, there may be exceptions to this rule such as when a
company makes significant enhancements to its compensation programs.
Frequency of Say-on-Pay
We believe companies should submit say-on-pay votes to shareholders every year. Unless a company
provides a compelling rationale or unique circumstances for say-on-pay votes less frequent than
annually, we will generally recommend that shareholders support annual votes on compensation.
EQUITY-BASED COMPENSATION PLAN PROPOSALS
We believe that equity compensation awards are useful, when not abused, for retaining employees
and providing an incentive for them to act in a way that will improve company performance. Glass
Lewis evaluates equity-based compensation plans using a detailed model and analytical review.
We evaluate equity plans based on certain overarching principles:
|
•
|
Companies should seek more shares only when needed.
|
|
•
|
Requested share amounts should be small enough that companies seek shareholder approval
|
|
every three to four years (or more frequently).
|
|
•
|
If a plan is relatively expensive, it should not grant options solely to senior executives and board
|
|
•
|
Annual net share count and voting power dilution should be limited.
|
|
•
|
Annual cost of the plan (especially if not shown on the income statement) should be reasonable
|
|
as a percentage of financial results and should be in line with the peer group.
|
|
•
|
The expected annual cost of the plan should be proportional to the business’s value.
|
|
•
|
The intrinsic value that option grantees received in the past should be reasonable compared with
|
|
the business’s financial results.
|
|
•
|
Plans should deliver value on a per-employee basis when compared with programs at peer
|
|
•
|
Plans should not permit re-pricing of stock options.
|
|
•
|
Plans should not contain excessively liberal administrative or payment terms.
|
|
•
|
Plans should not count shares in ways that understate the potential dilution, or cost, to common
|
|
shareholders. This refers to “inverse” full-value award multipliers.
|
|
•
|
Selected performance metrics should be challenging and appropriate, and should be subject to
|
|
relative performance measurements.
|
|
•
|
Stock grants should be subject to minimum vesting and/or holding periods sufficient to ensure
|
|
sustainable performance and promote retention.
|
Option Exchanges
Glass Lewis views option repricing plans and option exchange programs with great skepticism.
Shareholders have substantial risk in owning stock and we believe that the employees, officers, and
directors who receive stock options should be similarly situated to align their interests with shareholder
interests.
We will recommend supporting a repricing only if the following conditions are true:
|
•
|
Officers and board members cannot participate in the program;
|
|
•
|
The stock decline mirrors the market or industry price decline in terms of timing and approximates
|
|
the decline in magnitude;
|
|
•
|
The exchange is value-neutral or value-creative to shareholders using very conservative assumptions
|
|
and with a recognition of the adverse selection problems inherent in voluntary programs; and
|
|
•
|
Management and the board make a cogent case for needing to motivate and retain existing
|
|
employees, such as being in a competitive employment market.
|
162(m) Plans
Section 162(m) of the Internal Revenue Code allows companies to deduct compensation in excess of
$1 million for the CEO and the next three most highly compensated executive officers, excluding the
CFO, upon shareholder approval of the excess compensation. Glass Lewis recognizes the value of
executive incentive programs and the tax benefit of shareholder-approved incentive plans.
We believe the best practice for companies is to provide robust disclosure to shareholders so that they
can make fully-informed judgments about the reasonableness of the proposed compensation plan. To
allow for meaningful shareholder review, we prefer that disclosure should include specific performance
metrics, a maximum award pool, and a maximum award amount per employee. We also believe it is
important to analyze the estimated grants to see if they are reasonable and in line with the company’s
peers.
We typically recommend voting against a 162(m) plan where: a company fails to provide at least a list
of performance targets; a company fails to provide one of either a total pool or an individual maximum;
or the proposed plan is excessive when compared with the plans of the company’s peers.
As with all other issues we review, our goal is to provide consistent but contextual advice given the
specifics of the company and ongoing performance. Overall, we recognize that it is generally not
in shareholders’ best interests to vote against such a plan and forgo the potential tax benefit since
shareholder rejection of such plans will not curtail the awards; it will only prevent the tax deduction
associated with them.
Director Compensation Plans
Glass Lewis believes that non-employee directors should receive reasonable and appropriate
compensation for the time and effort they spend serving on the board and its committees. Director fees
should be competitive in order to retain and attract qualified individuals. But excessive fees represent
a financial cost to the company and threaten to compromise the objectivity and independence of
non-employee directors. Therefore, a balance is required. We will consider recommending supporting
compensation plans that include option grants or other equity-based awards that help to align the
interests of outside directors with those of shareholders. However, equity grants to directors should
not be performance-based to ensure directors are not incentivized in the same manner as executives
but rather serve as a check on imprudent risk-taking in executive compensation plan design.
IV.
Governance Structure And The Shareholder Franchise
ANTI-TAKEOVER MEASURES
Poison Pills (Shareholder Rights Plans)
Glass Lewis believes that poison pill plans are not generally in shareholders’ best interests. They can
reduce management accountability by substantially limiting opportunities for corporate takeovers.
Rights plans can thus prevent shareholders from receiving a buy-out premium for their stock.
We believe boards should be given wide latitude in directing company activities and in charting
the company’s course. However, on an issue such as this, where the link between the shareholders’
financial interests and their right to consider and accept buyout offers is substantial, we believe that
shareholders should be allowed to vote on whether they support such a plan’s implementation.
In certain circumstances, we will support a poison pill that is limited in scope to accomplish a particular
objective, such as the closing of an important merger, or a pill that contains what we believe to be a
reasonable qualifying offer clause.
AUTHORIZED SHARES
Glass Lewis believes that adequate capital stock is important to a company’s operation. When analyzing
a request for additional shares, we typically review four common reasons why a company might need
additional capital stock:
|
3.
|
Financing for Acquisitions
|
|
4.
|
Financing for Operations
|
Unless we find that the company has not disclosed a detailed plan for use of the proposed shares,
or where the number of shares far exceeds those needed to accomplish a detailed plan, we typically
recommend in favor of the authorization of additional shares.
VOTING STRUCTURE
Cumulative Voting
Glass Lewis will recommend voting for proposals seeking to allow cumulative voting unless the company
has majority voting for the election of directors in which case we will vote against. Cumulative voting
is a voting process that maximizes the ability of minority shareholders to ensure representation of their
views on the board. Cumulative voting generally operates as a safeguard for by ensuring that those
who hold a significant minority of shares are able to elect a candidate of their choosing to the board.
Supermajority Vote Requirements
Glass Lewis favors a simple majority voting structure. Supermajority vote requirements act as
impediments to shareholder action on ballot items that are critical to our interests. One key example is
in the takeover context where supermajority vote requirements can strongly limit shareholders’ input
in making decisions on such crucial matters as selling the business.
MUTUAL FUNDS: INVESTMENT POLICIES AND ADVISORY AGREEMENTS
Glass Lewis believes that decisions about a fund’s structure and/or a fund’s relationship with its
investment advisor or sub-advisors are generally best left to management and the members of the
board, absent a showing of egregious or illegal conduct that might threaten shareholder value. As
such, we focus our analyses of such proposals on the following main areas:
|
•
|
The terms of any amended advisory or sub-advisory agreement;
|
|
•
|
Any changes in the fee structure paid to the investment advisor; and
|
|
•
|
Any material changes to the fund’s investment objective or strategy.
|
We generally support amendments to a fund’s investment advisory agreement absent a material
change that is not in the best interests of shareholders. In matters pertaining to a fund’s investment
objective or strategy, we believe shareholders are best served when a fund’s objective or strategy
closely resembles the investment discipline shareholders understood and selected when they initially
bought into the fund. As such, we generally recommend voting against amendments to a fund’s
investment objective or strategy when the proposed changes would leave shareholders with stakes
in a fund that is noticeably different than when originally contemplated, and which could therefore
potentially negatively impact some investors’ diversification strategies.
V.
Compensation, Environmental, Social And Governance Shareholder Initiatives Overview
Glass Lewis typically prefers to leave decisions regarding day-to-day management and policy decisions,
including those related to social, environmental or political issues, to management and the board,
except when there is a clear link between the proposal and value enhancement or risk mitigation.
We feel strongly that shareholders should not attempt to micromanage the company, its businesses
or its executives through the shareholder initiative process. Rather, we believe shareholders should
use their influence to push for governance structures that protect shareholders and promote director
accountability. Shareholders should then put in place a board they can trust to make informed decisions
that are in the best interests of the business and its owners, and then hold directors accountable for
management and policy decisions through board elections. However, we recognize that support of
appropriately crafted shareholder initiatives may at times serve to promote or protect shareholder
value.
To this end, Glass Lewis evaluates shareholder proposals on a case-by-case basis. We generally
recommend supporting shareholder proposals calling for the elimination of, as well as to require
shareholder approval of, antitakeover devices such as poison pills and classified boards. We generally
recommend supporting proposals likely to increase and/or protect shareholder value and also those that
promote the furtherance of shareholder rights. In addition, we also generally recommend supporting
proposals that promote director accountability and those that seek to improve compensation practices,
especially those promoting a closer link between compensation and performance.
For a detailed review of compensation, environmental, social and governance shareholder initiatives,
please refer to our comprehensive Proxy Paper Guidelines on Shareholder Initiatives.
Disclaimer
This document sets forth the proxy voting policy and guidelines of Glass, Lewis & Co., LLC. The
policies included herein have been developed based on Glass Lewis’ experience with proxy voting and
corporate governance issues and are not tailored to any specific person. Moreover, these guidelines are
not intended to be exhaustive and do not include all potential voting issues. The information included
herein is reviewed periodically and updated or revised as necessary. Glass Lewis is not responsible for
any actions taken or not taken on the basis of this information. This document may not be reproduced
or distributed in any manner without the written permission of Glass Lewis.
Copyright © 2012 Glass, Lewis & Co., LLC. All Rights Reserved.