Statement
of Additional Information
ADVISORSHARES TRUST
2 Bethesda Metro Center
Suite 1330
Bethesda, Maryland 20814
877.843.3831
www.advisorshares.com
AdvisorShares Trust (the “Trust”)
is an investment company offering professionally managed investment portfolios. This Statement of Additional Information (the
“SAI”) relates to shares of the following portfolio (the “Fund”):
AdvisorShares Sage Core Reserves ETF
(NYSE Arca Ticker: HOLD)
This SAI is not a prospectus. It should
be read in conjunction with the Fund’s Prospectus, dated August 13, 2013, which incorporates this SAI by reference. Capitalized
terms not defined herein are defined in the Prospectus. Copies of the Fund’s Prospectus are available, without charge, upon
request to the Trust at the address above or by telephoning the Trust at the telephone number above. Shares of the Fund are subject
to listing on NYSE Arca, Inc. (the “Exchange”), and will trade in the secondary market.
The date of this SAI is August 13, 2013
THE
FUND WILL NOT COMMENCE OPERATIONS, AND SHARES OF THE FUND WILL NOT BE OFFERED OR SOLD, UNTIL THE SHARES ARE LISTED ON THE NYSE
ARCA.
Table of
Contents
GENERAL INFORMATION ABOUT THE TRUST
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1
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INVESTMENT POLICIES, TECHNIQUES AND RISK FACTORS
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1
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INVESTMENT RESTRICTIONS
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34
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CONTINUOUS OFFERING
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35
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EXCHANGE LISTING AND TRADING
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36
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PORTFOLIO TRANSACTIONS AND BROKERAGE
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36
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MANAGEMENT OF THE TRUST
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38
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BOOK ENTRY ONLY SYSTEM
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48
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CREATION AND REDEMPTION OF CREATION UNITS
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49
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DETERMINATION OF NET ASSET VALUE
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55
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DIVIDENDS, DISTRIBUTIONS, AND TAXES
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56
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OTHER INFORMATION
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63
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COUNSEL
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64
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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65
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CUSTODIAN
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65
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FINANCIAL STATEMENTS
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65
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APPENDIX A
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A-1
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APPENDIX B
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B-1
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GENERAL INFORMATION ABOUT THE
TRUST
The Trust, an open-end management investment
company, was organized as a Delaware statutory trust on July 30, 2007. The Trust is permitted to offer separate series (
i.e.,
funds) and additional series may be created from time to time.
As of the date of this SAI, the Trust offers
twenty four separate funds. This SAI relates only to the following fund of the Trust (the “Fund”):
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AdvisorShares Sage Core Reserves ETF
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Each share issued by the Fund has a pro
rata interest in the assets of the Fund. Shares have no preemptive, exchange, subscription or conversion rights and are freely
transferable. Each share is entitled to participate equally in dividends and distributions declared by the Board of Trustees of
the Trust (“Board”) with respect to the Fund, and in the net distributable assets of the Fund on liquidation. All payments
received by the Trust for shares of the Fund belong to the Fund. The Fund has its own assets and liabilities.
The shares of the Fund are subject to approval
for listing on the Exchange. The shares of the Fund, as described in the Fund’s Prospectus, will trade on the Exchange at
market prices that may be below, at, or above net asset value (“NAV”) per share of the Fund.
The Fund offers and issues shares at NAV
in aggregated lots of 25,000 or more (each, a “Creation Unit” or a “Creation Unit Aggregation”), generally
in exchange for: (i) a basket of individual securities (the “Deposit Securities”) and (ii) an amount of cash (the “Cash
Component”). Shares are redeemable only in Creation Unit Aggregations and, generally, in exchange for portfolio securities
and a specified cash payment.
The Trust reserves the right to offer an
“all cash” option for creations and redemptions of Creation Units for the Fund. In addition, Creation Units may be
issued in advance of receipt of Deposit Securities subject to various conditions, including a requirement to maintain a cash deposit
with the Trust at least equal to 115% of the market value of the missing Deposit Securities. In each instance, transaction fees
may be imposed that will be higher than the transaction fees associated with traditional in-kind creations or redemptions. In all
cases, such fees will be limited in accordance with SEC requirements applicable to management investment companies offering redeemable
securities. See the “Creation and Redemption of Creation Units” section for detailed information.
INVESTMENT POLICIES, TECHNIQUES
AND RISK FACTORS
General
AdvisorShares Investments, LLC (the “Advisor”)
serves as the investment adviser to the Fund, which is a diversified open-end management investment company. The Fund’s investment
objective and principal investment strategies, as well as other important information, are described in the Fund’s Prospectus,
which should be read together with this SAI. The investment objective of the Fund is non-fundamental and may be changed without
the consent of the holders of a majority of the Fund’s outstanding shares.
The day-to-day portfolio management of
the Fund is provided by Sage Advisory Services, Ltd. Co. (the “Sub-Advisor”), the sub-adviser to the Fund, and is subject
to the oversight of the Advisor and the Board.
The Sub-Advisor selects securities for
the Fund’s investment pursuant to an “active” management strategy for security selection and portfolio construction.
The investment techniques and instruments
described below and in the Fund’s Prospectus may, consistent with the Fund’s investment objective and investment policies,
be used by the Fund if, in the opinion of the Advisor or the Sub-Advisor, such strategies will be advantageous to the Fund. The
Fund may not invest in all of the instruments and techniques described below. In addition, the Fund is free to reduce or eliminate
its activity with respect to any of the investment techniques described below without changing the Fund’s fundamental investment
policies, and the Fund will periodically change the composition of its portfolio to best meet its investment objective. For more
information about the Fund’s principal strategies and risks, please see the Fund’s Prospectus.
Borrowing
While the Fund does not anticipate doing
so, the Fund may borrow money for investment purposes. Borrowing for investment purposes is one form of leverage. Leveraging investments,
by purchasing securities with borrowed money, is a speculative technique that increases investment risk, but also increases investment
opportunity. Because substantially all of the Fund’s assets will fluctuate in value, whereas the interest obligations on
borrowings may be fixed, the NAV per share of the Fund will increase more when the Fund’s portfolio assets increase in value
and decrease more when the Fund’s portfolio assets decrease in value than would otherwise be the case. Moreover, interest
costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the returns on the
borrowed funds. Under adverse conditions, the Fund might have to sell portfolio securities to meet interest or principal payments
at a time when investment considerations would not favor such sales. The Fund may use leverage during periods when its Sub-Advisor
believes that the Fund’s investment objective would be furthered.
The Fund may also borrow money to facilitate
management of the Fund’s portfolio by enabling the Fund to meet redemption requests when the liquidation of portfolio instruments
would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will be repaid by the Fund promptly.
As required by the Investment Company Act of 1940, as amended (the “1940 Act”), the Fund must maintain continuous asset
coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all
amounts borrowed. If, at any time, the value of the Fund’s assets should fail to meet this 300% coverage test, the Fund,
within three days (not including Sundays and holidays), will reduce the amount of the Fund’s borrowings to the extent necessary
to meet this 300% coverage requirement. Maintenance of this percentage limitation may result in the sale of portfolio securities
at a time when investment considerations otherwise indicate that it would be disadvantageous to do so.
In addition to the foregoing, the Fund
is authorized to borrow money as a temporary measure for extraordinary or emergency purposes in amounts not in excess of 5% of
the value of the Fund’s total assets. Borrowings for extraordinary or emergency purposes are not subject to the foregoing
300% asset coverage requirement. The Fund is authorized to pledge portfolio securities the Sub-Advisor deems appropriate as may
be necessary in connection with any borrowings for extraordinary or emergency purposes,
in which event such pledging may
not exceed 15% of the Fund’s assets, valued at cost.
Currency Transactions
Foreign Currencies.
The Fund may
invest directly and indirectly in foreign currencies. The Fund may conduct foreign currency transactions on a spot (
i.e.
,
cash) or forward basis (
i.e.
, by entering into forward contracts to purchase or sell foreign currencies). Currency transactions
made on a spot basis are for cash at the spot rate prevailing in the currency exchange market for buying or selling currency. Although
foreign exchange dealers generally do not charge a fee for such conversions, they do realize a profit based on the difference between
the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency at one
rate, while offering a lesser rate of exchange should the counterparty desire to resell that currency to the dealer. Forward contracts
are customized transactions that require a specific amount of a currency to be delivered at a specific exchange rate on a specific
date or range of dates in the future and can have substantial price volatility. Forward contracts are generally traded in an interbank
market directly between currency traders (usually large commercial banks) and their customers. The parties to a forward contract
may agree to offset or terminate the contract before its maturity, or may hold the contract to maturity and complete the contemplated
currency exchange. At the discretion of the Advisor, a Fund may, but is not obligated to, enter into forward currency exchange
contracts for hedging purposes to help reduce the risks and volatility caused by changes in foreign currency exchange rates, or
to gain exposure to certain currencies in an effort to achieve the Fund’s investment objective. When used for hedging purposes,
forward currency contracts tend to limit any potential gain that may be realized if the value of the Fund’s foreign holdings
increases because of currency fluctuations.
Investments in foreign currencies are subject
to numerous risks, not the least of which is the fluctuation of foreign currency exchange rates with respect to the U.S. dollar.
Exchange rates fluctuate for a number of reasons.
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Inflation
. Exchange rates change to reflect changes in a currency’s buying power.
Different countries experience different inflation rates due to different monetary and fiscal policies, different product and labor
market conditions, and a host of other factors.
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Trade Deficits
. Countries with trade deficits tend to experience a depreciating currency.
Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so reducing
demand for its currency.
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Interest Rates
. High interest rates may raise currency values in the short term by making
such currencies more attractive to investors. However, since high interest rates are often the result of high inflation long-term
results may be the opposite.
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Budget Deficits and Low Savings Rates
. Countries that run large budget deficits and save
little of their national income tend to suffer a depreciating currency because they are forced to borrow abroad to finance their
deficits. Payments of interest on this debt can inundate the currency markets with the currency of the debtor nation. Budget deficits
also can indirectly contribute to currency depreciation if a government chooses inflationary measures to cope with its deficits
and debts.
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Political Factors
. Political instability in a country can cause a currency to depreciate.
Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do business.
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Government Control
. Through their own buying and selling of currencies, the world’s
central banks sometimes manipulate exchange rate movements. In addition, governments occasionally issue statements to influence
people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target
as the goal. The value of the Fund’s investments is calculated in U.S. dollars each day that the New York Stock Exchange
(“NYSE”) is open for business. As a result, to the extent that the Fund’s assets are invested in instruments
denominated in foreign currencies and the currencies appreciate relative to the U.S. dollar, the Fund’s NAV as expressed
in U.S. dollars (and, therefore, the value of your investment) should increase. If the U.S. dollar appreciates relative to the
other currencies, the opposite should occur. The currency-related gains and losses experienced by the Fund will be based on changes
in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such
securities as stated in U.S. dollars. Gains or losses on shares of the Fund will be based on changes attributable to fluctuations
in the NAV of such shares, expressed in U.S. dollars, in relation to the original U.S. dollar purchase price of the shares. The
amount of appreciation or depreciation in the Fund’s assets also will be affected by the net investment income generated
by the money market instruments in which the Fund invest and by changes in the value of the securities that are unrelated to changes
in currency exchange rates.
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The Fund may incur currency exchange costs
when it sells instruments denominated in one currency and buys instruments denominated in another.
Equity Securities
The Fund may invest in equity securities.
Equity securities represent ownership interests in a company or partnership and consist of common stocks, preferred stocks, warrants
to acquire common stock, securities convertible into common stock, and investments in master limited partnerships. Investments
in equity securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in
the value of equity securities in which the Fund invests will cause the NAV per share of the Fund to fluctuate. The U.S. stock
market tends to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline. The
Fund may purchase equity securities traded in the U.S. on registered exchanges or the over-the-counter market. The Fund may invest
in the types of equity securities described below:
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Common Stock.
Common stock represents an equity or ownership interest in an issuer. In the
event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred stock take precedence over the
claims of those who own common stock.
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Preferred Stock.
Preferred stock represents an equity or ownership interest in an issuer
that pays dividends at a specified rate and that has precedence over common stock in the payment of dividends. In the event an
issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred
and common stock.
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Warrants.
Warrants are instruments that entitle the holder to buy an equity security at
a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the
value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a
warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends
or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company.
A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative
than other types of investments.
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Convertible Securities.
Convertible securities are bonds, debentures, notes, preferred stocks
or other securities that may be converted or exchanged (by the holder or by the issuer) into shares of the underlying common stock
(or cash or securities of equivalent value) at a stated exchange ratio. A convertible security may also be called for redemption
or conversion by the issuer after a particular date and under certain circumstances (including a specified price) established upon
issue. If a convertible security held by the Fund is called for redemption or conversion, the Fund could be required to tender
it for redemption, convert it into the underlying common stock, or sell it to a third party.
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Convertible securities generally
have less potential for gain or loss than common stocks. Convertible securities generally provide yields higher than the underlying
common stocks, but generally lower than comparable non-convertible securities. Because of this higher yield, convertible securities
generally sell at a price above their “conversion value,” which is the current market value of the stock to be received
upon conversion. The difference between this conversion value and the price of convertible securities will vary over time depending
on changes in the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value,
convertible securities will tend not to decline to the same extent because of the interest or dividend payments and the repayment
of principal at maturity for certain types of convertible securities. However, securities that are convertible other than at the
option of the holder generally do not limit the potential for loss to the same extent as securities convertible at the option of
the holder. When the underlying common stocks rise in value, the value of convertible securities may also be expected to increase.
At the same time, however, the difference between the market value of convertible securities and their conversion value will narrow,
which means that the value of convertible securities will generally not increase to the same extent as the value of the underlying
common stocks. Because convertible securities may also be interest-rate sensitive, their value may increase as interest rates fall
and decrease as interest rates rise. Convertible securities are also subject to credit risk, and are often lower-quality securities.
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Master Limited Partnerships (“MLPs”).
MLPs are limited partnerships in which
the ownership units are publicly traded. MLP units are registered with the U.S. Securities & Exchange Commission (“SEC”)
and are freely traded on a securities exchange or in the over-the-counter market. MLPs often own several properties or businesses
(or own interests) that are related to real estate development and oil and gas industries, but they also may finance motion pictures,
research and development and other projects. Generally, an MLP is operated under the supervision of one or more managing general
partners. Limited partners are not involved in the day-to-day management of the partnership.
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The risks of investing in an
MLP are generally those involved in investing in a partnership as opposed to a corporation. For example, state law governing partnerships
is often less restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded investors
in an MLP than investors in a corporation. Additional risks involved with investing in an MLP are risks associated with the specific
industry or industries in which the partnership invests, such as the risks of investing in real estate, or oil and gas industries.
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Rights.
A right is a privilege granted to existing shareholders of a corporation to subscribe
to shares of a new issue of common stock before it is issued. Rights normally have a short life of usually two to four weeks, are
freely transferable and entitle the holder to buy the new common stock at a lower price than the public offering price. An investment
in rights may entail greater risks than certain other types of investments. Generally, rights do not carry the right to receive
dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets
of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease
to have value if they are not exercised on or before their expiration date. Investing in rights increases the potential profit
or loss to be realized from the investment as compared with investing the same amount in the underlying securities.
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Exchange-Traded Notes (ETNs)
The Fund may invest in exchange traded
notes (“ETNs”). ETNs are senior, unsecured unsubordinated debt securities issued by an underwriting bank that are designed
to provide returns that are linked to a particular benchmark less investor fees. ETNs have a maturity date and, generally, are
backed only by the creditworthiness of the issuer. As a result, the value of an ETN may be influenced by time to maturity, level
of supply and demand for the ETN, volatility and lack of liquidity in the underlying market (
e.g.,
the commodities market),
changes in the applicable interest rates, and changes in the issuer’s credit rating and economic, legal, political or geographic
events that affect the referenced market. ETNs also may be subject to credit risk.
It is expected that the issuer’s
credit rating will be investment grade at the time of investment, however, the credit rating may be revised or withdrawn at any
time and there is no assurance that a credit rating will remain in effect for any given time period. If a rating agency lowers
the issuer’s credit rating or there is a decline in the perceived creditworthiness of the issuer, the value of the ETN will
decline as a lower credit rating reflects a greater risk that the issuer will default on its obligation to ETN investors. The Fund
must pay an investor fee when investing in an ETN, which will reduce the amount of return on investment at maturity or upon redemption.
There may be restrictions on the Fund’s right to redeem its investment in an ETN, which is meant to be held until maturity.
There are no periodic interest payments for ETNs, and principal typically is not protected. As is the case with other exchange
traded products, an investor could lose some of or the entire amount invested in ETNs. The Fund’s decision to sell its ETN
holdings may be limited by the availability of a secondary market.
Fixed Income Securities
The Fund intends to invest in fixed
income securities. The market value of the fixed income investments in which the Fund may invest will change in response to interest
rate changes and other factors. During periods of falling interest rates, the values of outstanding fixed income securities generally
rise. Conversely, during periods of rising interest rates, the values of such securities generally decline. Moreover, while securities
with longer maturities tend to produce higher yields, the prices of longer maturity securities are also subject to greater market
fluctuations as a result of changes in interest rates. Changes by recognized agencies in the rating of any fixed income security
and in the ability of an issuer to make payments of interest and principal also affect the value of these investments. Changes
in the value of these securities will not necessarily affect cash income derived from these securities but will affect the Fund’s
NAV. Additional information regarding fixed income securities is described below:
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Duration.
Duration is a measure of the expected change in value of a fixed income security
for a given change in interest rates. For example, if interest rates changed by one percent, the value of a security having an
effective duration of two years generally would vary by two percent. Duration takes the length of the time intervals between the
present time and time that the interest and principal payments are scheduled, or in the case of a callable bond, expected to be
received, and weighs them by the present values of the cash to be received at each future point in time.
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Creditor Liability and Participation on Creditors Committees.
Generally, when a fund holds
bonds or other similar fixed income securities of an issuer, the fund becomes a creditor of the issuer. If the Fund is a creditor
of an issuer it may be subject to challenges related to the securities that it holds, either in connection with the bankruptcy
of the issuer or in connection with another action brought by other creditors of the issuer, shareholders of the issuer or the
issuer itself. The Fund may from time to time participate on committees formed by creditors to negotiate with the management of
financially troubled issuers of securities held by the Fund. Such participation may subject the Fund to expenses such as legal
fees and may make the Fund an “insider” of the issuer for purposes of the federal securities laws, and therefore may
restrict the Fund’s ability to trade in or acquire additional positions in a particular security when it might otherwise
desire to do so. Participation by the Fund on such committees also may expose the Fund to potential liabilities under the federal
bankruptcy laws or other laws governing the rights of creditors and debtors. The Fund will participate on such committees only
when the Sub-Advisor believes that such participation is necessary or desirable to enforce the Fund’s rights as a creditor
or to protect the value of securities held by the Fund. Further, the Sub-Advisor has the authority to represent the Trust, or the
Fund, on creditors committees or similar committees and generally with respect to challenges related to the securities held by
the Fund relating to the bankruptcy of an issuer or in connection with another action brought by other creditors of the issuer,
shareholders of the issuer or the issuer itself.
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Variable and Floating Rate Securities.
The Fund may invest in variable and floating rate
instruments, which involve certain obligations that may carry variable or floating rates of interest, and may involve a conditional
or unconditional demand feature. Such instruments bear interest at rates which are not fixed, but which vary with changes in specified
market rates or indices. The interest rates on these securities may be reset daily, weekly, quarterly, or some other reset period,
and may have a set floor or ceiling on interest rate changes. There is a risk that the current interest rate on such obligations
may not accurately reflect existing market interest rates. A demand instrument with a demand notice exceeding seven days may be
considered illiquid if there is no secondary market for such security.
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Bank Obligations.
The Fund may invest in bank obligations, including certificates of deposit,
bankers’ acceptances, and fixed time deposits. Certificates of deposit are negotiable certificates issued against funds deposited
in a commercial bank for a definite period of time and earning a specified return. Bankers’ acceptances are negotiable drafts
or bills of exchange, normally drawn by an importer or exporter to pay for specific merchandise, which are “accepted”
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed
time deposits are bank obligations payable at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits
may be withdrawn on demand by the investor, but may be subject to early withdrawal penalties which vary depending upon market conditions
and the remaining maturity of the obligation. There are no contractual restrictions on the right to transfer a beneficial interest
in a fixed time deposit to a third party, although there is no market for such deposits. The Fund will not invest in fixed time
deposits which: (1) are not subject to prepayment; or (2) provide for withdrawal penalties upon prepayment (other than overnight
deposits) if, in the aggregate, more than 15% of its net assets would be invested in such deposits, repurchase agreements with
remaining maturities of more than seven days and other illiquid assets. Subject to the Trust’s limitation on concentration
as described in the “Investment Restrictions” section below, there is no limitation on the amount of the Fund’s
assets which may be invested in obligations of foreign banks which meet the conditions set forth herein.
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Obligations of foreign banks
involve somewhat different investment risks than those affecting obligations of U.S. banks, including the possibilities that their
liquidity could be impaired because of future political and economic developments, that their obligations may be less marketable
than comparable obligations of U.S. banks, that a foreign jurisdiction might impose withholding taxes on interest income payable
on those obligations, that foreign deposits may be seized or nationalized, that foreign governmental restrictions such as exchange
controls may be adopted which might adversely affect the payment of principal and interest on those obligations and that the selection
of those obligations may be more difficult because there may be less publicly available information concerning foreign banks or
the accounting, auditing and financial reporting standards, practices and requirements applicable to foreign banks may differ from
those applicable to United States banks. Foreign banks are not generally subject to examination by any United States Government
agency or instrumentality.
Debt Securities.
The Fund may invest
in debt securities, which
are securities consisting of a certificate or other evidence of a debt (secured or unsecured)
on which the issuing company or governmental body promises to pay the holder thereof a fixed, variable, or floating rate of interest
for a specified length of time, and to repay the debt on the specified maturity date, as discussed above. Some debt securities,
such as zero coupon bonds, do not make regular interest payments but are issued at a discount to their principal or maturity value.
Debt securities include a variety of fixed income obligations, including, but not limited to, corporate debt securities, government
securities, municipal securities, convertible securities, and mortgage-backed securities. Debt securities include investment-grade
securities, non-investment-grade securities, and unrated securities. Debt securities are subject to a variety of risks, such as
interest rate risk, income risk, call/prepayment risk, inflation risk, credit risk, and currency risk.
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Corporate Debt Securities.
The Fund may seek to invest in corporate debt securities representative
of one or more high yield bond or credit derivative indices, which may change from time to time. Selection will generally be dependent
on independent credit analysis or fundamental analysis performed by the Sub-Advisor. The Fund may invest in all grades of corporate
debt securities including below investment grade as discussed below. See
Appendix A
for a description of corporate bond
ratings. The Fund also may invest in unrated securities.
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Corporate debt securities are
typically fixed-income securities issued by businesses to finance their operations. Notes, bonds, debentures and commercial paper
are the most common types of corporate debt securities. The primary differences between the different types of corporate debt securities
are their maturities and secured or unsecured status. Commercial paper has the shortest term and is usually unsecured. The broad
category of corporate debt securities includes debt issued by domestic or foreign companies of all kinds, including those with
small-, mid- and large-capitalizations. Corporate debt may be rated investment grade or below investment-grade and may carry variable
or floating rates of interest.
Because of the wide range of
types, and maturities, of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities
have widely varying potentials for return and risk profiles. For example, commercial paper issued by a large established domestic
corporation that is rated investment-grade may have a modest return on principal, but carries relatively limited risk. On the other
hand, a long-term corporate note issued by a small foreign corporation from an emerging market country that has not been rated
may have the potential for relatively large returns on principal, but carries a relatively high degree of risk.
Corporate debt securities carry
both credit risk and interest rate risk. Credit risk is the risk that a fund could lose money if the issuer of a corporate debt
security is unable to pay interest or repay principal when it is due. Some corporate debt securities that are rated below investment-grade
are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities.
The credit risk of a particular issuer’s debt security may vary based on its priority for repayment. For example, higher
ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer
might not make payments on subordinated securities while continuing to make payments on senior securities. In addition, in the
event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior
securities. Interest rate risk is the risk that the value of certain corporate debt securities will tend to fall when interest
rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate
debt securities with shorter terms.
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Non-Investment-Grade Debt Securities.
The Fund may invest in non-investment-grade securities.
Non-investment-grade securities, also referred to as “high yield securities” or “junk bonds,” are debt
securities that are rated lower than the four highest rating categories by a nationally recognized statistical rating organization
(for example, lower than Baa3 by Moody’s Investors Service, Inc. or lower than BBB- by Standard & Poor’s) or are
determined to be of comparable quality by the Fund’s Sub-Advisor. These securities are generally considered to be, on balance,
predominantly speculative with respect to capacity to pay interest and repay principal in accordance with the terms of the obligation
and will generally involve more credit risk than securities in the investment-grade categories. Investment in these securities
generally provides greater income and increased opportunity for capital appreciation than investments in higher quality securities,
but they also typically entail greater price volatility and principal and income risk.
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Analysis of the creditworthiness
of issuers of high yield securities may be more complex than for issuers of investment-grade securities. Thus, reliance on credit
ratings in making investment decisions entails greater risks for high yield securities than for investment-grade debt securities.
The success of a fund’s advisor in managing high yield securities is more dependent upon its own credit analysis than is
the case with investment-grade securities.
Some high yield securities are
issued by smaller, less-seasoned companies, while others are issued as part of a corporate restructuring, such as an acquisition,
merger, or leveraged buyout. Companies that issue high yield securities are often highly leveraged and may not have available to
them more traditional methods of financing. Therefore, the risk associated with acquiring the securities of such issuers generally
is greater than is the case with investment-grade securities. Some high yield securities were once rated as investment-grade but
have been downgraded to junk bond status because of financial difficulties experienced by their issuers.
The market values of high yield
securities tend to reflect individual issuer developments to a greater extent than do investment-grade securities, which in general
react to fluctuations in the general level of interest rates. High yield securities also tend to be more sensitive to economic
conditions than are investment-grade securities. A projection of an economic downturn or of a period of rising interest rates,
for example, could cause a decline in junk bond prices because the advent of a recession could lessen the ability of a highly leveraged
company to make principal and interest payments on its debt securities. If an issuer of high yield securities defaults, in addition
to risking payment of all or a portion of interest and principal, a fund investing in such securities may incur additional expenses
to seek recovery.
The secondary market on which
high yield securities are traded may be less liquid than the market for investment-grade securities. Less liquidity in the secondary
trading market could adversely affect the ability of a fund to sell a high yield security or the price at which a fund could sell
a high yield security, and could adversely affect the daily NAV of fund shares. When secondary markets for high yield securities
are less liquid than the market for investment-grade securities, it may be more difficult to value the securities because such
valuation may require more research, and elements of judgment may play a greater role in the valuation because there is less reliable,
objective data available.
The Fund will not necessarily
dispose of a security if a credit-rating agency downgrades the rating of the security below its rating at the time of purchase.
However, the Sub-Advisor will monitor the investment to determine whether continued investment in the security is in the best interest
of shareholders.
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Unrated Debt Securities.
The Fund may invest in unrated debt securities. Unrated debt, while
not necessarily lower in quality than rated securities, may not have as broad a market. Because of the size and perceived demand
for the issue, among other factors, certain issuers may decide not to pay the cost of getting a rating for their bonds. The creditworthiness
of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed to
determine whether to purchase unrated bonds.
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Commercial Paper.
The Fund may invest in commercial paper.
Commercial
paper is a short-term obligation with a maturity ranging from one to 270 days issued by banks, corporations and other borrowers.
Such investments are unsecured and usually discounted. The Fund may invest in commercial paper rated A-1 or A-2 by Standard and
Poor’s Ratings Services (“S&P”) or Prime-1 or Prime-2 by Moody’s Investors Service, Inc. (“Moody’s”).
See
Appendix A
for a description of commercial paper ratings.
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Inflation-Indexed Bonds.
The Fund may invest in
inflation-indexed bonds, which are
fixed income securities whose principal value is periodically adjusted according to the rate of inflation. Two structures are common.
The U.S. Treasury and some other issuers use a structure that accrues inflation into the principal value of the bond. Most other
issuers pay out the Consumer Price Index (“CPI”) accruals as part of a semiannual coupon.
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Inflation-indexed securities
issued by the U.S. Treasury have maturities of five, ten or thirty years, although it is possible that securities with other maturities
will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis, equal to a fixed percentage of
the inflation-adjusted principal amount. For example, if the Fund purchased an inflation-indexed bond with a par value of $1,000
and a 3% real rate of return coupon (payable 1.5% semi-annually), and inflation over the first six months was 1%, the mid-year
par value of the bond would be $1,010 and the first semi-annual interest payment would be $15.15 ($1,010 times 1.5%). If inflation
during the second half of the year resulted in the whole years’ inflation equaling 3%, the end-of-year par value of the bond
would be $1,030 and the second semi-annual interest payment would be $15.45 ($1,030 times 1.5%).
If the periodic adjustment rate
measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted downward, and consequently the interest
payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of the original
bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S. Treasury inflation-indexed bonds, even
during a period of deflation. However, the current market value of the bonds is not guaranteed, and will fluctuate. The Fund also
may invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not
provided, the adjusted principal value of the bond repaid at maturity may be less than the original principal.
The value of inflation-indexed
bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship
between nominal interest rates and the rate of inflation. Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of inflation-indexed bonds. In contrast, if nominal interest
rates increased at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed
bonds.
While these securities are expected
to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest
rates rise due to reasons other than inflation (for example, due to changes in currency exchange rates), investors in these securities
may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
The periodic adjustment of U.S.
inflation-indexed bonds is tied to the Consumer Price Index for All Urban Consumers (“CPI-U”), which is calculated
monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of living, made up of components
such as housing, food, transportation and energy. Inflation-indexed bonds issued by a foreign government are generally adjusted
to reflect a comparable inflation index, calculated by that government. There can be no assurance that the CPI-U or any foreign
inflation index will accurately measure the real rate of inflation in the prices of goods and services. Moreover, there can be
no assurance that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United States.
Any increase in the principal
amount of an inflation-indexed bond will be considered taxable ordinary income, even though investors do not receive their principal
until maturity.
Mortgage-Related and Asset-Backed Securities.
The Fund may invest in mortgage-related and asset-backed securities. Mortgage-related securities are interests in pools of
residential or commercial mortgage loans, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial
banks and others. Pools of mortgage loans are assembled as securities for sale to investors by various governmental, government-related
and private organizations. See “Mortgage Pass-Through Securities.” The Fund also may invest in debt securities which
are secured with collateral consisting of mortgage-related securities (see “Collateralized Mortgage Obligations”).
The recent financial downturn, particularly
the increase in delinquencies and defaults on residential mortgages, falling home prices, and unemployment, has adversely affected
the market for mortgage-related securities. In addition, various market and governmental actions may impair the ability to foreclose
on or exercise other remedies against underlying mortgage holders, or may reduce the amount received upon foreclosure. These factors
have caused certain mortgage-related securities to experience lower valuations and reduced liquidity. There is also no assurance
that the U.S. government will take further action to support the mortgage-related securities industry, as it has in the past, should
the economic downturn continue or the economy experience another downturn. Further, recent legislative action and any future government
actions may significantly alter the manner in which the mortgage-related securities market functions. Each of these factors could
ultimately increase the risk that the Fund could realize losses on mortgage-related securities.
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Mortgage Pass-Through Securities.
The Fund may invest in mortgage pass-through securities.
Interests in pools of mortgage-related securities differ from other forms of debt securities, which normally provide for periodic
payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these securities provide
a monthly payment which consists of both interest and principal payments. In effect, these payments are a “pass-through”
of the monthly payments made by the individual borrowers on their residential or commercial mortgage loans, net of any fees paid
to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal resulting from the sale
of the underlying property, refinancing or foreclosure, net of fees or costs which may be incurred. Some mortgage-related securities
(such as securities issued by the Government National Mortgage Association (“Ginnie Mae”)) are described as “modified
pass-through.” These securities entitle the holder to receive all interest and principal payments owed on the mortgage pool,
net of certain fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
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The rate of pre-payments on underlying
mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending
the effective duration of the security relative to what was anticipated at the time of purchase. To the extent that unanticipated
rates of pre-payment on underlying mortgages increase the effective duration of a mortgage-related security, the volatility of
such security can be expected to increase. The residential mortgage market in the United States recently has experienced difficulties
that may adversely affect the performance and market value of certain of the Fund’s mortgage-related investments. Delinquencies
and losses on residential mortgage loans (especially subprime and second-lien mortgage loans) generally have increased recently
and may continue to increase, and a decline in or flattening of housing values (as has recently been experienced and may continue
to be experienced in many housing markets) may exacerbate such delinquencies and losses. Borrowers with adjustable rate mortgage
loans are more sensitive to changes in interest rates, which affect their monthly mortgage payments, and may be unable to secure
replacement mortgages at comparably low interest rates. Also, a number of residential mortgage loan originators have experienced
serious financial difficulties or bankruptcy. Owing largely to the foregoing, reduced investor demand for mortgage loans and mortgage-
related securities and increased investor yield requirements have caused limited liquidity in the secondary market for certain
mortgage-related securities, which can adversely affect the market value of mortgage-related securities. It is possible that such
limited liquidity in such secondary markets could continue or worsen.
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Agency Mortgage-Related Securities.
The Fund may invest in agency mortgage-related securities.
The principal governmental guarantor of mortgage-related securities is Ginnie Mae. Ginnie Mae is a wholly owned United States Government
corporation within the Department of Housing and Urban Development. Ginnie Mae is authorized to guarantee, with the full faith
and credit of the United States Government, the timely payment of principal and interest on securities issued by institutions approved
by Ginnie Mae (such as savings and loan institutions, commercial banks and mortgage bankers) and backed by pools of mortgages insured
by the Federal Housing Administration (the “FHA”), or guaranteed by the Department of Veterans Affairs (the “VA”).
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Government-related guarantors
(
i.e.
, not backed by the full faith and credit of the United States Government) include the Federal National Mortgage Association
(“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”). Fannie Mae is a government-sponsored
corporation. Fannie Mae purchases conventional (
i.e.
, not insured or guaranteed by any government agency) residential mortgages
from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings
banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by Fannie Mae are guaranteed as
to timely payment of principal and interest by Fannie Mae, but are not backed by the full faith and credit of the United States
Government. Freddie Mac was created by Congress in 1970 for the purpose of increasing the availability of mortgage credit for residential
housing. It is a government-sponsored corporation that issues Participation Certificates (“PCs”), which are pass-through
securities, each representing an undivided interest in a pool of residential mortgages. Freddie Mac guarantees the timely payment
of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the United States Government.
On September 6, 2008, the Federal
Housing Finance Agency (“FHFA”) placed Fannie Mae and Freddie Mac into conservatorship. As the conservator, FHFA succeeded
to all rights, titles, powers and privileges of Fannie Mae and Freddie Mac and of any stockholder, officer or director of Fannie
Mae and Freddie Mac with respect to Fannie Mae and Freddie Mac and the assets of Fannie Mae and Freddie Mac. FHFA selected a new
chief executive officer and chairman of the board of directors for each of Fannie Mae and Freddie Mac.
In connection with the conservatorship,
the U.S. Treasury entered into a Senior Preferred Stock Purchase Agreement with each of Fannie Mae and Freddie Mac pursuant to
which the U.S. Treasury will purchase up to an aggregate of $100 billion of each of Fannie Mae and Freddie Mac to maintain a positive
net worth in each enterprise. This agreement contains various covenants that severely limit each enterprise’s operations.
In exchange for entering into these agreements, the U.S. Treasury received $1 billion of each enterprise’s senior preferred
stock and warrants to purchase 79.9% of each enterprise’s common stock. On February 18, 2009, the U.S. Treasury announced
that it was doubling the size of its commitment to each enterprise under the Senior Preferred Stock Program to $200 billion. The
U.S. Treasury’s obligations under the Senior Preferred Stock Program are for an indefinite period of time for a maximum amount
of $200 billion per enterprise.
Fannie Mae and Freddie Mac are
continuing to operate as going concerns while in conservatorship and each remain liable for all of its obligations, including its
guaranty obligations, associated with its mortgage-backed securities. The Senior Preferred Stock Purchase Agreement is intended
to enhance each of Fannie Mae’s and Freddie Mac’s ability to meet its obligations. The FHFA has indicated that the
conservatorship of each enterprise will end when the director of FHFA determines that FHFA’s plan to restore the enterprise
to a safe and solvent condition has been completed.
Under the Federal Housing Finance
Regulatory Reform Act of 2008 (the “Reform Act”), which was included as part of the Housing and Economic Recovery Act
of 2008, FHFA, as conservator or receiver, has the power to repudiate any contract entered into by Fannie Mae or Freddie Mac prior
to FHFA’s appointment as conservator or receiver, as applicable, if FHFA determines, in its sole discretion, that performance
of the contract is burdensome and that repudiation of the contract promotes the orderly administration of Fannie Mae’s or
Freddie Mac’s affairs. The Reform Act requires FHFA to exercise its right to repudiate any contract within a reasonable period
of time after its appointment as conservator or receiver.
FHFA, in its capacity as conservator,
has indicated that it has no intention to repudiate the guaranty obligations of Fannie Mae or Freddie Mac because FHFA views repudiation
as incompatible with the goals of the conservatorship. However, in the event that FHFA, as conservator or if it is later appointed
as receiver for Fannie Mae or Freddie Mac, were to repudiate any such guaranty obligation, the conservatorship or receivership
estate, as applicable, would be liable for actual direct compensatory damages in accordance with the provisions of the Reform Act.
Any such liability could be satisfied only to the extent of Fannie Mae’s or Freddie Mac’s assets available therefor.
In the event of repudiation,
the payments of interest to holders of Fannie Mae or Freddie Mac mortgage-backed securities would be reduced if payments on the
mortgage loans represented in the mortgage loan groups related to such mortgage- backed securities are not made by the borrowers
or advanced by the servicer. Any actual direct compensatory damages for repudiating these guaranty obligations may not be sufficient
to offset any shortfalls experienced by such mortgage-backed security holders.
Further, in its capacity as conservator
or receiver, FHFA has the right to transfer or sell any asset or liability of Fannie Mae or Freddie Mac without any approval, assignment
or consent. Although FHFA has stated that it has no present intention to do so, if FHFA, as conservator or receiver, were to transfer
any such guaranty obligation to another party, holders of Fannie Mae or Freddie Mac mortgage-backed securities would have to rely
on that party for satisfaction of the guaranty obligation and would be exposed to the credit risk of that party.
In addition, certain rights provided
to holders of mortgage-backed securities issued by Fannie Mae and Freddie Mac under the operative documents related to such securities
may not be enforced against FHFA, or enforcement of such rights may be delayed, during the conservatorship or any future receivership.
The operative documents for Fannie Mae and Freddie Mac mortgage- backed securities may provide (or with respect to securities issued
prior to the date of the appointment of the conservator may have provided) that upon the occurrence of an event of default on the
part of Fannie Mae or Freddie Mac, in its capacity as guarantor, which includes the appointment of a conservator or receiver, holders
of such mortgage-backed securities have the right to replace Fannie Mae or Freddie Mac as trustee if the requisite percentage of
mortgage-backed securities holders consent. The Reform Act prevents mortgage-backed security holders from enforcing such rights
if the event of default arises solely because a conservator or receiver has been appointed. The Reform Act also provides that no
person may exercise any right or power to terminate, accelerate or declare an event of default under certain contracts to which
Fannie Mae or Freddie Mac is a party, or obtain possession of or exercise control over any property of Fannie Mae or Freddie Mac,
or affect any contractual rights of Fannie Mae or Freddie Mac, without the approval of FHFA, as conservator or receiver, for a
period of 45 or 90 days following the appointment of FHFA as conservator or receiver, respectively.
In addition, in a February 2011
report to Congress from the Treasury Department and the Department of Housing and Urban Development, the Obama administration provided
a plan to reform America’s housing finance market. The plan would reduce the role of and eventually eliminate Fannie Mae
and Freddie Mac. Notably, the plan does not propose similar significant changes to Ginnie Mae, which guarantees payments on mortgage-related
securities backed by federally insured or guaranteed loans such as those issued by the Federal Housing Association or guaranteed
by the Department of Veterans Affairs. The report also identified three proposals for Congress and the administration to consider
for the long-term structure of the housing finance markets after the elimination of Fannie Mae and Freddie Mac, including implementing:
(i) a privatized system of housing finance that limits government insurance to very limited groups of creditworthy low- and moderate-income
borrowers; (ii) a privatized system with a government backstop mechanism that would allow the government to insure a larger share
of the housing finance market during a future housing crisis; and (iii) a privatized system where the government would offer reinsurance
to holders of certain highly-rated mortgage-related securities insured by private insurers and would pay out under the reinsurance
arrangements only if the private mortgage insurers were insolvent.
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Privately Issued Mortgage-Related Securities.
The Fund may invest in privately issued mortgage-related
securities. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary
market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may be the originators and/or
servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related securities. Pools created by such
non-governmental issuers generally offer a higher rate of interest than government and government-related pools because there are
no direct or indirect government or agency guarantees of payments in the former pools. However, timely payment of interest and
principal of these pools may be supported by various forms of insurance or guarantees, including individual loan, title, pool and
hazard insurance and letters of credit, which may be issued by governmental entities or private insurers. Such insurance and guarantees
and the creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets the
Trust’s investment quality standards. There can be no assurance that insurers or guarantors can meet their obligations under
the insurance policies or guarantee arrangements. The Fund may buy mortgage-related securities without insurance or guarantees
if, through an examination of the loan experience and practices of the originators/servicers and poolers, the Sub-Advisor determines
that the securities meet the Trust’s quality standards. Securities issued by certain private organizations may not be readily
marketable. The Fund will not purchase mortgage-related securities or any other assets which in the Sub-Advisor’s opinion
are illiquid if, as a result, more than 15% of the Fund’s net assets will be invested in illiquid securities.
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Privately issued mortgage-related
securities are not subject to the same underwriting requirements for the underlying mortgages that are applicable to those mortgage-related
securities that have a government or government-sponsored entity guarantee. As a result, the mortgage loans underlying privately
issued mortgage-related securities may, and frequently do, have less favorable collateral, credit risk or other underwriting characteristics
than government or government-sponsored mortgage-related securities and have wider variances in a number of terms including interest
rate, term, size, purpose and borrower characteristics. Mortgage pools underlying privately issued mortgage-related securities
more frequently include second mortgages, high loan-to-value ratio mortgages and manufactured housing loans, in addition to commercial
mortgages and other types of mortgages where a government or government-sponsored entity guarantee is not available. The coupon
rates and maturities of the underlying mortgage loans in a privately-issued mortgage-related securities pool may vary to a greater
extent than those included in a government guaranteed pool, and the pool may include subprime mortgage loans. Subprime loans are
loans made to borrowers with weakened credit histories or with a lower capacity to make timely payments on their loans. For these
reasons, the loans underlying these securities have had in many cases higher default rates than those loans that meet government
underwriting requirements.
The risk of non-payment is greater
for mortgage-related securities that are backed by loans that were originated under weak underwriting standards, including loans
made to borrowers with limited means to make repayment. A level of risk exists for all loans, although, historically, the poorest
performing loans have been those classified as subprime. Other types of privately issued mortgage-related securities, such as those
classified as pay-option adjustable rate or Alt-A have also performed poorly. Even loans classified as prime have experienced higher
levels of delinquencies and defaults. The substantial decline in real property values across the U.S. has exacerbated the level
of losses that investors in privately issued mortgage-related securities have experienced. It is not certain when these trends
may reverse. Market factors that may adversely affect mortgage loan repayment include adverse economic conditions, unemployment,
a decline in the value of real property, or an increase in interest rates.
Privately issued mortgage-related
securities are not traded on an exchange and there may be a limited market for the securities, especially when there is a perceived
weakness in the mortgage and real estate market sectors. Without an active trading market, mortgage-related securities held in
the Fund’s portfolio may be particularly difficult to value because of the complexities involved in assessing the value of
the underlying mortgage loans.
The Fund may purchase privately
issued mortgage-related securities that are originated, packaged and serviced by third party entities. It is possible these third
parties could have interests that are in conflict with the holders of mortgage- related securities, and such holders (such as the
Fund) could have rights against the third parties or their affiliates. For example, if a loan originator, servicer or its affiliates
engaged in negligence or willful misconduct in carrying out its duties, then a holder of the mortgage-related security could seek
recourse against the originator/servicer or its affiliates, as applicable. Also, as a loan originator/servicer, the originator/servicer
or its affiliates may make certain representations and warranties regarding the quality of the mortgages and properties underlying
a mortgage-related security. If one or more of those representations or warranties is false, then the holders of the mortgage-related
securities (such as the Fund) could trigger an obligation of the originator/servicer or its affiliates, as applicable, to repurchase
the mortgages from the issuing trust. Notwithstanding the foregoing, many of the third parties that are legally bound by trust
and other documents have failed to perform their respective duties, as stipulated in such trust and other documents, and investors
have had limited success in enforcing terms.
Mortgage-related securities that
are issued or guaranteed by the U.S. government, its agencies or instrumentalities, are not subject to the Fund’s industry
concentration restrictions, set forth below under “Investment Restrictions,” by virtue of the exclusion from that test
available to all U.S. government securities. In the case of privately issued mortgage-related securities, the Fund takes the position
that mortgage-related securities do not represent interests in any particular “industry” or group of industries. Therefore,
the Fund may invest more or less than 25% of its total assets in privately issued mortgage- related securities. The assets underlying
such securities may be represented by a portfolio of residential or commercial mortgages (including both whole mortgage loans and
mortgage participation interests that may be senior or junior in terms of priority of repayment) or portfolios of mortgage pass-through
securities issued or guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac. Mortgage loans underlying a mortgage-related security
may in turn be insured or guaranteed by the FHA or the VA. In the case of privately issued mortgage-related securities whose underlying
assets are neither U.S. government securities nor U.S. government-insured mortgages, to the extent that real properties securing
such assets may be located in the same geographical region, the security may be subject to a greater risk of default than other
comparable securities in the event of adverse economic, political or business developments that may affect such region and, ultimately,
the ability of residential homeowners to make payments of principal and interest on the underlying mortgages.
The Sub-Advisor seeks to manage
the portion of the Fund’s assets committed to privately issued mortgage-related securities in a manner consistent with the
Fund’s investment objective, policies and overall portfolio risk profile. In determining whether and how much to invest in
privately issued mortgage-related securities, and how to allocate those assets, the Sub-Advisor will consider a number of factors.
These include, but are not limited to: (1) the nature of the borrowers (
e.g.
, residential vs. commercial); (2) the collateral
loan type (
e.g.
, for residential: First Lien – Jumbo/Prime, First Lien – Alt-A, First Lien – Subprime,
First Lien – Pay-Option or Second Lien; for commercial: Conduit, Large Loan or Single Asset / Single Borrower); and (3) in
the case of residential loans, whether they are fixed rate or adjustable mortgages. Each of these criteria can cause privately
issued mortgage-related securities to have differing primary economic characteristics and distinguishable risk factors and performance
characteristics.
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Collateralized Mortgage Obligations (“CMOs”).
The Fund may invest in CMO, which
are debt obligations of a legal entity that are collateralized by mortgages and divided into classes. Similar to a bond, interest
and prepaid principal is paid, in most cases, on a monthly basis. CMOs may be collateralized by whole mortgage loans or private
mortgage bonds, but are more typically collateralized by portfolios of mortgage pass-through securities guaranteed by Ginnie Mae,
Freddie Mac, or Fannie Mae, and their income streams.
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CMOs are structured into multiple
classes, often referred to as “tranches,” with each class bearing a different stated maturity and entitled to a different
schedule for payments of principal and interest, including pre-payments. Actual maturity and average life will depend upon the
pre-payment experience of the collateral. In the case of certain CMOs (known as “sequential pay” CMOs), payments of
principal received from the pool of underlying mortgages, including pre-payments, are applied to the classes of CMOs in the order
of their respective final distribution dates. Thus, no payment of principal will be made to any class of sequential pay CMOs until
all other classes having an earlier final distribution date have been paid in full.
In a typical CMO transaction,
a corporation (“issuer”) issues multiple series (
e.g.
, A, B, C, Z) of CMO bonds (“Bonds”). Proceeds
of the Bond offering are used to purchase mortgages or mortgage pass-through certificates (“Collateral”). The Collateral
is pledged to a third party trustee as security for the Bonds. Principal and interest payments from the Collateral are used to
pay principal on the Bonds in the order A, B, C, Z. The Series A, B, and C Bonds all bear current interest. Interest on the Series
Z Bond is accrued and added to principal and a like amount is paid as principal on the Series A, B, or C Bond currently being paid
off. When the Series A, B, and C Bonds are paid in full, interest and principal on the Series Z Bond begins to be paid currently.
CMOs may be less liquid and may exhibit greater price volatility than other types of mortgage- or asset-backed securities.
As CMOs have evolved, some classes
of CMO bonds have become more common. For example, the Fund may invest in parallel-pay and planned amortization class (“PAC”)
CMOs and multi-class pass through certificates. Parallel-pay CMOs and multi-class pass-through certificates are structured to provide
payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating
the stated maturity date or final distribution date of each class, which, as with other CMO and multi-class pass-through structures,
must be retired by its stated maturity date or final distribution date but may be retired earlier. PACs generally require payments
of a specified amount of principal on each payment date. PACs are parallel-pay CMOs with the required principal amount on such
securities having the highest priority after interest has been paid to all classes. Any CMO or multi-class pass through structure
that includes PAC securities must also have support tranches—known as support bonds, companion bonds or non- PAC bonds—which
lend or absorb principal cash flows to allow the PAC securities to maintain their stated maturities and final distribution dates
within a range of actual prepayment experience. These support tranches are subject to a higher level of maturity risk compared
to other mortgage-related securities, and usually provide a higher yield to compensate investors. If principal cash flows are received
in amounts outside a pre-determined range such that the support bonds cannot lend or absorb sufficient cash flows to the PAC securities
as intended, the PAC securities are subject to heightened maturity risk. Consistent with the Fund’s investment objectives
and policies, the Sub-Advisor may invest in various tranches of CMO bonds, including support bonds.
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Commercial Mortgage-Backed Securities.
The Fund may invest in commercial mortgage-backed
securities, which include securities that reflect an interest in, and are secured by, mortgage loans on commercial real property.
Many of the risks of investing in commercial mortgage-backed securities reflect the risks of investing in the real estate securing
the underlying mortgage loans. These risks reflect the effects of local and other economic conditions on real estate markets, the
ability of tenants to make loan payments, and the ability of a property to attract and retain tenants. Commercial mortgage-backed
securities may be less liquid and exhibit greater price volatility than other types of mortgage- or asset-backed securities.
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Other Mortgage-Related Securities.
The Fund may invest in other mortgage-related securities,
which include securities other than those described above that directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property, including mortgage dollar rolls, CMO residuals or stripped mortgage-backed
securities (“SMBS”). Other mortgage-related securities may be equity or debt securities issued by agencies or instrumentalities
of the U.S. government or by private originators of, or investors in, mortgage loans, including savings and loan associations,
homebuilders, mortgage banks, commercial banks, investment banks, partnerships, trusts and special purpose entities of the foregoing.
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CMO Residuals.
The Fund may invest in CMO residuals, which are mortgage securities issued
by agencies or instrumentalities of the U.S. government or by private originators of, or investors in, mortgage loans, including
savings and loan associations, homebuilders, mortgage banks, commercial banks, investment banks and special purpose entities of
the foregoing.
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The cash flow generated by the
mortgage assets underlying a series of CMOs is applied first to make required payments of principal and interest on the CMOs and
second to pay the related administrative expenses and any management fee of the issuer. The residual in a CMO structure generally
represents the interest in any excess cash flow remaining after making the foregoing payments. Each payment of such excess cash
flow to a holder of the related CMO residual represents income and/or a return of capital. The amount of residual cash flow resulting
from a CMO will depend on, among other things, the characteristics of the mortgage assets, the coupon rate of each class of CMO,
prevailing interest rates, the amount of administrative expenses and the pre-payment experience on the mortgage assets. In particular,
the yield to maturity on CMO residuals is extremely sensitive to pre-payments on the related underlying mortgage assets, in the
same manner as an interest-only (“IO”) class of stripped mortgage-backed securities. See “Other Mortgage-Related
Securities – Stripped Mortgage-Backed Securities.” In addition, if a series of a CMO includes a class that bears interest
at an adjustable rate, the yield to maturity on the related CMO residual will also be extremely sensitive to changes in the level
of the index upon which interest rate adjustments are based. As described below with respect to stripped mortgage-backed securities,
in certain circumstances the Fund may fail to recoup fully its initial investment in a CMO residual.
CMO residuals are generally purchased
and sold by institutional investors through several investment banking firms acting as brokers or dealers. Transactions in CMO
residuals are generally completed only after careful review of the characteristics of the securities in question. In addition,
CMO residuals may, or pursuant to an exemption therefrom, may not have been registered under the Securities Act of 1933 (the “1933
Act”). CMO residuals, whether or not registered under the 1933 Act, may be subject to certain restrictions on transferability,
and may be deemed “illiquid” and subject to the Fund’s limitations on investment in illiquid securities.
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Adjustable Rate Mortgage-Backed Securities (“ARMBSs”).
The Fund may invest in
ARMBSs, which have interest rates that reset at periodic intervals. Acquiring ARMBSs permits the Fund to participate in increases
in prevailing current interest rates through periodic adjustments in the coupons of mortgages underlying the pool on which ARMBSs
are based. Such ARMBSs generally have higher current yield and lower price fluctuations than is the case with more traditional
fixed income debt securities of comparable rating and maturity. In addition, when prepayments of principal are made on the underlying
mortgages during periods of rising interest rates, the Fund can reinvest the proceeds of such prepayments at rates higher than
those at which they were previously invested. Mortgages underlying most ARMBSs, however, have limits on the allowable annual or
lifetime increases that can be made in the interest rate that the mortgagor pays. Therefore, if current interest rates rise above
such limits over the period of the limitation, the Fund, when holding an ARMBS, does not benefit from further increases in interest
rates. Moreover, when interest rates are in excess of coupon rates (
i.e.
, the rates being paid by mortgagors) of the mortgages,
ARMBSs behave more like fixed income securities and less like adjustable rate securities and are subject to the risks associated
with fixed income securities. In addition, during periods of rising interest rates, increases in the coupon rate of adjustable
rate mortgages generally lag current market interest rates slightly, thereby creating the potential for capital depreciation on
such securities.
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Stripped Mortgage-Backed Securities (“SMBSs”).
The Fund may invest in SMBS,
which are derivative multi-class mortgage securities. SMBSs may be issued by agencies or instrumentalities of the U.S. government,
or by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose entities of the foregoing.
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SMBSs are usually structured
with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. A
common type of SMBS will have one class receiving some of the interest and most of the principal from the mortgage assets, while
the other class will receive most of the interest and the remainder of the principal. In the most extreme case, one class will
receive all of the interest (the “IO” class), while the other class will receive all of the principal (the principal-only
or “PO” class). The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including
pre-payments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect
on the Fund’s yield to maturity from these securities. If the underlying mortgage assets experience greater than anticipated
pre-payments of principal, the Fund may fail to recoup some or all of its initial investment in these securities even if the security
is in one of the highest rating categories.
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Collateralized Bond Obligations, Collateralized Loan Obligations and other Collateralized Debt
Obligations.
The Fund may invest in each of collateralized bond obligations (“CBOs”), collateralized loan obligations
(“CLOs”), other collateralized debt obligations (“CDOs”) and other similarly structured securities. CBOs,
CLOs and other CDOs are types of asset-backed securities. A CBO is a trust which is often backed by a diversified pool of high
risk, below investment grade fixed income securities. The collateral can be from many different types of fixed income securities
such as high yield debt, residential privately issued mortgage-related securities, commercial privately issued mortgage-related
securities, trust preferred securities and emerging market debt. A CLO is a trust typically collateralized by a pool of loans,
which may include, among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans,
including loans that may be rated below investment grade or equivalent unrated loans. Other CDOs are trusts backed by other types
of assets representing obligations of various parties. CBOs, CLOs and other CDOs may charge management fees and administrative
expenses.
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For CBOs, CLOs and other CDOs,
the cash flows from the trust are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion
is the “equity” tranche which bears the bulk of defaults from the bonds or loans in the trust and serves to protect
the other, more senior tranches from default in all but the most severe circumstances. Since they are partially protected from
defaults, senior tranches from a CBO trust, CLO trust or trust of another CDO typically have higher ratings and lower yields than
their underlying securities, and can be rated investment grade. Despite the protection from the equity tranche, CBO, CLO or other
CDO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default
and disappearance of protecting tranches, market anticipation of defaults, as well as aversion to CBO, CLO or other CDO securities
as a class.
The risks of an investment in
a CBO, CLO or other CDO depend largely on the type of the collateral securities and the class of the instrument in which the Fund
invests. Normally, CBOs, CLOs and other CDOs are privately offered and sold, and thus, are not registered under the securities
laws. As a result, investments in CBOs, CLOs and other CDOs may be characterized by the Fund as illiquid securities, however an
active dealer market may exist for CBOs, CLOs and other CDOs allowing them to qualify for Rule 144A transactions. In addition to
the normal risks associated with fixed income securities discussed elsewhere in this Statement of Additional Information and the
Fund’s Prospectus (
e.g.
, fixed income risk and credit risk), CBOs, CLOs and other CDOs carry additional risks including,
but are not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest
or other payments; (ii) the quality of the collateral may decline in value or default; (iii) the risk that Fund may invest in CBOs,
CLOs or other CDOs that are subordinate to other classes; and (iv) the complex structure of the security may not be fully understood
at the time of investment and may produce disputes with the issuer or unexpected investment results.
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Asset-Backed Securities (“ABSs”).
The Fund may invest in ABSs, which are bonds
backed by pools of loans or other receivables. ABSs are created from many types of assets, including auto loans, credit card receivables,
home equity loans, and student loans. ABSs are issued through special purpose vehicles that are bankruptcy remote from the issuer
of the collateral. The credit quality of an ABS transaction depends on the performance of the underlying assets. To protect ABS
investors from the possibility that some borrowers could miss payments or even default on their loans, ABSs include various forms
of credit enhancement.
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Some ABSs, particularly home
equity loan transactions, are subject to interest-rate risk and prepayment risk. A change in interest rates can affect the pace
of payments on the underlying loans, which in turn, affects total return on the securities. ABSs also carry credit or default risk.
If many borrowers on the underlying loans default, losses could exceed the credit enhancement level and result in losses to investors
in an ABS transaction. Finally, ABSs have structure risk due to a unique characteristic known as early amortization, or early payout,
risk. Built into the structure of most ABSs are triggers for early payout, designed to protect investors from losses. These triggers
are unique to each transaction and can include: a big rise in defaults on the underlying loans, a sharp drop in the credit enhancement
level, or even the bankruptcy of the originator. Once early amortization begins, all incoming loan payments (after expenses are
paid) are used to pay investors as quickly as possible based upon a predetermined priority of payment. Consistent with the Fund’s
investment objectives and policies, the Sub-Advisor also may invest in other types of asset-backed securities.
Foreign Issuers
The Fund may invest in issuers located
outside the United States directly, or in financial instruments, ETFs or other exchange traded products (collectively, with ETFs,
“ETPs”) that are indirectly linked to the performance of foreign issuers. Examples of such financial instruments include
ADRs, Global Depositary Receipts (“GDRs”), European Depositary Receipts (“EDRs”), International Depository
Receipts (“IDRs”), “ordinary shares,” and “New York shares” issued and traded in the U.S. ADRs
are U.S. dollar denominated receipts typically issued by U.S. banks and trust companies that evidence ownership of underlying securities
issued by a foreign issuer. The underlying securities may not necessarily be denominated in the same currency as the securities
into which they may be converted. The underlying securities are held in trust by a custodian bank or similar financial institution
in the issuer’s home country. The depositary bank may not have physical custody of the underlying securities at all times
and may charge fees for various services, including forwarding dividends and interest and corporate actions. Generally, ADRs in
registered form are designed for use in domestic securities markets and are traded on exchanges or over-the-counter in the U.S.
GDRs, EDRs, and IDRs are similar to ADRs in that they are certificates evidencing ownership of shares of a foreign issuer, however,
GDRs, EDRs, and IDRs may be issued in bearer form and denominated in other currencies, and are generally designed for use in specific
or multiple securities markets outside the U.S. EDRs, for example, are designed for use in European securities markets while GDRs
are designed for use throughout the world. Ordinary shares are shares of foreign issuers that are traded abroad and on a U.S. exchange.
New York shares are shares that a foreign issuer has allocated for trading in the U.S. ADRs, ordinary shares, and New York shares
all may be purchased with and sold for U.S. dollars, which protects the Fund from the foreign settlement risks described below.
Depositary receipts may be sponsored or
unsponsored. Although the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences
regarding a holder’s rights and obligations and the practices of market participants. A depository may establish an unsponsored
facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter
of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally
bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities,
the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance
of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying
securities.
Sponsored depositary receipt facilities
are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly
by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities
of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer
typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored
depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts
agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information
to the depositary receipt holders at the underlying issuer’s request.
Investing in foreign issuers may involve
risks not typically associated with investing in issuers domiciled in the U.S. The value of securities denominated in foreign currencies,
and of dividends from such securities, can change significantly when foreign currencies strengthen or weaken relative to the U.S.
dollar. Foreign securities markets generally have less trading volume and less liquidity than U.S. markets, and prices in some
foreign markets can be very volatile. Many foreign countries lack uniform accounting and disclosure standards comparable to those
that apply to U.S. companies, and it may be more difficult to obtain reliable information regarding a foreign issuer’s financial
condition and operations. In addition, the costs of foreign investing, including withholding taxes, brokerage commissions, and
custodial fees, generally are higher than for U.S. investments.
Investing in companies located abroad also
carries political and economic risks distinct from those associated with investing in the U.S. Foreign investment may be affected
by actions of foreign governments adverse to the interests of U.S. investors, including the possibility of seizure, expropriation
or nationalization of assets, including foreign deposits, confiscatory taxation, restrictions on U.S. investment, or on the ability
to repatriate assets or to convert currency into U.S. dollars. There may be a greater possibility of default by foreign governments
or foreign-government sponsored enterprises. Investments in foreign countries also involve a risk of local political, economic,
or social instability, military action or unrest, or adverse diplomatic developments.
Futures and Options Transactions
Futures and Options on Futures.
The Fund may buy and sell futures contracts, which provide for the future sale by one party and purchase by another party of a
specified amount of a specific security at a specified future time and at a specified price. An option on a futures contract gives
the purchaser the right, in exchange for a premium, to assume a position in a futures contract at a specified exercise price during
the term of the option. A fund will reduce the risk that it will be unable to close out a futures contract by only entering into
futures contracts that are traded on a national futures exchange regulated by the Commodities Futures Trading Commission (“CFTC”).
The Fund may use futures contracts and related options for
bona fide
hedging; attempting to offset changes in the value
of securities held or expected to be acquired or be disposed of; attempting to gain exposure to a particular market, index or instrument;
or other risk management purposes. To the extent the Fund invests in futures, options on futures or other instruments subject to
regulation by the CFTC, it will do so in reliance on and in accordance with CFTC Regulation 4.5. The Trust, on behalf of certain
of its series, has filed a notice of eligibility for exclusion from the definition of the term “commodity pool operator”
in accordance with CFTC Regulation 4.5. Therefore, neither the Trust nor the Fund is deemed to be a “commodity pool”
or “commodity pool operator” with respect to the Fund under the Commodity Exchange Act (“CEA”), and they
are not subject to registration or regulation as such under the CEA. In addition, as of the date of this SAI, the Advisor is not
deemed to be a “commodity pool operator” or “commodity trading adviser” with respect to the advisory services
it provides to the Fund. The CFTC recently adopted amendments to CFTC Regulation 4.5 and has proposed additional regulatory requirements
that may affect the extent to which the Fund invests in instruments that are subject to regulation by the CFTC and impose additional
regulatory obligations on the Fund and the Advisor. The recent changes to CFTC regulations went into effect on December 31, 2012;
however, the CFTC has not yet adopted regulations intended to “harmonize” the CFTC’s regulation of newly registered
investment companies with that of the SEC. The Fund reserves the right to engage in transactions involving futures, options thereon
and swaps to the extent allowed by CFTC regulations in effect from time to time and in accordance with the Fund’s policies.
The Fund may buy and sell index futures
contracts with respect to any index that is traded on a recognized exchange or board of trade. An index futures contract is a bilateral
agreement pursuant to which two parties agree to take or make delivery of an amount of cash equal to a specified dollar amount
times the difference between the index value at the close of trading of the contract and the price at which the futures contract
is originally struck. No physical delivery of the securities comprising the index is made.
Instead,
settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract
price, and the actual level of the stock index at the expiration of the contract. Generally, contracts are closed out prior to
the expiration date of the contract
.
When the Fund purchases or sells a futures
contract, or sells an option thereon, the Fund is required to “cover” its position in order to limit leveraging and
related risks. To cover its position, the Fund may maintain with its custodian bank (and marked-to-market on a daily basis), a
segregated account consisting of cash or liquid securities that, when added to any amounts deposited with a futures commission
merchant as margin, are equal to the market value of the futures contract or otherwise “cover” its position in a manner
consistent with the 1940 Act or the rules and SEC interpretations thereunder. If the Fund continues to engage in the described
securities trading practices and properly segregates assets, the segregated account will function as a practical limit on the amount
of leverage which the Fund may undertake and on the potential increase in the speculative character of the Fund’s outstanding
portfolio securities. Additionally, such segregated accounts will generally assure the availability of adequate funds to meet the
obligations of the fund arising from such investment activities.
The Fund may also cover its long position
in a futures contract by purchasing a put option on the same futures contract with a strike price (
i.e.
, an exercise price)
as high or higher than the price of the futures contract. In the alternative, if the strike price of the put is less than the price
of the futures contract, the Fund will maintain, in a segregated account, cash or liquid securities equal in value to the difference
between the strike price of the put and the price of the futures contract. The Fund may also cover its long position in a futures
contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments with
prices which are expected to move relatively consistently with the futures contract. The Fund may cover its short position in a
futures contract by taking a long position in the instruments underlying the futures contracts, or by taking positions in instruments
with prices which are expected to move relatively consistently with the futures contract.
The Fund may cover its sale of a call option
on a futures contract by taking a long position in the underlying futures contract at a price less than or equal to the strike
price of the call option. In the alternative, if the long position in the underlying futures contract is established at a price
greater than the strike price of the written (sold) call, the Fund will maintain, in a segregated account, cash or liquid securities
equal in value to the difference between the strike price of the call and the price of the futures contract. The Fund may also
cover its sale of a call option by taking positions in instruments with prices which are expected to move relatively consistently
with the call option. The Fund may cover its sale of a put option on a futures contract by taking a short position in the underlying
futures contract at a price greater than or equal to the strike price of the put option, or, if the short position in the underlying
futures contract is established at a price less than the strike price of the written put, the Fund will maintain, in a segregated
account, cash or liquid securities equal in value to the difference between the strike price of the put and the price of the futures
contract. The Fund may also cover its sale of a put option by taking positions in instruments with prices which are expected to
move relatively consistently with the put option.
There are significant risks associated
with the Fund’s use of futures contracts and related options, including the following: (1) the success of a hedging strategy
may depend on the Sub-Advisor’s ability to predict movements in the prices of individual securities, fluctuations in markets
and movements in interest rates; (2) there may be an imperfect or no correlation between the changes in market value of the securities
held by the Fund and the prices of futures and options on futures; (3) there may not be a liquid secondary market for a futures
contract or option; (4) trading restrictions or limitations may be imposed by an exchange; and (5) government regulations may restrict
trading in futures contracts and options on futures. In addition, some strategies reduce the Fund’s exposure to price fluctuations,
while others tend to increase its market exposure.
Options.
The Fund may write (sell)
and purchase put and call options on indices and enter into related closing transactions. A put option on a security gives the
purchaser of the option the right to sell, and the writer of the option the obligation to buy, the underlying security at any time
during the option period. A call option on a security gives the purchaser of the option the right to buy, and the writer of the
option the obligation to sell, the underlying security at any time during the option period. The premium paid to the writer is
the consideration for undertaking the obligations under the option contract.
Put and call options on indices are similar
to options on securities except that options on an index give the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the underlying index is greater than (or less than, in the case of puts) the exercise price
of the option. This amount of cash is equal to the difference between the closing price of the index and the exercise price of
the option, expressed in dollars multiplied by a specified number. Thus, unlike options on individual securities, all settlements
are in cash, and gain or loss depends on price movements in the particular market represented by the index generally, rather than
the price movements in individual securities.
All options written on indices or securities
must be covered. The SEC staff has indicated that a written call option on a security may be covered if a fund: (1) owns the security
underlying the call until the option is exercised or expires; (2) holds an American-style call on the same security as the call
written with an exercise price (a) no greater than the exercise price of the call written or (b) greater than the exercise price
of the call written if the difference is maintained by the Fund in cash or other liquid assets designated on the Fund’s records
or placed in a segregated account with the Fund’s custodian; (3) has an absolute and immediate right to acquire the security
without additional cost (or if additional consideration is required, cash or other liquid assets in such amount have been segregated);
or (4) segregates cash or other liquid assets on the Fund’s records or with the custodian in an amount equal to (when added
to any margin on deposit) the current market value of the call option, but not less than the exercise price, marked to market daily.
If the call option is exercised by the purchaser during the option period, the seller is required to deliver the underlying security
against payment of the exercise price or pay the difference. The seller’s obligation terminates upon expiration of the option
period or when the seller executes a closing purchase transaction with respect to such option.
All put options written by the Fund will
be covered by: (1) segregating cash, cash equivalents, such as U.S. Treasury securities or overnight repurchase agreements, or
other liquid assets on the Fund’s records or with the custodian having a value at least equal to exercise price of the option
(less cash received, if any); or (2) holding a put option on the same security as the option written where the exercise price of
the written put option is (i) equal to or higher than the exercise price of the option written or (ii) less than the exercise price
of the option written provided the Fund segregates cash or other liquid assets in the amount of the difference.
The Fund may trade put and call options
on securities, securities indices and currencies, as the Sub-Advisor determines is appropriate in seeking the Fund’s investment
objective, and except as restricted by the Fund’s investment limitations.
The initial purchase (sale) of an option
contract is an “opening transaction.” In order to close out an option position, the Fund may enter into a “closing
transaction,” which is simply the purchase of an option contract on the same security with the same exercise price and expiration
date as the option contract originally opened. If the Fund is unable to effect a closing purchase transaction with respect to an
option it has written, it will not be able to sell the underlying security until the option expires or the Fund delivers the security
upon exercise.
The Fund may purchase put and call options
on securities to protect against a decline in the market value of the securities in its portfolio or to anticipate an increase
in the market value of securities that the Fund may seek to purchase in the future. The Fund purchasing put and call options pays
a premium; therefore, if price movements in the underlying securities are such that exercise of the options would not be profitable
for the Fund, loss of the premium paid may be offset by an increase in the value of the Fund’s securities or by a decrease
in the cost of acquisition of securities by the Fund.
The Fund may write covered call options
on securities as a means of increasing the yield on its assets and as a means of providing limited protection against decreases
in its market value. When the Fund writes an option, if the underlying securities do not increase or decrease to a price level
that would make the exercise of the option profitable to the holder thereof, the option generally will expire without being exercised
and the Fund will realize as profit the premium received for such option. When a call option of which the Fund is the writer is
exercised, the Fund will be required to sell the underlying securities to the option holder at the strike price, and will not participate
in any increase in the price of such securities above the strike price. When a put option of which the Fund is the writer is exercised,
the Fund will be required to purchase the underlying securities at a price in excess of the market value of such securities.
The Fund may purchase and write options
on an exchange or over-the-counter. OTC options differ from exchange traded options in several respects. They are transacted directly
with dealers and not with a clearing corporation, and therefore entail the risk of non-performance by the dealer. OTC options are
available for a greater variety of securities and for a wider range of expiration dates and exercise prices than are available
for exchange traded options. Because OTC options are not traded on an exchange, pricing is done normally by reference to information
from a market maker. It is the SEC’s position that OTC options are generally illiquid.
The market value of an option generally
reflects the market price of an underlying security. Other principal factors affecting market value include supply and demand,
interest rates, the pricing volatility of the underlying security and the time remaining until the expiration date.
Risks associated with options transactions
include: (1) the success of a hedging strategy may depend on an ability to predict movements in the prices of individual securities,
fluctuations in markets and movements in interest rates; (2) there may be an imperfect correlation between the movement in prices
of options and the securities underlying them; (3) there may not be a liquid secondary market for options; and (4) while the Fund
will receive a premium when it writes covered call options, it may not participate fully in a rise in the market value of the underlying
security.
Hybrid Instruments
The Fund may invest in hybrid instruments. A
hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option
or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid
is tied (positively or negatively) to the price of some security, commodity, currency or securities index or another interest rate
or some other economic factor (each a “benchmark”). The interest rate or (unlike most fixed income securities) the
principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the
benchmark. An example of a hybrid instrument could be a bond issued by an oil company that pays a small base level of interest
with additional interest that accrues in correlation with the extent to which oil prices exceed a certain predetermined level. Such
a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrid instruments can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging, and increased total return. Hybrid instruments may
not bear interest or pay dividends. The value of a hybrid instrument or its interest rate may be a multiple of a benchmark and,
as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive
to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid instrument. Under certain conditions, the redemption value of a hybrid instrument could be zero. Thus, an
investment in a hybrid instrument may entail significant market risks that are not associated with a similar investment in a traditional,
U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase
of a hybrid instrument also exposes the Fund to the credit risk of the issuer of the hybrid instrument. These risks may cause significant
fluctuations in the NAV of a Fund.
Certain hybrid instruments may provide
exposure to the commodities markets. These are derivative securities with one or more commodity-linked components that have payment
features similar to commodity futures contracts, commodity options, or similar instruments. Commodity-linked hybrid instruments
may be either equity or debt securities, and are considered hybrid instruments because they have both security and commodity-like
characteristics. A portion of the value of these instruments may be derived from the value of a commodity, futures contract, index
or other economic variable. The Fund will only invest in commodity-linked hybrid instruments that qualify, under applicable rules
of the CFTC, for an exemption from the provisions of the CEA.
Certain issuers of structured products,
such as hybrid instruments, may be deemed to be investment companies as defined in the 1940 Act. As a result, the Fund’s
investments in these products may be subject to limits applicable to investments in investment companies and may be subject to
restrictions contained in the 1940 Act.
Structured Notes.
The Fund
may invest in structured notes, which are debt obligations that also contain an embedded derivative component with characteristics
that adjust the obligation’s risk/return profile. Generally, the performance of a structured note will track that of the
underlying debt obligation and the derivative embedded within it. The Fund have the right to receive periodic interest payments
from the issuer of the structured notes at an agreed-upon interest rate and a return of the principal at the maturity date.
Structured notes are typically privately
negotiated transactions between two or more parties. The Fund bears the risk that the issuer of the structured note will default
or become bankrupt which may result in the loss of principal investment and periodic interest payments expected to be received
for the duration of its investment in the structured notes.
In the case of structured notes on credit
default swaps, the Fund is also subject to the credit risk of the corporate credits underlying the credit default swaps. If one
of the underlying corporate credits defaults, the Fund may receive the security that has defaulted, or alternatively a cash settlement
may occur, and the Fund’s principal investment in the structured note would be reduced by the corresponding face value of
the defaulted security.
The market for structured notes may be,
or suddenly can become, illiquid. The other parties to the transaction may be the only investors with sufficient understanding
of the derivative to be interested in bidding for it. Changes in liquidity may result in significant, rapid, and unpredictable
changes in the prices for structured notes. In certain cases, a market price for a credit-linked security may not be available.
The collateral for a structured note may be one or more credit default swaps, which are subject to additional risks. See “Swap
Agreements” for a description of additional risks associated with credit default swaps.
Illiquid Securities
The Fund may invest up to an aggregate
amount of 15% of its net assets in illiquid securities (calculated at the time of investment), including Rule 144A securities.
The Fund will monitor its portfolio liquidity on an ongoing basis to determine whether, in light of current circumstances, an adequate
level of liquidity is being maintained, and will consider taking appropriate steps in order to maintain adequate liquidity if,
through a change in values, net assets, or other circumstances, more than 15% of the Fund’s net assets are vested in illiquid
securities. Illiquid securities include securities subject to contractual or other restrictions on resale and other instruments
that lack readily available markets as determined in accordance with SEC guidance.
A portfolio security is illiquid if it
cannot be disposed of in the ordinary course of business within seven days at approximately the value ascribed to it by the Fund.
Under the current guidelines of the staff of the SEC, illiquid securities also are considered to include, among other securities,
purchased OTC options, certain cover for OTC options, repurchase agreements with maturities in excess of seven days, and certain
securities whose disposition is restricted under the federal securities laws. The Fund may not be able to sell illiquid securities
when the Sub-Advisor considers it desirable to do so or may have to sell such securities at a price that is lower than the price
that could be obtained if the securities were more liquid. In addition, the sale of illiquid securities also may require more time
and may result in higher dealer discounts and other selling expenses than does the sale of securities that are not illiquid. Illiquid
securities also may be more difficult to value due to the unavailability of reliable market quotations for such securities, and
investment in illiquid securities may have an adverse impact on NAV.
Investments in Other Investment Companies
The Fund may invest in the securities of
other investment companies to the extent that such an investment would be consistent with the requirements of Section 12(d)(1)
of the 1940 Act, or any rule, regulation or order of the SEC or interpretation thereof. Generally, a fund may invest in the securities
of another investment company (the “acquired company”) provided that the fund, immediately after such purchase or acquisition,
does not own in the aggregate: (i) more than 3% of the total outstanding voting stock of the acquired company; (ii) securities
issued by the acquired company having an aggregate value in excess of 5% of the value of the total assets of the fund; or (iii)
securities issued by the acquired company and all other investment companies (other than Treasury stock of the fund) having an
aggregate value in excess of 10% of the value of the total assets of the fund. The fund also may invest in the securities of other
investment companies if the fund is part of a “master-feeder” structure or operates as a fund of funds in compliance
with Section 12(d)(1)(E), (F) and (G) and the rules thereunder. Section 12(d)(1) prohibits another investment company from selling
its shares to the fund if, after the sale: (i) the fund owns more than 3% of the other investment company’s voting stock
or (ii) the fund and other investment companies, and companies controlled by them, own more than 10% of the voting stock of such
other investment company. The Trust has entered into agreements with several unaffiliated ETFs that permit, pursuant to an SEC
order, the Fund to purchase shares of those ETFs beyond the Section 12(d)(1) limits described above. The Fund will only make such
investments in conformity with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended (the “Internal
Revenue Code”).
If the Fund invests in, and thus, is a
shareholder of, another investment company, the Fund’s shareholders will indirectly bear the Fund’s proportionate share
of the fees and expenses paid by such other investment company, including advisory fees, in addition to both the management fees
payable directly by the Fund to the Fund’s own investment adviser and the other expenses that the Fund bears directly in
connection with the Fund’s own operations.
Consistent with the restrictions discussed
above, the Fund may invest in several different types of investment companies from time to time, including mutual funds, ETFs,
closed-end funds, and business development companies (“BDCs”), when the Advisor or the Sub-Advisor believes such an
investment is in the best interests of the Fund and its shareholders. For example, the Fund may elect to invest in another investment
company when such an investment presents a more efficient investment option than buying securities individually. The Fund also
may invest in investment companies that are included as components of an index, such as BDCs, to seek to track the performance
of that index. A BDC is a less common type of closed-end investment company that more closely resembles an operating company than
a typical investment company. BDCs generally focus on investing in, and providing managerial assistance to, small, developing,
financially troubled, private companies or other companies that may have value that can be realized over time and with management
assistance. Similar to an operating company, a BDC’s total annual operating expense ratio typically reflects all of the operating
expenses incurred by the BDC, and is generally greater than the total annual operating expense ratio of a mutual fund that does
not bear the same types of operating expenses. However, as a shareholder of a BDC, the Fund does not directly pay for a portion
of all of the operating expenses of the BDC, just as a shareholder of computer manufacturer does not directly pay for the cost
of labor associated with producing such computers. As a result, when the Fund invests in a BDC, its Fees and Expenses will be effectively
overstated by an amount equal to the “Acquired Fund Fees and Expenses.” Acquired Fund Fees and Expenses are not included
as an operating expense of the Fund in the Fund’s financial statements, which more accurately reflect the Fund’s actual
operating expenses.
Investment companies may include index-based
investments, such as ETFs that hold substantially all of their assets in securities representing a specific index. The main risk
of investing in index-based investments is the same as investing in a portfolio of equity securities comprising the index. The
market prices of index-based investments will fluctuate in accordance with both changes in the market value of their underlying
portfolio securities and due to supply and demand for the instruments on the exchanges on which they are traded (which may result
in their trading at a discount or premium to their NAVs). Index-based investments may not replicate exactly the performance of
their specific index because of transaction costs and the temporary unavailability of certain component securities of the index.
The Fund may invest in primarily index-based
ETFs as well as ETFs that are actively managed.
Closed-End Funds.
The Fund may invest
in closed-end funds. Closed-end funds are pooled investment vehicles that are registered under the 1940 Act and whose shares are
listed and traded on U.S. national securities exchanges. Like any stock, a closed-end fund’s share price will fluctuate in
response to market conditions and other factors. Secondary market trading prices of closed-end funds should be expected to fluctuate
and such prices may be higher or lower than the net asset value of a closed-end fund’s portfolio holdings. When such prices
are higher, shares are said to be trading at a “premium.” When they are lower, shares are said to be trading at a “discount.”
Closed-end fund shares frequently trade at persistent and ongoing discounts to the net asset value of the closed-end fund’s
portfolio investments. There can be no guarantee that shares of a closed-end fund held by the Fund will not trade at a persistent
and ongoing discount. Nor can there be any guarantee that an active market in shares of the closed-end funds held by the Fund will
exist. The Fund may not be able to sell closed-end fund shares at a price equal to the net asset value of the closed-end fund.
While the Fund seeks to take advantage of differences between the net asset value of closed-end fund shares and any secondary market
premiums or discounts, the Fund may not be able to do so. In addition, there can be no assurance that any closed-end fund will
achieve its stated investment objective. While the Fund attempts to invest in a diversified basket of closed-end funds, lackluster
performance of a single closed-end fund can have a negative impact on the performance of the Fund as a whole. The Fund may lose
money on its investment in any closed-end fund which, in turn, may cause investors to lose money on an investment in the Fund.
Lending of Portfolio Securities
The Fund may lend portfolio securities
to brokers, dealers and other financial organizations that meet capital and other credit requirements or other criteria established
by the Fund’s Board. These loans, if and when made, may not exceed 33
1
/
3
% of the total asset value
of the Fund (including the loan collateral). The Fund will not lend portfolio securities to the Advisor, Sub-Advisor, or their
affiliates, unless it has applied for and received specific authority to do so from the SEC. Loans of portfolio securities will
be fully collateralized by cash, letters of credit or U.S. government securities, and the collateral will be maintained in an amount
equal to at least 100% of the current market value of the loaned securities by marking to market daily. Any gain or loss in the
market price of the securities loaned that might occur during the term of the loan would be for the account of the Fund. The Fund
may pay a part of the interest earned from the investment of collateral, or other fee, to an unaffiliated third party for acting
as the Fund’s securities lending agent. By lending its securities, the Fund may increase its income by receiving payments
from the borrower that reflect the amount of any interest or any dividends payable on the loaned securities as well as by either
investing cash collateral received from the borrower in short-term instruments or obtaining a fee from the borrower when U.S. government
securities or letters of credit are used as collateral.
The Fund will adhere to the following conditions
whenever its portfolio securities are loaned: (i) the Fund must receive at least 100% cash collateral or equivalent securities
of the type discussed in the preceding paragraph from the borrower; (ii) the borrower must increase such collateral whenever the
market value of the securities rises above the level of such collateral; (iii) the Fund must be able to terminate the loan on demand;
(iv) the Fund must receive reasonable interest on the loan, as well as any dividends, interest or other distributions on the loaned
securities and any increase in market value; (v) the Fund may pay only reasonable fees in connection with the loan (which fees
may include fees payable to the lending agent, the borrower, the Fund’s administrator and the custodian); and (vi) voting
rights on the loaned securities may pass to the borrower, provided, however, that if a material event adversely affecting the investment
occurs, the Fund must terminate the loan and regain the right to vote the securities. The Fund’s securities lending arrangements
are subject to Board approval. In addition, to the extent the Fund engages in securities lending, the Board will adopt procedures
that reasonably designed to ensure that the foregoing criteria will be met. Loan agreements involve certain risks in the event
of default or insolvency of the borrower, including possible delays or restrictions upon the Fund’s ability to recover the
loaned securities or dispose of the collateral for the loan, which could give rise to loss because of adverse market action, expenses
and/or delays in connection with the disposition of the underlying securities.
Pooled Investment Vehicles
The Fund may invest in the securities of
pooled vehicles that are not investment companies and, thus, not required to comply with the provisions of the 1940 Act. As a result,
as a shareholder of such pooled vehicles, the Fund will not have all of the investor protections afforded by the 1940 Act. Such
pooled vehicles may, however, be required to comply with the provisions of other federal securities laws, such as the Securities
Act. These pooled vehicles typically hold commodities, such as gold or oil, currency, or other property that is itself not a security.
If the Fund invests in, and thus, is a shareholder of, a pooled vehicle, the Fund’s shareholders will indirectly bear the
Fund’s proportionate share of the fees and expenses paid by the pooled vehicle, including any applicable management fees,
in addition to both the management fees payable directly by the Fund to the Advisor and the other expenses that the Fund bears
directly in connection with its own operations.
The Fund may invest in certain ETFs or
other ETPs that are not taxable as regulated investment companies (“RICs”). These non-RIC ETPs may produce non-qualifying
income for purposes of the “90% Test” (as defined below), which must be met in order for the Fund to maintain its status
as a RIC under the Internal Revenue Code. If one or more of these non-RIC ETPs generates more non-qualifying income for purposes
of the 90% Test than the Fund’s portfolio management expects, this non-qualifying income may be attributed to the Fund and
could cause the Fund to inadvertently fail the 90% Test, thereby causing the Fund to inadvertently fail to qualify as a RIC under
the
Internal Revenue
Code.
Portfolio Turnover
Portfolio turnover may vary from year to
year, as well as within a year. Generally, the higher the Fund’s rate of portfolio turnover, the higher the transaction costs
borne by the Fund and their long-term shareholders. In addition, the Fund’s portfolio turnover level may adversely affect
the ability of the Fund to achieve its investment objective. Because the Fund’s portfolio turnover rate, to a great extent,
will depend on the creation and redemption activity of investors, it is difficult to estimate what the Fund’s actual portfolio
turnover rate will be in the future.
“Portfolio Turnover Rate” is
defined under the rules of the SEC as the lesser of the value of the securities purchased or of the securities sold, excluding
all securities whose maturities at the time of acquisition were one-year or less, divided by the average monthly value of such
securities owned during the year. Based on this definition, instruments with a remaining maturity of less than one-year are excluded
from the calculation of the portfolio turnover rate. Instruments excluded from the calculation of portfolio turnover generally
would include the futures contracts and options contracts in which the Fund invests since such contracts generally have a remaining
maturity of less than one year.
Real Estate Investment Trusts (REITs)
The Fund may invest in shares of REITs.
REITs are pooled investment vehicles which invest primarily in real estate or real estate related loans. REITs are generally classified
as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the majority of their assets
directly in real property and derive income primarily from the collection of rents. Equity REITs can also realize capital gains
by selling properties that have appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages
and derive income from the collection of interest payments. Like regulated investment companies such as the Fund, REITs are not
taxed on income distributed to shareholders provided they comply with certain requirements under the Internal Revenue Code. The
Fund will indirectly bear its proportionate share of any expenses paid by REITs in which the Fund invests in addition to the expenses
paid by the Fund. Investing in REITs involves certain unique risks. Equity REITs may be affected by changes in the value of the
underlying property owned by such REITs, while mortgage REITs may be affected by the quality of any credit extended. REITs are
dependent upon management skills, are not diversified (except to the extent the Internal Revenue Code requires), and are subject
to the risks of financing projects. REITs are subject to heavy cash flow dependency, default by borrowers, self-liquidation, and
the possibilities of failing to qualify for the exemption from tax for distributed income under the Internal Revenue Code and failing
to maintain their exemptions from registration under the 1940 Act. REITs (especially mortgage REITs) are also subject to interest
rate risks.
Investing in foreign real estate companies
would make the Fund more susceptible to risks associated with the ownership of real estate and with the real estate industry in
general. In addition, foreign real estate companies depend upon specialized management skills, may not be diversified, may have
less trading volume, and may be subject to more abrupt or erratic price movements than the overall securities markets. Foreign
real estate companies have their own expenses, and the Fund will bear a proportionate share of those expenses.
Repurchase Agreements
The Fund may enter into repurchase agreements
with financial institutions, which may be deemed to be loans. The Fund follows certain procedures designed to minimize the risks
inherent in such agreements. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established
financial institutions whose condition will be continually monitored by the Sub-Advisor. In addition, the value of the collateral
underlying the repurchase agreement will always be at least equal to the repurchase price, including any accrued interest earned
on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, the Fund will seek to
liquidate such collateral. However, the exercising of the Fund’s right to liquidate such collateral could involve certain
costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the
repurchase price, the Fund could suffer a loss. It is the current policy of the Fund not to invest in repurchase agreements that
do not mature within seven days if any such investment, together with any other illiquid assets held by the Fund, amounts to more
than 15% of the Fund’s net assets. The investments of the Fund in repurchase agreements, at times, may be substantial when,
in the view of the Sub-Advisor, liquidity or other considerations so warrant.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase
agreements without limit as part of the Fund’s investment strategy. However, the Fund does not expect to engage, under normal
circumstances, in reverse repurchase agreements with respect to more than 33
1
/
3
% of its assets. Reverse
repurchase agreements involve sales by the Fund of portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. Generally, the effect of such a transaction is that the Fund can recover all or most
of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while the Fund will
be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if the
interest cost to the Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities
to achieve this advantage may not always be available, and the Fund intends to use the reverse repurchase technique only when it
will be advantageous to the Fund. The Fund will establish a segregated account with the Trust’s custodian bank in which the
Fund will maintain cash, cash equivalents or other portfolio securities equal in value to the Fund’s obligations in respect
of reverse repurchase agreements. Such reverse repurchase agreements could be deemed to be a borrowing, but are not senior securities.
Short Sales
The Fund may engage in short sales transactions
in which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow or otherwise obtain the
security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security
at the market price at the time of replacement. The price at such time may be more or less than the price at which the security
was sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender amounts equal to any dividends
or interest, which accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium,
which would increase the cost of the security sold. The Fund may also use repurchase agreements to satisfy delivery obligations
in short sales transactions. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the
margin requirements, until the short position is closed out.
Until the Fund closes its short position
or replaces the borrowed security, the Fund will: (a) maintain a segregated account containing cash or liquid securities at such
a level that (i) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current
value of the security sold short and (ii) the amount deposited in the segregated account plus the amount deposited with the broker
as collateral will not be less than the market value of the security at the time the security was sold short; or (b) otherwise
cover the Fund’s short position. The Fund may use up to 100% of its portfolio to engage in short sales transactions and collateralize
its open short positions.
Swap Agreements
The Fund may enter into swap agreements,
including, but not limited to, total return swaps, index swaps, and interest rate swaps. The Fund may utilize swap agreements in
an attempt to gain exposure to the securities in a market without actually purchasing those securities, or to hedge a position.
Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more
than one-year. In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates
of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped”
between the parties are calculated with respect to a “notional amount,”
i.e
., the return on or increase in value
of a particular dollar amount invested in a “basket” of securities representing a particular index.
Forms of swap agreements include interest
rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates
exceed a specified rate, or “cap,” interest rate floors, under which, in return for a premium, one party agrees to
make payments to the other to the extent that interest rates fall below a specified level, or “floor;” and interest
rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest
rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the
Fund will calculate the obligations of the parties to the agreement on a “net basis.” Consequently, the Fund’s
obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). Other
swap agreements may require initial premium (discount) payments as well as periodic payments (receipts) related to the interest
leg of the swap or to the default of a reference obligation.
The Fund’s obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the fund) and any accrued but unpaid net amounts owed to a
swap counterparty will be covered by segregating assets determined to be liquid. Obligations under swap agreements so covered will
not be construed to be “senior securities” for purposes of the Fund’s investment restriction concerning senior
securities. Because they are two party contracts and because they may have terms of greater than seven days, swap agreements may
be considered to be illiquid for the Fund’s illiquid investment limitations. The Fund will not enter into any swap agreement
unless the Advisor believes that the other party to the transaction is creditworthy. The Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty.
The Fund may enter into swap agreements
to invest in a market without owning or taking physical custody of the underlying securities in circumstances in which direct investment
is restricted for legal reasons or is otherwise impracticable. The counterparty to any swap agreement will typically be a bank,
investment banking firm or broker/dealer. The counterparty will generally agree to pay the Fund the amount, if any, by which the
notional amount of the swap agreement would have increased in value had it been invested in the particular stocks, plus the dividends
that would have been received on those stocks. The Fund will agree to pay to the counterparty a floating rate of interest on the
notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it
been invested in such stocks. Therefore, the return to the Fund on any swap agreement should be the gain or loss on the notional
amount plus dividends on the stocks less the interest paid by the Fund on the notional amount.
Swap agreements typically are settled on
a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only
the net amount of the two payments. Payments may be made at the conclusion of a swap agreement or periodically during its term.
Other swap agreements, may require initial premium (discount) payments as well as periodic payments (receipts) related to the interest
leg of the swap or to the default of a reference obligation. The Fund will earmark and reserve assets necessary to meet any accrued
payment obligations when it is the buyer of a credit default swap.
Swap agreements do not involve the delivery
of securities or other underlying assets. Accordingly, the risk of loss with respect to swap agreements is limited to the net amount
of payments that the Fund is contractually obligated to make. If a swap counterparty defaults, the Fund’s risk of loss consists
of the net amount of payments the Fund is contractually entitled to receive, if any. The net amount of the excess, if any, of the
Fund’s obligations over its entitlements with respect to each equity swap will be accrued on a daily basis and an amount
of cash or liquid assets, having an aggregate NAV at least equal to such accrued excess will be maintained in a segregated account
by the Fund’s custodian. Inasmuch as these transactions are entered into for hedging purposes or are offset by segregated
cash of liquid assets, as permitted by applicable law, the Fund and the Advisor believe that these transactions do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as being subject to the Fund’s borrowing restrictions.
The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar
instruments, which are traded in the OTC market. The Advisor, under the supervision of the Board, is responsible for determining
and monitoring the liquidity of Fund transactions in swap agreements.
The use of swap agreements is a highly
specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities
transactions. If a counterparty’s creditworthiness declines, the value of the swap would likely decline. Moreover, there
is no guarantee that a Fund could eliminate its exposure under an outstanding swap agreement by entering into an offsetting swap
agreement with the same or another party.
U.S. Government Securities
The Fund may invest in U.S. government
securities. Securities issued or guaranteed by the U.S. government or its agencies or instrumentalities include U.S. Treasury securities,
which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and
times of issuance. U.S. Treasury bills have initial maturities of one year or less; U.S. Treasury notes have initial maturities
of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government
securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations
of U.S. government agencies or instrumentalities such as Fannie Mae, Freddie Mac, Ginnie Mae, the Small Business Administration,
the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives),
the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United
States, the Commodity Credit Corporation, the Federal Financing Bank, the National Credit Union Administration and the Federal
Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by
U.S. government agencies and instrumentalities, including, for example, Ginnie Mae pass-through certificates, are supported by
the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those securities
issued by Fannie Mae, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the
federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides financial support
to such U.S. government-sponsored federal agencies, no assurance can be given that the U.S. government will always do so, since
the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay
the principal at maturity.
On September 7, 2008, the U.S. Treasury
announced a federal takeover of Fannie Mae and Freddie Mac, placing the two federal instrumentalities in conservatorship. In connection
with the takeover, the U.S. Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and obtained
warrants for the purchase of common stock of each instrumentality (the “Senior Preferred Stock Purchase Agreement”
or “Agreement”). Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as
needed, including the contribution of cash capital to the instrumentalities in the event their liabilities exceed their assets.
This was intended to ensure that the instrumentalities maintain a positive net worth and meet their financial obligations, preventing
mandatory triggering of receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement to allow
the $200 billion cap on the U.S. Treasury’s funding commitment to increase as necessary to accommodate any cumulative reduction
in net worth over the next three years. As a result of this Agreement, the investments of holders, including the Fund, of mortgage-backed
securities and other obligations issued by Fannie Mae and Freddie Mac currently are protected.
When-Issued, Delayed-Delivery and
Forward Commitment Securities
The Fund, from time to time, in the ordinary
course of business, may purchase securities on a when-issued, delayed-delivery or forward commitment basis (
i.e.
, delivery
and payment can take place between a month and 120 days after the date of the transaction). These securities are subject to market
fluctuation and no interest accrues to the purchaser during this period. At the time the Fund makes the commitment to purchase
securities on a when-issued, delayed-delivery or forward commitment basis, the Fund will record the transaction and thereafter
reflect the value of the securities, each day, in determining the Fund’s NAV. The Fund will not purchase securities on a
when-issued, delayed-delivery or forward commitment basis if, as a result, more than 15% of the Fund’s net assets would be
so invested. At the time of delivery of the securities, the value of the securities may be more or less than the purchase price.
The Fund will also establish a segregated account with the Fund’s custodian bank in which the Fund will maintain cash or
liquid securities equal to or greater in value than the Fund’s purchase commitments for such when-issued, delayed-delivery
or forward commitment securities. The Trust does not believe that the Fund’s NAV or income will be adversely affected by
the Fund’s purchase of securities on a when-issued, delayed-delivery or forward commitment basis.
Zero Coupon Bonds
The Fund may invest in U.S. Treasury zero-coupon
bonds. These securities are U.S. Treasury bonds which have been stripped of their unmatured interest coupons, the coupons themselves,
and receipts or certificates representing interests in such stripped debt obligations and coupons. Interest is not paid in cash
during the term of these securities, but is accrued and paid at maturity. Such obligations have greater price volatility than coupon
obligations and other normal interest-paying securities, and the value of zero coupon securities reacts more quickly to changes
in interest rates than do coupon bonds. Because dividend income is accrued throughout the term of the zero coupon obligation, but
is not actually received until maturity, the Fund may have to sell other securities to pay said accrued dividends prior to maturity
of the zero coupon obligation. Unlike regular U.S. Treasury bonds which pay semi-annual interest, U.S. Treasury zero coupon bonds
do not generate semi-annual coupon payments. Instead, zero coupon bonds are purchased at a substantial discount from the maturity
value of such securities, the discount reflecting the current value of the deferred interest; this discount is amortized as interest
income over the life of the security, and is taxable even though there is no cash return until maturity. Zero coupon U.S. Treasury
issues originally were created by government bond dealers who bought U.S. Treasury bonds and issued receipts representing an ownership
interest in the interest coupons or in the principal portion of the bonds. Subsequently, the U.S. Treasury began directly issuing
zero coupon bonds with the introduction of “Separate Trading of Registered Interest and Principal of Securities” (or
“STRIPS”). While zero coupon bonds eliminate the reinvestment risk of regular coupon issues, that is, the risk of subsequently
investing the periodic interest payments at a lower rate than that of the security held, zero coupon bonds fluctuate much more
sharply than regular coupon-bearing bonds. Thus, when interest rates rise, the value of zero coupon bonds will decrease to a greater
extent than will the value of regular bonds having the same interest rate.
INVESTMENT RESTRICTIONS
Fundamental Policies of the Fund
The investment limitations listed below
are fundamental policies of the Fund, and cannot be changed with respect to the Fund without the vote of a majority of the outstanding
voting securities of the Fund. Under the 1940 Act, a “vote of a majority of the outstanding voting securities” of a
fund means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of
the shares present at a shareholders meeting if more than 50% of the outstanding shares are represented at the meeting in person
or by proxy.
The Fund may not:
|
1.
|
Borrow money, except to the extent permitted by the 1940 Act, the rules and regulations thereunder
and any applicable exemptive relief. The 1940 Act presently allows a fund to: (1) borrow from any bank (including pledging, mortgaging
or hypothecating assets) in an amount up to 33 1/3% of its total assets, (2) borrow money for temporary purposes in an amount not
exceeding 5% of the value of the Fund’s total assets at the time of the loan, and (3) enter into reverse repurchase agreements.
|
|
2.
|
Purchase or sell commodities or commodity contracts unless acquired
as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities
contracts; but this shall not prevent the Fund from purchasing, selling and entering into financial futures contracts (including
futures contracts on indices of securities, interest rates and currencies), options on financial futures contracts (including futures
contracts on indices of securities, interest rates and currencies), warrants, swaps, forward contracts, foreign currency spot and
forward contracts or other derivative instruments that are not related to physical commodities.
|
|
3.
|
(i) With respect to 75% of its total assets, purchase securities of any issuer (except securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities or shares of investment companies) if, as a result,
more than 5% of its total assets would be invested in the securities of such issuer; or (ii) acquire more than 10% of the outstanding
voting securities of any one issuer.*
|
* For purposes of this policy, the issuer of the underlying security will be
deemed to be the issuer of any respective depositary receipt.
|
4.
|
Invest 25% or more of its total assets in the securities of one or more issuers conducting their
principal business activities in the same industry or group of industries. This limitation does not apply to investments in securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities, or shares of investment companies. The Fund will
not invest 25% or more of its total assets in any investment company that so concentrates.
|
|
5.
|
Make loans, except as permitted under the 1940 Act, the rules and regulations thereunder and any
applicable exemptive relief.
|
|
6.
|
Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund
may (a) invest in securities or other instruments directly or indirectly secured by real estate, and (b) invest in securities or
other instruments issued by issuers that invest in real estate.
|
|
7.
|
Issue senior securities, except to the extent permitted by the 1940 Act, the rules and regulations
thereunder and any applicable exemptive relief.
|
|
8.
|
Underwrite securities issued by others, except to the extent that the Fund may be considered an
underwriter within the meaning of the Securities Act in the disposition of restricted securities or in connection with investments
in other investment companies.
|
Non-Fundamental Policies
In addition to the investment objective
of the Fund, the investment limitation listed below is a non-fundamental policy of the Fund and may be changed with respect to
the Fund by the Board.
The Fund may not purchase or hold illiquid
securities if, in the aggregate, more than 15% of its net assets would be invested in illiquid securities.
CONTINUOUS OFFERING
The method by which Creation Units are
created and sold may raise certain issues under applicable securities laws. Because new Creation Units of shares are issued and
sold by the Fund on an ongoing basis, at any point a “distribution,” as such term is used in the Securities Act, may
occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result
in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them
to the prospectus delivery requirement and liability provisions of the Securities Act.
For example, a broker-dealer firm or its
client may be deemed a statutory underwriter if it takes Creation Units after placing an order with Foreside Fund Services, LLC
(the “Distributor”), breaks them down into constituent shares, and sells such shares directly to customers, or if it
chooses to couple the creation of a supply of new shares with an active selling effort involving solicitation of secondary market
demand for shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all
the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples
mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an
underwriter.
Broker-dealer firms should also note that
dealers who are not “underwriters,” but are effecting transactions in shares, whether or not participating in the distribution
of shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of
the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. Firms that incur
a prospectus-delivery obligation with respect to shares are reminded that, under Rule 153 of the Securities Act, a prospectus-delivery
obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in connection with a sale on an exchange is satisfied
by the fact that the prospectus is available at the exchange upon request. The prospectus delivery mechanism provided in Rule 153
is only available with respect to transactions on an exchange.
EXCHANGE LISTING
AND TRADING
A discussion of exchange listing and trading
matters associated with an investment in the Fund is contained in the Fund’s Prospectus. The discussion below supplements,
and should be read in conjunction with, the Fund’s Prospectus.
Shares of the Fund are listed and traded
on the Exchange. The shares of the Fund will trade on the Exchange at prices that may differ to some degree from the Fund’s
NAV. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of shares will continue
to be met.
As in the case of other stocks traded on
the Exchange, broker’s commissions on purchases or sales of shares in market transactions will be based on negotiated commission
rates at customary levels.
The Trust reserves the right to adjust
the price levels of shares in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished
through stock splits or reverse stock splits, which would have no effect on the net assets of the Fund.
PORTFOLIO TRANSACTIONS
AND BROKERAGE
Brokerage Transactions.
Generally,
equity securities are bought and sold through brokerage transactions for which commissions are payable. Purchases from underwriters
will include the underwriting commission or concession, and purchases from dealers serving as market makers will include a dealer’s
mark-up or reflect a dealer’s mark-down. Money market securities and other debt securities are usually bought and sold directly
from the issuer or an underwriter or market maker for the securities. Generally, the Fund will not pay brokerage commissions for
such purchases. When a debt security is bought from an underwriter, the purchase price will usually include an underwriting commission
or concession. The purchase price for securities bought from dealers serving as market makers will similarly include the dealer’s
mark up or reflect a dealer’s mark down. When the Fund executes transactions in the over-the-counter market, it will generally
deal with primary market makers unless prices that are more favorable are otherwise obtainable.
In addition, the Sub-Advisor may place
a combined order, often referred to as “bunching,” for two or more accounts it manages, including the Fund, engaged
in the purchase or sale of the same security or other instrument if, in its judgment, joint execution is in the best interest of
each participant and will result in best price and execution. Transactions involving commingled orders are allocated in a manner
deemed equitable to each account or Fund. Although it is recognized that, in some cases, the joint execution of orders could adversely
affect the price or volume of the security that a particular account or the Fund may obtain, it is the opinion of the Sub-Advisor,
the Advisor, and the Board that the advantages of combined orders outweigh the possible disadvantages of separate transactions.
In addition, in some instances, the Fund effecting the larger portion of a combined order may not benefit to the same extent as
participants effecting smaller portions of the combined order. Nonetheless, the Advisor believes that the ability of the Fund to
participate in higher volume transactions generally will be beneficial to the Fund.
Brokerage Selection.
The Trust does
not expect to use one particular broker-dealer to effect the Trust’s portfolio transactions. When one or more broker-dealers
is believed capable of providing the best combination of price and execution, the Sub-Advisor is not required to select a broker-dealer
based on the lowest commission rate available for a particular transaction. In such cases, the Sub-Advisor may pay a higher commission
than otherwise obtainable from other brokers in return for brokerage research services provided to the Sub-Advisor consistent with
Section 28(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). Section 28(e) provides that the Sub-Advisor
may cause the Fund to pay a broker-dealer a commission for effecting a transaction in excess of the amount of commission another
broker or dealer would have charged as long as the Sub-Advisor makes a good faith determination that the amount of commission is
reasonable in relation to the value of the brokerage and research services provided by the broker-dealer. To the extent the Sub-Advisor
obtains brokerage and research services that it otherwise would acquire at its own expense, the Sub-Advisor may have incentive
to place a greater volume of transactions or pay higher commissions than would otherwise be the case.
The Sub-Advisor will only obtain brokerage
and research services from broker-dealers in arrangements that are consistent with Section 28(e) of the Exchange Act. The types
of products and services that the Sub-Advisor may obtain from broker-dealers through such arrangements will include research reports
and other information on the economy, industries, sectors, groups of securities, individual companies, statistical information,
political developments, technical market action, pricing and appraisal services, credit analysis, risk measurement analysis, performance
and other analysis. The Sub-Advisor may use products and services provided by brokers in servicing all of its client accounts and
not all such products and services may necessarily be used in connection with the account that paid commissions to the broker-dealer
providing such products and services. Any advisory or other fees paid to the Sub-Advisor are not reduced as a result of the receipt
of brokerage and research services.
In some cases, the Sub-Advisor may receive
a product or service from a broker that has both a “research” and a “non-research” use. When this occurs,
the Sub-Advisor will make a good faith allocation between the research and non-research uses of the product or service. The percentage
of the service that is used for research purposes may be paid for with brokerage commissions, while the Sub-Advisor will use its
own funds to pay for the percentage of the service that is used for non-research purposes. In making this good faith allocation,
the Sub-Advisor faces a potential conflict of interest, but the Sub-Advisor believes that its allocation procedures are reasonably
designed to appropriately allocate the anticipated use of such products and services to research and non-research uses.
Brokerage with Fund Affiliates.
The
Fund may execute brokerage or other agency transactions through registered broker-dealer affiliates of the Fund, the Advisor, the
Fund’s Sub-Advisor, or the Distributor for a commission in conformity with the 1940 Act, the Exchange Act and rules promulgated
by the SEC. Under the 1940 Act and the Exchange Act, affiliated broker-dealers are permitted to receive and retain compensation
for effecting portfolio transactions for the Fund on an exchange if a written contract is in effect between the affiliate and the
Fund expressly permitting the affiliate to receive and retain such compensation. These rules further require that commissions paid
to the affiliate by the Fund for exchange transactions not exceed
“
usual and customary” brokerage commissions.
The rules define “usual and customary” commissions to include amounts which are “reasonable and fair compared
to the commission, fee or other remuneration received or to be received by other brokers in connection with comparable transactions
involving similar securities being purchased or sold on a securities exchange during a comparable period of time.” The Board,
including those who are not “interested persons” of the Fund, has adopted procedures for evaluating the reasonableness
of commissions paid to affiliates and reviews these procedures periodically.
Securities of “Regular Broker-Dealers.”
The Fund is required to identify any securities of its “regular brokers and dealers” (as such term is defined in
the 1940 Act) which the Fund may hold at the close of its most recent fiscal year. “Regular brokers or dealers” of
the Trust are the ten brokers or dealers that, during the most recent fiscal year: (i) received the greatest dollar amounts of
brokerage commissions from the Trust’s portfolio transactions; (ii) engaged as principal in the largest dollar amounts of
portfolio transactions of the Trust; or (iii) sold the largest dollar amounts of the Trust’s shares.
Because the Fund is new, as of the date
of this SAI, the Fund did not hold any securities of its “regular brokers and dealers.”
MANAGEMENT OF THE
TRUST
Board Responsibilities.
The Board
of Trustees is responsible for overseeing the management and affairs of the Fund and each of the Trust’s other funds, which
are not described in this SAI. The Board has considered and approved contracts, as described herein, under which certain companies
provide essential management and administrative services to the Trust. Like most funds, the day-to-day business of the Trust, including
the day-to-day management of risk, is performed by third-party service providers, such as the Advisor, the Fund’s Sub-Advisor,
Distributor and Administrator. The Board is responsible for overseeing the Trust’s service providers and, thus, has oversight
responsibility with respect to the risk management performed by those service providers. Risk management seeks to identify and
eliminate or mitigate the potential effects of risks,
i.e.
, events or circumstances that could have material adverse effects
on the business, operations, shareholder services, investment performance or reputation of the Trust or funds. Under the overall
supervision of the Board and the Audit Committee (discussed in more detail below), the service providers to the Fund employ a variety
of processes, procedures and controls to identify risks relevant to the operations of the Trust and the Fund to lessen the probability
of their occurrence and/or to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible
for one or more discrete aspects of the Trust’s business (
e.g.
, the Sub-Advisor is responsible for the day-to-day
management of the Fund’s portfolio investments) and, consequently, for managing the risks associated with that activity.
The Board has emphasized to the Fund’s service providers the importance of maintaining vigorous risk management.
The Board’s role in risk management
oversight begins before the inception of a fund, at which time the fund’s primary service providers present the Board with
information concerning the investment objectives, strategies and risks of the fund as well as proposed investment limitations for
the fund. Additionally, the fund’s Advisor provides the Board with an overview of, among other things, its investment philosophy,
brokerage practices and compliance infrastructure. Thereafter, the Board oversees the risk management of the fund’s operations,
in part, by requesting periodic reports from and otherwise communicating with various personnel of the fund and its service providers,
including in particular the Trust’s Chief Compliance Officer and the fund’s independent accountants. The Board and,
with respect to identified risks that relate to its scope of expertise, the Audit Committee oversee efforts by management and service
providers to manage risks to which the fund may be exposed.
The Board is responsible for overseeing
the nature, extent and quality of the services provided to the Fund by the Advisor and the Sub-Advisor and receives information
about those services at its regular meetings. In addition, on an annual basis, in connection with its consideration of whether
to renew the Advisory Agreement and the Sub-Advisory Agreement with the Advisor and the Sub-Advisor, respectively, the Board meets
with the Advisor and Sub-Advisor to review such services. Among other things, the Board regularly considers the Advisor’s
and the Sub-Advisor’s adherence to the Fund’s investment restrictions and compliance with various Fund policies and
procedures and with applicable securities regulations. The Board also reviews information about the Fund’s investments, including,
for example, portfolio holdings schedules and reports on the Advisor’s or the Sub-Advisor’s use of higher-risk financial
instruments in managing the Fund, if any, as well as reports on the Fund’s investments in other investment companies, if
any.
The Trust’s Chief Compliance Officer
reports regularly to the Board to review and discuss compliance issues and Fund, Advisor, and Sub-Advisor risk assessments. At
least annually, the Trust’s Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness
of the Trust’s policies and procedures and those of its service providers, including the Advisor and the Sub-Advisor. The
report addresses the operation of the policies and procedures of the Trust and each service provider since the date of the last
report; any material changes to the policies and procedures since the date of the last report; any recommendations for material
changes to the policies and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the Fund’s
service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. The Administrator
makes regular reports to the Board concerning investments for which market quotations are not readily available. Annually, the
independent registered public accounting firm reviews with the Audit Committee its audit of the Fund’s financial statements,
focusing on major areas of risk encountered by the Fund and noting any significant deficiencies or material weaknesses in the Fund’s
internal controls. Additionally, in connection with its oversight function, the Board oversees Fund management’s implementation
of disclosure controls and procedures, which are designed to ensure that information required to be disclosed by the Trust in its
periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also
oversees the Trust’s internal controls over financial reporting, which comprise policies and procedures designed to provide
reasonable assurance regarding the reliability of the Trust’s financial reporting and the preparation of the Trust’s
financial statements.
From their review of these reports and
discussions with the Advisor, the Sub-Advisor, the Chief Compliance Officer, the independent registered public accounting firm,
and other service providers, the Board and the Audit Committee review in detail any material risks of the Fund, thereby facilitating
a dialogue about how management and service providers identify and mitigate those risks.
The Board recognizes that not all risks
that may affect the Fund can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks,
that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Fund’s goals, and that the
processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, despite the
periodic reports the Board receives, it may not be made aware of all of the relevant information of a particular risk. Most of
the Fund’s investment management and business affairs are carried out by or through the Fund’s Advisor, the Sub-Advisor,
and other service providers each of which has an independent interest in risk management but whose policies and the methods by
which one or more risk management functions are carried out may differ from the Fund’s and each other’s in the setting
of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors,
the Board’s risk management oversight is subject to substantial limitations.
Members of the Board and Officers of
the Trust.
Set forth below are the names, ages, position with the Trust, term of office, and the principal occupations for
a minimum of the last five years of each of the persons currently serving as members of the Board and as Executive Officers of
the Trust. Also included below is the term of office for each of the Executive Officers of the Trust. The members of the Board
serve as Trustees for the life of the Trust or until retirement, removal, or their office is terminated pursuant to the Trust’s
Declaration of Trust.
The Chairman of the Board, Noah Hamman,
is an interested person of the Trust as that term is defined in the 1940 Act. No single independent Trustee serves as a lead independent
Trustee. The Trust has determined its leadership structure is appropriate given the specific characteristics the Trust and its
operations. The Trust made this determination in consideration of, among other things, the fact that the Trustees who are not interested
persons of the Fund (
i.e.
, “independent Trustees”) constitute at least fifty percent (50%) of the Board, the
fact that the Audit Committee is composed of the independent Trustees, the amount of assets under management in the Trust, and
the number of funds (and classes of shares) overseen by the Board. The Board also believes that its leadership structure facilitates
the orderly and efficient flow of information to the independent Trustees from Fund management.
Name, Address
and Date of Birth of
Trustee/Officer
|
Position(s)
Held with
the Trust,
Term of Office
and Length of
Time Served
|
Principal Occupation(s)
During Past 5 Years
|
Number of
Portfolios in
Fund
Complex
Overseen
by Trustee/
Officer
|
Other
Directorships
Held by
Trustee
|
Interested Trustee
|
Noah Hamman*
2 Bethesda Metro Center, Suite 1330, Bethesda, MD 20814
(1968)
|
Trustee, No set term; served since 2009
|
Chief Executive Officer, Principal Financial Officer and President of AdvisorShares Trust (2006 - present); Chief Executive Officer, President, and Founder of AdvisorShares Investments, LLC - Investment Advisory Services (2006-present); President and Chief Executive Officer of Arrow Investment Advisors, LLC (2006-2008); Vice President - Business Development of Rydex Investments (2001 - 2006).
|
24
|
None
|
Independent Trustees
|
Elizabeth (“Betsy”) Piper/Bach
2 Bethesda Metro Center, Suite 1330, Bethesda, MD 20814
(1952)
|
Trustee, No set term; served since 2009
|
Vice President / Chief Operating Officer of NADA Retirement
Administrators, Inc. (2009-present); President of Cardinal Trust and Investments; Chief Investment Officer for Wilson/Bennett Capital
Management (2006); Senior Vice President and Chief Trust Officer at FBR National Trust Co., (2001-2006).
|
24
|
None
|
William G. McVay
2 Bethesda Metro Center, Suite 1330, Bethesda, MD 20814
(1954)
|
Trustee, No set term; served since 2011
|
Founder of RDK Strategies, LLC (2007-present); Vice President
of Zephyr Associates, Inc. (2001- 2006); Executive Vice President of Financeware, Inc. (2000); First Vice President of Legg Mason
Wood Walker, Inc. (1989-2000).
|
24
|
None
|
Name, Address
and Date of Birth of
Trustee/Officer
|
Position(s)
Held with
the Trust,
Term of Office
and Length of
Time Served
|
Principal Occupation(s)
During Past 5 Years
|
Number of
Portfolios in
Fund
Complex
Overseen
by Trustee/
Officer
|
Other
Directorships
Held by
Trustee
|
Officers of AdvisorShares Trust
|
Noah Hamman
2 Bethesda Metro Center, Suite 1330, Bethesda, MD 20814
(1968)
|
Chief Executive Officer & President, No set term; served since 2009
|
Chief Executive Officer, Principal Financial Officer and President of AdvisorShares Trust (2006 - present); Chief Executive Officer, President, and Founder of AdvisorShares Investments, LLC - Investment Advisory Services (2006-present); President and Chief Executive Officer of Arrow Investment Advisors, LLC (2006-2008); Vice President - Business Development of Rydex Investments (2001 - 2006).
|
24
|
None
|
|
|
|
|
|
Dan Ahrens
4144 N. Central Expressway, Suite 600, Dallas, TX 75204
(1966)
|
Chief Compliance Officer, Secretary & Treasurer, No set term; served since 2009
|
Executive Vice President of AdvisorShares Investments, LLC (2008 - present); President of Ahrens Advisors, LP (2005 - 2008); President of Mutuals Advisors, Inc. & Mutuals.com Funds (2003-2005).
|
24
|
None
|
|
*
|
Mr. Hamman is an “interested” person of the Trust, as that term is defined in the 1940
Act, by virtue of his ownership and controlling interest in the Advisor.
|
Board Standing Committee.
The Board
has established the following standing committee:
Audit Committee.
The Board has a
standing Audit Committee that is composed of each of the independent Board members of the Trust. The Audit Committee operates under
a written charter approved by the Board. The principal responsibilities of the Audit Committee include: (i) recommending which
firm to engage as the Trust’s independent registered public accounting firm and whether to terminate this relationship; (ii)
reviewing the independent registered public accounting firm’s compensation, the proposed scope and terms of its engagement,
and the firm’s independence; (iii) serving as a channel of communication between the independent registered public accounting
firm and the Board; (iv) reviewing the results of each external audit, including any qualifications in the independent registered
public accounting firm’s opinion, any related management letter, management’s responses to recommendations made by
the independent registered public accounting firm in connection with the audit, if any, reports submitted to the Committee by the
Trust’s service providers that are material to the Trust as a whole, and management’s responses to any such reports;
(v) reviewing the Trust’s audited financial statements and considering any significant disputes between the Trust’s
management and the independent registered public accounting firm that arose in connection with the preparation of those financial
statements; (vi) considering, in consultation with the independent registered public accounting firm and the Trust’s senior
internal accounting executive, the independent registered public accounting firm’s report on the adequacy of the Trust’s
internal financial controls; (vii) reviewing, in consultation with the Trust’s independent registered public accounting firm,
major changes regarding auditing and accounting principles and practices to be followed when preparing the Trust’s financial
statements; and (viii) other audit related matters. Each Independent Trustee serves as a member of the Audit Committee. The Audit
Committee met five times during the most recently completed fiscal year.
Individual Trustee Qualifications.
The
Trust has concluded that each of the Trustees should serve on the Board because of his or her ability to review and understand
information about the Trust and the Fund provided by management, to identify and request other information he or she may deem relevant
to the performance of his or her duties, to question management and other service providers regarding material factors bearing
on the management and administration of the Fund, and to exercise his or her business judgment in a manner that serves the best
interests of the Fund and its shareholders. The Trust has concluded that each of the Trustees should serve as a Trustee based
on his or her experience, qualifications, attributes and skills, as described below.
The Trust has concluded that Mr. Hamman
should serve as Trustee because of the experience he has gained with respect to mutual fund company business development, and the
development of exchange-traded funds in particular, in his past position with Rydex Investments, and as the former president and
co-founder of Arrow Investment Advisors, LLC, a registered investment adviser to a mutual fund company. Mr. Hamman’s knowledge
of and experience in the financial services industry, in general, also qualifies him to serve as Trustee.
The Trust has concluded that Ms. Piper/Bach
should serve as Trustee because of her extensive experience in and knowledge of public company accounting and auditing, the financial
services industry, and fiduciary and banking law. In particular, during her 30 years in the financial services industry, Ms. Piper/Bach
has gained relevant experience in her roles as vice president and chief operating officer of a retirement services company, vice
president, and chief trust officer of a large custodian bank and president of a large regional brokerage and wealth management
group. In addition, Ms. Piper/Bach is currently serving a two-year term as the Investment Management Consultants Association (“IMCA”)
chair. She has been a director of the IMCA for eight years and a member of the Finance, Audit, and Investment Committee, Personnel
Committee, Certification Committee, Government Relations Committee, Investments & Wealth Monitor Editorial Advisory Board,
and the Journal of Investment Consulting Editorial Advisory Board.
The Trust has concluded that Mr. McVay
should serve as Trustee because of his extensive experience in providing investment advice and business consulting services to
financial institutions, endowments, foundations, corporations and pension funds. In particular, during his 31 years in the financial
services industry, Mr. McVay has gained relevant experience in his roles as founder of an investment management firm and vice president
and co-director of investment management services of a global asset management firm.
Fund Shares Owned by Board Members.
The following table shows the dollar amount range of each Trustee’s “beneficial ownership” of shares of
the Fund and all AdvisorShares funds as of the end of the most recently completed calendar year. Dollar amount ranges disclosed
are established by the SEC. “Beneficial ownership” is determined in accordance with Rule 16a-1(a)(2) under the
Exchange Act. As of the date of this SAI, the Trustees and officers of the Trust own less than 1% of the outstanding shares of
the Trust.
Trustee Name
|
Fund Name
|
Dollar Range of
Fund Shares
|
Aggregate Dollar Range
of Shares in Fund
Complex Overseen by
Trustee
|
Interested
Trustee
|
Noah
Hamman
|
AdvisorShares
Sage Core Reserves ETF
|
$0
|
over
$100,000
|
Independent
Trustees
|
Elizabeth
Piper/Bach
|
AdvisorShares
Sage Core Reserves ETF
|
$0
|
$1 - $10,000
|
Trustee Name
|
Fund Name
|
Dollar Range of
Fund Shares
|
Aggregate Dollar Range
of Shares in Fund
Complex Overseen by
Trustee
|
William
G. McVay
|
AdvisorShares
Sage Core Reserves ETF
|
$0
|
None
|
Board Compensation.
The following table sets
forth the compensation that will be paid to each Trustee by the Trust for the fiscal year ending June 30, 2013.
Name of Trustee
|
Aggregate
Compensation
From Trust
|
Pension or
Retirement
Benefits
Accrued as
Part of Trust’s
Expenses
|
Estimated
Annual
Benefits Upon
Retirement
|
Total
Compensation
from Fund
Complex
|
Interested
Trustee
|
Noah
Hamman
|
$0
|
N/A
|
N/A
|
$0
|
Independent
Trustees
|
Elizabeth
(Betsy) Piper/Bach
|
$12,500
|
N/A
|
N/A
|
$12,500
|
William
G. McVay
|
$12,500
|
N/A
|
N/A
|
$12,500
|
Control Persons and Principal Holders of Securities
Because the Fund is new, as of the date of this SAI, there were
no beneficial owners of the Fund.
Codes of Ethics
The Board, on behalf of the Trust,
has adopted a code of ethics pursuant to Rule 17j-1 under the 1940 Act. In addition, the Advisor and the Sub-Advisor have each
adopted a code of ethics pursuant to Rule 17j-1. These codes of ethics (each, a “Code of Ethics” and collectively,
the “Codes of Ethics”) apply to the personal investing activities of trustees, directors, officers and certain employees
(“access persons”). Rule 17j-1 and the Codes of Ethics are designed to prevent unlawful practices in connection with
the purchase or sale of securities by access persons. Under each Code of Ethics, access persons are permitted to engage in personal
securities transactions, but are required to report their personal securities transactions for monitoring purposes. In addition,
certain access persons are required to obtain approval before investing in private placements and are prohibited from investing
in IPOs. Copies of the Codes of Ethics are on file with the SEC, and are available to the public.
Proxy Voting
The Board has delegated responsibility
for decisions regarding proxy voting for securities held by the Fund to the Sub-Advisor. The Sub-Advisor will vote such proxies
in accordance with its proxy policies and procedures, which are included in Appendix B to this SAI. The Board will periodically
review the Fund’s proxy voting record.
The Trust will annually disclose its complete
proxy voting record on Form N-PX. The Trust’s most recent Form N-PX will be available without charge, upon request by calling
877.843.3831 or by writing to the Trust at 2
Bethesda Metro Center, Suite 1330, Bethesda, Maryland 20814. The Trust’s
Form N-PX will also be available on the SEC’s web site at
www.sec.gov
.
The Advisor and the Advisory Agreement
The Advisor, a registered investment adviser
under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), is located at 2 Bethesda Metro Center,
Suite 1330, Bethesda, Maryland 20814. The Advisor is a Delaware limited liability company organized on October 12, 2006. The membership
units are owned and controlled by Wilson Lane Group, LLC (which is controlled by Noah Hamman), and by Fund.com, Inc.
Pursuant to an investment advisory agreement
with the Trust dated June 2, 2009, as amended from time to time (the “Advisory Agreement”), the Advisor serves as the
investment adviser for the Trust and provides investment advice to the Fund and oversees the day-to-day operations of the Fund,
subject to direction and control of the Board and the officers of the Trust. In addition to its overall responsibility to manage
the Fund, the Advisor oversees the investment and the reinvestment of the assets of the Fund by the Sub-Advisor, in accordance
with the investment objectives, policies, and limitations of the Fund, subject to the general supervision and control of the Board
and the officers of the Trust.
The Advisor bears all costs associated
with providing these advisory services and the expenses of the members of the Board who are affiliated with or interested persons
of the Advisor. The Advisor, from its own resources, including profits from advisory fees received from the Fund, provided such
fees are legitimate and not excessive, may make payments to broker-dealers and other financial institutions for their expenses
in connection with the distribution of Fund shares, and otherwise currently pay all distribution costs for Fund shares. The Advisor
may from time to time reimburse certain expenses of the Fund in order to limit the Fund’s operating expenses as described
in the Fund’s Prospectus.
After an initial two-year term, the continuance
of the Advisory Agreement must be specifically approved at least annually: (i) by a majority vote of the Trustees, including a
majority vote of such Trustees who are not “interested persons” of the Trust or the Advisor, at a meeting called for
the purpose of voting on such approval; or (ii) the vote of a majority of the outstanding voting securities of the Fund. The Advisory
Agreement will terminate automatically in the event of its assignment, and is terminable at any time without penalty by the Board
or, with respect to the Fund, by a majority of the outstanding shares of the Fund. In addition, the Advisor may, at any time, terminate
the Advisory Agreement by not more than 60 days’ nor less than 30 days’ written notice to the Trust.
A discussion regarding the basis for the
Board’s initial approval of the Fund’s Advisory Agreement will be available in the Fund’s first Annual or Semi-Annual
Report to Shareholders following the Fund’s commencement of operations.
For its investment management services,
the Advisor is entitled to a fee, which is calculated daily and paid monthly, at the annual rates listed below based on the average
daily net assets of the Fund. As part of its agreement with the Trust, the Advisor has contractually agreed to reduce its fees
and/or reimburse expenses in order to keep net expenses (excluding brokerage commissions, taxes, interest expense, Acquired Fund
Fees and Expenses, amounts payable pursuant to any plan adopted in accordance with Rule 12b-1, if any, other expenditures which
are capitalized in accordance with generally accepted accounting principles, and other extraordinary expenses not incurred in the
ordinary course of the Fund’s business) from exceeding the Maximum Annual Operating Expense Limit of the Fund’s average
daily net assets for at least a year from the date of this SAI. The expense limitation agreement (i) may be terminated at any time
by the Board, (ii) may be terminated by the Advisor upon ninety days’ prior written notice to the Trust, with such termination
to be effective as of the close of business on the last day of the then current one year period; or at such earlier time provided
that such termination is approved by majority vote of the Trustees and the Independent Trustees voting separately, and (iii) will
be terminated upon termination of the investment advisory agreement between the Advisor and the Trust, with respect to the Fund.
If at any point it becomes unnecessary for the Advisor to reduce fees or make expense reimbursements, the Board may permit the
Advisor to retain the difference between the Total Annual Fund Operating Expenses and the Fund’s Maximum Annual Operating
Expense Limit to recapture all or a portion of its prior fee reductions or expense reimbursements made during the preceding three-year
period. The Fund’s Maximum Annual Operating Expense Limit is listed below.
Fund
|
Advisory Fee as a % of Average
Daily Net Assets
|
Maximum
Annual
Operating
Expense
Limit
|
AdvisorShares
Sage Core Reserves ETF
|
0.30%
|
0.35%
|
The Sub-Advisor and the Sub-Advisory
Agreement
Under a Sub-Advisory Agreement, the Sub-Advisor
listed below serves as the investment sub-adviser to the Fund, makes the investment decisions for the Fund, and continuously reviews,
supervises and administers the investment program of the Fund, subject to the supervision of, and policies established by, the
Advisor and the Board.
After an initial two-year term, the continuance
of the Sub-Advisory Agreement must be specifically approved at least annually: (i) by the vote of the Trustees or by a vote of
the shareholders of the Fund and (ii) by the vote of a majority of the Trustees who are not parties to the respective Sub-Advisory
Agreement or “interested persons” of any party thereto, cast in person at a meeting called for the purpose of voting
on such approval. The Sub-Advisory Agreement will terminate automatically in the event of its assignment, or in the event of a
termination of the Advisory Agreement, and is terminable at any time without penalty by the Board or, with respect to the Fund,
by a majority of the outstanding shares of the Fund, on not less than 30 days’ nor more than 60 days’ written notice
to the Sub-Advisor, or by the Sub-Advisor on 90 days’ written notice to the Trust. The Sub-Advisory Agreement provides that
the Sub-Advisor shall not be protected against any liability to the Trust or its shareholders by reason of willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or from reckless disregard of its obligations or duties
thereunder.
Sub-Advisory Fees Paid to the Sub-Advisor.
For its services under the Sub-Advisory Agreement, the Sub-Advisor is entitled to a fee, which is calculated daily and paid monthly,
by the Advisor, at an annual rate based on the average daily net assets of the Fund as follows:
Fund
|
Sub-Advisor
|
Sub-Advisory Fee
|
AdvisorShares
Sage Core Reserves ETF
|
Sage
Advisory Services, Ltd. Co.
|
0.15%
|
Pursuant to an exemptive order from
the SEC, the Advisor, subject to certain conditions, may terminate the existing Sub-Advisor or hire new sub-advisers for the Fund,
materially amend the terms of particular agreements with sub-advisers or continue the employment of a sub-adviser after events
that would otherwise cause an automatic termination of a sub-advisory agreement. Consequently, under the exemptive order, the
Advisor has the right to hire, terminate and replace a sub-adviser when the Board and the Advisor feel that a change would benefit
the Fund. Within 90 days of retaining a new sub-adviser, shareholders of the Fund will receive notification of the change. This
“manager of managers” structure enables the Fund to operate with greater efficiency and without incurring the expense
and delays associated with obtaining shareholder approval of sub-advisory agreements. The structure does not permit investment
advisory fees paid by the Fund to be increased or change the Advisor’s obligations under the investment advisory agreement,
including the Advisor’s responsibility to monitor and oversee sub-advisory services furnished to the Fund, without shareholder
approval. Furthermore, any sub-advisory agreements with affiliates of the Fund or the Advisor will require shareholder approval.
A discussion regarding the basis for the
Board’s initial approval of the Fund’s Sub-Advisory Agreement will be available in the Fund’s first Annual or
Semi-Annual Report to Shareholders following the Fund’s commencement of operations.
Portfolio Managers
This section includes information about
the Fund’s portfolio managers, including information about other accounts they manage, the dollar range of Fund shares they
own, and how they are compensated. The tables reflecting the dollar range of each portfolio manager’s “beneficial ownership”
of shares of the Fund they sub-advise use dollar amount ranges established by the SEC. “Beneficial ownership” is determined
in accordance with Rule 16a-1(a)(2) under the Exchange Act.
Portfolio Manager Compensation.
The
portfolio managers are compensated by the Sub-Advisor and do not receive any compensation directly from the Fund or the
Advisor. The Sub-Advisor pays its portfolio managers a salary plus a discretionary bonus. The discretionary bonus is based on
accomplishment of personal, team, and enterprise objectives. Since the portfolio managers are also principals of the
Sub-Advisor, each receives partnership distributions in addition to his salary and discretionary bonus.
Fund Shares Owned by Portfolio Managers.
The portfolio managers did not beneficially own any shares of the Fund as of the date of this SAI.
Accounts Managed by Portfolio Managers.
Including the Fund, the portfolio managers are responsible for the day-to-day management of certain other accounts,
as follows:
Name
|
Registered Investment
Companies
*
|
Other Pooled Investment
Vehicles
*
|
Other Accounts
*
|
Number
of
Accounts
|
Total Assets
(in millions)
|
Number
of
Accounts
|
Total
Assets
|
Number of
Accounts
|
Total Assets
(in millions)
|
Mark
C. MacQueen
|
0
|
$0
|
7
|
$743
|
280
|
$6,889
|
Thomas
H. Urano
|
0
|
$0
|
7
|
$743
|
280
|
$6,889
|
* Information provided is as of June 30, 2013.
Conflicts of Interest
The portfolio managers’ management
of “other accounts” may give rise to potential conflicts of interest in connection with their management of the Fund’s
investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment
objective as the Fund they manage. Therefore, a potential conflict of interest may arise as a result of the identical investment
objectives, whereby the portfolio managers could favor one account over another. Another potential conflict could include the portfolio
managers’ knowledge about the size, timing and possible market impact of Fund trades, whereby a portfolio manager could use
this information to the advantage of other accounts and to the disadvantage of the Fund they manage. However, the Sub-Advisor has
established policies and procedures to ensure that the purchase and sale of securities among all accounts the Sub-Advisor manages
are fairly and equitably allocated.
Administration, Custody and Transfer
Agency Agreements
The Bank
of New York Mellon (the
“Administrator”) serves as administrator, custodian and transfer agent for the Fund. The principal address of the Administrator
is 101 Barclay Street, New York, New York 10286. Under the Fund’s Administration and Accounting Agreement with the Trust,
the Administrator provides necessary administrative and accounting services for the maintenance and operations of the Trust and
the Fund. In addition, the Administrator makes available the office space, equipment, personnel and facilities required to provide
such services. Under the Fund’s Custodian Agreement with the Trust, the Administrator maintains in separate accounts cash,
securities and other assets of the Trust and the Fund, keeps all necessary accounts and records, and provides other services. The
Administrator is required, upon the order of the Trust, to deliver securities held by it and to make payments for securities purchased
by the Fund. Pursuant to the Fund’s Transfer Agency and Service Agreement with the Trust, the Administrator acts as a transfer
agent for the Fund’s authorized and issued shares of beneficial interest, and as dividend disbursing agent of the Fund.
In consideration for its administrative
services, the Administrator is entitled to a fee, which is calculated daily and paid monthly, at an annual rate of 0.025% on the
first $1 billion on the gross adjusted assets of the Fund and 0.02% on the gross adjusted assets of the Fund exceeding $1 billion.
Distribution
Distributor.
Foreside
Fund Services, LLC serves as the principal underwriter and distributor of shares of the Fund. The principal address of the Distributor
is Three Canal Plaza, Suite 100, Portland, Maine 04101. The Distributor has entered into an agreement with the Trust pursuant to
which it distributes shares of the Fund (the “Distribution Agreement”). The Distributor continually distributes shares
of the Fund on a best effort basis. The Distributor has no obligation to sell any specific quantity of Fund shares. The Distribution
Agreement will continue for two years from its effective date and is renewable annually. Shares are continuously offered for sale
by the Fund through the Distributor only in Creation Units, as described in the Fund’s Prospectus and this SAI. Shares amounting
to less than a Creation Unit are not distributed by the Distributor. The Distributor is a broker-dealer registered under the Exchange
Act and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”). The Distributor, its affiliates and
officers have no role in determining the investment policies or which securities are to be purchased or sold by the Fund. The Distributor
is not affiliated with the Trust, the Advisor, the Sub-Advisor, or any stock exchange.
The Distribution Agreement
for the Fund provides that it may be terminated at any time, without the payment of any penalty, on at least 60 days’ prior
written notice to the other party (i) by vote of a majority of the Independent Trustees or (ii) by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund. The Distribution Agreement will terminate automatically in the event
of its “assignment,” as that term is defined in the 1940 Act.
Distribution Plan.
The Fund has adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act (the “Distribution Plan”). Under
the Distribution Plan, the Distributor, or designated service providers, may receive up to 0.25% of the Fund’s assets attributable
to shares as compensation for distribution services. Distribution services may include, but are not limited to: (i) services in
connection with distribution assistance or (ii) payments to financial institutions and other financial intermediaries, such as
broker-dealers, mutual fund “supermarkets” and the Distributor’s affiliates and subsidiaries, as compensation
for services or reimbursement of expenses incurred in connection with distribution assistance.
No distribution fees are currently charged
to the Fund; there are no plans to impose distribution fees, and no distribution fees will be charged for at least a year from
the date of this SAI. However, in the event that distribution fees are charged in the future, because the Fund will pay these fees
out of assets on an ongoing basis, over time distribution fees may cost you more than other types of sales charges and will increase
the cost of your investment in the Fund.
Costs and Expenses.
The Fund bears
all expenses of its operation other than those assumed by the Advisor, which are discussed in detail above under “The Advisor
and the Advisory Agreement.”
BOOK ENTRY ONLY
SYSTEM
The following information supplements and
should be read in conjunction with the section in the Fund’s Prospectus entitled “Shareholder Information.”
Depository Trust Company (“DTC”)
acts as securities depository for the Fund’s shares. Shares of the Fund are represented by securities registered in the name
of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was
created to hold securities of its participants (the “DTC Participants”) and to facilitate the clearance and settlement
of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the
DTC Participants, thereby eliminating the need for physical movement of securities’ certificates. DTC Participants include
securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or
their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE and FINRA.
Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a DTC Participant, either directly or indirectly (the “Indirect Participants”).
Beneficial ownership of shares is limited
to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership
of beneficial interests in shares (owners of such beneficial interests are referred to herein as “Beneficial Owners”)
is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants)
and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants).
Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of shares.
Conveyance of all notices, statements and
other communications to Beneficial Owners is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC,
DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the shares of
the Fund held by each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners
holding shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies
of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly,
to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participants a fair and reasonable amount as reimbursement
for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions shall be made to DTC
or its nominee, Cede & Co., as the registered holder of all shares. DTC or its nominee, upon receipt of any such distributions,
shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their respective beneficial
interests in shares of the Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants
and Beneficial Owners of shares held through such DTC Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,”
and will be the responsibility of such DTC Participants.
The Trust has no responsibility or liability
for any aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership
interests in such shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests,
or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants
and the Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing
its service with respect to shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with
respect thereto under applicable law. Under such circumstances, the Trust shall take action to find a replacement for DTC to perform
its functions at a comparable cost. The DTC Participants’ rules and policies are made publicly available through its website
at www.dtcc.com.
CREATION AND REDEMPTION OF CREATION
UNITS
Creation
The Trust issues and sells shares of the
Fund only in Creation Units on a continuous basis through the Distributor, at their NAV next determined after receipt, on any Business
Day (as defined below), of an order received in proper form.
A “Business Day” with respect
to the Fund is any day on which the Exchange is open for business. As of the date of the Prospectus, the Exchange observes the
following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day (Washington’s Birthday), Good
Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Fund Deposit.
The consideration
for purchase of a Creation Unit of the Fund generally consists of an in-kind deposit of a designated portfolio of securities –
the “Deposit Securities” – per each Creation Unit constituting a substantial replication, or a representation,
of the securities included in the Fund’s portfolio and an amount of cash – the Cash Component – computed as described
below. Together, the Deposit Securities and the Cash Component constitute the “Fund Deposit,” which represents the
minimum initial and subsequent investment amount for a Creation Unit of the Fund. The Cash Component is an amount equal to the
difference between the NAV of the shares (per Creation Unit) and the market value of the Deposit Securities. If the Cash Component
is a positive number (
i.e.
, the NAV per Creation Unit exceeds the market value of the Deposit Securities), the Cash Component
shall be such positive amount. If the Cash Component is a negative number (
i.e.
, the NAV per Creation Unit is less than
the market value of the Deposit Securities), the Cash Component shall be such negative amount and the creator will be entitled
to receive cash from the Fund in an amount equal to the Cash Component. The Cash Component serves the function of compensating
for any differences between the NAV per Creation Unit and the market value of the Deposit Securities.
The Administrator, through the National
Securities Clearing Corporation (“NSCC”) (discussed below), makes available on each Business Day, immediately prior
to the opening of business on the Exchange (currently 9:30 a.m., Eastern Time), the list of the names and the required number of
shares of each Deposit Security to be included in the current Fund Deposit (based on information at the end of the previous Business
Day) for the Fund. Such Fund Deposit is applicable, subject to any adjustments as described below, in order to effect creations
of Creation Units of the Fund until such time as the next-announced composition of the Deposit Securities is made available.
The identity and number of shares of the
Deposit Securities required for a Fund Deposit for the Fund changes as rebalancing adjustments and corporate action events are
reflected from time to time by the Sub-Advisor to the Fund with a view to the investment objective of the Fund. In addition, the
Trust reserves the right to permit or require the substitution of an amount of cash –
i.e.
, a “cash in lieu”
amount – to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity
for delivery or which may not be eligible for transfer through the Clearing Process (discussed below), or which may not be eligible
for trading by an Authorized Participant (as defined below) or the investor for which it is acting. The Trust also reserves the
right to offer an “all cash” option for creations of Creation Units for the Fund.
In addition to the list of names and numbers
of securities constituting the current Deposit Securities of a Fund Deposit, the Administrator, through the NSCC, also makes available
on each Business Day, the estimated Cash Component, effective through and including the previous Business Day, per outstanding
Creation Unit of the Fund.
Procedures for Creation of Creation
Units.
To be eligible to place orders with the Distributor to create a Creation Unit of the Fund, an entity must be (i) a “Participating
Party,”
i.e.
, a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System
of the NSCC (the “Clearing Process”), a clearing agency that is registered with the SEC; or (ii) a DTC Participant
(see “Book Entry Only System”), and, in each case, must have executed an agreement with the Trust, the Distributor
and the Administrator with respect to creations and redemptions of Creation Units (“Participant Agreement”) (discussed
below). A Participating Party and DTC Participant are collectively referred to as an “Authorized Participant.” Investors
should contact the Distributor for the names of Authorized Participants that have signed a Participant Agreement with the Fund.
All shares of the Fund, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of
a DTC Participant.
All orders to create Creation Units must
be placed for one or more Creation Unit size aggregations of at least 25,000 shares. All orders to create Creation Units, whether
through the Clearing Process (through a Participating Party) or outside the Clearing Process (through a DTC Participant), must
be received by the Distributor no later than 3:00 p.m., Eastern Time, an hour earlier than the close of the regular trading session
on the Exchange (ordinarily 4:00 p.m., Eastern Time) (“Closing Time”), in each case on the date such order is placed
in order for the creation of Creation Units to be effected based on the NAV of shares of the Fund as next determined on such date
after receipt of the order in proper form. The date on which an order to create Creation Units (or an order to redeem Creation
Units as discussed below) is placed is referred to as the “Transmittal Date.” Orders must be transmitted by an Authorized
Participant by telephone or other transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant
Agreement, as described below (see “Placement of Creation Orders Using Clearing Process” and “Placement of Creation
Orders Outside Clearing Process”). Severe economic or market disruptions or changes, or telephone or other communication
failure, may impede the ability to reach the Distributor or an Authorized Participant.
Orders to create Creation Units of the
Fund shall be placed with an Authorized Participant, as applicable, in the form required by such Authorized Participant. In addition,
the Authorized Participant may request the investor to make certain representations or enter into agreements with respect to the
order,
i.e.
, to provide for payments of cash, when required. Investors should be aware that their particular broker may
not have executed a Participant Agreement and, therefore, orders to create Creation Units of the Fund have to be placed by the
investor’s broker through an Authorized Participant that has executed a Participant Agreement. At any given time there may
be only a limited number of broker-dealers that have executed a Participant Agreement. Those placing orders for Creation Units
through the Clearing Process should afford sufficient time to permit proper submission of the order to the Distributor prior to
3:00 p.m., Eastern Time, on the Transmittal Date.
Orders for creation that are effected outside
the Clearing Process are likely to require transmittal by the DTC Participant earlier on the Transmittal Date than orders effected
using the Clearing Process. Those persons placing orders outside the Clearing Process, all purchases of which will be effected
through a transfer of cash directly through DTC, should ascertain the deadlines applicable to DTC and the Federal Reserve Bank
wire system by contacting the operations department of the broker or depository institution effecting such transfer of Deposit
Securities and Cash Component.
Placement of Creation Orders Using the
Clearing Process.
The Clearing Process is the process of creating or redeeming Creation Units through the Continuous Net Settlement
System of the NSCC. Fund Deposits made through the Clearing Process must be delivered through a Participating Party that has executed
a Participant Agreement. The Participant Agreement authorizes the Distributor to transmit through the Fund’s transfer agent
to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the Participating Party’s
creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the requisite Deposit Securities
and the Cash Component to the Trust, together with such additional information as may be required by the Distributor. An order
to create Creation Units through the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such
order is received by the Distributor not later than 3:00 p.m., Eastern Time on such Transmittal Date and (ii) all other procedures
set forth in the Participant Agreement are properly followed.
Placement of Creation Orders Outside
the Clearing Process.
Fund Deposits made outside the Clearing Process must be delivered through a DTC Participant that has
executed a Participant Agreement with the Trust, the Distributor and the Administrator. A DTC Participant who wishes to place an
order creating Creation Units to be effected outside the Clearing Process need not be a Participating Party, but such orders must
state that the DTC Participant is not using the Clearing Process and that the creation of Creation Units will instead be effected
through a transfer of securities and cash directly through DTC. A Fund Deposit transfer must be ordered by the DTC Participant
on the Transmittal Date in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities through
DTC to the account of the Trust by no later than 11:00 a.m., Eastern Time, of the next Business Day immediately following the Transmittal
Date. All questions as to the number of Deposit Securities to be delivered, and the validity, form and eligibility (including time
of receipt) for the deposit of any tendered securities, will be determined by the Trust, whose determination shall be final and
binding. The cash equal to the Cash Component must be transferred directly to the Administrator through the Federal Reserve wire
system in a timely manner so as to be received by the Administrator no later than 2:00 p.m., Eastern Time, on the next Business
Day immediately following such Transmittal Date. An order to create Creation Units outside the Clearing Process is deemed received
by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than 3:00 p.m., Eastern Time
on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed. However,
if the Administrator does not receive both the requisite Deposit Securities and the Cash Component by 11:00 a.m. and 2:00 p.m.,
respectively, on the next Business Day immediately following the Transmittal Date, such order will be cancelled. Upon written notice
to the Distributor, such cancelled order may be resubmitted the following Business Day using a Fund Deposit as newly constituted
to reflect the then current NAV of the Fund. The delivery of Creation Units of the Fund so created will occur no later than the
third (3rd) Business Day following the day on which the purchase order is deemed received by the Distributor.
Creation Units may be created in advance
of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the
initial deposit will have a value greater than the NAV of the shares on the date the order is placed in proper form since in addition
to available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) 115%
of the market value of the undelivered Deposit Securities (the “Additional Cash Deposit”). The order shall be deemed
to be received on the Business Day on which the order is placed provided that the order is placed in proper form prior to 3:00
p.m., Eastern Time on such date and federal funds in the appropriate amount are deposited with the Administrator by 11:00 a.m.,
Eastern Time, the following Business Day. If the order is not placed in proper form by 3:00 p.m., Eastern Time or federal funds
in the appropriate amount are not received by 11:00 a.m. the next Business Day, then the order may be deemed to be rejected and
the investor shall be liable to the Trust for losses, if any, resulting therefrom. An additional amount of cash shall be required
to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional
Cash Deposit with the Trust in an amount at least equal to 115% of the daily marked to market value of the missing Deposit Securities.
To the extent that missing Deposit Securities are not received by 1:00 p.m., Eastern Time, on the third Business Day following
the day on which the purchase order is deemed received by the Distributor or in the event a mark to market payment is not made
within one Business Day following notification by the Distributor that such a payment is required, the Trust may use the cash on
deposit to purchase the missing Deposit Securities. Authorized Participants will be liable to the Trust for the costs incurred
by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase
price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received
by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused
portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Administrator
or purchased by the Trust and deposited into the Trust. In addition, a transaction fee will be charged in all cases. The delivery
of Creation Units of the Fund so created will occur no later than the third Business Day following the day on which the purchase
order is deemed received by the Distributor.
Acceptance of Orders for Creation Units.
The Trust reserves the absolute right to reject a creation order transmitted to it by the Distributor in respect of the Fund if
(a) the order is not in proper form; (b) the investor(s), upon obtaining the shares ordered, would own 80%
or more of the
currently outstanding shares of the Fund; (c) the Deposit Securities delivered are not as disseminated through the facilities of
the Exchange for that date by the Administrator, as described above; (d) acceptance of the Deposit Securities or Cash Purchase
Amount would have certain adverse tax consequences to the Fund; (e) the acceptance of the Fund Deposit or Cash Purchase Amount
would, in the opinion of counsel, be unlawful; (f) the acceptance of the Fund Deposit or Cash Purchase Amount would otherwise,
in the discretion of the Trust or the Advisor, have an adverse effect on the Trust or the rights of beneficial owners; or (g) in
the event that circumstances outside the control of the Trust, the Distributor and the Advisor make it for all practical purposes
impossible to process creation orders. Examples of such circumstances include acts of God or public service or utility problems
such as fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and computer failures; market
conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the
Trust, the Advisor, the Distributor, DTC, NSCC or any other participant in the creation process, and similar extraordinary events.
The Distributor shall notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on behalf of the
creator of a Creation Unit of its rejection of the order of such person. The Trust, the Administrator and the Distributor are under
no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits or Cash Purchase Amounts
nor shall either of them incur any liability for the failure to give any such notification.
All questions as to the number of shares
of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to
be delivered shall be determined by the Trust, and the Trust’s determination shall be final and binding.
Creation Transaction Fee.
To compensate
the Trust for transfer and other transaction costs involved in creation transactions through the Clearing Process, investors will
be required to pay a minimum creation transaction fee, assessed per transaction, as follows:
Fund
|
Creation Transaction Fee*
|
AdvisorShares Sage Core Reserves ETF
|
$500
|
* To the extent a Creation Unit consists
of more than 100 securities, an additional Creation Transaction Fee may be charged to Authorized Participants to the next highest
$500 increment at the following rates: (i) $5 per book-entry security settled via the NSCC’s CNS; and (ii) $15 per security
for “in-kind” settlements settled outside the NSCC, and all physical settlements, including options, futures and other
derivatives.
The Fund, subject to approval by the Board,
may adjust the fee from time to time based upon actual experience. Investors who use the services of a broker or other such intermediary
in addition to an Authorized Participant to effect a creation of a Creation Unit may be charged a fee for such services.
Redemption
Shares may be redeemed only in Creation
Units at their NAV next determined after receipt of a redemption request in proper form by the Fund through the Administrator and
only on a Business Day. The Trust will not redeem shares in amounts less than Creation Units. Beneficial Owners must accumulate
enough shares in the secondary market to constitute a Creation Unit in order to have such shares redeemed by the Trust. There can
be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of
a Creation Unit. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of
shares to constitute a redeemable Creation Unit.
With respect to the Fund, the Administrator,
through the NSCC, makes available immediately prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern Time)
on each Business Day, the Fund Securities that will be applicable (subject to possible amendment or correction) to redemption requests
received in proper form (as defined below) on that day. Fund Securities received on redemption may not be identical to Deposit
Securities which are applicable to creations of Creation Units.
Cash Redemption Amount.
Unless cash
redemptions are available or specified for the Fund, the redemption proceeds for a Creation Unit generally consist of Fund Securities
– as announced by the Administrator on the Business Day of the request for redemption received in proper form – plus
cash in an amount equal to the difference between the NAV of the shares being redeemed, as next determined after receipt of a request
in proper form, and the value of the Fund Securities (the “Cash Redemption Amount”), less a redemption transaction
fee described below in the section entitled “Redemption Transaction Fee”. In the event that the Fund Securities have
a value greater than the NAV of the shares, a compensating cash payment equal to the differential is required to be made by or
through an Authorized Participant by the redeeming shareholder.
Placement of Redemption Orders Using
Clearing Process.
Orders to redeem Creation Units through the Clearing Process must be delivered through a Participating Party
that has executed the Participant Agreement. An order to redeem Creation Units using the Clearing Process is deemed received on
the Transmittal Date if (i) such order is received by the Administrator not later than 3:00 p.m., Eastern Time on such Transmittal
Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed; such order will be effected based
on the NAV of the Fund as next determined. An order to redeem Creation Units using the Clearing Process made in proper form but
received by the Fund after 3:00 p.m., Eastern Time will be deemed received on the next Business Day immediately following the Transmittal
Date and will be effected at the NAV next determined on such Business Day. The requisite Fund Securities and the Cash Redemption
Amount will be transferred by the third (3rd) NSCC Business Day following the date on which such request for redemption is deemed
received.
Placement of Redemption Orders Outside
Clearing Process.
Orders to redeem Creation Units outside the Clearing Process must be delivered through a DTC Participant
that has executed the Participant Agreement.
A DTC Participant who wishes to place an order for redemption of Creation Units
to be effected outside the Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant
is not using the Clearing Process and that redemption of Creation Units will instead be effected through transfer of shares directly
through DTC. An order to redeem Creation Units outside the Clearing Process is deemed received by the Administrator on the Transmittal
Date if (i) such order is received by the Administrator not later than 3:00 p.m., Eastern Time on such Transmittal Date; (ii) such
order is accompanied or proceeded by the requisite number of shares of the Fund and/or the Cash Redemption Amount specified in
such order, which delivery must be made through DTC to the Administrator no later than 11:00 a.m. and 2:00 p.m., respectively,
Eastern Time, on the next Business Day following such Transmittal Date (the “DTC Cut-Off-Time”); and (iii) all other
procedures set forth in the Participant Agreement are properly followed.
After the Administrator has deemed an order
for redemption outside the Clearing Process received, the Administrator will initiate procedures to transfer the requisite Fund
Securities, which are expected to be delivered within three Business Days, and/or the Cash Redemption Amount to the Authorized
Participant, on behalf of the redeeming Beneficial Owner, by the third Business Day following the Transmittal Date on which such
redemption order is deemed received by the Administrator.
The calculation of the value of the Fund
Securities and the Cash Redemption Amount to be delivered upon redemption will be made by the Administrator according to the procedures
set forth under “Determination of Net Asset Value” computed on the Business Day on which a redemption order is deemed
received by the Administrator. Therefore, if a redemption order in proper form is submitted to the Administrator by a DTC Participant
not later than 3:00 p.m., Eastern Time on the Transmittal Date, and the requisite number of shares of the Fund are delivered to
the custodian prior to the DTC Cut-Off-Time, then the value of the Fund Securities and/or the Cash Redemption Amount to be delivered
will be determined by the Administrator on such Transmittal Date. If, however, a redemption order is submitted to the Administrator
by a DTC Participant not later than 3:00 p.m., Eastern Time on the Transmittal Date, but either (1) the requisite number of shares
of the Fund are not delivered by the DTC Cut-Off-Time as described above on the next Business Day following the Transmittal Date
or (2) the redemption order is not submitted in proper form, then the redemption order will not be deemed received as of the Transmittal
Date. In such case, the value of the Fund Securities and the Cash Redemption Amount to be delivered will be computed on the Business
Day that such order is deemed received by the Administrator,
i.e.
, the Business Day on which the shares of the Fund are
delivered through DTC to the Administrator by the DTC Cut-Off-Time on such Business Day pursuant to a properly submitted redemption
order.
If it is not possible to effect deliveries
of the Fund Securities, the Trust may in its discretion exercise its option to redeem such shares in cash, and the redeeming Beneficial
Owner will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash which
the Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV of its
shares based on the NAV of shares of the Fund next determined after the redemption request is received in proper form (minus a
redemption transaction fee and additional charge for requested cash redemptions specified above, to offset the Trust’s brokerage
and other transaction costs associated with the disposition of Fund Securities). The Fund may also, in its sole discretion, upon
request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact composition of the Fund
Securities but does not differ in NAV.
Redemptions of shares for Fund Securities
will be subject to compliance with applicable federal and state securities laws and the Fund (whether or not it otherwise permits
cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Fund could not lawfully deliver specific
Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An Authorized
Participant or an investor for which it is acting subject to a legal restriction with respect to a particular stock included in
the Fund Securities applicable to the redemption of a Creation Unit may be paid an equivalent amount of cash. The Authorized Participant
may request the redeeming Beneficial Owner of the shares to complete an order form or to enter into agreements with respect to
such matters as compensating cash payment, beneficial ownership of shares or delivery instructions. The Trust also reserves the
right to offer an “all cash” option for redemptions of Creation Units for the Fund.
The right of redemption may be suspended
or the date of payment postponed with respect to the Fund (1) for any period during which the NYSE is closed (other than customary
weekend and holiday closings); (2) for any period during which trading on the NYSE is suspended or restricted; (3) for any period
during which an emergency exists as a result of which disposal of the shares of the Fund or determination of the shares’
NAV is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
Redemption Transaction Fee.
To compensate
the Trust for transfer and other transaction costs involved in redemption transactions through the Clearing Process, investors
will be required to pay a minimum redemption transaction fee, assessed per transaction as follows:
Fund
|
Redemption Transaction Fee*
|
AdvisorShares Sage Core Reserves ETF
|
$500
|
* To the extent a Creation Unit consists
of more than 100 securities, an additional Redemption Transaction Fee may be charged to Authorized Participants to the next highest
$500 increment at the following rates: (i) $5 per book-entry security settled via the NSCC’s CNS; and (ii) $15 per security
for “in-kind” settlements settled outside the NSCC, and all physical settlements, including options, futures and other
derivatives.
The Fund, subject to approval by the Board,
may adjust the fee from time to time based upon actual experience. Investors who use the services of a broker or other such intermediary
in addition to an Authorized Participant to effect a redemption of a Creation Unit may be charged a fee for such services.
DETERMINATION OF NET ASSET VALUE
The following information supplements and
should be read in conjunction with the section in the Fund’s Prospectus entitled “Calculating NAV.”
The NAV per share of the Fund is computed
by dividing the value of the net assets of the Fund (
i.e.
, the value of its total assets less total liabilities) by the
total number of shares of the Fund outstanding, rounded to the nearest cent. Expenses and fees, including without limitation, the
management, administration and distribution fees, are accrued daily and taken into account for purposes of determining NAV per
share. The NAV per share for the Fund is calculated by the Administrator and determined as of the close of the regular trading
session on the Exchange (ordinarily 4:00 p.m., Eastern Time) on each day that such exchange is open.
In computing the Fund’s NAV, the
Fund’s securities holdings are valued based on their last readily available market price. Price information on listed securities,
including ETFs in which the Fund invests, is taken from the exchange where the security is primarily traded. Other portfolio securities
and assets for which market quotations are not readily available or determined to not represent the current fair value are valued
based on fair value as determined in good faith by the Fund’s Sub-Advisor in accordance with procedures adopted by the Board.
DIVIDENDS, DISTRIBUTIONS, AND
TAXES
Dividends and Distributions
The following information supplements and
should be read in conjunction with the section in the Prospectus entitled “Shareholder Information.”
General Policies.
Dividends from
net investment income, if any, are declared and paid at least annually by the Fund. Distributions of net realized securities gains,
if any, generally are declared and paid once a year, but the Fund may make distributions on a more frequent basis for the Fund
to comply with the distribution requirements of the Internal Revenue Code, in all events in a manner consistent with the provisions
of the 1940 Act.
Dividends and other distributions on shares
are distributed, as described below, on a pro rata basis to Beneficial Owners of such shares. Dividend payments are made through
DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds received from the Fund.
The Fund may make additional distributions
to the extent necessary (i) to distribute the entire annual taxable income of the Fund, plus any net capital gains and (ii) to
avoid imposition of the excise tax imposed by Section 4982 of the Internal Revenue Code. Management of the Trust reserves the right
to declare special dividends for the Fund if, in its reasonable discretion, such action is necessary or advisable to preserve the
status of the Fund as a RIC to avoid imposition of income or excise taxes on undistributed income.
Dividend Reinvestment Service.
No
reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service
for use by Beneficial Owners of the Fund for reinvestment of their dividend distributions. Beneficial Owners should contact their
broker to determine the availability and costs of the service and the details of participation therein. Brokers may require Beneficial
Owners to adhere to specific procedures and timetables. If this service is available and used, dividend distributions of both income
and realized gains will be automatically reinvested in additional whole shares of the Fund purchased in the secondary market.
Federal Income Taxes
The following is a summary of certain additional
federal income tax considerations generally affecting the Fund and its shareholders that supplements the summary in the Prospectus.
No attempt is made to present a comprehensive explanation of the federal, state, local or foreign tax treatment of the Fund or
its shareholders, and the discussion here and in the Prospectus is not intended to be a substitute for careful tax planning.
The following general discussion of certain
federal income tax consequences is based on provisions of the Internal Revenue Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative changes or court decisions, may significantly change
the conclusions expressed herein, and may have a retroactive effect with respect to the transactions contemplated herein.
Shareholders are urged to consult their
own tax advisers regarding the application of the provisions of tax law described in this SAI in light of the particular tax situations
of the shareholders and regarding specific questions as to federal, state, or local taxes.
Regulated Investment Company (RIC)
Status
The Fund will seek to qualify for treatment
as a RIC under the Internal Revenue Code. Provided that for each tax year the Fund: (i) meets the requirements to be treated as
a RIC (as discussed below); and (ii) distributes at least an amount equal to the sum of 90% of the Fund’s net investment
income for such year (including, for this purpose, the excess of net realized short-term capital gains over net long-term capital
losses) and 90% of its net tax-exempt interest income, the Fund itself will not be subject to federal income taxes to the extent
the Fund’s net investment income and the Fund’s net realized capital gains, if any, are distributed to the Fund’s
shareholders. One of several requirements for RIC qualification is that the Fund must receive at least 90% of the Fund’s
gross income each year from dividends, interest, payments with respect to certain securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived with respect to the Fund’s business of investing
in stock, securities, foreign currencies and net income from an interest in a qualified publicly traded partnership (the “90%
Test”). A second requirement for qualification as a RIC is that the Fund must diversify its holdings so that, at the end
of each quarter of the Fund’s taxable year: (a) at least 50% of the market value of the Fund’s total assets is represented
by cash and cash items, U.S. government securities, securities of other RICs, and other securities, with these other securities
limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Fund’s total assets or 10% of
the outstanding voting securities of such issuer; and (b) not more than 25% of the value of its total assets are invested in the
securities (other than U.S. government securities or securities of other RICs) of any one issuer, the securities (other than securities
of other RICs) of two or more issuers which the Fund controls and which are engaged in the same, similar, or related trades or
businesses, or the securities of one or more qualified publicly traded partnerships (the “Asset Test”).
If the Fund fails to satisfy the 90% Test
or the Asset Test, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect
and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief is provided
for certain
de minimis
failures of the Asset Test. In order to qualify for relief provisions for a failure to meet the Asset
Test, the Fund may be required to dispose of certain assets. If the Fund fails to qualify for treatment as a RIC for any year,
and the relief provisions are not available, all of its taxable income will be subject to federal income tax at regular corporate
rates without any deduction for distributions to shareholders. In such case, its shareholders would be taxed as if they received
ordinary dividends, although the dividends could be eligible for the dividends received deduction for corporate shareholders and
the dividends may be eligible for the lower tax rates available to noncorporate shareholders on qualified dividend income. To requalify
for treatment as a RIC in a subsequent taxable year, the Fund would be required to satisfy the RIC qualification requirements for
that year and to distribute any earnings and profits from any year in which the Fund failed to qualify for tax treatment as a RIC.
If the Fund failed to qualify as a RIC for a period greater than two taxable years, it would generally be required to pay a Fund-level
tax on certain net built-in gains recognized with respect to certain of its assets upon a disposition of such assets within ten
years of qualifying as a RIC in a subsequent year. The Board reserves the right not to maintain the qualification of the Fund for
treatment as a RIC if it determines such course of action to be beneficial to shareholders. If the Fund determines that it will
not qualify for treatment as a RIC under Subchapter M of the Internal Revenue Code, the Fund will establish procedures to reflect
the anticipated tax liability in the Fund’s NAV.
The Fund may elect to treat part or all
of any “qualified late year loss” as if it had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and profits. A “qualified late year loss”
generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the
current taxable year, and certain other late-year losses.
If the Fund has a “net capital loss”
(that is, capital losses in excess of capital gains) for a taxable year, the excess of the Fund’s net short-term capital
losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund’s
next taxable year, and the excess (if any) of the Fund’s net long-term capital losses over its net short-term capital gains
is treated as a long-term capital loss arising on the first day of the Fund’s next taxable year.
The Fund will generally be subject to a
nondeductible 4% federal excise tax to the extent it fails to distribute by the end of any calendar year at least the sum of 98%
of its ordinary income for the year and 98.2% of its capital gain net income for the one-year period ending on October 31 of that
year, plus certain other amounts. The Fund intends to make sufficient distributions, or deemed distributions, to avoid imposition
of the excise tax, but can make no assurances that all such tax liability will be eliminated.
Fund Distributions
The Fund intends to distribute substantially
all its net investment income and net realized capital gains to shareholders, at least annually. The distribution of net investment
income and net realized capital gains will be taxable to Fund shareholders regardless of whether the shareholder elects to receive
these distributions in cash or in additional shares. However, the Fund may determine not to distribute, or determine to defer the
distribution of, some portion of its income in non-routine circumstances. If the Fund retains for investment an amount equal to
all or a portion of its net long-term capital gains in excess of its net short-term capital losses (including any capital loss
carryovers), it will be subject to a corporate tax on the amount retained. In that event, the Fund will designate such retained
amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in income for U.S.
federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, (b) will
be entitled to credit their proportionate shares of the income tax paid by the Fund on the undistributed amount against their U.S.
federal income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if any, and
(c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in their shares by an amount equal
to the excess of the amount of undistributed net capital gain included in their respective income over their respective income
tax credits. Organizations or persons not subject to U.S. federal income tax on such capital gains will be entitled to a refund
of their pro rata share of such taxes paid by the Fund upon timely filing appropriate returns or claims for refund with the Internal
Revenue Service (the “IRS”).
The Fund’s distributions from income
and short-term capital gains will generally be taxable as ordinary income. Distributions reported to Fund shareholders as capital
gain dividends shall be taxable as long-term capital gains (which, for noncorporate shareholders, are taxable at reduced rates),
regardless of how long the shareholders have owned the shares. The Fund does not anticipate that a significant portion of its distributions
will be eligible for treatment as qualified dividend income (which for noncorporate taxpayers is taxable at reduced rates) or for
the dividends-received deduction for corporate taxpayers. The Fund’s shareholders will be notified annually by the Fund as
to the federal tax status of all distributions made by the Fund. Distributions may be subject to state and local taxes.
Shareholders who have not held Fund shares
for a full year should be aware that the Fund may report and distribute, as ordinary dividends or capital gain dividends, a percentage
of income that is not equal to the percentage of the Fund’s ordinary income or net capital gain, respectively, actually earned
during the period of investment in the Fund.
If the Fund’s distributions for a
taxable year exceed its taxable income and capital gains realized during a taxable year, all or a portion of the distributions
made for the taxable year may be recharacterized as a return of capital to shareholders. A return of capital distribution will
generally not be taxable, but will reduce each shareholder’s cost basis in the Fund and generally result in a higher reported
capital gain or lower reported capital loss when those shares on which the distribution was received are sold.
B
eginning
in 2013, U.S. individuals with income exceeding certain thresholds are subject to a 3.8% Medicare contribution tax on their “net
investment income,” including interest, dividends, and capital gains (including capital gains realized on the sale or exchange
of shares). This 3.8% tax also applies to all or a portion of the undistributed net investment income of certain shareholders that
are estates and trusts.
Sale or Redemption of Shares
Sales and redemptions of Fund shares are
generally taxable transactions for federal income tax purposes. In general, if you hold your shares as a capital asset, gain or
loss realized will be capital in nature and will be classified as long-term or short-term, depending on the length of the time
shares have been held.
All or a portion of any loss realized upon
the sale or redemption of Fund shares will be disallowed to the extent that substantially identical shares in the Fund are purchased
(through reinvestment of dividends or otherwise) within 30 days before or after a share redemption. Any loss disallowed under these
rules will be added to the tax basis in the newly purchased shares. In addition, any loss realized by a shareholder on the disposition
of shares held for six months or less is treated as a long-term capital loss to the extent of any amounts treated as distributions
of long-term capital gains to the shareholder with respect to such shares (including any amounts credited to the shareholder as
undistributed capital gains).
Foreign Taxes
The Fund may be subject to foreign withholding
taxes on income it may earn from investing in foreign securities which may reduce the return on such investments. In addition,
the Fund’s investments in foreign securities or foreign currencies may increase or accelerate the Fund’s recognition
of ordinary income and may affect the timing or amount of the Fund’s distributions. If more than 50% of the value of the
Fund’s assets at taxable year- end is represented by debt and equity securities of foreign corporations, the Fund may elect
to permit shareholders who are U.S. citizens, resident aliens or U.S. corporations to claim a foreign tax credit or deduction (but
not both) on their U.S. income tax returns for their pro rata portion of qualified taxes paid by the Fund to foreign countries
in respect of foreign securities the Fund has held for at least the minimum period specified in the Internal Revenue Code. If at
least 50% of the value of the Fund’s total assets at the close of each quarter of a taxable year consists of interests in
RICs (including ETFs that are RICs), the Fund may elect to permit shareholders who are U.S. citizens, resident aliens or U.S. corporations
to claim a foreign tax credit or deduction (but not both) on their U.S. federal income tax returns for their pro rata portion of
(1) any qualified taxes paid by those other RICs and passed through to the Fund for that taxable year and (2) any qualified
foreign taxes paid by the Fund itself for that taxable year. In the event the Fund makes either such election, each such shareholder
will be required to include in gross income its pro rata share of such taxes. Certain limitations imposed by the Internal Revenue
Code may prevent shareholders from receiving a full foreign tax credit or deduction for their allocable amount of such taxes.
Investment in Certain ETFs and Certain
Direct Fund Investments
The Fund may invest in ETFs that are taxable
as RICs under the Internal Revenue Code. Any income the Fund receives from such ETFs should be qualifying income for purposes of
the 90% Test. Because the Fund may invest in ETFs taxable as RICs and distributions from any such ETFs to the Fund may be reinvested
in additional shares of those ETFs, the Fund may have to sell assets to distribute income derived from those ETFs. Those sales
may occur at a time when the Sub-Advisor would not otherwise have chosen to sell such securities and will generally result in taxable
gain or loss.
The Fund also may invest in one or more
ETFs or other ETPs that are not taxable as RICs under the Internal Revenue Code and that may generate non-qualifying income for
purposes of the 90% Test. Similarly, the Fund may make certain direct investments that may produce non-qualifying income for purposes
of the 90% Test. The Fund’s Sub-Advisor and Advisor anticipate monitoring investments that may produce non-qualifying income
very closely to ensure that the Fund satisfies the 90% Test. Nevertheless, non-qualifying income of the Fund may be more than anticipated,
the Fund may be unable to generate qualifying income at levels sufficient to ensure it satisfies the 90% Test, or the Fund might
not be able to determine the percentage of qualifying income it derives for a taxable year until after year-end. In any such case,
the Fund could fail the 90% Test and fail to qualify as a RIC.
The Fund may invest in ETPs that are structured
in a manner that causes income, gains, losses, credits and deductions of the ETPs to be taken into account for U.S. federal income
tax purposes by the Fund whether or not any distributions are made from the ETPs to the Fund. Thus, the Fund may be required to
take into account income or gains in a taxable year without receiving any cash and may have to sell assets to distribute such income
or gains. Those sales will generally result in taxable gain or loss and may occur at a time when the Fund’s Sub-Advisor or
Advisor would not otherwise have chosen to sell such securities.
Options, Swaps and Other Complex
Securities
The Fund may invest in complex securities
such as equity options, index options, repurchase agreements, foreign currency contracts, hedges and swaps, transactions treated
as straddles for U.S. federal income tax purposes, and futures contracts. These investments may be subject to numerous special
and complex tax rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income
or capital gain, accelerate the recognition of income to the Fund and/or defer the Fund’s ability to recognize losses. In
turn, those rules may affect the amount, timing or character of the income distributed by the Fund.
With respect to any investments in zero
coupon securities which are sold at original issue discount and thus do not make periodic cash interest payments, the Fund may
be required to include as part of its current income the imputed interest on such obligations even though it may not have received
any interest payments on such obligations during that period.
The Fund may be required for federal income
tax purposes to mark to market and recognize as income for each taxable year its net unrealized gains and losses on certain futures
contracts and options as of the end of the year as well as those actually realized during the year. Options on “broad based”
securities indices are classified as “non-equity options” under the Internal Revenue Code. Gains and losses resulting
from the expiration, exercise, or closing of such non-equity options, as well as gains and losses resulting from futures contract
transactions, will be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss (hereinafter, “blended
gain or loss”). In addition, any non-equity option and futures contract held by the Fund on the last day of a fiscal year
will be treated as sold for market value on that date, and gain or loss recognized as a result of such deemed sale will be blended
gain or loss.
Any transactions in foreign currencies
and forward foreign currency contracts may be subject to special provisions of the Internal Revenue Code that, among other things,
may affect the character of gains and losses realized by the Fund (
i.e.
, may affect whether gains or losses are ordinary
or capital), may accelerate recognition of income by the Fund and may defer Fund losses. These rules could therefore affect the
character, amount and timing of distributions to Fund shareholders. These provisions also may require the Fund to mark to market
certain types of positions in its portfolio (
i.e.
, treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts necessary to satisfy the RIC distribution requirements
for avoiding income and excise taxes.
Complex Securities
If the Fund owns shares in certain foreign
investment entities, referred to as “passive foreign investment companies” or “PFICs,” the Fund will generally
be subject to one of the following special tax regimes: (i) the Fund may be liable for U.S. federal income tax, and an additional
interest charge, on a portion of any “excess distribution” from such foreign entity or any gain from the disposition
of such shares, even if the entire distribution or gain is paid out by the Fund as a dividend to its shareholders; (ii) if the
Fund were able and elected to treat a PFIC as a “qualifying electing fund” or “QEF,” the Fund would be
required each year to include in income, and distribute to shareholders in accordance with the distribution requirements set forth
above, the Fund’s pro rata share of the ordinary earnings and net capital gains of the passive foreign investment company,
whether or not such earnings or gains are distributed to the Fund; or (iii) the Fund may be entitled to mark-to-market annually
shares of the PFIC, whether or not any distributions are made to the Fund, and in such event would be required to distribute to
shareholders any such mark-to-market gains in accordance with the distribution requirements set forth above.
Back-Up Withholding
In certain cases, the Fund will be required
to withhold (as “backup withholding”) on reportable dividends and distributions, as well as the proceeds of any redemptions
of Creation Units, paid to a shareholder who: (1) has failed to provide a correct taxpayer identification number (usually the shareholder’s
social security number); (2) is subject to back-up withholding by the IRS; (3) has failed to provide the Fund with the certifications
required by the IRS to document that the shareholder is not subject to back-up withholding; or (4) has failed to certify that he
or she is a U.S. person (including a U.S. resident alien). The backup withholding rate is currently 28%. Backup withholding will
not, however, be applied to payments that have been subject to the 30% withholding tax applicable to shareholders who are neither
citizens nor residents of the U.S. (discussed below).
Foreign Shareholders
Foreign shareholders (
i.e.
, nonresident
alien individuals and foreign corporations, partnerships, trusts and estates) are generally subject to U.S. withholding tax at
the rate of 30% (or a lower tax treaty rate) on distributions derived from net investment income and short-term capital gains.
Different tax consequences may result if the foreign shareholder is engaged in a trade or business within the United States. In
addition, the tax consequences to a foreign shareholder entitled to claim the benefits of a tax treaty may be different than those
described above.
Ordinary dividends, redemption payments
and certain capital gain dividends paid after December 31, 2013 to a non-U.S. shareholder that fails to make certain
required certifications, that is a “foreign financial institution” as defined in Section 1471 of the Internal Revenue
Code and that does not meet the requirements imposed on foreign financial institutions by Section 1471, are generally subject to
withholding tax at a 30% rate. Under current IRS guidance, withholding on such payments will begin at different times depending
on the type of payment, the type of payee, and whether the shareholder’s account is opened before or after January 1, 2014.
Withholding with respect to ordinary dividends is currently scheduled to begin on January 1, 2014 for accounts opened on or after
that date and on certain later dates for accounts opened before January 1, 2014. Withholding on redemption payments and certain
capital gain dividends is currently scheduled to begin on January 1, 2017. The extent, if any, to which such withholding tax may
be reduced or eliminated by an applicable tax treaty is unclear.
Taxes on Creation and Redemptions
of Creation Units
A person who purchases a Creation Unit
by exchanging securities in-kind generally will recognize a gain or loss equal to the difference between the market value of the
Creation Units at the time, and the purchaser’s aggregate basis in the securities surrendered and any net cash paid. A person
who redeems Creation Units and receives securities in-kind from the Fund will generally recognize a gain or loss equal to the difference
between the redeemer’s basis in the Creation Units, and the aggregate market value of the securities received and any net
cash received. The IRS, however, may assert that a loss realized upon an in-kind exchange of securities for Creation Units or an
exchange of Creation Units for securities cannot be deducted currently under the rules governing “wash sales,” or on
the basis that there has been no significant change in economic position.
Any capital gain or loss realized upon
the creation of Creation Units will generally be treated as long-term capital gain or loss if the securities exchanged for such
Creation Units have been held for more than one year. Any capital gain or loss realized upon the redemption of Creation Units will
generally be treated as long-term capital gain or loss if the shares comprising the Creation Units have been held for more than
one year. Otherwise, such capital gains or losses will be treated as short-term capital gains or losses. In some circumstances,
a redemption of Creation Units may be treated as resulting in a distribution to which section 301 of the Internal Revenue Code
applies, potentially causing amounts received by the shareholder in the redemption to be treated as dividend income rather than
as a payment in exchange for Creation Units. The rules for determining when a redemption will be treated as giving rise to a distribution
under section 301 of the Internal Revenue Code and the tax consequences of Internal Revenue Code section 301 distributions are
complex. Persons purchasing or redeeming Creation Units should consult their own tax advisers with respect to the tax treatment
of any creation or redemption transaction.
The Fund has the right to reject an order
for Creation Units if the purchaser (or group of purchasers) would, upon obtaining the shares so ordered, own 80% or more of the
outstanding shares of the Fund and if, pursuant to section 351 of the Internal Revenue Code, the Fund would have a basis in the
deposit securities different from the market value of such securities on the date of deposit. The Fund also has the right to require
information necessary to determine beneficial share ownership for purposes of the 80% determination.
Other Tax Considerations
Certain tax-exempt shareholders, including
qualified pension plans, individual retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt entities,
generally are exempt from federal income taxation except with respect to their unrelated business taxable income (“UBTI”).
Under current law, a RIC generally serves to block UBTI from being realized by its tax-exempt shareholders. However, notwithstanding
the foregoing, tax-exempt shareholders could realize UBTI by virtue of an investment in the Fund where, for example, (i) the Fund
invests in REITs that hold residual interests in real estate mortgage investment conduits (“REMICs”) or (ii) shares
in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of section 514(b) of
the Internal Revenue Code, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund. Charitable remainder
trusts are subject to special rules and should consult their tax advisers. There are no restrictions preventing ETPs from holding
investments in REITs that hold residual interests in REMICs, and the Fund may do so. The IRS has issued guidance with respect to
these issues and prospective shareholders, especially charitable remainder trusts, are strongly encouraged to consult with their
tax advisers regarding these issues.
Under U.S. Treasury regulations, if a shareholder
recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders of portfolio securities are in many cases excepted
from this reporting requirement, but under current guidance, shareholders of a RIC such as the Fund are not excepted. The fact
that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer’s treatment
of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light
of their individual circumstances.
The Fund may be subject to tax or taxes
in certain states where the Fund does business. Furthermore, in those states which have income tax laws, the tax treatment of the
Fund and of Fund shareholders with respect to distributions by the Fund may differ from federal tax treatment.
Shareholders are urged to consult their
own tax advisers regarding the particular tax consequences to them of an investment in the Fund and regarding specific questions
as to foreign, federal, state, or local taxes.
OTHER INFORMATION
Portfolio Holdings
The Board has approved portfolio holdings
disclosure policies that govern the timing and circumstances of disclosure to shareholders and third parties of information regarding
the portfolio investments held by the Fund. These policies and procedures, as described below, are designed to ensure that disclosure
of portfolio holdings is in the best interests of Fund shareholders, and address conflicts of interest between the interests of
Fund shareholders and those of the Fund’s Advisor, Sub-Advisor, Distributor, or any affiliated person of the Fund, the Advisor,
Sub-Advisor, or the Distributor.
Each Business Day, Fund portfolio holdings
information will be provided to the Distributor or other agent for dissemination through the facilities of the NSCC and/or other
fee-based subscription services to NSCC members and/or subscribers to those other fee-based subscription services, including Authorized
Participants, and to entities that publish and/or analyze such information in connection with the process of purchasing or redeeming
Creation Units or trading shares of the Fund in the secondary market. This information typically reflects the Fund’s anticipated
holdings on the following Business Day. Daily access to information concerning the Fund’s portfolio holdings also is permitted
(i) to certain personnel of those service providers that are involved in portfolio management and providing administrative, operational,
risk management, or other support to portfolio management, including affiliated broker-dealers and/or Authorized Participants,
and (ii) to other personnel of the Advisor, Sub-Advisor, and other service providers, such as the Administrator, and fund accountant,
who deal directly with, or assist in, functions related to investment management, administration, custody and fund accounting,
as may be necessary to conduct business in the ordinary course in a manner consistent with agreements with the Fund and/or the
terms of the Fund’s current registration statement.
From time to time, information concerning
Fund portfolio holdings, other than portfolio holdings information made available in connection with the creation/redemption process,
as discussed above, may also be provided to other entities that provide additional services to the Fund, including, among others,
rating or ranking organizations, in the ordinary course of business, no earlier than one Business Day following the date of the
information. Portfolio holdings information made available in connection with the creation/redemption process may be provided to
other entities that provide additional services to the Fund in the ordinary course of business after it has been disseminated to
the NSCC.
The Fund’s Chief Compliance Officer,
or a Compliance Manager designated by the Chief Compliance Officer, may also grant exceptions to permit additional disclosure of
Fund portfolio holdings information at differing times and with different lag times (the period from the date of the information
to the date the information is made available), if any, in instances where the Fund has legitimate business purposes for doing
so, it is in the best interests of shareholders, and the recipients are subject to a duty of confidentiality, including a duty
not to trade on the nonpublic information and are required to execute an agreement to that effect. The Board will be informed of
any such disclosures at its next regularly scheduled meeting or as soon as is reasonably practicable thereafter. In no event shall
the Fund, the Advisor, the Sub-Advisor, or any other party receive any direct or indirect compensation in connection with the disclosure
of information about Fund portfolio holdings.
The Board exercises continuing oversight
of the disclosure of the Fund’s portfolio holdings by (1) overseeing the implementation and enforcement of Portfolio Holdings
Disclosure Policies and Procedures, the Code of Ethics, and the Protection of Non-Public Information Policies and Procedures (collectively,
the portfolio holdings governing policies) by the Fund’s Chief Compliance Officer and the Fund, (2) considering reports and
recommendations by the Chief Compliance Officer concerning any material compliance matters (as defined in Rule 38a-1 under the
1940 Act and Rule 206(4)-7 under the Advisers Act) that may arise in connection with any portfolio holdings governing policies,
and (3) considering whether to approve or ratify any amendment to any portfolio holdings governing policies. The Board and the
Fund reserve the right to amend the Policies and Procedures at any time and from time to time without prior notice in their sole
discretion. For purposes of the Policies and Procedures, the term “portfolio holdings” means the equity and debt securities
(
e.g
., stocks and bonds) held by the Fund and does not mean the cash investments, derivatives, and other investment positions
(collectively, other investment positions) held by the Fund, which are not disclosed.
In addition to the permitted disclosures
described above, the Fund must disclose its complete holdings quarterly within 60 days of the end of each fiscal quarter in the
Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available,
free of charge, on the EDGAR database on the SEC’s web site at www.sec.gov.
Voting Rights
Each share has one vote with respect to
matters upon which a shareholder vote is required consistent with the requirements of the 1940 Act and the rules promulgated thereunder.
Shareholders receive one vote for every full Fund share owned. The Fund will vote separately on matters relating solely to the
Fund. All shares of the Fund are freely transferable.
As a Delaware statutory trust, the Trust
is not required to hold annual shareholder meetings unless otherwise required by the 1940 Act. However, a meeting may be called
by the Board on the written request of shareholders owning at least 10% of the outstanding shares of the Trust entitled to vote.
If a meeting is requested by shareholders, the Trust will provide appropriate assistance and information to the shareholders who
requested the meeting. Shareholder inquiries can be made by calling 877.843.3831 or by writing to the Trust at 2 Bethesda Metro
Center, Suite 1330, Bethesda, Maryland 20814.
Shareholder Inquiries
Shareholders may visit the Trust’s
web site at www.advisorshares.com or call 877.843.3831 to obtain information on account statements, procedures, and other
related information.
COUNSEL
Bingham McCutchen LLP, located at 2020
K Street, N.W., Washington, D.C. 20006, serves as counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Tait, Weller & Baker LLP, located
at 1818 Market Street, Philadelphia, Pennsylvania 19103, serves as the Fund’s independent registered public accounting firm.
The independent registered public accounting firm is responsible for auditing the annual financial statements of the Fund.
CUSTODIAN
The Bank of New York Mellon, located at
101 Barclay Street, New York, New York 10286, serves as custodian for the Trust and the Fund under a custody agreement between
the Trust and the Custodian. Pursuant to the agreement, the Bank of New York Mellon holds the portfolio securities of the Fund
and maintains all necessary related accounts and records.
FINANCIAL STATEMENTS
As of the date of this SAI, the Fund has
not yet commenced operations and therefore, it does not have any financial statements. The Fund’s financial statements will
be available after the Fund has completed a full year of operations.
PART C: OTHER INFORMATION
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(a)(1)
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Certificate of Trust dated July 30, 2007, as filed with the state of Delaware on August 1, 2007,
for AdvisorShares Trust (the “Registrant” or the “Trust”) is incorporated herein by reference to Exhibit
(a)(1) of the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the U.S.
Securities and Exchange Commission (the “SEC”) via EDGAR Accession No. 0001104659-09-017027 on March 12, 2009.
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(a)(2)
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Registrant’s Agreement and Declaration of Trust dated July 30, 2007 is incorporated herein
by reference to Exhibit (a)(2) of Pre-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form N-1A (File
Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No.
0001104659-09-037448
on
June 9, 2009.
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(b)
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Registrant’s By-Laws dated July 30, 2007 are incorporated herein by reference to Exhibit
(b) of Pre-Effective Amendment No. 1 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No.
0001104659-09-037448
on June 9, 2009.
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(d)(1)
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Advisory Agreement dated June 2, 2009 between the Registrant and AdvisorShares Investments, LLC
is incorporated herein by reference to Exhibit (d)(1) of Post-Effective Amendment No. 9 to the Registrant’s Registration
Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-037333
on July 9, 2010.
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(d)(2)
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Amendment and revised Schedule A, effective as of July 1, 2013, to the Advisory Agreement dated
June 2, 2009 between the Registrant and AdvisorShares Investments, LLC is incorporated herein by reference to Exhibit (d)(2) of
Post-Effective Amendment No. 76 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-13-037874 on July 2, 2013.
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(d)(3)
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Amendment and revised Schedule A to the Advisory Agreement dated June 2, 2009 between the Registrant
and AdvisorShares Investments, LLC, reflecting the addition of the YieldPro ETF, to be filed by amendment.
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(d)(4)
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Sub-Advisory Agreement dated November 20, 2009 between AdvisorShares Investments, LLC and WCM Investment
Management, relating to the WCM/BNY Mellon Focused Growth ADR ETF, is incorporated herein by reference to Exhibit (d)(7) of Post-Effective
Amendment No. 5 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-10-021988 on April 23, 2010.
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(d)(5)
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Sub-Advisory Agreement dated May 10, 2010 between AdvisorShares Investments, LLC and Peritus I
Asset Management, LLC, relating to the Peritus High Yield ETF, is incorporated herein by reference to Exhibit (d)(10) of Post-Effective
Amendment No. 6 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-10-026211 on May 11, 2010.
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(d)(6)
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Sub-Advisory Agreement dated September 9, 2010 between AdvisorShares Investments, LLC and Cambria
Investment Management, Inc. (now Cambria Investment Management, L.P.), relating to the Cambria Global Tactical ETF, is incorporated
herein by reference to Exhibit (d)(12) of Post-Effective Amendment No. 11 to the Registrant’s Registration Statement on Form
N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-049117 on September 13,
2010.
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(d)(7)
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Sub-Advisory Agreement dated September 15, 2010 between AdvisorShares Investments, LLC and Ranger
Alternative Management, L.P., relating to the Active Bear ETF (now, Ranger Equity Bear ETF), is incorporated herein by reference
to Exhibit (d)(14) of Post-Effective Amendment No. 12 to the Registrant’s Registration Statement on Form N-1A (File Nos.
333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-050506 on September 22, 2010.
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(d)(8)
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Sub-Advisory Agreement dated December 22, 2010 between AdvisorShares Investments, LLC and Madrona
Funds, LLC, relating to the Madrona Forward Domestic ETF (now the Madrona Domestic ETF), Madrona Forward International ETF (now
the Madrona International ETF) and Madrona Forward Global Bond ETF (now the Madrona Global Bond ETF), is incorporated herein by
reference to Exhibit (d)(20) of Post-Effective Amendment No. 17 to the Registrant’s Registration Statement on Form N-1A (File
Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-069019 on December 30, 2010.
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(d)(9)
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Sub-Advisory Agreement dated March 14, 2011 between AdvisorShares Investments, LLC and American
Retirement Planners II, Inc., relating to the Meidell Tactical Advantage ETF, is incorporated herein by reference to Exhibit (d)(20)
of Post-Effective Amendment No. 20 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-11-014960 on March 15, 2011.
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(d)(10)
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Sub-Advisory Agreement dated May 9, 2011 between AdvisorShares Investments, LLC and Trim Tabs Asset
Management, LLC, relating to the TrimTabs Float Shrink ETF, is incorporated herein by reference to Exhibit (d)(20) of Post-Effective
Amendment No. 26 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157867 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-11-027848 on May 11, 2011.
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(d)(11)
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Amended and Restated Investment Sub-Advisory Agreement dated March 29, 2012 between AdvisorShares
Investments LLC and Accuvest Global Advisors, relating to the Accuvest Global Opportunities ETF and the Accuvest Global Long Short
ETF, is incorporated herein by reference to Exhibit (d)(22) of Post-Effective Amendment No. 47 to the Registrant’s Registration
Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-12-036318
on June 25, 2012.
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(d)(12)
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Sub-Advisory Agreement dated October 28, 2011 between AdvisorShares Investments, LLC and First
Affirmative Financial Network, LLC, relating to the AdvisorShares Global Echo ETF, is incorporated herein by reference to Exhibit
(d)(24) of Post-Effective Amendment No. 47 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876
and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-12-036318 on June 25, 2012.
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(d)(13)
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Sub-Advisory Agreement dated September 21, 2011 between AdvisorShares Investments, LLC and Reynders,
McVeigh Capital Management, LLC, relating to the AdvisorShares Global Echo ETF, is incorporated herein by reference to Exhibit
(d)(28) of Post-Effective Amendment No. 35 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876
and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-11-055384 on September 28, 2011.
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(d)(14)
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Sub-Advisory Agreement dated September 23, 2011 between AdvisorShares Investments, LLC and Community
Capital Management, Inc., relating to the AdvisorShares Global Echo ETF, is incorporated herein by reference to Exhibit (d)(26)
of Post-Effective Amendment No. 47 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-12-036318 on June 25, 2012.
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(d)(15)
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Sub-Advisory Agreement dated September 23, 2011 between AdvisorShares Investments, LLC and Baldwin
Brothers, Inc., relating to the AdvisorShares Global Echo ETF, is incorporated herein by reference to Exhibit (d)(30) of Post-Effective
Amendment No. 35 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-11-055384 on September 28, 2011.
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(d)(16)
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Sub-Advisory Agreement dated October 28, 2011 between AdvisorShares Investments, LLC and Partnervest
Advisory Services, LLC, relating to the STAR Global Buy-Write ETF, is incorporated herein by reference to Exhibit (d)(30) of Post-Effective
Amendment No. 38 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-11-060142 on October 31, 2011.
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(d)(17)
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Sub-Advisory Agreement dated December 21, 2011 between AdvisorShares Investments, LLC and Commerce
Asset Management, LLC, relating to the QAM Equity Hedge ETF, is incorporated herein by reference to Exhibit (d)(30) of Post-Effective
Amendment No. 47 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-12-036318 on June 25, 2012.
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(d)(18)
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Sub-Advisory Agreement dated December 8, 2011 between AdvisorShares Investments, LLC and Your Source
Financial PLC, relating to the AdvisorShares Global Alpha & Beta ETF, is incorporated herein by reference to Exhibit (d)(33)
of Post-Effective Amendment No. 44 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-12-004761 on January 30, 2012.
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(d)(19)
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Sub-Advisory Agreement dated June 5, 2012 between AdvisorShares Investments, LLC and Pring Turner
Capital Group, relating to the Pring Turner Business Cycle ETF, is incorporated herein by reference to Exhibit (d)(32) of Post-Effective
Amendment No. 48 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-12-036752 on June 27, 2012.
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(d)(20)
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Sub-Advisory Agreement dated June 21, 2012 between AdvisorShares Investments, LLC and Newfleet
Asset Management, LLC, relating to the Newfleet Multi-Sector Income ETF, is incorporated herein by reference to Exhibit (d)(33)
of Post-Effective Amendment No. 50 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-12-050438 on September 10, 2012.
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(d)(21)
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Sub-Advisory Agreement dated July 1, 2013 between AdvisorShares Investments, LLC and AthenaInvest
Advisors, LLC, relating to the Athena International Bear ETF, is incorporated herein by reference to Exhibit (d)(20) of Post-Effective
Amendment No. 76 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-13-037874 on July 2, 2013.
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(d)(22)
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Investment Sub-Advisory Agreement dated January 11, 2013 between Advisorshares Investments, LLC
and Treesdale Partners, LLC, relating to the International Gold ETF, Gartman Gold/Yen ETF, Gartman Gold/British Pound ETF, and
Gartman Gold/Euro ETF is incorporated herein by reference to Exhibit (d)(23) of Post-Effective Amendment No. 59 to the Registrant’s
Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-13-004364
on January 29, 2013.
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(d)(23)
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Investment Sub-Advisory Agreement, dated July 31, 2013, between AdvisorShares Investments, LLC
and Sage Advisory Services, Ltd. Co., relating to the Sage Core Reserves ETF, is filed herewith.
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(d)(24)
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Form of Sub-Advisory Agreement between AdvisorShares Investments, LLC and Recon Capital Partners,
LLC, relating to the Recon Capital Alternative Income ETF, is incorporated herein by reference to Exhibit (d)(25) of Post-Effective
Amendment No. 63 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-13-012663 on March 4, 2013.
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(d)(25)
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Sub-Advisory Agreement between AdvisorShares Investments, LLC and Treesdale Partners, LLC, relating
to the Treesdale Rising Rates ETF, to be filed by amendment.
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(d)(26)
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Form of Sub-Advisory Agreement between AdvisorShares Investments, LLC and The Elements Financial
Group, LLC, relating to the YieldPro ETF, is incorporated herein by reference to Exhibit (d)(26) of Post-Effective Amendment No.
78 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via
EDGAR Accession No. 0001144204-13-043644 on August 7, 2013.
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(e)(1)
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ETF Distribution Agreement dated June 25, 2009 between the Registrant and Foreside Fund Services,
LLC is incorporated herein by reference to Exhibit (e)(1) of Post-Effective Amendment No. 4
to the Registrant’s
Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-013601
on March 16, 2010
.
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(e)(2)
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Sixth Amendment and revised Exhibit A dated August 15, 2012 to the ETF Distribution Agreement dated
June 25, 2009 between the Registrant and Foreside Fund Services, LLC is incorporated herein by reference to Exhibit (e)(2) of Post-Effective
Amendment No. 50 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
SEC via EDGAR Accession No. 0001144204-12-050438 on September 10, 2012.
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(e)(3)
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Eighth Amendment and revised Exhibit A dated January 17, 2013 to the ETF Distribution Agreement
dated June 25, 2009 between the Registrant and Foreside Fund Services, LLC is incorporated herein by reference to Exhibit (e)(3)
of Post-Effective Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-13-004364 on January 29, 2013.
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(e)(4)
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Ninth Amendment and revised Exhibit A dated July 1, 2013 to the ETF Distribution Agreement dated
June 25, 2009 between the Registrant and Foreside Fund Services, LLC is incorporated herein by reference to Exhibit (e)(4) of Post-Effective
Amendment No. 76 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-13-037874 on July 2, 2013.
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(e)(5)
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Tenth Amendment and revised Exhibit A dated August 12, 2013 to the ETF Distribution Agreement dated
June 25, 2009 between the Registrant and Foreside Fund Services, LLC, reflecting the addition of the Sage Core Reserves ETF, is
filed herewith.
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(e)(6)
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Eleventh Amendment and revised Exhibit A to the ETF Distribution Agreement dated June 25, 2009
between the Registrant and Foreside Fund Services, LLC, reflecting the addition of the YieldPro ETF, to be filed by amendment.
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(e)(7)
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Form of Authorized Participant Agreement is incorporated herein by reference to Exhibit (e)(2)
of Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001104659-09-052948 on September 1, 2009.
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(g)(1)
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Custody Agreement dated July 16, 2009 between the Registrant and The Bank of New York Mellon is
incorporated herein by reference to Exhibit (g) of Post-Effective Amendment No. 4
to the Registrant’s
Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-013601
on March 16, 2010
.
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(g)(2)
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Revised Schedule II, as last revised July 1, 2013, to the Custody Agreement dated July 16, 2009
between the Registrant and The Bank of New York Mellon is incorporated herein by reference to Exhibit (g)(2) of Post-Effective
Amendment No. 76 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-13-037874 on July 2, 2013.
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(g)(3)
|
Revised Schedule II to the Custody Agreement dated July 16, 2009 between the Registrant and The
Bank of New York Mellon, reflecting the addition of the YieldPro ETF, to be filed by amendment.
|
|
(h)(1)
|
Fund Administration and Accounting Agreement dated July 16, 2009 between the Registrant and The
Bank of New York Mellon is incorporated herein by reference to Exhibit (h)(1) of Post-Effective Amendment No. 4
to
the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR
Accession No. 0001144204-10-013601 on March 16, 2010
.
|
|
(h)(2)
|
Revised Exhibit A, as last revised July 1, 2013, to the Fund Administration and Accounting Agreement
dated July 16, 2009 between the Registrant and The Bank of New York Mellon is incorporated herein by reference to Exhibit (h)(2)
of Post-Effective Amendment No. 76 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-13-037874 on July 2, 2013.
|
|
(h)(3)
|
Revised Exhibit A to the Fund Administration and Accounting Agreement dated July 16, 2009 between
the Registrant and The Bank of New York Mellon, reflecting the addition of the YieldPro ETF, to be filed by amendment.
|
|
(h)(4)
|
Transfer Agency and Service Agreement dated July 16, 2009 between the
Registrant and The
Bank of New York Mellon is incorporated herein by reference to Exhibit (h)(2) of Post-Effective Amendment
No. 4
to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-10-013601 on March 16, 2010
.
|
|
(h)(5)
|
Revised Appendix I, as last revised July 1, 2013, to
the Transfer Agency and Service Agreement dated July 16, 2009 between the Registrant and The Bank of New York Mellon is incorporated
herein by reference to Exhibit (h)(4) of Post-Effective Amendment No. 76 to the Registrant’s Registration Statement on Form
N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-13-037874 on July 2, 2013.
|
|
(h)(6)
|
Revised Appendix I to the Transfer Agency and Service Agreement dated July 16, 2009 between the
Registrant and The Bank of New York Mellon, reflecting the addition of the YieldPro ETF, to be filed by amendment.
|
|
(h)(7)
|
Exchange Traded Fund Services Fee Schedule for Fund Custody, Fund Accounting, Fund Administration
and Transfer Agency Services dated February 2009 is incorporated herein by reference to Exhibit (h)(5) of Post-Effective Amendment
No. 11 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC
via EDGAR Accession No.
0001144204-10-049117 on September 13, 2010
.
|
|
(h)(8)
|
License Agreement between AdvisorShares Investments, LLC and the Global Echo Foundation, to be
filed by amendment.
|
|
(h)(9)
|
Second Amended and Restated Expense Limitation Agreement dated November 21, 2011 between the Registrant
and AdvisorShares Investments, LLC is incorporated herein by reference to Exhibit (d)(4) of Post-Effective Amendment No. 44 to
the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR
Accession No. 0001144204-12-004761 on January 30, 2012.
|
|
(h)(10)
|
Schedule A, as last revised July 1, 2013, to the Second Amended and
Restated Expense Limitation Agreement dated November 21, 2011 between the Registrant and AdvisorShares Investments, LLC
is incorporated herein by reference to Exhibit (h)(8) of Post-Effective Amendment No. 76 to the Registrant’s Registration
Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-13-037874
on July 2, 2013
.
|
|
(h)(11)
|
Revised Schedule A to the Second Amended and Restated Expense Limitation Agreement dated November
21, 2011 between the Registrant and AdvisorShares Investments, LLC, reflecting the addition of the YieldPro ETF, to be filed by
amendment.
|
|
(h)(12)
|
Expense Limitation Agreement dated May 10, 2010 between AdvisorShares
Investments, LLC and Peritus I Asset Management, LLC, relating to the Peritus High Yield ETF, is
incorporated herein by
reference to Exhibit (d)(11) of Post-Effective Amendment No. 6 to the Registrant’s Registration Statement on Form N-1A (File
Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-026211 on May 11, 2010.
|
|
(h)(13)
|
Expense Limitation Agreement dated September 9, 2010 between AdvisorShares Investments, LLC and
Cambria Investment Management, Inc. (now Cambria Investment Management, L.P.), relating to the Cambria Global Tactical ETF, is
incorporated herein by reference to Exhibit (d)(13) of Post-Effective Amendment No. 11 to the Registrant’s Registration statement
on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-049117 on September
13, 2010.
|
|
(h)(14)
|
Expense Limitation Agreement dated September 15, 2010 between AdvisorShares Investments, LLC and
Ranger Alternative Management, L.P., relating to the Active Bear ETF (now, Ranger Equity Bear ETF), is incorporated herein by reference
to Exhibit (d)(15) of Post-Effective Amendment No. 12 to the Registrant’s Registration Statement on Form N-1A (File Nos.
333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-050506 on September 22, 2010.
|
|
(h)(15)
|
Expense Limitation Agreement dated December 22, 2010 between AdvisorShares Investments, LLC and
Madrona Funds, LLC, relating to the Madrona Forward Domestic ETF (now the Madrona Domestic ETF), Madrona Forward International
ETF (now the Madrona International ETF) and Madrona Forward Global Bond ETF (now the Madrona Global Bond ETF), is incorporated
herein by reference to Exhibit (d)(21) of Post-Effective Amendment No. 17 to the Registrant’s Registration Statement on Form
N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-069019 on December 30, 2010.
|
|
(h)(16)
|
Expense Limitation Agreement dated March 14, 2011 between AdvisorShares Investments, LLC and American
Retirement Planners II, Inc., relating to the Meidell Tactical Advantage ETF, is incorporated herein by reference to Exhibit (d)(21)
of Post-Effective Amendment No. 20 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-11-014960 on March 15, 2011.
|
|
(h)(17)
|
Expense Limitation Agreement dated May 9, 2011 between AdvisorShares Investments, LLC and Trim
Tabs Asset Management, LLC, relating to the TrimTabs Float Shrink ETF, is incorporated herein by reference to Exhibit (d)(21) of
Post-Effective Amendment No. 26 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157867 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-11-027848 on May 11, 2011.
|
|
(h)(18)
|
Expense Limitation Agreement dated December 1, 2011 between AdvisorShares Investments, LLC and
Accuvest Global Advisors, relating to the Accuvest Global Opportunities ETF and the Accuvest Global Long Short ETF, is incorporated
herein by reference to Exhibit (d)(24) of Post-Effective Amendment No. 42 to the Registrant’s Registration Statement on Form
N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-11-067733 on November 30, 2011.
|
|
(h)(19)
|
Expense Limitation Agreement dated October 28, 2011 between AdvisorShares Investments, LLC and
Partnervest Advisory Services, LLC, relating to the STAR Global Buy-Write ETF, is incorporated herein by reference to Exhibit (d)(31)
of Post-Effective Amendment No. 38 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-11-060142 on October 31, 2011.
|
|
(h)(20)
|
Expense Limitation Agreement dated December 21, 2011 between AdvisorShares Investments, LLC and
Commerce Asset Management, LLC, relating to the QAM Equity Hedge ETF, is incorporated herein by reference to Exhibit (d)(31) of
Post-Effective Amendment No. 47 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-12-036318 on June 25, 2012.
|
|
(h)(21)
|
Expense Limitation Agreement dated June 5, 2012 between AdvisorShares Investments, LLC and Pring
Turner Capital Group, relating to the Pring Turner Business Cycle ETF, is incorporated herein by reference to Exhibit (d)(33) of
Post-Effective Amendment No. 48 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-12-036752 on June 27, 2012.
|
|
(h)(22)
|
Expense Limitation Agreement dated January 11, 2013 between AdvisorShares Investments, LLC and
Treesdale Partners, LLC, relating to the International Gold ETF, is incorporated herein by reference to Exhibit (h)(23) of Post-Effective
Amendment No. 59 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-13-004364 on January 29, 2013.
|
|
(h)(23)
|
Expense Limitation Agreement dated July 1, 2013, between AdvisorShares Investments, LLC and AthenaInvest
Advisors, LLC, relating to the Athena International Bear ETF, is incorporated herein by reference to Exhibit (h)(20) of Post-Effective
Amendment No. 76 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001144204-13-037874 on July 2, 2013.
|
|
(h)(24)
|
Form of Expense Limitation Agreement between AdvisorShares Investments, LLC and The Elements Financial
Group, LLC, relating to the YieldPro ETF is incorporated herein by reference to Exhibit (h)(24) of Post-Effective Amendment No.
78 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via
EDGAR Accession No. 0001144204-13-043644 on August 7, 2013.
|
|
(h)(25)
|
Expense Limitation Agreement, effective as of July 31, 2013, between AdvisorShares Investments,
LLC and Sage Advisory Services, Ltd. Co., relating to the Sage Core Reserves ETF, is filed herewith.
|
|
(h)(26)
|
Expense Limitation Agreement between AdvisorShares Investments, LLC and Treesdale Partners LLC,
relating to the Treesdale Rising Rates ETF, to be filed by amendment.
|
|
(i)(1)
|
Opinion and consent of counsel, Bingham McCutchen LLP, is incorporated herein by reference to Exhibit
(i) of Post-Effective Amendment No. 50 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and
811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-12-050438 on September 10, 2012.
|
|
(i)(2)
|
Opinion and consent of counsel, Bingham McCutchen LLP, relating to the shares of the Gartman Gold/Yen
ETF, Gartman Gold/Euro ETF, Gartman Gold/British Pound ETF, and International Gold ETF, is incorporated herein by reference to
Exhibit (i)(2) of Post-Effective Amendment No. 67 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876
and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-13-018692 on March 29, 2013.
|
|
(i)(3)
|
Opinion and consent of counsel, Bingham McCutchen LLP, relating to the shares of the Athena International
Bear ETF, is incorporated herein by reference to Exhibit (i)(3) of Post-Effective Amendment No. 76 to the Registrant’s Registration
Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-13-037874
on July 2, 2013.
|
|
(i)(4)
|
Opinion and consent of counsel, Bingham McCutchen LLP, relating to the shares of the Sage Core
Reserves ETF, is filed herewith.
|
|
(i)(5)
|
Opinion and consent of counsel, Bingham McCutchen LLP, relating to the shares of the Treesdale
Rising Rates ETF, to be filed by amendment.
|
|
(i)(6)
|
Opinion and consent of counsel, Bingham McCutchen LLP, relating to the shares of the YieldPro ETF,
to be filed by amendment.
|
|
(m)(1)
|
Distribution Plan is incorporated herein by reference to Exhibit (m) of Pre-Effective Amendment
No. 2 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC
via EDGAR Accession No. 0001104659-09-052948 on September 1, 2009.
|
|
(m)(2)
|
Revised Schedule A to the Distribution Plan is incorporated herein by reference to Exhibit (m)(2)
of Post-Effective Amendment No. 76 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-13-037874 on July 2, 2013.
|
|
(m)(3)
|
Revised Schedule A to the Distribution Plan, reflecting the addition of the YieldPro ETF, to be
filed by amendment.
|
|
(p)(1)
|
Code of Ethics for the Registrant is incorporated herein by reference to Exhibit (p)(1) of Pre-Effective
Amendment No. 2 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with
the SEC via EDGAR Accession No. 0001104659-09-052948 on September 2, 2009.
|
|
(p)(2)
|
Code of Ethics, dated May 11, 2009, of AdvisorShares Investments, LLC is incorporated herein by
reference to Exhibit (p)(2) of Pre-Effective Amendment No. 2 to the Registrant’s Registration Statement on Form N-1A (File
Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001104659-09-052948 on September 2, 2009.
|
|
(p)(3)
|
Code of Ethics, dated May 1, 2009, of Foreside Financial Group, LLC (including Fund Services, LLC)
is incorporated herein by reference to Exhibit (p)(3) of the Registrant’s Registration Statement on Form N-1A (File Nos.
333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-056114 on October 28, 2010.
|
|
(p)(4)
|
Code of Ethics, dated December 31, 2012, of WCM Investment Management is incorporated herein by
reference to Exhibit (p)(4) of the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-13-035024 on June 14, 2013.
|
|
(p)(5)
|
Code of Ethics of Peritus I Asset Management, LLC is incorporated herein by reference to Exhibit
(p)(7) of Post-Effective Amendment No. 6 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and
811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-026211 on May 11, 2010.
|
|
(p)(6)
|
Code of Ethics, dated August 5, 2010, of Cambria Investment Management, Inc. (now Cambria Investment
Management, L.P.) is incorporated herein by reference to Exhibit (p)(8) of Post-Effective Amendment No. 11 to the Registrant’s
Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No.
0001144204-10-049117
on September 13, 2010
.
|
|
(p)(7)
|
Code of Ethics of Ranger Alternative Management, L.P. is incorporated herein by reference to Exhibit
(p)(8) of Post-Effective Amendment No. 12 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and
811-22110), as filed with the SEC via EDGAR Accession No
0001144204-10-050506 on September 22, 2010
.
|
|
(p)(8)
|
Code of Ethics, dated August 27, 1999, of Madrona Funds, LLC is incorporated herein by reference
to Exhibit (p)(11)
of Post-Effective Amendment No. 16 to the Registrant’s Registration Statement
on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-10-068568 on December
28, 2010
.
|
|
(p)(9)
|
Code of Ethics of American Retirement Planners II, Inc. is incorporated herein by reference to
Exhibit (p)(12) of Post-Effective Amendment No. 20 to the Registrant’s Registration Statement on Form N-1A
(File
Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-11-014960 on March 15, 2011
.
|
|
(p)(10)
|
Code of Ethics of Trim Tabs Asset Management, LLC
is incorporated herein
by reference to Exhibit (p)(12) of Post-Effective Amendment No. 26 to the Registrant’s Registration Statement on Form N-1A
(File Nos. 333-157867 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-11-027848 on May 11, 2011.
|
|
(p)(11)
|
Code of Ethics of Accuvest Global Advisors is incorporated herein by reference to Exhibit (p)(12)
of Post-Effective Amendment No. 63 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-13-012663 on March 4, 2013
.
|
|
(p)(12)
|
Code of Ethics of First Affirmative Financial Network, LLC is incorporated herein by reference
to Exhibit (p)(13) of Post-Effective Amendment No. 55 to the Registrant’s Registration Statement on Form N-1A (File Nos.
333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-12-065129 on November 28, 2012.
|
|
(p)(13)
|
Code of Ethics of Reynders, McVeigh Capital Management, LLC is incorporated herein by reference
to Exhibit (p)(16) of Post-Effective Amendment No. 34 to the Registrant’s Registration Statement
on
Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-11-053588 on September
16, 2011.
|
|
(p)(14)
|
Code of Ethics of Baldwin Brothers, Inc. is incorporated herein by reference to Exhibit (p)(17)
of Post-Effective Amendment No. 34 to the Registrant’s Registration Statement
on Form N-1A (File
Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-11-053588 on September 16, 2011.
|
|
(p)(15)
|
Code of Ethics of Community Capital Management Inc. is incorporated herein by reference to Exhibit
(p)(18) of Post-Effective Amendment No. 34 to the Registrant’s Registration Statement
on Form
N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-11-053588 on September 16,
2011.
|
|
(p)(16)
|
Code of Ethics of Partnervest Advisory Services, LLC is
incorporated
herein by reference to Exhibit (p)(19) of Post-Effective Amendment No. 38 to the Registrant’s Registration Statement on Form
N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-11-060142 on October 31, 2011.
|
|
(p)(17)
|
Code of Ethics of Commerce Asset Management, LLC
is incorporated herein
by reference to Exhibit (p)(17) of Post-Effective Amendment No. 78 to the Registrant’s Registration Statement on Form N-1A
(File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-13-043644 on August 7, 2013
.
|
|
(p)(18)
|
Code of Ethics of Your Source Financial, PLC
is incorporated herein
by reference to Exhibit (p)(20) of Post-Effective Amendment No. 44 to the Registrant’s Registration Statement on Form N-1A
(File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-12-004761 on January 30, 2012
.
|
|
(p)(19)
|
Code of Ethics, dated September 30, 2012, of Pring Turner Capital Group is incorporated herein
by reference to exhibit (p)(20) of Post-Effective Amendment No. 53 to the Registrant’s Registration Statement on Form N-1A
(File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-12-058175
on October 29, 2012.
|
|
(p)(20)
|
Code of Ethics of Newfleet Asset Management, LLC,
amended and restated
February 15, 2012, is incorporated herein by reference to Exhibit (p)(22) of Post-Effective Amendment No. 47 to the Registrant’s
Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-12-036318
on June 25, 2012
.
|
|
(p)(21)
|
Code of Ethics, dated June 2013, of AthenaInvest Advisors, LLC, sub-adviser to the Athena International
Bear ETF, is incorporated herein by reference to Exhibit (p)(21) of Post-Effective Amendment No. 76 to the Registrant’s Registration
Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-13-037874
on July 2, 2013.
|
|
(p)(22)
|
Code of Ethics of Treesdale Partners, LLC, is incorporated herein by reference to Exhibit (p)(23)
of Post-Effective Amendment No. 67 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-13-018692 on March 29, 2013.
|
|
(p)(23)
|
Code of Ethics of Sage Advisory Services, Ltd. Co., sub-adviser to the Sage Core Reserves ETF,
is incorporated herein by reference to Exhibit (p)(24) of Post-Effective Amendment No. 73 to the Registrant’s Registration
Statement on Form N-1A (File Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-13-035024
on June 14, 2013.
|
|
(p)(24)
|
Code of Ethics of Recon Capital Partners, LLC is incorporated herein by reference to Exhibit (p)(25)
of Post-Effective Amendment No. 57 to the Registrant’s Registration Statement on Form N-1A
(File
Nos. 333-157876 and 811-22110), as filed with the SEC via EDGAR Accession No. 0001144204-12-068496 on December 18, 2012
.
|
|
(p)(25)
|
Code of Ethics of The Elements Financial Group, LLC, sub-adviser to the YieldPro ETF, to be filed
by amendment.
|
|
(q)
|
Powers of Attorney dated June 2013 for Messrs. Noah Hamman and Dan Ahrens and May 2013 for Mr.
William G. McVay and Madame Elizabeth Piper/Bach are
incorporated herein by reference to Exhibit (q)
of Post-Effective Amendment No. 73 to the Registrant’s Registration Statement on Form N-1A (File Nos. 333-157876 and 811-22110),
as filed with the SEC via EDGAR Accession No. 0001144204-13-035024 on June 14, 2013
.
|
|
Item 29
.
|
Persons Controlled by or under Common Control with
the Fund
|
Not Applicable.
|
Item 30
.
|
Indemnification
|
AdvisorShares Trust (the “Trust”
or the “Registrant”) is organized as a Delaware statutory trust and is operated pursuant to an Agreement and Declaration
of Trust dated as of July 30, 2007, as amended (the “Declaration of Trust”), that permits the Registrant to indemnify
its trustees and officers under certain circumstances. Such indemnification, however, is subject to the limitations imposed by
the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended. The Registrant’s Declaration
of Trust provides that officers and trustees of the Trust shall be indemnified by the Trust against liabilities and expenses of
defense in proceedings against them by reason of the fact that they each serve as an officer or trustee of the Trust or as an officer
or trustee of another entity at the request of the entity.
|
(a)
|
Subject to the exceptions and limitations contained in paragraph (b) below:
|
(i) every
person who is, or has been, a Trustee or an officer, employee, or agent of the Trust (“Covered Person”) shall be indemnified
by the Trust or the appropriate Series (out of assets belonging to that Series) to the fullest extent permitted by law against
liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit, or proceeding
in which he becomes involved as a party or otherwise by virtue of his being or having been a Covered Person and against amounts
paid or incurred by him in the settlement thereof; provided that the transfer agent of the Trust or any Series shall not be considered
an agent for these purposes unless expressly deemed to be such by the Trustees in a resolution referring to Article IX of the Declaration
of Trust.
(ii) as
used herein the words “claim,” “action,” “suit,” or “proceeding” shall apply to
all claims, actions, suits, or proceedings (civil, criminal, or other, including appeals), actual or threatened, while in office
or thereafter, and the words “liability” and “expenses” shall include, without limitation, attorneys’
fees, costs, judgments, amounts paid in settlement, fines, penalties, and other liabilities.
|
(b)
|
No indemnification shall be provided hereunder to a Covered Person:
|
(i) who
shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders
by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his
office or (B) not to have acted in good faith in the reasonable belief that his action was in the best interest of the Trust; or
(ii) in
the event of a settlement, unless there has been a determination that such Trustee or officer did not engage in willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office:
(A) by
the court or other body approving the settlement;
(B) by
at least a majority of those Trustees who neither are Interested Persons of the Trust nor are parties to the matter based upon
a review of readily available facts (as opposed to a full trial-type inquiry); or
(C) by
written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type inquiry);
provided, however, that any Shareholder, by appropriate legal proceedings, may challenge any such determination by the Trustees
or by independent counsel.
|
(c)
|
The rights of indemnification herein provided may be insured against by policies maintained by
the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be a Covered Person and shall inure to the benefit of the heirs, executors,
and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel,
other than Covered Persons, and other persons may be entitled by contract or otherwise under law.
|
|
(d)
|
To the maximum extent permitted by applicable law, expenses in connection with the preparation
and presentation of a defense to any claim, action, suit, or proceeding of the character described in paragraph (a) of Section
9.02 of the Declaration of Trust may be paid by the Trust or Series from time to time prior to final disposition thereof upon receipt
of any undertaking by or on behalf of such Covered Person that such amount will be paid over by him to the Trust or Series if it
ultimately is determined that he is not entitled to indemnification under Section 9.02 of the Declaration of Trust; provided, however,
that either (a) such Covered Person shall have provided appropriate security for such undertaking, (b) the Trust is insured against
losses arising out of any such advance payments, or (c) either a majority of the Trustees who are neither Interested Persons of
the Trust nor parties to the matter, or independent legal counsel in a written opinion, shall have determined, based upon a review
of readily-available facts (as opposed to a full trial-type inquiry or investigation), that there is a reason to believe that such
Covered Person will be found entitled to indemnification under Section 9.02 of the Declaration of Trust.
|
Insofar as indemnification for liability
arising under the Securities Act of 1933, as amended, may be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer, or controlling person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed
by the final adjudication of such issue.
|
Item 31
.
|
Business and Other Connections of the Investment
Adviser
|
Any other business, profession, vocation
or employment of a substantial nature in which each director or principal officer of the Adviser and each sub-advisor is or has
been, at any time during the last two fiscal years (June 30, 2011 and 2012), engaged for his or her own account or in the capacity
of director, officer, employee, partner or trustee are as follows:
AdvisorShares Investments LLC
AdvisorShares Investments, LLC (the “Adviser”)
serves as the investment adviser for each series of the Trust. The principal address of the Adviser is 2 Bethesda Metro Center,
Suite 1330, Bethesda, Maryland 20814. The Adviser is an investment adviser registered with the SEC under the Investment Advisers
Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, none of the directors, officers or partners of the Adviser is or has been engaged in any other business, profession,
vocation or employment of a substantial nature for his or her own account or in the capacity of director, officer, employee, partner
or trustee.
WCM Investment Management
WCM Investment Management (“WCM”)
serves as investment sub-adviser for the Trust’s WCM/BNY Mellon Focused Growth ADR ETF. The principal address of WCM is 281
Brooks Street, Laguna Beach, California 92651. WCM is an investment adviser registered with the SEC under the Investment Advisers
Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, none of the directors, officers or partners of WCM are or have been engaged in any other business, profession, vocation
or employment of a substantial nature for his or her own account or in the capacity of director, officer, employee, partner or
trustee.
Peritus I Asset Management, LLC
Peritus I Asset Management, LLC (“Peritus”)
serves as investment sub-adviser for the Trust’s
Peritus High Yield ETF
. The principal
address of Peritus is 26 West Anapamu, 3rd Floor, Santa Barbara, California 93101. Peritus is an investment adviser registered
with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Peritus are or have been engaged in any other business, profession,
vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
Name and Position with
Peritus
|
Name of Other Company
|
Connection with Other Company
|
Timothy J. Gramatovich, CIO
|
World Play, Inc., Canada
|
Interim CEO, Board Member
|
Cambria Investment Management, L.P.
Cambria Investment Management, L.P. (“Cambria”)
serves as investment sub-adviser for the Trust’s Cambria Global Tactical ETF. The principal address of Cambria is 2321 Rosecrans
Avenue, Suite 3225, El Segundo, California 90245. Cambria is an investment adviser registered with the SEC under the Investment
Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Cambria are or have been engaged in the business, profession, vocation
or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
Name and Position with
Cambria
|
Name of Other Company
|
Connection with Other Company
|
Mebane Faber, CIO
|
AlphaClone LLC
|
Co-Founder/Consultant
|
Name and Position with
Cambria
|
Name of Other Company
|
Connection with Other Company
|
Eric Richardson, CEO
|
Cohen & Richardson, LLP
|
Partner
|
Ranger Alternative Management, L.P.
Ranger Alternative Management L.P. (“Ranger”)
serves as investment sub-adviser for the Trust’s Ranger Equity Bear ETF. The principal address of Ranger is 2828 N. Harwood
Street, Suite 1600, Dallas, Texas 75201. Ranger is an investment adviser registered with the SEC under the Investment Advisers
Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Ranger are or have been engaged in the business, profession, vocation
or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
Fiscal Year Ended June 30, 2011
Name and Position with
Ranger
|
Name of Other Company
|
Connection with Other Company
|
John Del Vecchio
|
Parabolix Research Incorporated
|
President
|
Brad Lamensdorf
|
BHL Advisors, LLC
|
Managing Member & Portfolio Manager
|
Precision GP, LLC
|
Managing Member & Portfolio Manager
|
Scott Canon
|
Green Mountain Energy Company
|
Director
|
Fiscal Year Ended June 30, 2012
Name and Position with
Ranger
|
Name of Other Company
|
Connection with Other Company
|
John Del Vecchio
|
Parabolix Research Incorporated
|
President
|
Index Deletion Strategies, LLC
|
Managing Member
|
Brad Lamensdorf
|
BHL Advisors, LLC
|
Managing Member & Portfolio Manager
|
Precision GP, LLC
|
Managing Member & Portfolio Manager
|
Madrona Funds, LLC
Madrona Funds, LLC (“Madrona”)
serves as investment sub-adviser for the Trust’s
Madrona Domestic ETF, Madrona International ETF
and Madrona Global Bond ETF. The principal address of Madrona is 2911 Bond Street, Suite 105, Everett, Washington 98201. Madrona
is an investment adviser registered with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Madrona are or have been engaged in the business, profession, vocation
or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
Name and Position with
Madrona
|
Name of Other Company
|
Connection with Other Company
|
Brian K. Evans, Investment Manager and Managing Member
|
Bauer Evans, Inc. P.S.
|
Owner and Director
|
BondStreet Wealth Management, LLC
|
Owner and Director
|
Robert W. Bauer, Investment Manager and Member
|
Bauer Evans, Inc. P.S.
|
Employee
|
BondStreet Wealth Management, LLC
|
Employee
|
Kristi R. Henderson, Investment Manager and Member
|
Bauer Evans, Inc. P.S.
|
Employee
|
BondStreet Wealth Management, LLC
|
Employee
|
Robert W. Bauer, Investment Manager and Member
|
Bauer Evans, Inc. P.S.
|
Employee
|
BondStreet Wealth Management, LLC
|
Employee
|
Kristi R. Henderson, Investment Manager and Member
|
Bauer Evans, Inc. P.S.
|
Employee
|
BondStreet Wealth Management, LLC
|
Employee
|
American Retirement Planners II, Inc.
American Retirement Planners II, Inc. (doing
business as “American Wealth Management”) serves as investment sub-adviser for the Trust’s Meidell Tactical Advantage
ETF. The principal address of American Wealth Management is 570 Hammill Lane, Reno, Nevada, 89511. American Wealth Management is
an investment adviser registered with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of American Wealth Management are or have been engaged in the business,
profession, vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of
director, officer, employee, partner or trustee.
Name and Position with
American Wealth
Management
|
Name of Other Company
|
Connection with Other Company
|
Laif Meidell, President
|
Nevada-Area Council BSA
|
Board Member
|
LDS Church
|
Young Men’s President of Foothill Ward
|
Patricia Meidell, Secretary
|
Quail Village II Association
|
Secretary/Treasurer
|
LDS Church
|
Public Relations Committee, Reno Nevada Stake
|
Trim Tabs Asset Management, LLC
Trim Tabs Asset Management, LLC (“TrimTabs”)
serves as investment sub-adviser for the Trust’s TrimTabs Float Shrink ETF. The principal address of TrimTabs is 1505 Bridgeway,
Suite 121, Sausalito, California 94965. TrimTabs is an investment adviser registered with the SEC under the Investment Advisers
Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of TrimTabs are or have been engaged in the business, profession, vocation
or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
Name and Position with
TrimTabs
|
Name of Other Company
|
Connection with Other Company
|
Charles Biderman. President & Chief Executive Officer
|
TrimTabs Investment Research
|
President & CEO
|
Minyi Chen, Executive Vice President & Portfolio Manager
|
TrimTabs Investment Research
|
EVP Research
|
Accuvest Global Advisors
Accuvest Global Advisors (“Accuvest”)
serves as investment sub-adviser for the Trust’s Accuvest Global Opportunities ETF and Accuvest Global Long Short ETF. The
principal address of Accuvest is 3100 Oak Road, Suite 380, Walnut Creek, California 94597. Accuvest is an investment adviser registered
with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Accuvest are or have been engaged in the business, profession, vocation
or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
Name and Position with
Accuvest
|
Name of Other Company
|
Connection with Other Company
|
Brad Jensen,
Managing Director
|
William Wright Associates
|
Senior Portfolio Manager
|
First Affirmative Financial Network,
LLC
First Affirmative Financial Network, LLC
(“First Affirmative Financial”) serves as investment sub-adviser for the Trust’s AdvisorShares Global Echo ETF.
The principal address of First Affirmative Financial is 5475 Mark Dabling Boulevard, Suite 108, Colorado Springs, Colorado 80918.
First Affirmative Financial is an investment adviser registered with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of First Affirmative Financial are or have been engaged in the business,
profession, vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of
director, officer, employee, partner or trustee.
Name and Position with
First Affirmative
Financial
|
Name of Other Company
|
Connection with Other Company
|
Steven J. Schueth
|
Alliance for Sustainable Colorado (non-profit)
|
Director, Treasurer
|
Americans for Nonsmokers Rights
|
Director
|
Americans for Nonsmokers Rights Foundation
(non-profit)
|
Director
|
Reynders, McVeigh Capital Management,
LLC
Reynders, McVeigh Capital Management, LLC
(“Reynders McVeigh”) serves as investment sub-adviser for the Trust’s AdvisorShares Global Echo ETF. The principal
address of Reynders McVeigh is 121 High Street, 5th floor, Boston, Massachusetts 02110. Reynders McVeigh is an investment adviser
registered with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Reynders McVeigh are or have been engaged in the business, profession,
vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
Name and Position with
Reynders McVeigh
|
Name of Other Company
|
Connection with Other Company
|
Chat Reynders, Chairman and CEO
|
Highwood Productions
|
President and Owner
|
Baldwin Brothers, Inc.
Baldwin Brothers, Inc. (“Baldwin
Brothers”) serves as investment sub-adviser for the Trust’s AdvisorShares Global Echo ETF. The principal address of
Baldwin Brothers is 204 Spring St., Marion, Massachusetts, 02738. Baldwin Brothers is an investment adviser registered with the
SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Baldwin Brothers are or have been engaged in the business, profession,
vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
Name and Position with
Baldwin Brothers
|
Name of Other Company
|
Connection with Other Company
|
Chris de Rotth
|
Account Manager
|
Partner
|
Michael Baldwin
|
Northeast Investors
|
Trustee
|
David Barrett
|
Tabor Academy
|
Trustee
|
Community Capital Management Inc.
Community Capital Management Inc. (“Community
Capital”) serves as investment sub-adviser for the Trust’s AdvisorShares Global Echo ETF. The principal address of
Community Capital is 2500 Weston Road, Suite 101, Weston, Florida 3331. Community Capital is an investment adviser registered with
the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Community Capital are or have been engaged in the business, profession,
vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
Name and Position with
Community Capital
|
Name of Other Company
|
Connection with Other
Company
|
David Downes, CEO
|
Oppenheimer Funds
Internet Capital
Glaxo Smith Kline Benefit Trust
THL Credit
|
Trustee
Director
Chair
Director
|
Michelle Rogers, EVP/Senior Portfolio Manager
|
BAND (Broward Alliance for Neighborhood Development, Inc.)
|
Unpaid board member
|
Barbara VanScoy, Founder, Chair of the Board & Senior Portfolio Manager
|
Southern Municipal Finance Society
|
Unpaid board member
|
Julie Egan, SVP/Portfolio Manager
|
Class Action Claims Management
National Federation of Municipal Bond Analysts
Southern Municipal Finance Society
|
Member
Member
President
|
Stefanie Little, CCO
|
Little Consulting Group
SEC Compliance Alliance, LLC
|
President
Managing Member
|
Partnervest Advisory Services, LLC
Partnervest Advisory Services, LLC
(“Partnervest”) serves as investment sub-adviser for the Trust’s STAR Global Buy-Write ETF. The principal
address of Partnervest is 1216 State Street 3rd Floor, Santa Barbara, California, 93101. Partnervest is an investment adviser
registered with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Partnervest are or have been engaged in the business, profession, vocation
or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
Name and Position with
Partnervest
|
Name of Other Company
|
Connection with Other Company
|
Timothy J. Mahota, Managing Member and Chief Compliance Officer
|
Integral Development Corp
|
General Counsel
|
Commerce Asset Management, LLC
Commerce Asset Management, LLC (“Commerce
Management”) serves as investment sub-adviser for the Trust’s QAM Equity Hedge ETF. The principal address of Commerce
Management is 5050 Poplar Avenue, Suite 2020, Memphis, Tennessee 38157. Commerce Management is an investment adviser registered
with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Commerce Management are or have been engaged in the business, profession,
vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
Name and Position with
Commerce Management
|
Name of Other Company
|
Connection with Other
Company
|
J. Vincent Robinson, CEO
|
Trust One Bank, division of Synovus
|
Advisory Board member
|
Ducks Unlimited, Inc.
|
Non Board member independent audit committee member
|
Christian Brothers University
|
Non Board member, independent audit committee member
|
Kurt Voldeng, COO
|
Memphis Sigma Chi Housing Group, non-profit
|
Treasurer, Board Member
|
Your Source Financial, PLC
Your Source Financial, PLC (“Your
Source Financial”) serves as investment sub-adviser for the Trust’s AdvisorShares Global Alpha & Beta ETF. The
principal address of Your Source Financial is 707 E. Northern Avenue, Phoenix, Arizona, 85020. Your Source Financial is an investment
adviser registered with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Your Source Financial are or have been engaged in the business, profession,
vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
Name and Position with
Your Source
|
Name of Other Company
|
Connection with Other Company
|
Raymond J. Dimuro, Managing Member
|
Your Source Accounting, LLC
|
Member
|
YSFI Management, LLC
|
Board of Managers
|
Your Source Partners, LLC
|
Board of Managers
|
George R. Collett, Managing Member, CCO
|
Your Source Accounting, LLC
|
Member
|
YSFI Management, LLC
|
Board of Managers
|
Your Source Partners, LLC
|
Board of Managers
|
James R. Baum, Member
|
YSFI Management, LLC
|
Board of Managers
|
|
Your Source Partners, LLC
|
Board of Managers
|
|
Arizona Opera
|
Board of Trustees
|
Jeffry W. Baum, Member
|
YSFI Management, LLC
|
Board of Managers
|
Your Source Partners, LLC
|
Board of Managers
|
Manhatten Associates, Inc.
|
Senior Vice President, Asia Pacific
|
Douglas A. Cling, Member
|
YSFI Management, LLC
|
Board of Managers
|
Your Source Partners, LLC
|
Board of Managers
|
Cling’s Manufacturing
|
President
|
Pring Turner Capital Group
Pring Turner Capital Group (“Pring
Turner”) serves as investment sub-adviser for the Trust’s Pring Turner Business Cycle ETF. The principal address of
Pring Turner is 1600 South Main Street, Suite #375, Walnut Creek, California 94596. Pring Turner is an investment adviser registered
with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Pring Turner are or have been engaged in the business, profession, vocation
or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
Name and Position with
Pring Turner
|
Name of Other Company
|
Connection with Other Company
|
Martin Pring
|
Pring Research
|
Owner
|
Joe D. Turner
|
Joe D. Turner, Trustee
|
Sole proprietor
|
Newfleet Asset Management, LLC
Newfleet Asset Management, LLC (“Newfleet”)
serves as investment sub-adviser for the Trust’s Newfleet Multi-Sector Income ETF. The principal address of Newfleet is 100
Pearl Street, Hartford, Connecticut 06103. Newfleet is an investment adviser registered with the SEC under the Investment Advisers
Act of 1940.
For any other business, profession, vocation
or employment of a substantial nature in which each director or principal officer of Newfleet is or has been, at any time
during the last two fiscal years (June 30, 2011 and 2012), engaged for his or her own account or in the capacity of director, officer,
employee, partner or trustee, see Item 7 of Part 1A and Item 10 of Part 2A of Newfleet’s current Form ADV (SEC File No. 801-51559)
filed under the Investment Advisers Act of 1940, and incorporated herein by reference. Information about Newfleet also may be found
under the headings “Management of the Fund” in the Newfleet Multi-Sector Income ETF’s Prospectus and “Services
of the Adviser and Sub-adviser” and “Management of the Trust” in the Newfleet Multi-Income Sector ETF’s
Statement of Additional Information.
AthenaInvest Advisors, LLC
AthenaInvest Advisors, LLC (“Athena”)
serves as investment sub-adviser for the Trust’s AdvisorShares Athena International Bear ETF. The principal address of Athena
is 5340 South Quebec Street, Suite 365-N, Greenwood Village, Colorado 80111. Athena is an investment adviser registered with
the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Athena are or have been engaged in the business, profession, vocation
or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
Name and Position
with Athena
|
Name of Other Company
|
Connection with Other Company
|
C. Thomas Howard, CEO
|
University of Denver
|
Professor of Finance (Retired June 2011)
|
Lambert Bunker
VP Business Development
|
Lambert Bunker
VP Business Development
|
Co Trustee
|
Boys & Girls Clubs Of Metro Denver
|
Associate Board
|
Treesdale Partners, LLC
Treesdale Partners, LLC (“Treesdale”)
serves as investment sub-adviser for the Trust’s AdvisorShares International Gold ETF,
Gartman
Gold/Yen ETF, Gartman Gold/British Pound ETF, Gartman Gold/Euro ETF, and Treesdale Rising Rates ETF. The principal address of Treesdale
is 1325 Avenue of the Americas, Suite 2302, New York, New York 10019. Treesdale is an investment adviser registered with the SEC
under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Treesdale are or have been engaged in the business, profession, vocation
or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director, officer,
employee, partner or trustee.
Name and Position
with Treesdale
|
Name of Other Company
|
Connection with Other Company
|
Ade Odunsi,
Portfolio Manager
|
Barclays Capital
|
Managing Director
|
Goose Hollow Capital Advisors
|
Managing Member
|
Sage Advisory Services, Ltd. Co.
Sage Advisory Services, Ltd. Co. (“Sage
Advisory Services”)
serves as investment sub-adviser for the Trust’s Sage Core Reserves
ETF. The principal address of
Sage Advisory Services
is
5900 Southwest Parkway, Building
I, Austin, Texas 78735
.
Sage Advisory Services
is an investment
adviser registered with the SEC under the Investment Advisers Act of 1940.
For the fiscal
years ended June 30, 2012 and 2013, none of the directors, officers or partners of
Sage Advisory Services
are
or have been engaged in the business, profession, vocation or employment of a substantial nature for his or her own account or
in the capacity of director, officer, employee, partner or trustee.
Recon Capital Partners, LLC
Recon Capital Partners, LLC (“Recon
Capital”) serves as investment sub-adviser for the Trust’s Recon Capital Alternative Income ETF. The principal address
of Recon Capital is 500 Mamaroneck Avenue, Suite 320, Harrison, New York 10528. Recon Capital is an investment adviser registered
with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2011
and 2012, the following directors, officers or partners of Recon Capital are or have been engaged in the business, profession,
vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
Name and Position with
Recon Capital
|
Name of Other Company
|
Connection with Other
Company
|
Kevin Kelly
|
Tontine Capital
|
Portfolio Manager
|
Garrett Paolella
|
MKM Partners
|
Executive Director
|
The Elements Financial Group, LLC
The Elements Financial Group, LLC (“Elements
Financial”) serves as investment sub-adviser for the Trust’s YieldPro ETF. The principal address of Elements Financial
is 19200 Von Karman Avenue, Suite 800, Irvine, California 92612. Elements Financial is an investment adviser registered
with the SEC under the Investment Advisers Act of 1940.
For the fiscal years ended June 30, 2012
and 2013, the following directors, officers or partners of Elements Financial are or have been engaged in the business, profession,
vocation or employment of a substantial nature, as indicated below, for his or her own account or in the capacity of director,
officer, employee, partner or trustee.
[TO BE FILED BY AMENDMENT]
|
Item 32
.
|
Foreside Fund Services, LLC
|
|
(a)
|
Foreside Fund Services, LLC (the “Distributor”) serves as principal underwriter for the following investment companies
registered under the Investment Company Act of 1940, as amended:
|
|
1.
|
361 Absolute Alpha Fund, Series of Investment Managers Series Trust
|
|
2.
|
361 Long/Short Equity Fund, Series of Investment Managers Series Trust
|
|
3.
|
361 Managed Futures Strategy Fund, Series of Investment Managers Series Trust
|
|
6.
|
American Beacon Select Funds
|
|
7.
|
Avenue Mutual Funds Trust
|
|
8.
|
Bennett Group of Funds
|
|
10.
|
Capital Innovations Global Agri, Timber, Infrastucture Fund, Series of Investment Managers Series Trust
|
|
11.
|
Center Coast MLP Focus Fund, Series of Investment Managers Series Trust
|
|
12.
|
Central Park Group Multi-Event Fund
|
|
13.
|
Direxion Shares ETF Trust
|
|
18.
|
Gottex Multi-Alternatives Fund - I
|
|
19.
|
Gottex Multi-Alternatives Fund - II
|
|
20.
|
Gottex Multi-Asset Endowment Fund - I
|
|
21.
|
Gottex Multi-Asset Endowment Fund - II
|
|
22.
|
Henderson Global Funds
|
|
23.
|
Ironwood Institutional Multi-Strategy Fund LLC
|
|
24.
|
Ironwood Multi-Strategy Fund LLC
|
25. Liberty Street Horizon
Fund, Series of Investment Managers Series Trust
|
26.
|
Manor Investment Funds
|
|
27.
|
Nomura Partners Funds, Inc.
|
|
28.
|
Performance Trust Mutual Funds, Series of Trust for Professional Managers
|
|
29.
|
Perimeter Small Cap Value Fund, Series of Investment Managers Series Trust
|
|
30.
|
PMC Funds, Series of Trust for Professional Managers
|
|
32.
|
Quaker Investment Trust
|
|
33.
|
RevenueShares ETF Trust
|
|
35.
|
Sound Shore Fund, Inc.
|
|
38.
|
Wintergreen Fund, Inc.
|
|
(b)
|
The following are the Officers and Managers of the Distributor. The Distributor’s main business address is Three Canal
Plaza, Suite 100, Portland, Maine 04101.
|
Name
|
Positions
with Underwriter
|
Positions and
Offices with Registrant
|
Mark A. Fairbanks
|
President and Manager
|
None
|
Richard J. Berthy
|
Vice President, Treasurer and Manager
|
None
|
Jennifer E. Hoopes
|
Secretary
|
None
|
Nanette K. Chern
|
Vice President and Chief Compliance Officer
|
None
|
Lisa S. Clifford
|
Vice President and Managing Director of Compliance
|
None
|
Nishant Bhatanagar
|
Assistant Secretary
|
None
|
(c) Not Applicable.
Item 33.
Location of Accounts and Records:
State the name and address of each person
maintaining principal possession of each account, book or other document required to be maintained by section 31(a) of the 1940
Act Section 15 U.S.C. 80a-30(a) and the rules under that section.
All accounts, books, and other documents
required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules promulgated thereunder
are maintained at the following offices:
(a)
|
Registrant:
|
|
c/o AdvisorShares Investments, LLC
|
|
2 Bethesda Metro Center, Suite 1330
|
|
Bethesda, Maryland 20814
|
|
|
(b)
|
Adviser:
|
|
AdvisorShares Investments, LLC
|
|
2 Bethesda Metro Center, Suite 1330
|
|
Bethesda, Maryland 20814
|
(c)
|
Sub-Advisers:
|
|
WCM Investment Management
|
|
281 Brooks Street
|
|
Laguna Beach, California 92651
|
|
|
|
Peritus I Asset Management, LLC
|
|
26 West Anapamu, 3rd Floor
|
|
Santa Barbara, California 93101
|
|
|
|
Cambria Investment Management, L.P.
|
|
2321 Rosecrans Avenue, Suite 3225
|
|
El Segundo, California 90245
|
|
Ranger Alternative Management L.P.
|
|
2828 N. Harwood Street, Suite 1600
|
|
Dallas, Texas 75201
|
|
|
|
Madrona Funds, LLC
|
|
2911 Bond Street, Suite 105
|
|
Everett, Washington 98201
|
|
|
|
American Retirement Planners, Inc.
|
|
d/b/a American Wealth Management
|
|
570 Hammill Lane
|
|
Reno, Nevada 89511
|
|
|
|
Trim Tabs Asset Management, LLC
|
|
1505 Bridgeway, Suite 121
|
|
Sausalito, California 94965
|
|
|
|
Accuvest Global Advisors
|
|
3100 Oak Road, Suite 380
|
|
Walnut Creek, California 94597
|
|
|
|
First Affirmative Financial Network, LLC
|
|
5475 Mark Dabling Boulevard, Suite 108
|
|
Colorado Springs, Colorado 80918
|
|
|
|
Reynders, McVeigh Capital Management, LLC
|
|
121 High Street, 5th Floor
|
|
Boston, Massachusetts 02110
|
|
|
|
Baldwin Brothers Inc.
|
|
204 Spring Street
|
|
Marion, Massachusetts 02738
|
|
|
|
Community Capital Management Inc.
|
|
2500 Weston Road, Suite 101
|
|
Weston, Florida 33331
|
|
Partnervest Advisory Services, LLC
|
|
1216 State Street 3rd Floor
|
|
Santa Barbara, California, 93101
|
|
|
|
Commerce Asset Management, LLC
|
|
5050 Poplar Avenue, Suite 2020
|
|
Memphis, Tennessee 38157
|
|
|
|
Your Source Financial, PLC
|
|
707 E. Northern Avenue
|
|
Phoenix, Arizona 85020
|
|
|
|
Pring Turner Capital Group
|
|
1600 South Main Street, Suite #375
|
|
Walnut Creek, California 94596
|
|
Newfleet Asset Management, LLC
|
|
100 Pearl Street
|
|
Hartford, Connecticut 06106
|
|
|
|
AthenaInvest Advisors, LLC
|
|
5340 South Quebec Street, Suite 365-N
|
|
Greenwood Village, Colorado 80111
|
|
|
|
Treesdale Partners, LLC
|
|
1325 Avenue of the Americas, Suite 2302
|
|
New York, New York 10019
|
|
|
|
Sage Advisory Services, Ltd. Co.
|
|
5900 Southwest Parkway, Building I
|
|
Austin, Texas 78735
|
|
|
|
Recon Capital Partners, LLC
|
|
500 Mamaroneck Avenue, Suite 320
|
|
Harrison, New York 10528
|
|
|
|
The Elements Financial Group, LLC
|
|
19200 Von Karman Avenue, Suite 800
|
|
Irvine, California 92612
|
(d)
|
Principal Underwriter:
|
|
Foreside Fund Services, LLC
|
|
Three Canal Plaza, Suite 100
|
|
Portland, Maine 04101
|
|
|
(e)
|
Custodian and Administrator:
|
|
The Bank of New York Mellon
|
|
101 Barclay Street
|
|
New York, New York 10286
|
|
Item 34
.
|
Management Services
|
Not Applicable.
Not Applicable.