For more detailed information about the Fund, see the SAI dated January 17, 2014, which is incorporated by reference into this Prospectus. Additional information about the Fund’s investments will be available in the Fund’s annual and semi-annual reports to shareholders. In the Fund’s annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund’s performance during its last fiscal year.
Call Van Eck at 888.MKT.VCTR to request, free of charge, the annual or semi-annual reports, the SAI, or other information about the Fund or to make shareholder inquiries. You may also obtain the SAI or the Fund’s annual or semi-annual reports, when available, by visiting the Van Eck website at www.marketvectorsetfs.com.
Information about the Fund (including the SAI) can also be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information about the operation of the Public Reference Room may be obtained by calling 202.551.8090.
Reports and other information about the Fund are available on the EDGAR Database on the SEC’s internet site at http://www.sec.gov. In addition, copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following email address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section,
Washington, DC 20549-0102.
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Transfer Agent: The Bank of New York Mellon
SEC Registration Number: 333-123257
1940 Act Registration Number: 811-10325 |
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888.MKT.VCTR |
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QDXUPRO
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vaneck.com |
MARKET VECTORS ETF TRUST
STATEMENT OF ADDITIONAL INFORMATION
Dated
January 17, 2014
This
Statement of Additional Information (“SAI”) is not a prospectus.
It should be read in conjunction with the Prospectuses dated January 17, 2014
(each a
“Prospectus” and, together, the “Prospectuses”) for the
Market Vectors ETF Trust (the “Trust”),
relating to the series of the Trust listed below, as they may be revised from
time to time.
| Fund |
Principal U.S. Listing Exchange |
Ticker |
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| Market Vectors MSCI International Quality ETF |
NYSE Arca, Inc. |
QXUS |
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| Market Vectors MSCI International Quality Dividend ETF |
NYSE Arca, Inc. |
QDXU |
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A copy of each Prospectus may be obtained
without charge by writing to the Trust or the Distributor. The Trust’s address is 335 Madison Avenue, 19th Floor, New York,
New York 10017. Capitalized terms used herein that are not defined have the same meaning as in the Prospectuses, unless otherwise
noted.
TABLE OF CONTENTS
GENERAL
DESCRIPTION OF THE TRUST
The
Trust is an open-end management investment company. The Trust currently consists
of 58 investment portfolios. This SAI relates to two investment portfolios,
Market Vectors MSCI International Quality ETF
and Market Vectors MSCI International Quality Dividend ETF (each, a “Fund” and,
together, the “Funds”).
Each Fund is classified as a non-diversified management investment company under
the Investment Company Act of 1940, as amended (“1940 Act”), and,
as a result, is not required to meet certain diversification requirements under
the 1940 Act. The Trust was organized as a Delaware statutory trust on March
15, 2001. The shares of each Fund are referred to herein as “Shares.”
The Funds offer and issue Shares at their
net asset value (“NAV”) only in aggregations of a specified number of Shares (each, a “Creation Unit”).
Similarly, Shares are redeemable by the Funds only in Creation Units, and generally in exchange for specified securities held
by each Fund and a specified cash payment. The Shares of the Funds are expected to be approved for listing, subject to notice
of issuance, on NYSE Arca, Inc. (“NYSE Arca” or the “Exchange”), and will trade in the secondary market
at market prices that may differ from the Shares’ NAV. A Creation Unit consists of 100,000 shares of each Fund. The Trust
reserves the right to permit or require a “cash” option for creations and redemptions of Shares of a Fund (subject
to applicable legal requirements) to the extent such Shares are not created and redeemed in cash.
INVESTMENT
POLICIES AND RESTRICTIONS
Repurchase Agreements
The Funds may invest in repurchase agreements
with commercial banks, brokers or dealers to generate income from their excess cash balances and to invest securities lending cash
collateral. A repurchase agreement is an agreement under which a Fund acquires a money market instrument (generally a security
issued by the U.S. Government or an agency thereof, a banker’s acceptance or a certificate of deposit) from a seller, subject
to resale to the seller at an agreed upon price and date (normally, the next business day). A repurchase agreement may be considered
a loan collateralized by securities. The resale price reflects an agreed upon interest rate effective for the period the instrument
is held by a Fund and is unrelated to the interest rate on the underlying instrument.
In these repurchase agreement transactions,
the securities acquired by a Fund (including accrued interest earned thereon) must have a total value at least equal to the value
of the repurchase agreement and are held by the Trust’s custodian bank until repurchased. In addition, the Trust’s
Board of Trustees (“Board” or “Trustees”) has established guidelines and standards for review of the creditworthiness
of any bank, broker or dealer counterparty to a repurchase agreement with each Fund. No more than an aggregate of 15% of each Fund’s
net assets will be invested in repurchase agreements having maturities longer than seven days.
The use of repurchase agreements involves
certain risks. For example, if the other party to the agreement defaults on its obligation to repurchase the underlying security
at a time when the value of the security has declined, the Funds may incur a loss upon disposition of the security. If the other
party to the agreement becomes insolvent and subject to liquidation or reorganization under the Bankruptcy Code or other laws,
a court may determine that the underlying security is collateral not within the control of the Fund and, therefore, the Fund may
incur delays in disposing of the security and/or may not be able to substantiate its interest in the underlying security and may
be deemed an unsecured creditor of the other party to the agreement.
Futures Contracts and Options
Futures contracts generally provide for the
future sale by one party and purchase by another party of a specified instrument, index or commodity at a specified future time
and at a specified price. Stock index futures contracts are settled daily with a payment by one party to the other of a cash amount
based on the difference between the level of the stock index specified in the contract from one day to the next. Futures contracts
are standardized as to maturity date and underlying instrument and are traded on futures exchanges. The Funds may use futures contracts
and options on futures contracts based on other indexes or combinations of indexes that Van Eck Associates Corporation (the “Adviser”)
believes to be representative of each Fund’s respective benchmark index (each, an “Index”).
An option is a contract that provides the
holder the right to buy or sell shares at a fixed price, within a specified period of time. An American call option gives the option
holder the right to buy the underlying security from the option writer at the option exercise price at any time prior to the expiration
of the option. A European call option gives the option holder the right to buy the underlying security from the option writer only
on the option expiration date. An American put option gives the option holder the right to sell the underlying security to the
option writer at the option exercise price at any time prior to the expiration of the option. A European put option gives the option
holder the right to sell the underlying security to the option writer at the option exercise price only on the option expiration
date.
Although futures contracts (other than cash
settled futures contracts including most stock index futures contracts) by their terms call for actual delivery or acceptance of
the underlying instrument or commodity, in most cases the contracts are closed out before the maturity date without the making
or taking of delivery. Closing out an open futures position is done by taking an opposite position (“buying” a contract
which has previously been “sold” or “selling” a contract previously “purchased”) in an identical
contract to terminate the position. Brokerage commissions are incurred when a futures contract position is opened or closed.
Futures traders are required to make a good
faith margin deposit in cash or government securities with a broker or custodian to initiate and maintain open positions in futures
contracts. A margin deposit is intended to assure completion of the contract (delivery or acceptance of the underlying instrument
or commodity or payment of
the cash settlement amount) if it is not
terminated prior to the specified delivery date. Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin deposits which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened,
the value of the contract is marked-to-market daily. If the futures contract price changes to the extent that the margin on deposit
does not satisfy margin requirements, payment of additional “variation” margin will be required.
Conversely, a change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the contract holder. Variation margin payments are
made to and from the futures broker for as long as the contract remains open. The Funds expect to earn interest income on their
margin deposits.
The Funds may use futures contracts and options
thereon, together with positions in cash and money market instruments, to simulate full investment in each Fund’s respective
Index. Under such circumstances, the Adviser may seek to utilize other instruments that it believes to be correlated to each Fund’s
respective Index components or a subset of the components. Liquid futures contracts may not be currently available for the Index
of each Fund.
Positions in futures contracts and options
may be closed out only on an exchange that provides a secondary market therefor. However, there can be no assurance that a liquid
secondary market will exist for any particular futures contract or option at any specific time. Thus, it may not be possible to
close a futures or options position. In the event of adverse price movements, the Funds would continue to be required to make daily
cash payments to maintain its required margin. In such situations, if a Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be disadvantageous to do so. In addition, the Funds may be required
to make delivery of the instruments underlying futures contracts they have sold.
The Funds will seek to minimize the risk
that they will be unable to close out a futures or options contract by only entering into futures and options for which there appears
to be a liquid secondary market.
The risk of loss in trading futures contracts
or uncovered call options in some strategies (e.g., selling uncovered stock index futures contracts) is potentially unlimited.
The Funds do not plan to use futures and options contracts in this way. The risk of a futures position may still be large as traditionally
measured due to the low margin deposits required. In many cases, a relatively small price movement in a futures contract may result
in immediate and substantial loss or gain to the investor relative to the size of a required margin deposit.
Utilization of futures transactions by the
Funds involves the risk of imperfect or even negative correlation to each Fund’s respective Index if the index underlying
the futures contracts differs from the Index. There is also the risk of loss by the Funds of margin deposits in the event of bankruptcy
of a broker with whom a Fund has an open position in the futures contract or option.
Certain financial futures exchanges limit
the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum
amount that the price of a futures contract may vary either up or down from the previous day’s settlement price at the end
of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day
at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation
of future positions and subjecting some futures traders to substantial losses.
Except as otherwise specified in the Prospectuses
or this SAI, there are no limitations on the extent to which the Funds may engage in transactions involving futures and options
thereon. The Funds will take steps to prevent their futures positions from “leveraging” their securities holdings.
When a Fund has a long futures position, it will maintain with its custodian bank, cash or liquid securities having a value equal
to the notional value of the contract (less any margin deposited in connection with the position). When a Fund has a short futures
position, as part of a complex stock replication strategy the Fund will maintain with their custodian bank assets substantially
identical to those underlying the contract
or cash and liquid securities (or a combination of the foregoing) having a value equal to the net obligation of the Fund under
the contract (less the value of any margin deposits in connection with the position).
Swaps
Over-the-counter (“OTC”) swap
agreements are contracts between parties in which one party agrees to make payments to the other party based on the change in market
value or level of a specified index or asset. In return, the other party agrees to make payments to the first party based on the
return of a different specified index or asset. Although OTC swap agreements entail the risk that a party will default on its payment
obligations thereunder, each Fund seeks to reduce this risk by entering into agreements that involve payments no less frequently
than quarterly. The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to each
swap is accrued on a daily basis and an amount of cash or highly liquid securities having an aggregate value at least equal to
the accrued excess is maintained in an account at the Trust’s custodian bank.
The use of such swap agreements involves
certain risks. For example, if the counterparty, under a swap agreement, defaults on its obligation to make payments due from it
as a result of its bankruptcy or otherwise, the Funds may lose such payments altogether or collect only a portion thereof, which
collection could involve costs or delays.
The Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) and related regulatory developments requires the clearing and exchange-trading
of certain OTC derivative instruments that the Commodity Futures Trading Commission (“CFTC”) and Securities and Exchange
Commission (“SEC”) recently defined as “swaps” and “security-based swaps,” respectively. Mandatory
exchange-trading and clearing is occurring on a phased-in basis based on the type of market participant and CFTC approval of contracts
for central clearing. The Adviser will continue to monitor these developments, particularly to the extent regulatory changes affect
a Fund’s ability to enter into swap agreements.
Warrants and Subscription Rights
Warrants are equity securities in the form
of options issued by a corporation which give the holder the right, but not the obligation, to purchase stock, usually at a price
that is higher than the market price at the time the warrant is issued. A purchaser takes the risk that the warrant may expire
worthless because the market price of the common stock fails to rise above the price set by the warrant.
Currency Forwards
A currency forward transaction is a contract
to buy or sell a specified quantity of currency at a specified date in the future at a specified price which may be any fixed number
of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. Currency forward
contracts may be used to increase or reduce exposure to currency price movements.
The use of currency forward transactions
involves certain risks. For example, if the counterparty under the contract defaults on its obligation to make payments due from
it as a result of its bankruptcy or otherwise, a Fund may lose such payments altogether or collect only a portion thereof, which
collection could involve costs or delays.
Convertible Securities
A convertible security is a bond, debenture,
note, preferred stock, right, warrant or other security that may be converted into or exchanged for a prescribed amount of common
stock or other security of the same or a different issuer or into cash within a particular period of time at a specified price
or formula. A convertible security generally entitles the holder to receive interest paid or accrued on debt securities or the
dividend paid on preferred stock until the convertible security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities generally have characteristics similar to both debt and equity securities. The value of convertible securities
tends to decline as interest rates rise and, because of the conversion feature, tends to vary with fluctuations in the market
value of the underlying securities. Convertible securities ordinarily provide a stream of income with generally higher yields
than those of common stock of the same or similar issuers. Convertible securities generally rank
senior to common stock in a corporation’s
capital structure but are usually subordinated to comparable nonconvertible securities. Convertible securities generally do not
participate directly in any dividend increases or decreases of the underlying securities although the market prices of convertible
securities may be affected by any dividend changes or other changes in the underlying securities.
Structured Notes
A structured note is a derivative security
for which the amount of principal repayment and/or interest payments is based on the movement of one or more “factors.”
These factors include, but are not limited to, currency exchange rates, interest rates (such as the prime lending rate or LIBOR),
referenced bonds and stock indices. Some of these factors may or may not correlate to the total rate of return on one or more underlying
instruments referenced in such notes. Investments in structured notes involve risks including interest rate risk, credit risk and
market risk. Depending on the factor(s) used and the use of multipliers or deflators, changes in interest rates and movement of
such factor(s) may cause significant price fluctuations. Structured notes may be less liquid than other types of securities and
more volatile than the reference factor underlying the note.
Participation Notes
Participation notes (“P-Notes”)
are issued by banks or broker-dealers and are designed to offer a return linked to the performance of a particular underlying equity
security or market. P-Notes can have the characteristics or take the form of various instruments, including, but not limited to,
certificates or warrants. The holder of a P-Note that is linked to a particular underlying security is entitled to receive any
dividends paid in connection with the underlying security. However, the holder of a P-Note generally does not receive voting rights
as it would if it directly owned the underlying security. P-Notes constitute direct, general and unsecured contractual obligations
of the banks or broker-dealers that issue them, which therefore subject a Fund to counterparty risk, as discussed below. Investments
in P-Notes involve certain risks in addition to those associated with a direct investment in the underlying foreign securities
or foreign securities markets whose return they seek to replicate. For instance, there can be no assurance that the trading price
of a P-Note will equal the value of the underlying foreign security or foreign securities market that it seeks to replicate. As
the purchaser of a P-Note, a Fund is relying on the creditworthiness of the counterparty issuing the P-Note and has no rights under
a P-Note against the issuer of the underlying security. Therefore, if such counterparty were to become insolvent, a Fund would
lose its investment. The risk that a Fund may lose its investments due to the insolvency of a single counterparty may be amplified
to the extent the Fund purchases P-Notes issued by one issuer or a small number of issuers. P-Notes also include transaction costs
in addition to those applicable to a direct investment in securities. In addition, a Fund’s use of P-Notes may cause the
Fund’s performance to deviate from the performance of the portion of the Index to which the Fund is gaining exposure through
the use of P-Notes.
Due to liquidity and transfer restrictions,
the secondary markets on which P-Notes are traded may be less liquid than the markets for other securities, which may lead to the
absence of readily available market quotations for securities in a Fund’s portfolio and may cause the value of the P-Notes
to decline. The ability of a Fund to value its securities becomes more difficult and the Adviser’s judgment in the application
of fair value procedures may play a greater role in the valuation of a Fund’s securities due to reduced availability of reliable
objective pricing data. Consequently, while such determinations will be made in good faith, it may nevertheless be more difficult
for a Fund to accurately assign a daily value to such securities.
Future Developments
The Funds may take advantage of opportunities
in the area of options, futures contracts, options on futures contracts, options on the Funds, warrants, swaps and any other investments
which are not presently contemplated for use or which are not currently available, but which may be developed, to the extent such
investments are considered suitable for a Fund by the Adviser.
Investment Restrictions
The Trust has adopted the following investment
restrictions as fundamental policies with respect to each Fund. These restrictions cannot be changed without the approval of the
holders of a majority of each Fund’s outstanding voting securities. For purposes of the 1940 Act, a majority of the outstanding
voting securities of a Fund means the vote, at an annual or a special meeting of the security holders of the Trust, of the lesser
of (1) 67%
or more of the voting securities of the
Fund present at such meeting, if the holders of more than 50% of the outstanding voting securities of the Fund are present or represented
by proxy, or (2) more than 50% of the outstanding voting securities of the Fund. Under these restrictions:
1. Each Fund may not make loans, except
that a Fund may (i) lend portfolio securities, (ii) enter into repurchase agreements, (iii) purchase all or a portion of an issue
of debt securities, bank loan or participation interests, bank certificates of deposit, bankers’ acceptances, debentures
or other securities, whether or not the purchase is made upon the original issuance of the securities and (iv) participate in an
interfund lending program with other registered investment companies;
2. Each Fund may not borrow money, except
as permitted under the 1940 Act, and as interpreted or modified by regulation from time to time;
3. Each Fund may not issue senior securities,
except as permitted under the 1940 Act, and as interpreted or modified by regulation from time to time;
4. Each Fund may not purchase or sell
real estate, except that a Fund may (i) invest in securities of issuers that invest in real estate or interests therein; (ii) invest
in mortgage-related securities and other securities that are secured by real estate or interests therein; and (iii) hold and sell
real estate acquired by the Fund as a result of the ownership of securities;
5. Each Fund may not engage in the business
of underwriting securities issued by others, except to the extent that the Fund may be considered an underwriter within the meaning
of the Securities Act of 1933, as amended (the “Securities Act”), in the disposition of restricted securities or in
connection with its investments in other investment companies;
6. Each Fund may not purchase or sell
commodities, unless acquired as a result of owning securities or other instruments, but it may purchase, sell or enter into financial
options and futures, forward and spot currency contracts, swap transactions and other financial contracts or derivative instruments
and may invest in securities or other instruments backed by commodities; and
7. Each Fund may not purchase any security
if, as a result of that purchase, 25% or more of its total assets would be invested in securities of issuers having their principal
business activities in the same industry except that the Fund may invest 25% or more of the value of its total assets in securities
of issuers in any one industry or group of industries if the index that the Fund replicates concentrates in an industry or group
of industries. This limit does not apply to securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
In addition to the investment restrictions
adopted as fundamental policies as set forth above, each Fund observes the following restrictions, which may be changed by the
Board without a shareholder vote. Each Fund will not:
1. Invest in securities which are “illiquid”
securities, including repurchase agreements maturing in more than seven days and options traded over-the-counter, if the result
is that more than 15% of a Fund’s net assets would be invested in such securities.
2. Make short sales of securities.
3. Purchase any security on margin, except
for such short-term loans as are necessary for clearance of securities transactions. The deposit or payment by a Fund or initial
or variation margin in connection with futures contracts or related options thereon is not considered the purchase of a security
on margin.
4. Participate
in a joint or joint-and-several basis in any trading account in securities, although transactions for the Funds and any other
account under common or affiliated management may be combined or allocated between a Fund and such account.
5. Purchase securities of open-end or
closed-end investment companies except in compliance with the 1940 Act, although a Fund may not acquire any securities of registered
open-end investment companies or registered unit investment trusts in reliance on Sections 12(d)(1)(F) or 12(d)(1)(G) of the 1940
Act.
If a percentage limitation is adhered to
at the time of investment or contract, a later increase or decrease in percentage resulting from any change in value or total or
net assets will not result in a violation of such restriction, except that the percentage limitations with respect to the borrowing
of money and illiquid securities will be continuously complied with.
Each Fund may invest in securities not included
in its respective index, money market instruments or funds which reinvest exclusively in money market instruments, in stocks that
are in the relevant market but not its Index, and/or in combinations of certain stock index futures contracts, options on such
futures contracts, stock options, stock index options, options on the Shares, and stock index swaps and swaptions, each with a
view towards providing each Fund with exposure to the securities in its Index. These investments may be made to invest uncommitted
cash balances or, in limited circumstances, to assist in meeting shareholder redemptions of Creation Units. Each Fund will generally
not invest in money market instruments as part of a temporary defensive strategy to protect against potential stock market declines.
SPECIAL
CONSIDERATIONS AND RISKS
A discussion of the risks associated with
an investment in each Fund is contained in the Prospectuses under the headings “Summary Information—Principal Risks
of Investing in the Fund” with respect to the applicable Fund, and “Additional Information About the Funds’ Investment
Strategies and Risks—Risks of Investing in the Funds.” The discussion below supplements, and should be read in conjunction
with, such sections of the Prospectuses.
General
Investment in each Fund should be made with
an understanding that the value of the Fund’s portfolio securities may fluctuate in accordance with changes in the financial
condition of the issuers of the portfolio securities, the value of securities generally and other factors.
An investment in each Fund should also be
made with an understanding of the risks inherent in an investment in equity securities, including the risk that the financial condition
of issuers may become impaired or that the general condition of the stock market may deteriorate (either of which may cause a decrease
in the value of the portfolio securities and thus in the value of Shares). Common stocks are susceptible to general stock market
fluctuations and to volatile increases and decreases in value as market confidence in and perceptions of their issuers change.
These investor perceptions are based on various and unpredictable factors, including expectations regarding government, economic,
monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or regional political,
economic and banking crises.
Holders of common stocks incur more risk
than holders of preferred stocks and debt obligations because common stockholders, as owners of the issuer, have generally inferior
rights to receive payments from the issuer in comparison with the rights of creditors of, or holders of debt obligations or preferred
stocks issued by, the issuer. Further, unlike debt securities which typically have a stated principal amount payable at maturity
(whose value, however, will be subject to market fluctuations prior thereto), or preferred stocks which typically have a liquidation
preference and which may have stated optional or mandatory redemption provisions, common stocks have neither a fixed principal
amount nor a maturity. Common stock values are subject to market fluctuations as long as the common stock remains outstanding.
In the event that the securities in a Fund’s
Index are not listed on a national securities exchange, the principal trading market for some may be in the over-the-counter market.
The existence of a liquid trading market for certain securities may depend on whether dealers will make a market in such securities.
There can be no assurance that a market will be made or maintained or that any such market will be or remain liquid. The price
at which securities may be sold and the value of a Fund’s Shares will be adversely affected if trading markets for the Fund’s
portfolio securities are limited or absent or if bid/ask spreads are wide.
The Funds are not actively managed by traditional
methods, and therefore the adverse financial condition of any one issuer will not result in the elimination of its securities from
the securities held by a Fund unless the securities of such issuer are removed from its respective Index.
An investment in each Fund should also be
made with an understanding that the Fund will not be able to replicate exactly the performance of its respective Index because
the total return generated by the securities will be reduced by transaction costs incurred in adjusting the actual balance of the
securities and other Fund expenses, whereas such transaction costs and expenses are not included in the calculation of its respective
Index. In addition, each Fund’s use of a representative sampling approach may cause the Fund to not be as well correlated
with the return of its Index as would be the case if the Fund purchased all of the securities in the Index in the proportions represented
in its Index. The risk of non-correlation may be higher than other exchange traded funds which utilize a sampling approach to the
extent that a Fund invests a portion of its assets in securities that have economic characteristics that are substantially identical
to the securities comprising the Index, but which are not included in its Index. It is also possible that for periods of time,
a Fund may not fully replicate the performance of its respective Index due to the temporary unavailability of certain Index securities
in the secondary market or due to other extraordinary circumstances. It is also possible that the composition of a Fund may not
exactly replicate the composition of its respective Index if the Fund has to adjust its portfolio holdings in order to continue
to qualify as a “regulated investment company” under the U.S. Internal Revenue Code of 1986, as amended (the “Internal
Revenue Code”).
Regulatory developments affecting the exchange-traded
and OTC derivatives markets may impair each Fund’s ability to manage or hedge its investment portfolio through the use of
derivatives. The Dodd- Frank Act and the rules promulgated thereunder may limit the ability of a Fund to enter into one or more
exchange-traded or OTC derivatives transactions.
Each Fund has filed a notice of eligibility
with the National Futures Association claiming an exclusion from the definition of the term “commodity pool operator”
(“CPO”) under the Commodity Exchange Act (“CEA”). Therefore, neither the Funds nor the Adviser (with respect
to each Fund) is subject to registration or regulation as a commodity pool or CPO under the CEA.
Each Fund’s use of derivatives may
also be limited by the requirements of the Internal Revenue Code, for qualification as a regulated investment company for U.S.
federal income tax purposes.
Shares are subject to the risks of an investment
in a portfolio of equity securities in an economic sector or industry in which a Fund’s Index is highly concentrated. In
addition, because it is the policy of each Fund to generally invest in the securities that comprise its respective Index, the portfolio
of securities held by such Fund (“Fund Securities”) also will be concentrated in that economic sector or industry.
U.S. Federal Tax Treatment of Futures Contracts
Each Fund may be required for federal income
tax purposes to mark-to-market and recognize as income for each taxable year their net unrealized gains and losses on certain futures
contracts as of the end of the year as well as those actually realized during the year. Gain or loss from futures contracts on
broad-based indexes required to be marked-to-market will be 60% long-term and 40% short-term capital gain or loss. Application
of this rule may alter the timing and character of distributions to shareholders. Each Fund may be required to defer the recognition
of losses on futures contracts to the extent of any unrecognized gains on related positions held by the Fund.
In order for a Fund to continue to qualify
for U.S. federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must
be derived from qualifying income, i.e., dividends, interest, income derived from loans of securities, gains from the sale
of securities or of foreign currencies or other income derived with respect to the Fund’s business of investing in securities.
It is anticipated that any net gain realized from the closing out of futures contracts will be considered gain from the sale of
securities and therefore will be qualifying income for purposes of the 90% requirement.
Each Fund distributes to shareholders quarterly
any net capital gains which have been recognized for U.S. federal income tax purposes (including unrealized gains at the end of
the Fund’s fiscal year) on futures transactions.
Such distributions are combined with distributions
of capital gains realized on a Fund’s other investments and shareholders are advised on the nature of the distributions.
EXCHANGE
LISTING AND TRADING
A discussion of exchange listing and trading
matters associated with an investment in each Fund is contained in the Prospectuses under the headings “Summary Information—Principal
Risks of Investing in the Fund” with respect to the applicable Fund, “Additional Information About the Funds’
Investment Strategies and Risks—Risks of Investing in the Funds,” “Shareholder Information—Determination
of NAV” and “Shareholder Information—Buying and Selling Exchange-Traded Shares.” The discussion below supplements,
and should be read in conjunction with, such sections of the Prospectuses.
The Shares of each Fund are expected to be
approved for listing on NYSE Arca, subject to notice of issuance, and will trade in the secondary market at prices that may differ
to some degree from their NAV. The Exchange may but is not required to remove the Shares of the Funds from listing if: (1) following
the initial twelve-month period beginning upon the commencement of trading of the Funds, there are fewer than 50 beneficial holders
of the Shares for 30 or more consecutive trading days, (2) the value of a Fund’s respective Index or portfolio of securities
on which the Funds is based is no longer calculated or available or (3) such other event shall occur or condition exists that,
in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. In addition, the Exchange will remove the Shares
from listing and trading upon termination of the Trust. There can be no assurance that the requirements of the Exchange necessary
to maintain the listing of Shares of the Funds will continue to be met.
As in the case of other securities traded
on the Exchange, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels.
In order to provide investors with a basis
to gauge whether the market price of the Shares on the Exchange is approximately consistent with the current value of the assets
of the Funds on a per Share basis, an updated Indicative Per Share Portfolio Value is disseminated intra-day through the facilities
of the Consolidated Tape Association’s Network B. Indicative Per Share Portfolio Values are disseminated every 15 seconds
during regular Exchange trading hours based on the most recently reported prices of Fund Securities. As the respective international
local markets close, the Indicative Per Share Portfolio Value will continue to be updated for foreign exchange rates for the remainder
of the U.S. trading day at the prescribed 15 second interval. The Funds are not involved in or responsible for the calculation
or dissemination of the Indicative Per Share Portfolio Value and make no warranty as to the accuracy of the Indicative Per Share
Portfolio Value.
BOARD OF
TRUSTEES OF THE TRUST
Trustees and Officers of the Trust
The Board of the Trust consists of five Trustees,
four of whom are not “interested persons” (as defined in the 1940 Act), of the Trust (the “Independent Trustees”).
Mr. David H. Chow, an Independent Trustee, serves as Chairman of the Board. The Board is responsible for overseeing the management
and operations of the Trust, including general supervision of the duties performed by the Adviser and other service providers to
the Trust. The Adviser is responsible for the day-to-day administration and business affairs of the Trust.
The Board believes that each Trustee’s
experience, qualifications, attributes or skills on an individual basis and in combination with those of the other Trustees lead
to the conclusion that the Board possesses the requisite skills and attributes to carry out its oversight responsibilities with
respect to the Trust. The Board believes that the Trustees’ ability to review, critically evaluate, question and discuss
information provided to them, to interact effectively with the Adviser, other service providers, counsel and independent auditors,
and to exercise effective business judgment in the performance of their duties, support this conclusion. The Board also has considered
the following experience, qualifications, attributes and/or skills, among others, of its members in reaching its conclusion: such
person’s character and integrity; length of service as a board member of the Trust; such person’s willingness to serve
and willingness and ability to commit the time necessary to perform the duties of a Trustee; and as to each Trustee other than
Mr. van Eck, his status as not being an “interested person” (as defined in the 1940 Act) of the Trust. In addition,
the following specific experience, qualifications, attributes and/or skills apply as to each Trustee: Mr. Chow, significant business
and financial experience, particularly in the investment management industry, experience with trading and markets through his involvement
with the Pacific Stock Exchange, and service as a chief executive officer, board member, partner or executive officer of various
businesses and non-profit organizations; Mr. Short, business and financial experience, particularly in the investment management
industry, and service as a president, board member or executive officer of various businesses; Mr. Sidebottom, business and financial
experience, particularly in the investment management industry, and service as partner and/or executive officer of various businesses;
Mr. Stamberger, business and financial experience and service as the president and chief executive officer of SmartBrief Inc.,
a media company; and Mr. van Eck, business and financial experience, particularly in the investment management industry, and service
as a president, executive officer and/or board member of various businesses, including the Adviser, Van Eck Securities Corporation,
and Van Eck Absolute Return Advisers Corporation. References to the experience, qualifications, attributes and skills of Trustees
are pursuant to requirements of the SEC, and do not constitute holding out of the Board or any Trustee as having any special expertise
or experience, and shall not impose any greater responsibility or liability on any such person or on the Board by reason thereof.
The Trustees of the Trust, their addresses,
positions with the Trust, ages, term of office and length of time served, principal occupations during the past five years, the
number of portfolios in the Fund Complex overseen by each Trustee and other directorships, if any, held by the Trustees, are set
forth below.
Independent Trustees
Name, Address1 and Age |
Position(s) Held
with the Trust |
Term of Office2
and Length of
Time Served |
Principal
Occupation(s)
During Past Five
Years |
Number of
Portfolios in
Fund Complex3 Overseen |
Other
Directorships
Held By
Trustee During
Past Five
Years |
David H. Chow,
56*† |
Chairman
Trustee |
Since 2008
Since 2006 |
Founder and CEO, DanCourt Management LLC (financial/strategy consulting firm and Registered Investment Adviser), March |
58 |
Director, Forward Management LLC and Audit Committee Chairman, January 2008 to present; Trustee, Berea |
Name,
Address1 and Age |
Position(s) Held
with the Trust |
Term of Office2
and Length of
Time Served |
Principal
Occupation(s)
During Past Five
Years |
Number of
Portfolios in
Fund Complex3 Overseen |
Other
Directorships
Held By
Trustee During
Past Five
Years |
| |
|
|
1999 to present |
|
College of Kentucky and Vice-Chairman of the Investment Committee, May 2009 to present; Member of the Governing Council of the Independent Directors Council, October 2012 to present; President, July 2013 to present, and Board Member of the CFA Society of Stamford, July 2009 to present. |
|
R. Alastair Short,
60*†
|
Trustee |
Since 2006 |
President,
Apex Capital Corporation (personal investment vehicle), January 1988 to present; Vice Chairman, W.P. Stewart & Co., Inc.
(asset management firm), September 2007 to September 2008; and Managing Director, The GlenRock Group, LLC (private
equity investment firm), May 2004 to September 2007. |
69 |
Chairman and Independent Director, EULAV Asset Management, January 2011 to present; Independent Director, Tremont offshore funds, June 2009 to present; Director, Kenyon
Review. |
Name,
Address1 and Age |
Position(s) Held
with the Trust |
Term of Office2
and Length of
Time Served |
Principal
Occupation(s)
During Past Five
Years |
Number of
Portfolios in
Fund Complex3 Overseen |
Other
Directorships
Held By
Trustee During
Past Five
Years |
| Peter J. Sidebottom, 51*† |
Trustee |
Since 2012 |
Independent
business adviser, January 2014 to present, Partner, Bain & Company
(management consulting firm), April
2012 to December 2013; Executive Vice President and Senior Operating Committee
Member, TD Ameritrade (on-line brokerage firm), February 2009 to January 2012;
Executive Vice President, Wachovia Corporation (financial services firm), December
2004 to February 2009. |
58 |
Board
Member, Special Olympics, New Jersey, November 2011 to September 2013;
Director, The Charlotte Research Institute, December 2000 to present; Board
Member, Social Capital Institute, University of North Carolina Charlotte,
November 2004
to January
2012. |
Richard D. Stamberger,
54*† |
Trustee |
Since 2006 |
Director, President and CEO, SmartBrief, Inc. (media company). |
69 |
Director, Food and Friends, Inc., 2013 to present. |
| 1 | The address for each Trustee and officer is 335 Madison Avenue, 19th Floor, New York, New York 10017. |
| 2 | Each Trustee serves until resignation, death, retirement or removal. Officers are elected yearly by the Trustees. |
| 3 | The Fund Complex consists of the Van Eck Funds, Van Eck VIP Trust and the Trust. |
| * | Member of the Audit Committee. |
| † | Member of the Nominating and Corporate Governance Committee. |
Interested Trustee
Name, Address1
and Age |
Position(s) Held
with the Trust |
Term of Office2
and Length of
Time Served |
Principal
Occupation(s)
During Past Five
Years |
Number of
Portfolios in
Fund Complex3
Overseen |
Other
Directorships
Held By
Trustee During
Past Five Years |
Jan F. van Eck,
504 |
Trustee, President and Chief Executive Officer |
Trustee (Since
2006); President and Chief Executive Officer (Since
2009) |
Director, President and Owner of the Adviser, Van Eck Associates Corporation; Director and President, Van Eck Securities Corporation (“VESC”); Director
and President, Van Eck Absolute Return Advisers Corp. (“VEARA”). |
58 |
Director, National Committee on US-China Relations. |
| 1 | The address for each Trustee and officer is 335 Madison Avenue, 19th Floor, New York, New York 10017. |
| 2 | Each Trustee serves until resignation, death, retirement or removal. Officers are elected yearly by the Trustees. |
| 3 | The Fund Complex consists of the Van Eck Funds, Van Eck VIP Trust and the Trust. |
| 4 | “Interested person” of the Trust within the meaning of the 1940 Act. Mr. van Eck is an officer of the Adviser. |
Officer Information
The Officers of the Trust, their addresses,
positions with the Trust, ages and principal occupations during the past five years are set forth below.
Officer’s
Name,
Address1 and Age |
Position(s) Held
with the Trust |
Term
of
Office2 and
Length of
Time Served |
Principal
Occupation(s) During The Past Five
Years |
|
|
|
|
| Russell G. Brennan, 49 |
Assistant Vice
President and Assistant Treasurer
|
Since 2008 |
Assistant Vice President and Assistant Treasurer of the Adviser (since 2008); Manager (Portfolio Administration) of the Adviser (September 2005 to October 2008); Officer of other investment companies advised by the Adviser. |
|
|
|
|
| Charles T. Cameron, 53 |
Vice President |
Since 2006 |
Director of Trading (since 1995) and Portfolio Manager (since 1997) for the Adviser; Officer of other investment companies advised by the Adviser. |
|
|
|
|
| Simon Chen, 42 |
Assistant Vice President |
Since 2012 |
Greater China Director of the Adviser (Since January 2012); General Manager, SinoMarkets Ltd. (June 2007 to December 2011). |
|
|
|
|
Officer’s Name,
Address1 and Age |
Position(s) Held
with the Trust |
Term of
Office2 and
Length of
Time Served |
Principal Occupation(s) During The Past
Five
Years |
|
|
|
|
| John J. Crimmins, 56 |
Vice President, Treasurer, Chief Financial Officer and Principal
Accounting Officer |
Vice President, Chief Financial Officer and Principal Accounting
Officer
(Since 2012); Treasurer (Since 2009) |
Vice President of Portfolio Administration of the Adviser,
June 2009 to present; Vice President of VESC and VEARA, June 2009 to present; Chief Financial, Operating and Compliance Officer,
Kern Capital Management LLC, September 1997 to February 2009; Officer of other investment companies advised by the Adviser. |
| Eduardo Escario, 38 |
Vice President |
Since 2012 |
Regional Director, Business Development/Sales for Southern Europe and
South America of the Adviser (since July 2008); Regional Director (Spain, Portugal, South America and Africa) of Dow Jones
Indexes and STOXX Ltd. (May 2001 – July 2008). |
| Lars Hamich, 45 |
Vice President |
Since 2012 |
Managing Director and Chief Executive Officer of Van Eck Global (Europe)
GmbH (since 2009); Chief Executive Officer of Market Vectors Index Solutions GmbH (“MVIS”) (since June 2011);
Managing Director of STOXX Limited (until 2008). |
|
|
|
|
| Wu-Kwan Kit, 32 |
Assistant Vice President and Assistant Secretary |
Since 2011 |
Assistant Vice President, Associate General Counsel
and Assistant Secretary of the Adviser, VESC and VEARA (since 2011); Associate, Schulte Roth & Zabel (September 2007 –
2011); University of Pennsylvania Law School (August 2004 – May 2007). |
|
|
|
|
| Susan C. Lashley, 59 |
Vice President |
Since 2006 |
Vice President of the Adviser and VESC; Officer of other investment
companies advised by the Adviser. |
| Laura I. Martínez, 33 |
Assistant Vice President and Assistant Secretary |
Since 2008 |
Assistant Vice President, Associate General Counsel and Assistant Secretary
of the Adviser, VESC and VEARA (since 2008); Associate, Davis Polk & Wardwell (October 2005 – June 2008); Officer
of other investment companies advised by the Adviser. |
|
|
|
|
Officer’s Name,
Address1 and Age |
Position(s) Held
with the Trust |
Term of
Office2 and
Length of
Time Served |
Principal Occupation(s) During The Past
Five
Years |
| Joseph J. McBrien, 65 |
Senior Vice President, Secretary, Chief Legal Officer |
Senior Vice President, Secretary
and Chief Legal Officer (Since 2006)
|
Senior Vice President, General Counsel and Secretary of the Adviser, VESC and VEARA (since December 2005); Director of VESC and VEARA (since October 2010); Chief Compliance Officer of the Adviser and VEARA (March 2013 – September 2013); Officer of other investment companies advised by the Adviser. |
| Ferat Oeztuerk, 30 |
Assistant Vice President |
Since 2012 |
Sales Associate, Van Eck Global (Europe) GmbH (since November 2011); Account Manager, Vodafone Global Enterprise Limited (January 2011 to October 2011). |
| Jonathan R. Simon, 39 |
Vice President and Assistant
Secretary
|
Since 2006 |
Vice President, Associate General Counsel and Assistant Secretary of the Adviser, VESC and VEARA (since 2006); Officer of other investment companies advised by the Adviser. |
| Bruce J. Smith, 58 |
Senior Vice President
|
Since 2006 |
Senior Vice President, Chief Financial Officer, Treasurer and Controller of the Adviser, VESC and VEARA (since 1997); Director of the Adviser, VESC and VEARA (since October 2010); Officer of other investment companies advised by the Adviser. |
| Janet Squitieri, 53 |
Chief Compliance Officer |
Since September 2013 |
Vice President, Global Head of Compliance of the Adviser, VESC and VEARA (since September 2013); Chief Compliance Officer and Senior Vice President North America of HSBC Global Asset Management NA (August 2010 – September 2013); Chief Compliance Officer North America of Babcock & Brown LP (July 2008 - June 2010) |
| 1. | The address for each officer is 335 Madison Avenue, 19th Floor, New York, New York 10017. |
| 2 | Officers are elected yearly by the Trustees. |
The Board has an Audit Committee consisting
of four Trustees who are Independent Trustees. Messrs. Chow, Short, Sidebottom and Stamberger currently serve as members of the
Audit Committee and each of Messrs. Chow, Short and Stamberger have been designated as an “audit committee financial expert”
as defined under Item 407 of Regulation S-K of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Mr. Short is the Chairman of the Audit Committee. The Audit Committee has the responsibility, among other things, to: (i) oversee
the accounting and financial reporting processes of the Trust and its internal control over financial reporting; (ii) oversee
the quality and integrity of the Trust’s financial statements and the independent audit thereof; (iii) oversee or, as appropriate,
assist the Board’s oversight of the Trust’s compliance with legal and regulatory requirements that relate to the Trust’s
accounting and financial reporting, internal control over financial reporting and independent audit; (iv) approve prior to appointment
the engagement of the Trust’s independent registered public accounting firm and, in connection therewith, to review and
evaluate the qualifications, independence and performance of the Trust’s
independent registered public accounting
firm; and (v) act as a liaison between the Trust’s independent registered public accounting firm and the full Board.
The Board also has a Nominating and Corporate
Governance Committee consisting of four Independent Trustees. Messrs. Chow, Short, Sidebottom and Stamberger currently serve as
members of the Nominating and Corporate Governance Committee. Mr. Stamberger is the Chairman of the Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee has the responsibility, among other things, to: (i) evaluate, as necessary,
the composition of the Board, its committees and sub-committees and make such recommendations to the Board as deemed appropriate
by the Committee; (ii) review and define Independent Trustee qualifications; (iii) review the qualifications of individuals serving
as Trustees on the Board and its committees; (iv) evaluate, recommend and nominate qualified individuals for election or appointment
as members of the Board and recommend the appointment of members and chairs of each Board committee and subcommittee; and (v) review
and assess, from time to time, the performance of the committees and subcommittees of the Board and report the results to the Board.
The Board has determined that its leadership
structure is appropriate given the business and nature of the Trust. In connection with its determination, the Board considered
that the Chairman of the Board is an Independent Trustee. The Chairman of the Board can play an important role in setting the agenda
of the Board and also serves as a key point person for dealings between management and the other Independent Trustees. The Independent
Trustees believe that the Chairman’s independence facilitates meaningful dialogue between the Adviser and the Independent
Trustees. The Board also considered that the Chairman of each Board committee is an Independent Trustee, which yields similar benefits
with respect to the functions and activities of the various Board committees. The Independent Trustees also regularly meet outside
the presence of management and are advised by independent legal counsel. The Board has determined that its committees help ensure
that the Trust has effective and independent governance and oversight. The Board also believes that its leadership structure facilitates
the orderly and efficient flow of information to the Independent Trustees from management of the Trust, including the Adviser.
The Board reviews its structure on an annual basis.
As an integral part of its responsibility
for oversight of the Trust in the interests of shareholders, the Board, as a general matter, oversees risk management of the Trust’s
investment programs and business affairs. The function of the Board with respect to risk management is one of oversight and not
active involvement in, or coordination of, day-to-day risk management activities for the Trust. The Board recognizes that not all
risks that may affect the Trust 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 Trust’s goals, and
that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover,
reports received by the Trustees that may relate to risk management matters are typically summaries of the relevant information.
The Board exercises oversight of the risk
management process primarily through the Audit Committee, and through oversight by the Board itself. The Trust faces a number of
risks, such as investment-related and compliance risks. The Adviser’s personnel seek to identify and address 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. Under the overall supervision of the Board or the applicable Committee of the Board, the
Trust, the Adviser, and the affiliates of the Adviser employ a variety of processes, procedures and controls to identify such possible
events or circumstances, to lessen the probability of their occurrence and/or to mitigate the effects of such events or circumstances
if they do occur. Different processes, procedures and controls are employed with respect to different types of risks. Various personnel,
including the Trust’s Chief Compliance Officer, as well as various personnel of the Adviser and other service providers such
as the Trust’s independent accountants, may report to the Audit Committee and/or to the Board with respect to various aspects
of risk management, as well as events and circumstances that have arisen and responses thereto.
The
officers and Trustees of the Trust, in the aggregate, own less than 1% of the
Shares of each Fund as of January 17, 2014.
For each Trustee, the dollar range of equity
securities beneficially owned (including ownership through the Trust’s Deferred Compensation Plan) by the Trustee in the
Trust and in all registered investment companies advised by the Adviser (“Family of Investment Companies”) that are
overseen by the Trustee is shown below.
| Name of Trustee |
Dollar Range of
Equity Securities in
Market Vectors
MSCI
International
Quality ETF (As of
December 31,
2013) |
Dollar Range of
Equity Securities in
Market Vectors
MSCI
International
Quality Dividend
ETF (As of
December 31,
2013) |
Aggregate
Dollar
Range of Equity
Securities
in all
Registered
Investment
Companies
Overseen
By
Trustee
In Family
of
Investment
Companies
(As of December
31, 2013) |
| David H. Chow |
None |
None |
Over
$100,000 |
| R. Alastair Short |
None |
None |
Over
$100,000 |
| Peter J. Sidebottom |
None |
None |
None |
| Richard D. Stamberger |
None |
None |
Over
$100,000 |
| Jan F. van Eck |
None |
None |
Over
$100,000 |
As to each Independent Trustee and his immediate
family members, no person owned beneficially or of record securities in an investment manager or principal underwriter of the Funds,
or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control
with the investment manager or principal underwriter of the Funds.
Remuneration of Trustees
The Trust pays each Independent Trustee an
annual retainer of $80,000, a per meeting fee of $15,000 for scheduled quarterly meetings of the Board and each special meeting
of the Board and a per meeting fee of $7,500 for telephonic meetings. The Trust pays the Chairman of the Board an annual retainer
of $45,500, the Chairman of the Audit Committee an annual retainer of $19,500 and the Chairman of the Governance Committee an annual
retainer of $13,000. The Trust also reimburses each Trustee for travel and other out-of-pocket expenses incurred in attending such
meetings. No pension or retirement benefits are accrued as part of Trustee compensation.
The table below shows the estimated compensation
that is contemplated to be paid to the Trustees by the Trust for the fiscal year ended September 30, 2014. Annual Trustee fees
may be reviewed periodically and changed by the Trust’s Board.
| Name of Trustee | |
Aggregate
Compensation
From the Trust | |
Deferred
Compensation
From the Trust | |
Pension
or
Retirement Benefits Accrued
as Part of
the
Trust’s Expenses(2) | |
Estimated
Annual
Benefits
Upon
Retirement | |
Total
Compensation
From the
Trust and the
Fund
Complex(1)
Paid to
Trustee(2) |
| David H. Chow | |
$ | 215,500 | | |
$ | 53,875 | | |
N/A | |
N/A | |
$ | 215,500 | |
| R. Alastair Short | |
$ | 189,500 | | |
$ | 0 | | |
N/A | |
N/A | |
$ | 319,500 | |
| Peter J. Sidebottom | |
$ | 170,000 | | |
$ | 0 | | |
N/A | |
N/A | |
$ | 170,000 | |
| Richard D. Stamberger | |
$ | 183,000 | | |
$ | 36,600 | | |
N/A | |
N/A | |
$ | 323,000 | |
| Jan F. van Eck(3.........) | |
$ | 0 | | |
$ | 0 | | |
N/A | |
N/A | |
$ | 0 | |
| (1) | The “Fund Complex” consists of Van Eck Funds, Van Eck VIP Trust and the Trust. |
| (2) | Because the funds of the Fund Complex have different fiscal year ends, the amounts shown are presented on a calendar year basis. |
| (3) | “Interested person” under the 1940 Act. |
PORTFOLIO
HOLDINGS DISCLOSURE
Each Fund’s portfolio holdings are
publicly disseminated each day the Fund is open for business through financial reporting and news services, including publicly
accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to
deliver in exchange for Creation Units, together with estimates and actual cash components, is publicly disseminated daily prior
to the opening of the Exchange via the National Securities Clearing Corporation (the “NSCC”), a clearing agency that
is registered with the SEC. The basket represents one Creation Unit of each Fund. The Trust, Adviser, Custodian and Distributor
will not disseminate non-public information concerning the Trust.
QUARTERLY
PORTFOLIO SCHEDULE
The Trust is required to disclose, after
its first and third fiscal quarters, the complete schedule of the Funds’ portfolio holdings with the SEC on Form N-Q. Form
N-Q for the Funds will be available on the SEC’s website at http://www.sec.gov. The Funds’ Form N-Q may also
be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. and information on the operation of the Public
Reference Room may be obtained by calling 202.551.8090. The Funds’ Form N-Q will be available through the Funds’ website,
at www.vaneck.com or by writing to 335 Madison Avenue, 19th Floor, New York, New York 10017.
CODE OF
ETHICS
The Funds, the Adviser and the Distributor
have each adopted a Code of Ethics pursuant to Rule 17j-1 under the 1940 Act, designed to monitor personal securities transactions
by their personnel (the “Personnel”). The Code of Ethics requires that all trading in securities that are being purchased
or sold, or are being considered for purchase or sale, by the Funds must be approved in advance by the Head of Trading, the Director
of Research and the Chief Compliance Officer of the Adviser. Approval will be granted if the security has not been purchased or
sold or recommended for purchase or sale for a Fund on the day that the Personnel of the Adviser requests pre-clearance, or otherwise
if it is determined that the personal trading activity will not have a negative or appreciable impact on the price or market of
the security, or is of such a nature that it does not present the dangers or potential for abuses that are likely to result in
harm or detriment to the Funds. At the end of each calendar quarter, all Personnel must file a report of all transactions entered
into during the quarter. These reports are reviewed by a senior officer of the Adviser.
Generally, all Personnel must obtain approval
prior to conducting any transaction in securities. Independent Trustees, however, are not required to obtain prior approval of
personal securities transactions. Personnel may purchase securities in an initial public offering or private placement, provided
that he or she obtains preclearance of the purchase and makes certain representations.
PROXY
VOTING POLICIES AND PROCEDURES
The Funds’ proxy voting record is available
upon request and on the SEC’s website at http://www.sec.gov. Proxies for each Fund’s portfolio securities are
voted in accordance with the Adviser’s proxy voting policies and procedures, which are set forth in Appendix A to this SAI.
The Trust is required to disclose annually
each Fund’s complete proxy voting record on Form N-PX covering the period July 1 through June 30 and file it with the SEC
no later than August 31. Form N-PX for the Funds will be available through the Funds’ website, at www.vaneck.com,
or by writing to 335 Madison Avenue, 19th Floor, New York, New York 10017. The Funds’ Form N-PX is also available on the
SEC’s website at www.sec.gov.
MANAGEMENT
The following information supplements and
should be read in conjunction with the section in the Prospectuses entitled “Management of the Funds.”
Investment Adviser
Van Eck Associates Corporation acts as investment
adviser to the Trust and, subject to the general supervision of the Board, is responsible for the day-to-day investment management
of the Funds. The Adviser is a private company with headquarters in New York and manages other mutual funds and separate accounts.
The Adviser serves as investment adviser
to each of the Funds pursuant to an investment management agreement between the Trust and the Adviser (the “Investment Management
Agreement”). Under the Investment Management Agreement, the Adviser, subject to the supervision of the Board and in conformity
with the stated investment policies of each Fund, manages the investment of the Funds’ assets. The Adviser is responsible
for placing purchase and sale orders and providing continuous supervision of the investment portfolio of the Funds.
Pursuant to the Investment Management Agreement,
the Trust has agreed to indemnify the Adviser for certain liabilities, including certain liabilities arising under the federal
securities laws, unless such loss or liability results from willful misfeasance, bad faith or gross negligence in the performance
of its duties or the reckless disregard of its obligations and duties.
Investments in the securities of underlying
funds involve duplication of advisory fees and certain other expenses. By investing in an underlying fund, a Fund becomes a shareholder
of that underlying fund. As a result, the Fund’s shareholders will indirectly bear the Fund’s proportionate share of
the fees and expenses paid by shareholders of the underlying fund, in addition to the fees and expenses the Fund’s shareholders
directly bear in connection with the Fund’s own operations. To minimize the duplication of fees, the Adviser has agreed to
waive the management fee it charges to a Fund by any amount it collects as a management fee from an underlying fund managed by
the Adviser, as a result of an investment of the Fund’s assets in such underlying fund.
Compensation.
As compensation for its services under each Investment Management Agreement,
the Adviser will be paid a monthly fee based on a percentage of each Fund’s
average daily net assets at the annual rate of 0.45%. From time to time, the Adviser
may waive all or a portion of its fees. Until at least February 1,
2015, the Adviser has agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the operating expenses of each Fund (excluding acquired
fund fees and expenses, interest expense, offering costs, trading expenses, taxes
and extraordinary expenses) from exceeding 0.45% of its average daily net assets
per year. From time to time, the Adviser will waive all or a portion of its fees.
Offering costs excluded from the expense caps are: (a) legal fees pertaining
to a Fund’s Shares offered for sale; (b) SEC and state registration
fees; and (c) initial fees paid for Shares of a Fund to be listed on an exchange.
Term. Each Investment Management
Agreement is subject to annual approval by (1) the Board or (2) a vote of a majority of the outstanding voting securities (as
defined in the 1940 Act) of each Fund, provided that in
either event such continuance also is approved
by a majority of the Board who are not interested persons (as defined in the 1940 Act) of the Trust by a vote cast in person at
a meeting called for the purpose of voting on such approval. Each Investment Management Agreement is terminable without penalty,
on 60 days notice, by the Board or by a vote of the holders of a majority (as defined in the 1940 Act) of a Fund’s outstanding
voting securities. Each Investment Management Agreement is also terminable upon 60 days’ notice by the Adviser and will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
The Administrator
Van Eck Associates Corporation also serves
as administrator for the Trust pursuant to each Investment Management Agreement. Under each Investment Management Agreement, the
Adviser is obligated on a continuous basis to provide such administrative services as the Board of the Trust reasonably deems necessary
for the proper administration of the Trust and the Funds. The Adviser will generally assist in all aspects of the Trust’s
and the Funds’ operations; supply and maintain office facilities, statistical and research data, data processing services,
clerical, bookkeeping and record keeping services (including without limitation the maintenance of such books and records as are
required under the 1940 Act and the rules thereunder, except as maintained by other agents), internal auditing, executive and administrative
services, and stationery and office supplies; prepare reports to shareholders or investors; prepare and file tax returns; supply
financial information and supporting data for reports to and filings with the SEC and various state Blue Sky authorities; supply
supporting documentation for meetings of the Board; provide monitoring reports and assistance regarding compliance with the Declaration
of Trust, by-laws, investment objectives and policies and with federal and state securities laws; arrange for appropriate insurance
coverage; calculate NAVs, net income and realized capital gains or losses; and negotiate arrangements with, and supervise and coordinate
the activities of, agents and others to supply services.
Custodian and Transfer Agent
The Bank of New York Mellon (“The Bank
of New York”), located at 101 Barclay Street, New York, New York 10286, serves as custodian for the Funds pursuant to a Custodian
Agreement. As Custodian, The Bank of New York holds the Funds’ assets. The Bank of New York serves as each Fund’s transfer
agent pursuant to a Transfer Agency Agreement. The Bank of New York may be reimbursed by each Fund for its out-of-pocket expenses.
In addition, The Bank of New York provides various accounting services to each of the Funds, pursuant to a fund accounting agreement.
The Distributor
Van Eck Securities Corporation (the “Distributor”)
is the principal underwriter and distributor of Shares. Its principal address is 335 Madison Avenue, New York, New York 10017 and
investor information can be obtained by calling 1-888-MKT-VCTR. The Distributor has entered into an agreement with the Trust which
will continue from its effective date unless terminated by either party upon 60 days’ prior written notice to the other party
by the Trust and the Adviser, or by the Distributor, or until termination of the Trust or each Fund offering its Shares, and which
is renewable annually thereafter (the “Distribution Agreement”), pursuant to which it distributes Shares. Shares will
be continuously offered for sale by the Trust through the Distributor only in Creation Units, as described below under “Creation
and Redemption of Creation Units—Procedures for Creation of Creation Units.” Shares in less than Creation Units are
not distributed by the Distributor. The Distributor will deliver a prospectus to persons purchasing Shares in Creation Units and
will maintain records of both orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer
registered under the Exchange Act and a member of the Financial Industry Regulatory Authority (“FINRA”). The Distributor
has no role in determining the investment policies of the Trust or which securities are to be purchased or sold by the Trust.
The Distributor may also enter into sales
and investor services agreements with broker-dealers or other persons that are Participating Parties and DTC Participants (as defined
below) to provide distribution assistance, including broker-dealer and shareholder support and educational and promotional services
but must pay such broker-dealers or other persons, out of its own assets.
The Distribution Agreement provides that
it may be terminated at any time, without the payment of any penalty: (i) by vote of a majority of the Independent Trustees or
(ii) by vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Funds, on at least 60 days
written notice to the Distributor. The
Distribution Agreement is also terminable
upon 60 days notice by the Distributor and will terminate automatically in the event of its assignment (as defined in the 1940
Act).
Other Accounts Managed by the Portfolio Managers
As of the date indicated below, Messrs. Liao
and Cao managed the following other accounts:
Name of
Portfolio
Manager |
Other Accounts Managed
(As of September 30, 2013) |
Accounts with respect to which
the advisory fee is based on the
performance of the account |
Category of
Account |
Number of
Accounts in
Category |
Total Assets in
Accounts in
Category |
Number of
Accounts in
Category |
Total Assets in
Accounts in
Category |
Hao-Hung
(Peter) Liao |
Registered investment companies |
40 |
$19,769.41million |
0 |
0 |
| |
Other pooled
investment
vehicles |
0 |
0 |
0 |
0 |
| |
Other accounts |
0 |
0 |
0 |
0 |
| George Cao |
Registered investment companies |
40 |
$19,769.41 million |
0 |
0 |
| |
Other pooled
investment
vehicles |
0 |
0 |
0 |
0 |
| |
Other accounts |
0 |
0 |
0 |
0 |
Although the funds in the Trust that are
managed by Messrs. Liao and Cao may have different investment strategies, each has an investment objective of seeking to replicate,
before fees and expenses, its respective underlying index. The Adviser does not believe that management of the various accounts
presents a material conflict of interest for Messrs. Liao and Cao or the Adviser.
Portfolio Manager Compensation
The portfolio managers are paid a fixed base
salary and a bonus. The bonus is based upon the quality of investment analysis and the management of the funds. The quality of
management of the funds includes issues of replication, rebalancing, portfolio monitoring and efficient operation, among other
factors. Portfolio managers who oversee accounts with significantly different fee structures are generally compensated by discretionary
bonus rather than a set formula to help reduce potential conflicts of interest. At times, the Adviser and its affiliates manage
accounts with incentive fees.
Portfolio Manager Share Ownership
As of the date of this SAI, Messrs. Liao
and Cao did not beneficially own any Shares of the Fund.
BROKERAGE
TRANSACTIONS
When selecting brokers and dealers to handle
the purchase and sale of portfolio securities, the Adviser looks for prompt execution of the order at a favorable price. Generally,
the Adviser works with recognized dealers in these securities, except when a better price and execution of the order can be obtained
elsewhere. The Funds will not deal with affiliates in principal transactions unless permitted by exemptive order or applicable
rule or regulation. The Adviser owes a duty to its clients to seek best execution on trades effected. Since the investment objective
of each Fund is investment performance that corresponds to that of an Index, the Adviser does not intend to select brokers and
dealers for the purpose of receiving research services in addition to a favorable price and prompt execution either from that
broker or an unaffiliated third party.
The Adviser assumes general supervision over
placing orders on behalf of the Trust for the purchase or sale of portfolio securities. If purchases or sales of portfolio securities
of the Trust and one or more other investment companies or clients supervised by the Adviser are considered at or about the same
time, transactions in such securities are allocated among the several investment companies and clients in a manner deemed equitable
to all by the Adviser. In some cases, this procedure could have a detrimental effect on the price or volume of the security so
far as the Trust is concerned. However, in other cases, it is possible that the ability to participate in volume transactions and
to negotiate lower brokerage commissions will be beneficial to the Trust. The primary consideration is best execution.
Portfolio turnover may vary from year to
year, as well as within a year. High turnover rates are likely to result in comparatively greater brokerage expenses and taxable
distributions. The overall reasonableness of brokerage commissions is evaluated by the Adviser based upon its knowledge of available
information as to the general level of commissions paid by other institutional investors for comparable services.
BOOK ENTRY
ONLY SYSTEM
The following information supplements and
should be read in conjunction with the section in the Prospectuses entitled “Shareholder Information—Buying and Selling
Exchange-Traded Shares.”
The Depository Trust Company (“DTC”)
acts as securities depositary for the Shares. Shares of the Funds are represented by securities registered in the name of DTC or
its nominee and deposited with, or on behalf of DTC. Certificates will not be issued for Shares.
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 New York Stock Exchange
(“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 holdings
of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding Shares,
directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice,
statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order
that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses
attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
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 as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial
Owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now
the case
with securities held for the accounts of
customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants.
The Trust has no responsibility or liability
for any aspects of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership
interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests
or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants
and the Indirect Participants and Beneficial Owners owning through such DTC Participants
DTC may determine to discontinue providing
its service with respect to the Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities
with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for
DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates
representing ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Exchange.
CREATION
AND REDEMPTION OF CREATION UNITS
General
The Funds issue and sell Shares only in Creation
Units on a continuous basis through the Distributor, without an initial sales load, at their NAV next determined after receipt,
on any Business Day (as defined herein), of an order in proper form. An Authorized Participant (defined below) that is not a “qualified
institutional buyer,” as such term is defined under Rule 144A of the Securities Act of 1933, will not be able to receive,
as part of a redemption, restricted securities eligible for resale under Rule 144A.
A “Business Day” with respect
to the Funds is any day on which the NYSE is open for business. As of the date of each Prospectus, the NYSE 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 a purchase of Creation
Units of a Fund generally consists of the in-kind deposit of a designated portfolio of equity securities (the “Deposit Securities”)
that comprise each Fund’s Index and an amount of cash computed as described below (the “Cash Component”) or,
as permitted or required by a Fund, of cash. The Cash Component together with the Deposit Securities, as applicable, are referred
to as the “Fund Deposit,” which represents the minimum initial and subsequent investment amount for Shares. The Cash
Component represents the difference between the NAV of a Creation Unit and the market value of Deposit Securities and may include
a Dividend Equivalent Payment. The “Dividend Equivalent Payment” enables each Fund to make a complete distribution
of dividends on the next dividend payment date, and is an amount equal, on a per Creation Unit basis, to the dividends on all the
securities held by the Fund (“Fund Securities”) with ex-dividend dates within the accumulation period for such distribution
(the “Accumulation Period”), net of expenses and liabilities for such period, as if all of the Fund Securities had
been held by the Trust for the entire Accumulation Period. The Accumulation Period begins on the ex-dividend date for each Fund
and ends on the next ex-dividend date.
The Administrator, through the NSCC, 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) as well as the Cash Component for each Fund. Such Fund Deposit is applicable,
subject to any adjustments as described below, in order to effect creations of Creation Units of each Fund until such time as the
next-announced Fund Deposit composition is made available.
The identity and number of shares of the
Deposit Securities required for a Fund Deposit for each Fund changes as rebalancing adjustments and corporate action events are
reflected from time to time by the Adviser with a view to the investment objective of a Fund. The composition of the Deposit Securities
may also change in response to adjustments to the weighting or composition of the securities constituting each Fund’s respective
Index. In addition, the Trust reserves the right to accept a basket of securities or cash that differs from Deposit Securities
or
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, among other reasons, not be available in sufficient quantity for delivery, not be permitted to be re-registered in the
name of the Trust as a result of an in-kind creation order pursuant to local law or market convention or which may not be eligible
for transfer through the Clearing Process (described below), or which may not be eligible for trading by a Participating Party
(defined below). In light of the foregoing, in order to seek to replicate the in-kind creation order process, the Trust expects
to purchase the Deposit Securities represented by the cash in lieu amount in the secondary market (“Market Purchases”).
In such cases where the Trust makes Market Purchases because a Deposit Security may not be permitted to be re-registered in the
name of the Trust as a result of an in-kind creation order pursuant to local law or market convention, or for other reasons, the
Authorized Participant will reimburse the Trust for, among other things, any difference between the market value at which the securities
were purchased by the Trust and the cash in lieu amount (which amount, at the Adviser’s discretion, may be capped), applicable
registration fees and taxes. Brokerage commissions incurred in connection with the Trust’s acquisition of Deposit Securities
will be at the expense of each Fund and will affect the value of all Shares of the Fund but the Adviser may adjust the transaction
fee to the extent the composition of the Deposit Securities changes or cash in lieu is added to the Cash Component to protect ongoing
shareholders. The adjustments described above will reflect changes, known to the Adviser on the date of announcement to be in effect
by the time of delivery of the Fund Deposit, in the composition of the relevant Index or resulting from stock splits and other
corporate actions.
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
(i) on each Business Day, the Dividend Equivalent Payment, if any, and the estimated Cash Component effective through and including
the previous Business Day, per outstanding Shares of the Fund, and (ii) on a continuous basis throughout the day, the Indicative
Per Share Portfolio Value.
Procedures for Creation of Creation Units
To be eligible to place orders with the Distributor
to create Creation Units of the Funds, an entity or person either must be (1) a “Participating Party,” i.e.,
a broker-dealer or other participant in the Clearing Process through the Continuous Net Settlement System of the NSCC; or (2) a
DTC Participant (see “Book Entry Only System”); and, in either case, must have executed an agreement with the Distributor
and the Transfer Agent (as it may be amended from time to time in accordance with its terms) (“Participant Agreement”)
(discussed below). A Participating Party and DTC Participant are collectively referred to as an “Authorized Participant.”
All Creation Units of the Funds, however created, will be entered on the records of the Depository in the name of Cede & Co.
for the account of a DTC Participant.
All orders to create Creation Units must
be placed in multiples of 100,000 of each Fund (i.e., a Creation Unit). All orders to create Creation Units, whether through
the Clearing Process or outside the Clearing Process, must be received by the Distributor no later than the closing time of the
regular trading session on NYSE Arca (“Closing Time”) (ordinarily 4:00 p.m. Eastern time) on the date such order is
placed in order for creation of Creation Units to be effected based on the NAV of the Fund as determined on such date. A “Custom
Order” may be placed by an Authorized Participant in the event that the Trust permits or requires the substitution of an
amount of cash to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity
for delivery or which may not be eligible for trading by such Authorized Participant or the investor for which it is acting, or
other relevant reason. The Business Day on which a creation order (or order to redeem as discussed below) is placed is herein referred
to as the “Transmittal Date.” Orders must be transmitted 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”). Severe economic or market disruptions or changes, or telephone or other communication failure,
may impede the ability to reach the Distributor, a Participating Party or a DTC Participant.
Creation Units may be created in advance
of the receipt by the Trust of all or a portion of the Fund Deposit. In such cases, the Authorized Participant will remain liable
for the full deposit of the missing portion(s) of the Fund Deposit and will be required to post collateral with the Trust consisting
of cash at least equal to a percentage of the marked-to-market value of such missing portion(s) that is specified in the Participant
Agreement. The Trust may use such collateral to buy the missing portion(s) of the Fund Deposit at any time and will subject such
Authorized
Participant to liability for any shortfall
between the cost to the Trust of purchasing such securities and the value of such collateral. The Trust will have no liability
for any such shortfall. The Trust will return any unused portion of the collateral to the Authorized Participant once the entire
Fund Deposit has been properly received by the Distributor and deposited into the Trust.
Orders to create Creation Units of the Funds
shall be placed with a Participating Party or DTC Participant, as applicable, in the form required by such Participating Party
or DTC Participant. Investors should be aware that their particular broker may not have executed a Participant Agreement, and that,
therefore, orders to create Creation Units of the Funds may have to be placed by the investor’s broker through a Participating
Party or a DTC Participant who 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 to create Creation Units of the Funds through the Clearing Process
should afford sufficient time to permit proper submission of the order to the Distributor prior to the Closing 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 should ascertain the deadlines applicable
to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution
effectuating such transfer of Deposit Securities and Cash Component.
Orders to create Creation Units of the Fund
may be placed through the Clearing Process utilizing procedures applicable to domestic funds for domestic securities (“Domestic
Funds”) (see “—Placement of Creation Orders Using Clearing Process”) or outside the Clearing Process utilizing
the procedures applicable to either Domestic Funds or foreign funds for foreign securities (“Foreign Funds”) (see “—
Placement of Creation Orders Outside Clearing Process—Domestic Funds” and “—Placement of Creation Orders
Outside Clearing Process—Foreign Funds”). In the event that a Fund includes both domestic and foreign securities, the
time for submitting orders is as stated in the “Placement of Creation Orders Outside Clearing Process—Foreign Funds”
and “Placement of Redemption Orders Outside Clearing Process—Foreign Funds” sections below shall operate.
Placement of Creation Orders Using Clearing Process
Fund Deposits created through the Clearing
Process, if available, must be delivered through a Participating Party that has executed a Participant Agreement.
The Participant Agreement authorizes the
Distributor to transmit 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 from the Distributor to NSCC, the Participating Party agrees
to transfer the requisite Deposit Securities (or contracts to purchase such Deposit Securities that are expected to be delivered
in a “regular way” manner by the third (3rd) Business Day) 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 of the Funds 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 the Closing Time on such Transmittal Date and (ii) all other procedures set forth in the Participant Agreement are properly
followed.
Placement of Creation Orders Outside Clearing Process—Domestic
Funds
Fund Deposits created outside the Clearing
Process must be delivered through a DTC Participant that has executed a Participant Agreement. A DTC Participant who wishes to
place an order creating Creation Units of the Funds 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. The Fund Deposit transfer must be ordered by the DTC Participant
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 Distributor through the Federal Reserve wire system in a timely
manner so as to be received by the Distributor
no later than 2:00 p.m. Eastern time, on
the next Business Day immediately following the Transmittal Date. An order to create Creation Units of a Fund 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 the Closing Time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly
followed. However, if the Distributor does not receive both the requisite Deposit Securities and the Cash Component in a timely
fashion 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 current NAV of the applicable Fund. The delivery of Creation Units so created will occur no later than the third
(3rd) Business Day following the day on which the creation order is deemed received by the Distributor.
Additional transaction fees may be imposed
with respect to transactions effected outside the Clearing Process (through a DTC participant) and in circumstances in which any
cash can be used in lieu of Deposit Securities to create Creation Units. (See “Creation Transaction Fee” section below.)
Placement of Creation Orders Outside Clearing Process—Foreign
Funds
The Distributor will inform the Transfer
Agent, the Adviser and the Custodian upon receipt of a Creation Order. The Custodian will then provide such information to the
appropriate subcustodian. For each Fund, the Custodian will cause the subcustodian of such Fund to maintain an account into which
the Deposit Securities (or the cash value of all or part of such securities, in the case of a permitted or required cash purchase
or “cash in lieu” amount) will be delivered. Deposit Securities must be delivered to an account maintained at the applicable
local custodian. The Trust must also receive, on or before the contractual settlement date, immediately available or same day funds
estimated by the Custodian to be sufficient to pay the Cash Component next determined after receipt in proper form of the purchase
order, together with the creation transaction fee described below.
Once the Transfer Agent has accepted a creation
order, the Transfer Agent will confirm the issuance of a Creation Unit of a Fund against receipt of payment, at such NAV as will
have been calculated after receipt in proper form of such order. The Transfer Agent will then transmit a confirmation of acceptance
of such order.
Creation Units will not be issued until the
transfer of good title to the Trust of the Deposit Securities and the payment of the Cash Component have been completed. When the
subcustodian has confirmed to the Custodian that the required Deposit Securities (or the cash value thereof) have been delivered
to the account of the relevant subcustodian, the Distributor and the Adviser will be notified of such delivery and the Transfer
Agent will issue and cause the delivery of the Creation Units.
Acceptance of Creation Orders
The Trust reserves the absolute right to
reject a creation order transmitted to it by the Distributor if, for any reason, (a) the order is not in proper form; (b) the
creator or creators, upon obtaining the Shares, would own 80% or more of the currently outstanding Shares of a Fund; (c) the Deposit
Securities delivered are not as specified by the Administrator, as described above; (d) the acceptance of the Deposit Securities
would have certain adverse tax consequences to a Fund; (e) the acceptance of the Fund Deposit would, in the opinion of counsel,
be unlawful; (f) the acceptance of the Fund Deposit would otherwise, in the discretion of the Trust or the Adviser, 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 Adviser make it for all practical purposes impossible to process creation orders. Examples of such circumstances
include, without limitation, acts of God or public service or utility problems such as earthquakes, fires, floods, extreme weather
conditions and power outages resulting in telephone, telecopy and computer failures; wars; civil or military disturbances, including
acts of civil or military authority or governmental actions; terrorism; sabotage; epidemics; riots; labor disputes; market conditions
or activities causing trading halts; systems failures involving computer or other information systems affecting the Trust, the
Adviser, the Distributor, DTC, the NSCC or any other participant in the creation process, and similar extraordinary events. The
Transfer Agent shall notify a prospective creator of its rejection of the order of such person. The Trust, the Custodian, any
subcustodian, the Distributor and the Transfer Agent are under no duty, however, to give notification of any defects or irregularities
in the delivery of Fund Deposits to Authorized Participants nor shall either of them incur any liability to Authorized Participants
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
A fixed creation transaction fee of $1,000
payable to the Custodian is imposed on each creation transaction regardless of the number of Creation Units purchased in the transaction.
In addition, a variable charge for cash creations or for creations outside the Clearing Process currently of up to four times the
basic creation transaction fee may be imposed. In the case of cash creations or where the Trust permits or requires a creator to
substitute cash in lieu of depositing a portion of the Deposit Securities, the creator may be assessed an additional variable charge
to compensate the Funds for the costs associated with purchasing the applicable securities. (See “Fund Deposit” section
above.) As a result, in order to seek to replicate the in-kind creation order process, the Trust expects to purchase, in the secondary
market or otherwise gain exposure to, the portfolio securities that could have been delivered as a result of an in-kind creation
order pursuant to local law or market convention, or for other reasons (“Market Purchases”). In such cases where the
Trust makes Market Purchases, the Authorized Participant will reimburse the Trust for, among other things, any difference between
the market value at which the securities and/or financial instruments were purchased by the Trust and the cash in lieu amount (which
amount, at the Adviser’s discretion, may be capped), applicable registration fees, brokerage commissions and certain taxes.
The Adviser may adjust the transaction fee to the extent the composition of the creation securities changes or cash in lieu is
added to the Cash Component to protect ongoing shareholders. Creators of Creation Units are responsible for the costs of transferring
the securities constituting the Deposit Securities to the account of the Trust.
Redemption of Creation Units
Shares may be redeemed only in Creation Units
at their NAV next determined after receipt of a redemption request in proper form by the Distributor, only on a Business Day and
only through a Participating Party or DTC Participant who has executed a Participant Agreement. The Trust will not redeem Shares
in amounts less than Creation Units. Beneficial Owners also may sell Shares in the secondary market, but must accumulate enough
Shares 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. See, with respect to each Fund, the section entitled “Summary Information—Principal Risks of Investing
in the Fund” and “Additional Information About the Funds’ Investment Strategies and Risks—Risks of Investing
in the Fund” in the Prospectuses.
The Administrator, through NSCC, makes available
immediately prior to the opening of business on the Exchange (currently 9:30 a.m. Eastern time) on each day that the Exchange
is open for business, 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. If the Trust determines, based on information available to the
Trust when a redemption request is submitted by an Authorized Participant, that (i) the short interest of a Fund in the marketplace
is greater than or equal to 100% and (ii) the orders in the aggregate from all Authorized Participants redeeming Fund Shares on
a Business Day represent 25% or more of the outstanding Shares of the Fund, such Authorized Participant will be required to verify
to the Trust the accuracy of its representations that are deemed to have been made by submitting a request for redemption. If,
after receiving notice of the verification requirement, the Authorized Participant does not verify the accuracy of its representations
that are deemed to have been made by submitting a request for redemption in accordance with this requirement, its redemption request
will be considered not to have been received in proper form. Unless cash redemptions are permitted or required for a 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, plus cash in an amount equal to the difference between the NAV of the Shares being redeemed,
as next determined after a receipt of a request in proper form, and the value of the Fund Securities, less the redemption transaction
fee and variable fees described below. Should the Fund Securities have a value greater than the NAV of the Shares being redeemed,
a compensating cash payment to the Trust equal to the differential plus the applicable redemption transaction fee will be required
to be arranged for by or on behalf of the redeeming shareholder. Each Fund reserves the right to honor a redemption request by
delivering a basket of securities or cash that differs from the Fund Securities.
Redemption Transaction Fee
The basic redemption transaction fee of $1,000
is the same no matter how many Creation Units are being redeemed pursuant to any one redemption request. An additional charge up
to four times the redemption transaction fee will be charged with respect to cash redemptions or redemptions outside of the Clearing
Process. An additional variable charge for cash redemptions or partial cash redemptions (when cash redemptions are permitted or
required for a Fund) may also be imposed to compensate the applicable Fund for the costs associated with selling the applicable
securities. As a result, in order to seek to replicate the in-kind redemption order process, the Trust expects to sell, in the
secondary market, the portfolio securities or settle any financial instruments that may not be permitted to be re-registered in
the name of the Participating Party as a result of an in-kind redemption order pursuant to local law or market convention, or for
other reasons (“Market Sales”). In such cases where the Trust makes Market Sales, the Authorized Participant will reimburse
the Trust for, among other things, any difference between the market value at which the securities and/or financial instruments
were sold or settled by the Trust and the cash in lieu amount (which amount, at the Adviser’s discretion, may be capped),
applicable registration fees, brokerage commissions and certain taxes (“Transaction Costs”). The Adviser may adjust
the transaction fee to the extent the composition of the redemption securities changes or cash in lieu is added to the Cash Component
to protect ongoing shareholders. In no event will fees charged by the Fund in connection with a redemption exceed 2% of the value
of each Creation Unit. Investors who use the services of a broker or other such intermediary may be charged a fee for such services.
To the extent the Fund cannot recoup the amount of Transaction Costs incurred in connection with a redemption from the redeeming
shareholder because of the 2% cap or otherwise, those Transaction Costs will be borne by the Fund’s remaining shareholders
and negatively affect the Fund’s performance.
Placement of Redemption Orders Using Clearing Process
Orders to redeem Creation Units of the Funds
through the Clearing Process, if available, must be delivered through a Participating Party that has executed the Participant Agreement.
An order to redeem Creation Units of the Funds using the Clearing Process is deemed received on the Transmittal Date if (i) such
order is received by the Distributor not later than 4:00 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 applicable Fund
as next determined. An order to redeem Creation Units of the Funds using the Clearing Process made in proper form but received
by the Fund after 4:00 p.m. Eastern time, will be deemed received on the next Business Day immediately following the Transmittal
Date. The requisite Fund Securities (or contracts to purchase such Fund Securities which are expected to be delivered in a “regular
way” manner) and the applicable cash payment will be transferred by the third (3rd) Business Day following the date on which
such request for redemption is deemed received.
Placement of Redemption Orders Outside Clearing Process—Domestic
Funds
Orders to redeem Creation Units of the Funds
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 of the Funds 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 of the Funds will instead be effected through transfer of Creation Units of the Funds directly through DTC. An
order to redeem Creation Units of the Funds 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 4:00 p.m. Eastern time on such Transmittal Date; (ii) such
order is preceded or accompanied by the requisite number of Shares of Creation Units specified in such order, which delivery must
be made through DTC to the Administrator no later than 11:00 a.m. Eastern time, on 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 (or contracts to purchase such Fund Securities) which are expected to be delivered within three Business Days and the
cash redemption payment to the redeeming Beneficial Owner by the third Business Day following the Transmittal Date on which such
redemption order is deemed received by the Administrator. An additional variable redemption transaction fee of up to four times
the basic transaction fee is applicable to redemptions outside the Clearing Process.
Placement of Redemption Orders Outside Clearing Process—Foreign
Funds
Arrangements satisfactory to the Trust must
be in place for the Participating Party to transfer the Creation Units through DTC on or before the settlement date. Redemptions
of Shares for Fund Securities will be subject to compliance with applicable U.S. federal and state securities laws and each Fund
(whether or not it otherwise permits or requires 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 Deposit Securities under such laws.
In connection with taking delivery of Shares
for Fund Securities upon redemption of Creation Units, a redeeming shareholder or entity acting on behalf of a redeeming shareholder
must maintain appropriate custody arrangements with a qualified broker-dealer, bank or other custody providers in each jurisdiction
in which any of the Fund Securities are customarily traded, to which account such Fund Securities will be delivered. If neither
the redeeming shareholder nor the entity acting on behalf of a redeeming shareholder has appropriate arrangements to take delivery
of the Fund Securities in the applicable foreign jurisdiction and it is not possible to make other such arrangements, or if it
is not possible to effect deliveries of the Fund Securities in such jurisdictions, the Trust may, in its discretion, exercise its
option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds in cash.
Deliveries of redemption proceeds generally
will be made within three business days. Due to the schedule of holidays in certain countries or for other reasons, however, the
delivery of redemption proceeds may take longer than three business days after the day on which the redemption request is received
in proper form. In such cases, the local market settlement procedures will not commence until the end of the local holiday periods.
The holidays applicable to the Foreign Funds
are listed below. The proclamation of new holidays, the treatment by market participants of certain days as “informal holidays”
(e.g., days on which no or limited securities transactions occur, as a result of substantially shortened trading hours),
the elimination of existing holidays or changes in local securities delivery practices, could affect the information set forth
herein at some time in the future. The dates in calendar year 2014 in which the regular holidays affect the relevant securities
markets are as follows (the following holiday schedule is subject to potential changes in the securities market):
2014
| AUSTRALIA |
|
|
|
|
| |
|
|
|
|
| January 1 |
April 18 |
May 19 |
August 13 |
December 25 |
| January 27 |
April 21 |
June 2 |
September 29 |
December 26 |
| March 3 |
April 25 |
June 9 |
October 6 |
|
| March 10 |
May 5 |
August 4 |
November 4 |
|
| |
|
|
|
|
| |
|
|
|
|
| AUSTRIA |
|
|
|
|
| |
|
|
|
|
| January 1 |
May 1 |
August 15 |
December 26 |
|
| January 6 |
May 29 |
December 8 |
December 31 |
|
| April 18 |
June 9 |
December 24 |
|
|
| April 21 |
June 19 |
December 25 |
|
|
| |
|
|
|
|
| |
|
|
|
|
| BRAZIL |
|
|
|
|
| |
|
|
|
|
| January 1 |
April 18 |
July 9 |
December 31 |
|
| January 20 |
April 21 |
November 20 |
|
|
| March 3 |
May 1 |
December 24 |
|
|
| March 4 |
June 19 |
December 25 |
|
|
| |
|
|
|
|
| CANADA |
|
|
|
|
| |
|
|
|
|
| January 1 |
May 19 |
September 1 |
December 26 |
|
| January 2 |
June 24 |
October 13 |
|
|
| February 17 |
July 1 |
November 11 |
|
|
| April 18 |
August 4 |
December 25 |
|
|
| |
|
|
|
|
| |
|
|
|
|
| CHILE |
|
|
|
|
| |
|
|
|
|
| January 1 |
June 16 |
December 8 |
|
|
| April 18 |
August 15 |
December 25 |
|
|
| May 1 |
September 18 |
December 31 |
|
|
| May 21 |
September 19 |
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| CHINA |
|
|
|
|
| January 1 |
February 6 |
May 7 |
October 6 |
|
| January 20 |
February 7 |
May 26 |
October 7 |
|
| January 30 |
February 17 |
July 4 |
October 13 |
|
| January 31 |
May 1 |
September 1 |
November 11 |
|
| February 3 |
May 2 |
October 1 |
November 27 |
|
| February 4 |
May 5 |
October 2 |
December 25 |
|
| February 5 |
May 6 |
October 3 |
|
|
| |
|
|
|
|
| COLOMBIA |
|
|
|
|
| January 1 |
May 1 |
August 18 |
December 25 |
|
| January 6 |
June 2 |
October 13 |
December 31 |
|
| March 24 |
June 23 |
November 3 |
|
|
| April 17 |
June 30 |
November 17 |
|
|
| April 18 |
August 7 |
December 8 |
|
|
| |
|
|
|
|
| CZECH REPUBLIC |
|
|
|
|
| January 1 |
October 28 |
December 26 |
|
|
| April 21 |
November 17 |
December 31 |
|
|
| May 1 |
December 24 |
|
|
|
| May 8 |
December 25 |
|
|
|
| |
|
|
|
|
| DENMARK |
|
|
|
|
| January 1 |
May 16 |
December 24 |
|
|
| April 17 |
May 29 |
December 25 |
|
|
| April 18 |
June 5 |
December 26 |
|
|
| April 21 |
June 9 |
December 31 |
|
|
| |
|
|
|
|
| EGYPT |
|
|
|
|
| January 1 |
April 21 |
July 28 |
October 6 |
|
| January 7 |
May 1 |
July 29 |
|
|
| January 13 |
July 1 |
July 30 |
|
|
| April 20 |
July 23 |
October 5 |
|
|
| The Egyptian market is closed every Friday. |
|
| |
|
| FRANCE |
|
|
|
|
| January 1 |
May 8 |
November 11 |
|
|
| April 18 |
May 29 |
December 25 |
|
|
| April 21 |
July 14 |
December 26 |
|
|
| May 1 |
August 15 |
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| GERMANY |
|
|
|
|
| April 6 |
December 26 |
|
|
|
| April 9 |
|
|
|
|
| May 1 |
|
|
|
|
| December 25 |
|
|
|
|
| |
|
|
|
|
| GREECE |
|
|
|
|
| January 1 |
April 18 |
August 15 |
|
|
| January 6 |
April 21 |
October 28 |
|
|
| March 3 |
May 1 |
December 25 |
|
|
| March 25 |
June 9 |
December 26 |
|
|
| |
|
|
|
|
| HONG KONG |
|
|
|
|
| January 1 |
April 21 |
July 1 |
December 24 |
|
| January 30 |
May 1 |
September 9 |
December 25 |
|
| January 31 |
May 6 |
October 1 |
December 26 |
|
| April 18 |
June 2 |
October 2 |
December 31 |
|
| |
|
|
|
|
| HUNGARY |
|
|
|
|
| January 1 |
June 9 |
December 24 |
|
|
| April 21 |
August 20 |
December 25 |
|
|
| May 1 |
October 23 |
December 26 |
|
|
| May 2 |
October 24 |
|
|
|
| |
|
|
|
|
| INDIA |
|
|
|
|
| January 14 |
April 18 |
August 15 |
October 6 |
|
| February 27 |
May 1 |
August 18 |
October 23 |
|
| March 17 |
May 14 |
August 23 |
November 4 |
|
| March 31 |
June 30 |
August 29 |
November 6 |
|
| April 1 |
July 1 |
September 30 |
December 25 |
|
| April 8 |
July 29 |
October 2 |
|
|
| April 14 |
July 30 |
October 3 |
|
|
| |
|
|
|
|
| INDONESIA |
|
|
|
|
| January 1 |
May 15 |
July 29 |
August 18 |
December 26 |
| January 13 |
May 26 |
July 30 |
October 6 |
December 30 |
| January 31 |
May 29 |
July 31 |
December 24 |
December 31 |
| April 18 |
July 28 |
August 1 |
December 25 |
|
| |
|
|
|
|
| IRELAND |
|
|
|
|
| January 1 |
May 1 |
October 27 |
December 29 |
|
| March 17 |
May 5 |
December 24 |
|
|
| April 18 |
June 2 |
December 25 |
|
|
| April 21 |
August 4 |
December 26 |
|
|
| |
|
|
|
|
| ISRAEL |
|
|
|
|
| March 16 |
April 21 |
June 4 |
September 26 |
October 15 |
| April 14 |
May 4 |
August 5 |
October 3 |
October 16 |
| April 15 |
May 5 |
September 24 |
October 8 |
|
| April 20 |
June 3 |
September 25 |
October 9 |
|
| The Israeli market is closed every Friday. |
|
| |
|
| |
|
|
|
|
| ITALY |
|
|
|
|
| January 1 |
May 1 |
December 24 |
|
|
| January 6 |
June 2 |
December 25 |
|
|
| April 18 |
August 15 |
December 26 |
|
|
| April 25 |
December 8 |
|
|
|
| |
|
|
|
|
| JAPAN |
|
|
|
|
| January 1 |
February 11 |
July 21 |
November 3 |
|
| January 2 |
March 21 |
September 15 |
November 24 |
|
| January 3 |
April 29 |
September 23 |
December 23 |
|
| January 13 |
May 5 |
October 13 |
December 31 |
|
| |
|
|
|
|
| MALAYSIA |
|
|
|
|
| January 1 |
February 3 |
June 7 |
October 6 |
|
| January 14 |
May 1 |
July 28 |
October 22 |
|
| January 30 |
May 13 |
July 29 |
October 23 |
|
| January 31 |
May 15 |
July 30 |
October 25 |
|
| February 1 |
May 30 |
September 1 |
December 25 |
|
| |
|
|
|
|
| MEXICO |
|
|
|
|
| January 1 |
March 21 |
September 16 |
December 25 |
|
| February 3 |
April 17 |
November 17 |
|
|
| February 5 |
April 18 |
November 20 |
|
|
| March 17 |
May 1 |
December 12 |
|
|
| |
|
|
|
|
| MOROCCO |
|
|
|
|
| January 1 |
July 28 |
August 20 |
November 18 |
|
| January 14 |
July 29 |
August 21 |
|
|
| January 15 |
July 30 |
October 6 |
|
|
| May 1 |
August 14 |
November 6 |
|
|
| |
|
|
|
|
| NETHERLANDS |
|
|
|
|
| January 1 |
May 1 |
December 26 |
|
|
| April 18 |
May 29 |
|
|
|
| April 21 |
June 9 |
|
|
|
| April 30 |
December 25 |
|
|
|
| |
|
|
|
|
| NEW ZEALAND |
|
|
|
|
| January 1 |
February 6 |
June 2 |
|
|
| January 2 |
April 18 |
October 27 |
|
|
| January 20 |
April 21 |
December 25 |
|
|
| January 27 |
April 25 |
December 26 |
|
|
| |
|
|
|
|
| NORWAY |
|
|
|
|
| January 1 |
May 1 |
December 25 |
|
|
| April 17 |
May 29 |
December 26 |
|
|
| April 18 |
June 9 |
December 31 |
|
|
| April 21 |
December 24 |
|
|
|
| |
|
|
|
|
| PERU |
|
|
|
|
| January 1 |
July 28 |
December 24 |
|
|
| April 17 |
July 29 |
December 25 |
|
|
| April 18 |
October 8 |
December 31 |
|
|
| May 1 |
December 8 |
|
|
|
| |
|
|
|
|
| |
|
|
|
|
| PHILIPPINES |
|
|
|
|
| January 1 |
April 18 |
July 29 |
December 30 |
|
| February 25 |
May 1 |
August 21 |
December 31 |
|
| April 7 |
June 12 |
December 24 |
|
|
| April 17 |
July 28 |
December 25 |
|
|
| |
|
|
|
|
| POLAND |
|
|
|
|
| January 1 |
May 1 |
November 11 |
|
|
| April 18 |
June 19 |
December 25 |
|
|
| April 21 |
August 15 |
December 26 |
|
|
| |
|
|
|
|
| PORTUGAL |
|
|
|
|
| January 1 |
April 25 |
June 19 |
December 24 |
|
| March 4 |
May 1 |
August 15 |
December 25 |
|
| April 18 |
June 10 |
December 1 |
December 26 |
|
| April 21 |
June 13 |
December 8 |
|
|
| |
|
|
|
|
| SINGAPORE |
|
|
|
|
| January 1 |
May 1 |
August 9 |
December 25 |
|
| January 31 |
May 13 |
October 6 |
|
|
| February 1 |
May 15 |
October 22 |
|
|
| April 18 |
July 28 |
October 23 |
|
|
| |
|
|
|
|
| SOUTH AFRICA |
|
|
|
|
| January 1 |
April 28 |
December 16 |
|
|
| March 21 |
May 1 |
December 25 |
|
|
| April 18 |
June 16 |
December 26 |
|
|
| April 21 |
September 24 |
|
|
|
| |
|
|
|
|
| SPAIN |
|
|
|
|
| January 1 |
April 21 |
July 25 |
December 25 |
|
| January 6 |
May 1 |
August 15 |
December 26 |
|
| April 17 |
May 2 |
September 9 |
|
|
| April 18 |
May 15 |
December 8 |
|
|
| |
|
|
|
|
| SWEDEN |
|
|
|
|
| January 1 |
May 1 |
December 24 |
|
|
| January 6 |
May 29 |
December 25 |
|
|
| April 18 |
June 6 |
December 26 |
|
|
| April 21 |
June 20 |
December 31 |
|
|
| |
|
|
|
|
| SWITZERLAND |
|
|
|
|
| January 1 |
April 21 |
August 1 |
December 25 |
|
| January 2 |
May 1 |
August 15 |
December 26 |
|
| January 6 |
May 29 |
September 11 |
December 31 |
|
| March 19 |
June 9 |
December 8 |
|
|
| April 18 |
June 29 |
December 24 |
|
|
| |
|
|
|
|
| TAIWAN |
|
|
|
|
| January 1 |
February 12 |
April 4 |
October 10 |
|
| February 7 |
February 13 |
May 1 |
|
|
| February 8 |
February 14 |
June 12 |
|
|
| February 11 |
February 28 |
September 19 |
|
|
| |
|
|
|
|
| |
|
|
|
|
| THAILAND |
|
|
|
|
| January 1 |
April 16 |
July 1 |
December 5 |
|
| February 25 |
May 1 |
July 23 |
December 10 |
|
| April 8 |
May 6 |
August 12 |
December 31 |
|
| April 15 |
May 27 |
October 23 |
|
|
| |
|
|
|
|
| TURKEY |
|
|
|
|
| January 1 |
July 28 |
October 3 |
October 28 |
|
| April 23 |
July 29 |
October 6 |
October 29 |
|
| May 19 |
July 30 |
October 7 |
|
|
| |
|
|
|
|
| |
|
|
|
|
| UNITED KINGDOM |
|
|
|
|
| |
|
|
|
|
| January 1 |
May 5 |
December 26 |
|
|
| April 18 |
August 25 |
|
|
|
| April 21 |
December 25 |
|
|
|
| |
|
|
|
|
The longest redemption cycle for Foreign
Funds is a function of the longest redemption cycle among the countries whose securities comprise the Funds. In the calendar year
2014, the dates of regular holidays affecting the following securities markets present the worst-case (longest) redemption cycle*
for Foreign Funds as follows:
| |
|
|
|
|
|
|
SETTLEMENT
PERIODS GREATER
THAN SEVEN DAYS
FOR YEAR 2014 |
|
Beginning of Settlement
Period |
|
End of Settlement
Period |
|
Number of Days in
Settlement Period |
| Austria |
|
12/19/14 |
|
12/29/14 |
|
10 |
| |
|
12/22/14 |
|
12/30/14 |
|
8 |
| |
|
12/23/14 |
|
01/02/15 |
|
10 |
| China |
|
01/27/14 |
|
02/10/14 |
|
14 |
| |
|
01/28/14 |
|
02/11/14 |
|
14 |
| |
|
01/29/14 |
|
02/12/14 |
|
14 |
| |
|
04/28/14 |
|
05/08/14 |
|
10 |
| |
|
04/29/14 |
|
05/09/14 |
|
10 |
| |
|
04/30/14 |
|
05/12/14 |
|
12 |
| |
|
09/26/14 |
|
10/08/14 |
|
12 |
| |
|
09/29/14 |
|
10/09/14 |
|
10 |
| |
|
09/30/14 |
|
10/10/14 |
|
10 |
| Czech Republic |
|
12/23/13 |
|
01/02/14 |
|
10 |
| |
|
12/19/14 |
|
12/29/14 |
|
10 |
| |
|
12/22/14 |
|
12/13/14 |
|
8 |
| |
|
12/23/14 |
|
01/02/15 |
|
10 |
| Denmark |
|
12/23/13 |
|
01/02/14 |
|
10 |
| |
|
04/14/14 |
|
04/23/14 |
|
8 |
| |
|
04/15/14 |
|
04/24/14 |
|
8 |
| |
|
04/16/14 |
|
04/25/14 |
|
8 |
| |
|
12/19/14 |
|
12/29/14 |
|
10 |
| |
|
12/22/14 |
|
12/30/14 |
|
8 |
| |
|
12/23/14 |
|
01/02/15 |
|
10 |
| Egypt |
|
12/31/13 |
|
01/08/14 |
|
8 |
| |
|
01/06/14 |
|
01/14/14 |
|
8 |
| |
|
04/14/14 |
|
04/22/14 |
|
8 |
| |
|
04/15/14 |
|
04/23/14 |
|
8 |
| |
|
04/16/14 |
|
04/24/14 |
|
8 |
| |
|
04/17/14 |
|
04/27/14 |
|
10 |
| |
|
07/21/14 |
|
07/31/14 |
|
10 |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
SETTLEMENT
PERIODS GREATER
THAN SEVEN DAYS
FOR YEAR 2014 |
|
Beginning of Settlement
Period |
|
End of Settlement
Period |
|
Number of Days in
Settlement Period |
| |
|
07/22/14 |
|
08/03/14 |
|
12 |
| |
|
07/24/14 |
|
08/04/14 |
|
11 |
| |
|
09/29/14 |
|
10/07/14 |
|
8 |
| |
|
09/30/14 |
|
10/08/14 |
|
8 |
| |
|
10/01/14 |
|
10/09/14 |
|
8 |
| |
|
10/02/14 |
|
10/12/14 |
|
10 |
| Finland |
|
12/23/13 |
|
01/02/14 |
|
10 |
| |
|
12/19/14 |
|
12/29/14 |
|
10 |
| |
|
12/22/14 |
|
12/30/14 |
|
8 |
| |
|
12/23/14 |
|
01/02/15 |
|
10 |
| Indonesia |
|
12/23/13 |
|
01/02/14 |
|
10 |
| |
|
07/23/14 |
|
08/04/14 |
|
12 |
| |
|
07/24/14 |
|
08/05/14 |
|
12 |
| |
|
07/25/14 |
|
08/06/14 |
|
12 |
| |
|
12/19/14 |
|
12/29/14 |
|
10 |
| |
|
12/22/14 |
|
12/30/14 |
|
8 |
| |
|
12/23/14 |
|
01/02/15 |
|
11 |
| Ireland |
|
12/23/14 |
|
01/02/14 |
|
10 |
| |
|
12/19/14 |
|
12/30/14 |
|
11 |
| |
|
12/22/14 |
|
12/31/14 |
|
9 |
| |
|
12/23/14 |
|
01/02/15 |
|
10 |
| Italy |
|
12/19/14 |
|
12/29/14 |
|
10 |
| |
|
12/22/14 |
|
12/30/14 |
|
8 |
| |
|
12/23/14 |
|
01/02/15 |
|
10 |
| Japan |
|
12/26/14 |
|
01/05/15 |
|
10 |
| |
|
12/29/14 |
|
01/06/15 |
|
8 |
| |
|
12/30/14 |
|
01/07/15 |
|
8 |
| Malaysia |
|
01/27/14 |
|
02/04/14 |
|
8 |
| |
|
01/28/14 |
|
02/05/14 |
|
8 |
| |
|
01/29/14 |
|
02/06/14 |
|
8 |
| |
|
07/23/14 |
|
07/31/14 |
|
8 |
| |
|
07/24/14 |
|
08/01/14 |
|
8 |
| |
|
07/25/14 |
|
08/04/14 |
|
10 |
| Philippines |
|
12/23/13 |
|
01/02/14 |
|
10 |
| |
|
12/26/13 |
|
01/03/14 |
|
8 |
| |
|
12/27/13 |
|
01/06/14 |
|
10 |
| |
|
12/23/14 |
|
01/02/15 |
|
10 |
| |
|
12/26/14 |
|
01/05/15 |
|
10 |
| |
|
12/29/14 |
|
01/06/15 |
|
8 |
| Portugal |
|
12/19/14 |
|
01/02/14 |
|
10 |
| |
|
12/22/14 |
|
01/03/14 |
|
8 |
| |
|
12/23/14 |
|
01/06/14 |
|
8 |
| South Africa |
|
12/23/13 |
|
01/02/14 |
|
10 |
| |
|
12/24/13 |
|
01/03/14 |
|
10 |
| |
|
12/27/13 |
|
01/06/14 |
|
10 |
| |
|
12/30/13 |
|
01/07/14 |
|
8 |
| |
|
12/31/13 |
|
01/08/14 |
|
8 |
| |
|
03/14/14 |
|
03/24/14 |
|
10 |
| |
|
03/17/14 |
|
03/25/14 |
|
8 |
| |
|
03/18/14 |
|
03/26/14 |
|
8 |
| |
|
03/19/14 |
|
03/27/14 |
|
8 |
| |
|
03/20/14 |
|
03/28/14 |
|
8 |
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
SETTLEMENT
PERIODS GREATER
THAN SEVEN DAYS
FOR YEAR 2014 |
|
Beginning of Settlement
Period |
|
End of Settlement
Period |
|
Number of Days in
Settlement Period |
| |
|
04/11/14 |
|
04/22/14 |
|
9 |
| |
|
04/14/14 |
|
04/23/14 |
|
9 |
| |
|
04/15/14 |
|
04/24/14 |
|
9 |
| |
|
04/16/14 |
|
04/25/14 |
|
9 |
| |
|
04/17/14 |
|
04/29/14 |
|
12 |
| |
|
04/22/14 |
|
04/30/14 |
|
8 |
| |
|
04/23/14 |
|
05/02/14 |
|
9 |
| |
|
04/24/14 |
|
05/05/14 |
|
11 |
| |
|
04/25/14 |
|
05/06/14 |
|
11 |
| |
|
04/29/14 |
|
05/07/14 |
|
8 |
| |
|
04/30/14 |
|
05/08/14 |
|
8 |
| |
|
06/09/14 |
|
06/17/14 |
|
8 |
| |
|
06/10/14 |
|
06/18/14 |
|
8 |
| |
|
06/11/14 |
|
06/19/14 |
|
8 |
| |
|
06/12/14 |
|
06/20/14 |
|
8 |
| |
|
06/13/14 |
|
06/23/14 |
|
10 |
| |
|
09/17/14 |
|
09/25/14 |
|
8 |
| |
|
09/18/14 |
|
09/26/14 |
|
8 |
| |
|
09/19/14 |
|
09/29/14 |
|
10 |
| |
|
09/22/14 |
|
09/30/14 |
|
8 |
| |
|
09/23/14 |
|
10/01/14 |
|
8 |
| |
|
12/09/14 |
|
12/17/14 |
|
8 |
| |
|
12/10/14 |
|
12/18/14 |
|
8 |
| |
|
12/11/14 |
|
12/19/14 |
|
8 |
| |
|
12/12/14 |
|
12/22/14 |
|
10 |
| |
|
12/15/14 |
|
12/23/14 |
|
8 |
| |
|
12/18/14 |
|
12/29/14 |
|
11 |
| |
|
12/19/14 |
|
12/30/14 |
|
11 |
| |
|
12/22/14 |
|
12/31/14 |
|
9 |
| |
|
12/23/14 |
|
01/02/15 |
|
10 |
| |
|
12/14/14 |
|
01/05/15 |
|
12 |
| |
|
12/29/14 |
|
01/06/15 |
|
8 |
| |
|
12/30/14 |
|
01/07/15 |
|
8 |
| |
|
12/31/14 |
|
01/08/15 |
|
8 |
| Spain |
|
04/14/14 |
|
04/22/14 |
|
8 |
| |
|
04/15/14 |
|
04/23/14 |
|
8 |
| |
|
04/16/14 |
|
04/24/14 |
|
8 |
| Sweden |
|
12/23/13 |
|
01/02/14 |
|
10 |
| |
|
12/19/14 |
|
12/29/14 |
|
10 |
| |
|
12/22/14 |
|
12/30/14 |
|
8 |
| |
|
12/23/14 |
|
01/02/15 |
|
10 |
| Taiwan |
|
01/24/14 |
|
02/05/14 |
|
12 |
| |
|
01/27/14 |
|
02/06/14 |
|
10 |
| Vietnam |
|
04/29/14 |
|
05/07/14 |
|
8 |
| |
|
|
|
|
|
|
| |
* |
These worst-case redemption cycles are based on information regarding regular holidays, which may be out of date. Based on changes in holidays, longer (worse) redemption cycles are possible. |
The right of redemption may be suspended
or the date of payment postponed (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 a Fund or determination of its NAV is not reasonably practicable; or (4) in such
other circumstance as is permitted by the SEC.
DETERMINATION
OF NET ASSET VALUE
The following information supplements and
should be read in conjunction with the section in the Prospectuses entitled “Shareholder Information—Determination
of NAV.”
The NAV per Share for each Fund is computed
by dividing the value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by the
total number of Shares outstanding. Expenses and fees, including the management fee, are accrued daily and taken into account for
purposes of determining NAV. The NAV of each Fund is determined each business day as of the close of trading (ordinarily 4:00 p.m.,
Eastern Time) on the NYSE. Any assets or liabilities denominated in currencies other than the U.S. dollar are converted into U.S.
dollars at the current market rates on the date of valuation as quoted by one or more sources.
The values of each Fund’s portfolio
securities are based on the securities’ closing prices on their local principal markets, where available. Due to the time
differences between the United States and certain countries in which certain Funds invest, securities on these exchanges may not
trade at times when Shares of the Fund trade. In the absence of a last reported sales price, or if no sales were reported, and
for other assets for which market quotes are not readily available, values may be based on quotes obtained from a quotation reporting
system, established market makers or by an outside independent pricing service. Prices obtained by an outside independent pricing
service may use information provided by market makers or estimates of market values obtained from yield data related to investments
or securities with similar characteristics and may use a computerized grid matrix of securities and its evaluations in determining
what it believes is the fair value of the portfolio securities. If a market quotation for a security is not readily available or
the Adviser believes it does not otherwise accurately reflect the market value of the security at the time a Fund calculates its
NAV, the security will be fair valued by the Adviser in accordance with the Trust’s valuation policies and procedures approved
by the Board of Trustees. Each Fund may also use fair value pricing in a variety of circumstances, including but not limited to,
situations where the value of a security in a Fund’s portfolio has been materially affected by events occurring after the
close of the market on which the security is principally traded (such as a corporate action or other news that may materially affect
the price of a security) or trading in a security has been suspended or halted. In addition, each Fund currently expects that it
will fair value certain of the foreign equity securities held by the Fund each day the Fund calculates its NAV, except those securities
principally traded on exchanges that close at the same time the Fund calculates its NAV. Accordingly, a Fund’s NAV may reflect
certain portfolio securities’ fair values rather than their market prices at the time the exchanges on which they principally
trade close. Fair value pricing involves subjective judgments and it is possible that a fair value determination for a security
is materially different than the value that could be realized upon the sale of the security. In addition, fair value pricing could
result in a difference between the prices used to calculate a Fund’s NAV and the prices used by the Fund’s respective
Index. This may adversely affect a Fund’s ability to track its respective Index. With respect to securities traded in foreign
markets, the value of a Fund’s portfolio securities may change on days when you will not be able to purchase or sell your
Shares.
DIVIDENDS
AND DISTRIBUTIONS
The following information supplements and
should be read in conjunction with the section in the Prospectuses entitled “Shareholder Information—Distributions.”
General Policies
Dividends from net investment income, if
any, are declared and paid at least quarterly by each Fund. Distributions of net realized capital gains, if any, generally are
declared and paid once a year, but the Trust may make distributions on a more frequent basis for each Fund to improve its Index
tracking or 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. In addition, the Trust may distribute at least quarterly amounts representing the full dividend
yield on the underlying portfolio securities of the Funds, net of expenses of the Funds, as if each Fund owned such underlying
portfolio securities for the entire dividend period in which case some portion of each distribution may result in a return of capital
for tax purposes for certain shareholders.
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 Trust. The Trust
makes additional distributions to the minimum extent necessary (i) to distribute the entire annual taxable income of the Trust,
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 if, in its reasonable discretion, such action is necessary
or advisable to preserve the status of each Fund as a regulated investment company (“RIC”) or 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 Funds
through DTC Participants for reinvestment of their dividend distributions. If this service is used, dividend distributions of both
income and realized gains will be automatically reinvested in additional whole Shares of the Funds. 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.
CONTROL
PERSONS AND PRINCIPAL SHAREHOLDERS
As of the date of this SAI, no entity beneficially
owned any voting securities of the Fund.
TAXES
The following information also supplements
and should be read in conjunction with the section in the Prospectuses entitled “Shareholder Information—Tax Information”
and the section in this Statement of Additional Information entitled “Special Considerations and Risks.” The following
summary of certain relevant tax provisions is subject to change, and does not constitute legal or tax advice.
Each Fund intends to qualify for and to elect
treatment as a RIC under Subchapter M of the Internal Revenue Code. As a RIC, a Fund will not be subject to U.S. federal income
tax on the portion of its taxable investment income and capital gains that it distributes to its shareholders. To qualify for treatment
as a RIC, a company must annually distribute at least 90% of its net investment company taxable income (which includes dividends,
interest and net short-term capital gains) and meet several other requirements relating to the nature of its income and the diversification
of its assets, among others. If a Fund fails to qualify for any taxable year as a RIC, all of its taxable income will be subject
to tax at regular corporate income tax rates without any deduction for distributions to shareholders, and such distributions generally
will be taxable to shareholders as ordinary dividends to the extent of the Fund’s current and accumulated earnings and profits.
Each Fund will be subject to a 4% excise
tax on certain undistributed income if it does not distribute to its shareholders in each calendar year at least 98% of its ordinary
income for the calendar year, 98.2% of its capital gain net income for the twelve months ended October 31 of such year, and 100%
of any undistributed amounts from the
prior years. Each Fund intends to declare and distribute dividends
and distributions in the amounts and at the times necessary to avoid the application of this 4% excise tax.
As a result of U.S. federal income tax requirements,
the Trust on behalf of the Funds, has the right to reject an order for a creation of Shares if the creator (or group of creators)
would, upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares of a Fund and if, pursuant to Section 351
of the Internal Revenue Code, the Funds would have a basis in the Deposit Securities different from the market value of such securities
on the date of deposit. The Trust also has the right to require information necessary to determine beneficial share ownership for
purposes of the 80% determination. See “Creation and Redemption of Creation Units—Procedures for Creation of Creation
Units.”
Dividends, interest and gains received by
a Fund from a non-U.S. investment may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between
certain countries and the United States may reduce or eliminate such taxes. If more than 50% of a Fund’s total assets at
the end of its taxable year consist of foreign stock or securities, that Fund may elect to “pass through” to its investors
certain foreign income taxes paid by the Fund, with the result that each investor will (i) include in gross income, as an additional
dividend, even though not actually received, the investor’s pro rata share of the Fund’s foreign income taxes, and
(ii) either deduct (in calculating U.S. taxable income) or credit (in calculating U.S. federal income), subject to certain holding
period and other limitations, the investor’s pro rata share of the Fund’s foreign income taxes. It is expected that
more than 50% of each Fund’s assets will consist of foreign securities.
With respect to Brazil, a 6% Imposto sobre
Operacões Financeiras (“IOF”) tax, with the rate subject to change, applies to certain foreign exchange inflows
into Brazil. Also, a 1.5% IOF tax applies to the creation of new depositary receipt issuances with respect to Brazilian equities
and a 0.38% IOF tax applies to the cancellation of depositary receipts if the underlying equities are then issued in the Brazil
(local) markets. If incurred by the Fund, an IOF tax would not be creditable against U.S. income tax liability.
Each Fund will report to shareholders annually
the amounts of dividends received from ordinary income, the amount of distributions received from capital gains and the portion
of dividends, if any, which may qualify for the dividends received deduction. Certain ordinary dividends paid to non-corporate
shareholders may qualify for taxation at a lower tax rate applicable to long-term capital gains provided holding period and other
requirements are met at both the shareholder and Fund levels.
In general, a sale of Shares results in capital
gain or loss, and for individual shareholders, is taxable at a federal rate dependent upon the length of time the Shares were held.
A redemption of a shareholder’s Fund Shares is normally treated as a sale for tax purposes. Fund Shares held for a period
of one year or less at the time of such sale or redemption will, for tax purposes, generally result in short-term capital gains
or losses, and those held for more than one year will generally result in long-term capital gains or losses. After 2012, the maximum
tax rate on long-term capital gains available to a non-corporate shareholder generally is 15% or 20%, depending on whether the
shareholder’s income exceeds certain threshold amounts.
An additional 3.8% Medicare tax will be imposed
on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains
from redemptions or other taxable dispositions of Fund Shares) of U.S. individuals, estates and trusts to the extent that such
person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income”
(in the case of an estate or trust) exceeds certain threshold amounts.
Special tax rules may change the normal treatment
of gains and losses recognized by a Fund if the Fund makes certain investments such as investments in structured notes, swaps,
options, futures transactions, and non-U.S. corporations classified as passive foreign investment companies (“PFICs”).
Those special tax rules can, among other things, affect the treatment of capital gain or loss as long-term or short-term and may
result in ordinary income or loss rather than capital gain or loss and may accelerate when the Fund has to take these items into
account for tax purposes.
Investments in PFICs are subject to special
tax rules which may result in adverse tax consequences to a Fund and its shareholders. To the extent a Fund invests in PFICs, it
generally intends to elect to “mark to market”
these investments at the end of each taxable year. By making
this election, the Fund will recognize as ordinary income any increase in the value of such shares as of the close of the taxable
year over their adjusted basis and as ordinary loss any decrease in such investment (but only to the extent of prior income from
such investment under the mark to market rules). Gains realized with respect to a disposition of a PFIC that a Fund has elected
to mark to market will be ordinary income. By making the mark to market election, a Fund may recognize income in excess of the
distributions that it receives from its investments. Accordingly, a Fund may need to borrow money or dispose of some of its investments
in order to meet its distribution requirements. If a Fund does not make the mark to market election with respect to an investment
in a PFIC, the Fund could become subject to U.S. federal income tax with respect to certain distributions from, and gain on the
dispositions of, the PFIC which cannot be avoided by distributing such amounts to the Fund’s shareholders.
Gain or loss on the sale or redemption of
Fund Shares is measured by the difference between the amount of cash received (or the fair market value of any property received)
and the adjusted tax basis of the Shares. Shareholders should keep records of investments made (including Shares acquired through
reinvestment of dividends and distributions) so they can compute the tax basis of their Fund Shares. Legislation passed by Congress
requires reporting of adjusted cost basis information for covered securities, which generally include shares of a regulated investment
company acquired after January 1, 2012, to the Internal Revenue Service and to taxpayers. Shareholders should contact their financial
intermediaries with respect to reporting of cost basis and available elections for their accounts.
A loss realized on a sale or exchange of
Shares of a Fund may be disallowed if other Fund Shares or substantially identical shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a sixty-one (61) day period beginning thirty (30) days before and ending thirty
(30) days after the date that the Shares are disposed of. In such a case, the basis of the Shares acquired will be adjusted to
reflect the disallowed loss. Any loss upon the sale or exchange of Shares held for six (6) months or less will be treated as long-term
capital loss to the extent of any capital gain dividends received by the shareholders. Distribution of ordinary income and capital
gains may also be subject to foreign, state and local taxes.
Each Fund may make investments in which it
recognizes income or gain prior to receiving cash with respect to such investment. For example, under certain tax rules, a Fund
may be required to accrue a portion of any discount at which certain securities are purchased as income each year even though the
Fund receives no payments in cash on the security during the year. To the extent that a Fund makes such investments, it generally
would be required to pay out such income or gain as a distribution in each year to avoid taxation at the Fund level.
Distributions reinvested in additional Fund
Shares through the means of a dividend reinvestment service (see “Dividend Reinvestment Service”) will nevertheless
be taxable dividends to Beneficial Owners acquiring such additional Shares to the same extent as if such dividends had been received
in cash.
Some shareholders may be subject to a withholding
tax on distributions of ordinary income, capital gains and any cash received on redemption of Creation Units (“backup withholding”).
The backup withholding rate for individuals is currently 28%. Generally, shareholders subject to backup withholding will be those
for whom no certified taxpayer identification number is on file with a Fund or who, to the Fund’s knowledge, have furnished
an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct
and that such investor is not otherwise subject to backup withholding. Backup withholding is not an additional tax. Any amounts
withheld will be allowed as a credit against shareholders’ U.S. federal income tax liabilities, and may entitle them to a
refund, provided that the required information is timely furnished to the Internal Revenue Service.
Distributions of ordinary income paid to
shareholders who are nonresident aliens or foreign entities will be generally subject to a 30% U.S. withholding tax unless a reduced
rate of withholding or a withholding exemption is provided under applicable treaty law. Prospective investors are urged to consult
their tax advisors regarding such withholding.
For taxable years beginning before January
1, 2014 (unless further extended by Congress), properly designated dividends received by a nonresident alien or foreign entity
are generally exempt from U.S. federal withholding tax when they (i) are paid in respect of the Fund’s “qualified net
interest income” (generally, the Fund’s
U.S. source interest income, reduced by expenses that are allocable
to such income), or (ii) are paid in connection with the Fund’s “qualified short-term capital gains” (generally,
the excess of the Fund’s net short-term capital gain over the Fund’s long-term capital loss for such taxable year).
However, depending on the circumstances, the Fund may designate all, some or none of the Fund’s potentially eligible dividends
as such qualified net interest income or as qualified short-term capital gains, and a portion of the Fund’s distributions
(e.g. interest from non-U.S. sources or any foreign currency gains) would be ineligible for this potential exemption from
withholding. There can be no assurance as to whether or not legislation will be enacted to extend this exemption.
Effective July 1, 2014, withholding of U.S.
tax at a 30% rate will be required on payments of dividends and (effective January 1, 2017) redemption proceeds and certain capital
gain dividends paid to certain non-U.S. entities that fail to comply (or be deemed compliant) with extensive new reporting and
withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders
may be requested to provide additional information to clarify whether withholding is required with respect to such payments relating
to their shares of the Fund.
Non-U.S. shareholders are advised to consult
their tax advisors with respect to the particular tax consequences to them of an investment in the Fund, including the possible
applicability of the U.S. estate tax.
The foregoing discussion is a summary only
and is not intended as a substitute for careful tax planning. Purchasers of Shares of the Trust should consult their own tax advisers
as to the tax consequences of investing in such Shares, including under state, local and other tax laws. Finally, the foregoing
discussion is based on applicable provisions of the Internal Revenue Code, regulations, judicial authority and administrative interpretations
in effect on the date hereof. Changes in applicable authority could materially affect the conclusions discussed above, and such
changes often occur.
Reportable Transactions
Under promulgated Treasury regulations, if
a shareholder recognizes a loss on disposition of a Fund’s Shares of $2 million or more in any one taxable year (or $4 million
or more over a period of six taxable years) for an individual shareholder or $10 million or more in any taxable year (or $20 million
or more over a period of six taxable years) 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 that engaged in a reportable transaction are not excepted. Future guidance may extend the
current exception from this reporting requirement to shareholders of most or all RICs. In addition, significant penalties may be
imposed for the failure to comply with the reporting requirements. 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 advisors to determine the applicability of these regulations in light of their individual circumstances.
CAPITAL
STOCK AND SHAREHOLDER REPORTS
The Trust currently is comprised of 58 investment
funds. The Trust issues Shares of beneficial interest with no par value. The Board may designate additional funds of the Trust.
Each Share issued by the Trust has a pro
rata interest in the assets of the corresponding Fund. Shares have no pre-emptive, exchange, subscription or conversion rights
and are freely transferable. Each Share is entitled to participate equally in dividends and distributions declared by the Board
with respect to the relevant Fund, and in the net distributable assets of such Fund on liquidation. A Fund may liquidate and terminate
at any time and for any reason, including as a result of the termination of the license agreement between the Adviser and the Index
Provider, without shareholder approval.
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
and each fractional Share has a proportional fractional vote. Shares of all funds vote together as a single class except that if
the matter being voted on affects only a particular fund it will be voted on only by that fund, and if a matter affects a particular
fund differently from other funds, that fund will vote separately on such matter. Under Delaware law, the Trust is not required
to hold an annual meeting of shareholders unless required to do so under the 1940 Act. The policy of the Trust is not to hold
an annual meeting of shareholders unless required to do so under
the 1940 Act. All Shares of the Trust have noncumulative voting rights for the election of Trustees. Under Delaware law, Trustees
of the Trust may be removed by vote of the shareholders.
Under Delaware law, the shareholders of a
Fund are not generally subject to liability for the debts or obligations of the Trust. Similarly, Delaware law provides that a
Fund will not be liable for the debts or obligations of any other series of the Trust. However, no similar statutory or other authority
limiting statutory trust shareholder liability may exist in other states. As a result, to the extent that a Delaware statutory
trust or a shareholder is subject to the jurisdiction of courts of such other states, the courts may not apply Delaware law and
may thereby subject the Delaware statutory trust’s shareholders to liability for the debts or obligations of the trust. The
Trust’s Amended and Restated Declaration of Trust (the “Declaration of Trust”) provides for indemnification by
the relevant Fund for all loss suffered by a shareholder as a result of an obligation of the Fund. The Declaration of Trust also
provides that a Fund shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation
of the Fund and satisfy any judgment thereon. In view of the above, the risk of personal liability to shareholders of a Fund is
believed to be remote.
The Trust will issue through DTC Participants
to its shareholders semi-annual reports containing unaudited financial statements and annual reports containing financial statements
audited by an independent auditor approved by the Trust’s Trustees and by the shareholders when meetings are held and such
other information as may be required by applicable laws, rules and regulations. Beneficial Owners also receive annually notification
as to the tax status of the Trust’s distributions.
Shareholder inquiries may be made by writing
to the Trust, c/o Van Eck Associates Corporation, 335 Madison Avenue, 19th Floor, New York, New York 10017.
COUNSEL
AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Dechert LLP, 1095 Avenue of the Americas,
New York, New York 10036, is counsel to the Trust and has passed upon the validity of each Fund’s Shares.
Ernst & Young LLP, 5 Times Square, New
York, New York 10036, is the Trust’s independent registered public accounting firm and audits the Funds’ financial
statements and performs other related audit services.
LICENSE
AGREEMENTS AND DISCLAIMERS
The
Adviser has entered into a licensing agreement with MSCI to use the MSCI ACWI
ex USA Quality Index and the MSCI ACWI ex USA High Dividend Yield Index (collectively,
the “Indexes”). Each Fund is entitled
to use its respective Index pursuant to a sub-licensing arrangement with the
Adviser.
THE FUNDS ARE NOT SPONSORED, ENDORSED, SOLD
OR PROMOTED BY MSCI INC. (“MSCI”), ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY
INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX (COLLECTIVELY, THE “MSCI PARTIES”). THE
MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE SERVICE MARK(S) OF MSCI OR ITS AFFILIATES AND
HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY VAN ECK ASSOCIATES CORPORATION. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION
OR WARRANTY, EXPRESS OR IMPLIED, TO THE ISSUER OR OWNERS OF THIS FUND OR ANY OTHER PERSON OR ENTITY REGARDING THE ADVISABILITY
OF INVESTING IN FUNDS GENERALLY OR IN THESE FUNDS PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET
PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF THE MSCI INDEXES
WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THE FUNDS OR THE ISSUER OR OWNERS OF THE FUNDS OR ANY OTHER
PERSON OR ENTITY. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUER OR OWNERS OF THE FUNDS OR ANY OTHER
PERSON OR ENTITY INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE
FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THE FUNDS TO BE ISSUED OR IN THE DETERMINATION
OR CALCULATION OF THE EQUATION BY OR THE CONSIDERATION INTO WHICH THIS FUND IS REDEEMABLE. FURTHER, NONE OF THE MSCI PARTIES HAS
ANY OBLIGATION OR LIABILITY TO THE ISSUER OR OWNERS OF THIS FUND OR ANY OTHER PERSON OR ENTITY IN CONNECTION WITH THE ADMINISTRATION,
MARKETING OR OFFERING OF THIS FUND.
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR
INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES THAT MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES
WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF
THE MSCI PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER OF THE FUNDS, OWNERS OF THE
FUNDS, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES SHALL
HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN.
FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARTIES HEREBY EXPRESSLY DISCLAIM
ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO EACH MSCI INDEX AND ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL,
PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
No purchaser, seller or holder of these securities,
products or funds, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor,
endorse, market or promote these securities without first contacting MSCI to determine whether MSCI’s permission is required.
Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
APPENDIX
A
VAN ECK GLOBAL PROXY VOTING POLICIES
Van Eck Global (the “Adviser”) has adopted the following
policies and procedures which are reasonably designed to ensure that proxies are voted in a manner that is consistent with the
best interests of its clients in accordance with its fiduciary duties and Rule 206(4)-6 under the Investment Advisers Act of 1940.
When an adviser has been granted proxy voting authority by a client, the adviser owes its clients the duties of care and loyalty
in performing this service on their behalf. The duty of care requires the adviser to monitor corporate actions and vote client
proxies. The duty of loyalty requires the adviser to cast the proxy votes in a manner that is consistent with the best interests
of the client.
Rule 206(4)-6 also requires the Adviser to disclose information
about the proxy voting procedures to its clients and to inform clients how to obtain information about how their proxies were voted.
Additionally, Rule 204-2 under the Advisers Act requires the Adviser to maintain certain proxy voting records.
An adviser that exercises voting authority without complying
with Rule 206(4)-6 will be deemed to have engaged in a “fraudulent, deceptive, or manipulative” act, practice or course
of business within the meaning of Section 206(4) of the Advisers Act.
The Adviser intends to vote all proxies in accordance with applicable
rules and regulations, and in the best interests of clients without influence by real or apparent conflicts of interest. To assist
in its responsibility for voting proxies and the overall voting process, the Adviser has engaged an independent third party proxy
voting specialist, Glass Lewis & Co., LLC. The services provided by Glass Lewis include in-depth research, global issuer analysis,
and voting recommendations as well as vote execution, reporting and recordkeeping.
When a material conflict of interest exists, proxies will be
voted in the following manner:
| 1. |
Strict adherence to the Glass Lewis guidelines , or |
| 2. |
The potential conflict will be disclosed to the client: |
| |
a. | with a request that the client vote the proxy, |
| |
b. | with a recommendation that the client engage another party to determine how the proxy should be voted or |
| |
c. | if the foregoing are not acceptable to the client, disclosure of how Van Eck intends to vote and a written consent to that
vote by the client. |
Any deviations from the foregoing voting mechanisms must be
approved by the Chief Compliance Officer with a written explanation of the reason for the deviation.
A material conflict of interest means the existence of
a business relationship between a portfolio company or an affiliate and the Adviser, any affiliate or subsidiary, or an “affiliated
person” of a Van Eck mutual fund. Examples of when a material conflict of interest exists include a situation where the adviser
provides significant investment advisory, brokerage or other services to a company whose management is soliciting proxies; an officer
of the Adviser serves on the board of a charitable organization that receives charitable contributions from the portfolio company
and the charitable organization is a client of the Adviser; a portfolio company that is a significant selling agent of the Adviser’s
products and services solicits proxies; a broker-dealer or insurance company that controls 5% or more of the Adviser’s assets
solicits proxies; the Adviser serves as an investment adviser to the pension or other investment account of the portfolio company;
the Adviser and the portfolio company have a lending relationship. In each of these situations voting against management may cause
the Adviser a loss of revenue or other benefit.
Client Inquiries
All inquiries by clients as to how the Adviser has voted proxies
must immediately be forwarded to Portfolio Administration.
Disclosure to Clients
| |
1. |
Notification of Availability of Information |
| |
|
a. |
Client Brochure - The Client Brochure or Part II of Form ADV will inform clients that they can obtain information from the Adviser on how their proxies were voted. The Client Brochure or Part II of Form ADV will be mailed to each client annually. The Legal Department will be responsible for coordinating the mailing with Sales/Marketing Departments. |
| |
2. |
Availability of Proxy Voting Information |
| |
|
a. |
At the client’s request or if the information is not available on the Adviser’s website, a hard copy of the account’s proxy votes will be mailed to each client. |
Recordkeeping Requirements
| |
1. |
Van Eck will retain the following documentation and information for each matter relating to a portfolio security with respect to which a client was entitled to vote: |
| |
|
|
|
| |
|
a. |
proxy statements received; |
| |
|
b. |
identifying number for the portfolio security; |
| |
|
c. |
shareholder meeting date; |
| |
|
d. |
brief identification of the matter voted on; |
| |
|
e. |
whether the vote was cast on the matter; |
| |
|
f. |
how the vote was cast (e.g., for or against proposal, or abstain; for or withhold regarding election of directors); |
| |
|
g. |
records of written client requests for information on how the Adviser voted proxies on behalf of the client; |
| |
|
h. |
a copy of written responses from the Adviser to any written or oral client request for information on how the Adviser voted proxies on behalf of the client; and any documents prepared by the Adviser that were material to the decision on how to vote or that memorialized the basis for the decision, if such documents were prepared. |
| |
|
|
|
| |
2. |
Copies of proxy statements filed on EDGAR, and proxy statements and records of proxy votes maintained with a third party (i.e., proxy voting service) need not be maintained. The third party must agree in writing to provide a copy of the documents promptly upon request. |
| |
|
|
| |
3. |
If applicable, any document memorializing that the costs of voting a proxy exceed the benefit to the client or any other decision to refrain from voting, and that such abstention was in the client’s best interest. |
| |
|
|
| |
4. |
Proxy voting records will be maintained in an easily accessible place for five years, the first two at the office of the Adviser. Proxy statements on file with EDGAR or maintained by a third party and proxy votes maintained by a third party are not subject to these particular retention requirements. |
Voting Foreign Proxies
At times the Adviser may determine that, in the best interests
of its clients, a particular proxy should not be voted. This may occur, for example, when the cost of voting a foreign proxy (translation,
transportation, etc.) would exceed the benefit of voting the proxy or voting the foreign proxy may cause an unacceptable limitation
on the sale of the security. Any such instances will be documented by the Portfolio Manager and reviewed by the Chief Compliance
Officer.
Securities Lending
Certain portfolios managed by the Adviser participate in securities
lending programs to generate additional revenue. Proxy voting rights generally pass to the borrower when a security is on loan.
The Adviser will use its best efforts to recall a security on loan and vote such securities if the Portfolio Manager determines
that the proxy involves a material event.
Proxy Voting Policy
The Adviser has reviewed the Glass Lewis Proxy Guidelines (“Guidelines”)
and has determined that the Guidelines are consistent with the Adviser’s proxy voting responsibilities and its fiduciary
duty with respect to its clients. The Adviser will review any material amendments to the Guidelines.
While it is the Adviser’s policy to generally follow the
Guidelines, the Adviser retains the right, on any specific proxy, to vote differently from the Guidelines, if the Adviser believes
it is in the best interests of its clients. Any such exceptions will be documented by the Adviser and reviewed by the Chief Compliance
Officer.
The portfolio manager or analyst covering the security is responsible
for making proxy voting decisions. Portfolio Administration, in conjunction with the portfolio manager and the custodian, is responsible
for monitoring corporate actions and ensuring that corporate actions are timely voted.
PROXY
PAPERTM
GUIDELINES
2014 PROXY SEASON
AN OVERVIEW OF THE GLASS LEWIS
APPROACH TO PROXY ADVICE
UNITED STATES
COPYRIGHT 2014 GLASS LEWIS, & CO., LLC
CONTENTS
| I. OVERVIEW OF SIGNIFICANT UPDATES FOR 2014 |
|
1 |
| |
|
|
|
| |
Majority-Approved Shareholder Proposals Seeking
Board Declassification |
|
1 |
| |
Poison
Pills with a Term of One Year or Less |
|
1 |
| |
Dual-Listed
Companies |
|
1 |
| |
Hedging
and Pledging of Stock |
|
1 |
| |
SEC
Final Rules Regarding Compensation Committee Member Independence and Compensation Consultants |
|
1 |
| |
|
|
|
| II. A BOARD OF DIRECTORS THAT SERVES THE INTERESTS OF SHAREHOLDERS |
|
2 |
| |
|
|
|
| |
Election of Directors |
|
2 |
| |
Independence |
|
2 |
| |
Voting
Recommendations on the Basis of Board Independence |
|
4 |
| |
Committee
Independence |
|
4 |
| |
Independent
Chairman |
|
4 |
| |
Performance |
|
5 |
| |
Voting
Recommendations on the Basis of Performance |
|
5 |
| |
Board
Responsiveness |
|
6 |
| |
The
Role of a Committee Chairman |
|
6 |
| |
Audit
Committees and Performance |
|
7 |
| |
Standards
for Assessing the Audit Committee |
|
7 |
| |
Compensation
Committee Performance |
|
10 |
| |
Nominating
and Governance Committee Performance |
|
12 |
| |
Board
Level Risk Management Oversight |
|
13 |
| |
Experience |
|
14 |
| |
Other
Considerations |
|
14 |
| |
Controlled
Companies |
|
16 |
| |
Unofficially
Controlled Companies and 20-50% Beneficial Owners |
|
17 |
| |
Exceptions
for Recent IPOs |
|
17 |
| |
Dual-Listed
Companies |
|
18 |
| |
Mutual
Fund Boards |
|
18 |
| |
Declassified
Boards |
|
19 |
| |
Mandatory
Director Term and Age limits |
|
20 |
| |
Requiring
Two or More Nominees per Board Seat |
|
21 |
| |
Proxy
Access |
|
21 |
 |
I |
|
| |
Majority Vote for the Election of Directors |
|
21 |
| |
The
Plurality Vote Standard |
|
21 |
| |
Advantages
of a Majority Vote Standard |
|
22 |
| |
|
|
|
| III. TRANSPARENCY AND INTEGRITY OF FINANCIAL REPORTING |
|
23 |
| |
|
|
|
| |
Auditor
Ratification |
|
23 |
| |
Voting
Recommendations on Auditor Ratification |
|
23 |
| |
Pension
Accounting Issues |
|
24 |
| |
|
|
|
| IV. THE LINK BETWEEN COMPENSATION AND PERFORMANCE |
|
25 |
| |
|
|
|
| |
Advisory
Vote on Executive Compensation (“Say-on-Pay”) |
|
25 |
| |
Say-on-Pay
Voting Recommendations |
|
26 |
| |
Company
Responsiveness |
|
27 |
| |
Pay
for Performance |
|
27 |
| |
Short-Term
Incentives |
|
27 |
| |
Long-Term
Incentives |
|
28 |
| |
Recoupment
(“Clawback”) Provisions |
|
29 |
| |
Hedging
of Stock |
|
29 |
| |
Pledging
of Stock |
|
29 |
| |
Compensation
Consultant Independence |
|
30 |
| |
Frequency
of Say-on-Pay |
|
30 |
| |
Vote
on Golden Parachute Arrangements |
|
31 |
| |
Equity-Based
Compensation Plan Proposals |
|
31 |
| |
Option
Exchanges |
|
32 |
| |
Option
Backdating, Spring-Loading and Bullet-Dodging |
|
33 |
| |
Director
Compensation Plans |
|
33 |
| |
Executive
Compensation Tax Deductibility (IRS 162(m) Compliance) |
|
34 |
| |
|
|
|
| V. GOVERNANCE STRUCTURE AND THE SHAREHOLDER FRANCHISE |
|
35 |
| |
|
|
|
| |
Anti-Takeover
Measures |
|
35 |
| |
Poison
Pills (Shareholder Rights Plans) |
|
35 |
| |
NOL
Poison Pills |
|
35 |
| |
Fair
Price Provisions |
|
36 |
| |
Reincorporation |
|
37 |
| |
Exclusive
Forum Provisions |
|
37 |
| |
Authorized
Shares |
|
38 |
| |
Advance
Notice Requirements |
|
38 |
| |
Voting
Structure |
|
39 |
| |
Cumulative
Voting |
|
39 |
| |
Supermajority
Vote Requirements |
|
40 |
|
II |
|
| |
Transaction of Other Business |
|
40 |
| |
Anti-Greenmail
Proposals |
|
40 |
| |
Mutual
Funds: Investment Policies and Advisory Agreements |
|
40 |
| |
Real
Estate Investment Trusts |
|
41 |
| |
Preferred
Stock Issuances at REITs |
|
41 |
| |
Business
Development Companies |
|
41 |
| |
Authorization
to Sell Shares at a Price below Net Asset Value |
|
41 |
| |
|
|
|
| VI. COMPENSATION, ENVIRONMENTAL, SOCIAL AND GOVERNANCE SHAREHOLDER INITIATIVES OVERVIEW |
|
43 |
|
III |
|
| I. | OVERVIEW OF SIGNIFICANT UPDATES FOR 2014 |
Glass Lewis evaluates these guidelines on
an ongoing basis and formally updates them on an annual basis. This year we’ve made noteworthy revisions in the following
areas, which are summarized below but discussed in greater detail throughout this document:
MAJORITY-APPROVED
SHAREHOLDER PROPOSALS SEEKING BOARD DECLASSIFICATION
| • | We have updated our policy with regard to implementation of majority-approved shareholder proposals
seeking board declassification. If a company fails to implement a shareholder proposal seeking board declassification, which received
majority support from shareholders (excluding abstentions and broker non-votes) at the previous year’s annual meeting, we
will consider recommending that shareholders vote against all nominees up for election that served throughout the previous year,
regardless of their committee membership. |
POISON PILLS WITH A TERM OF ONE YEAR OR LESS
| • | We have refined our policy with regard to short-term poison pills (those with a term of one year
or less). If a poison pill with a term of one year or less was adopted without shareholder approval, we will consider recommending
that shareholders vote against all members of the governance committee. If the board has, without seeking shareholder approval,
extended the term of a poison pill by one year or less in two consecutive years, we will consider recommending that shareholders
vote against the entire board. |
DUAL-LISTED COMPANIES
| • | We have clarified our approach to companies whose shares are listed on exchanges in multiple countries,
and which may seek shareholder approval of proposals in accordance with varying exchange- and country-specific rules. In determining
which Glass Lewis country-specific policy to apply, we will consider a number of factors, and we will apply the policy standards
most relevant in each situation. |
HEDGING AND PLEDGING OF STOCK
| • | We have included general discussions of our policies regarding hedging of stock and pledging of
shares owned by executives. |
SEC FINAL RULES
REGARDING COMPENSATION COMMITTEE MEMBER INDEPENDENCE
AND COMPENSATION CONSULTANTS
| • | We have summarized the SEC requirements for compensation committee member independence and compensation
consultant independence, and how these new rules may affect our evaluation of compensation committee members. These requirements
were mandated by Section 952 of the Dodd-Frank Act and formally adopted by the NYSE and NASDAQ in 2013. Companies listed on these
exchanges were required to meet certain basic requirements under the new rules by July 1, 2013, with full compliance by the earlier
of their first annual meeting after January 15, 2014, or October 31, 2014. |
|
1 |
|
| II. | A BOARD OF DIRECTORS THAT SERVES THE INTERESTS OF SHAREHOLDERS |
ELECTION OF DIRECTORS
The purpose of Glass Lewis’ proxy
research and advice is to facilitate shareholder voting in favor of governance structures that will drive performance, create shareholder
value and maintain a proper tone at the top. Glass Lewis looks for talented boards with a record of protecting shareholders and
delivering value over the medium- and long-term. We believe that a board can best protect and enhance the interests of shareholders
if it is sufficiently independent, has a record of positive performance, and consists of individuals with diverse backgrounds and
a breadth and depth of relevant experience.
INDEPENDENCE
The independence of directors, or lack thereof,
is ultimately demonstrated through the decisions they make. In assessing the independence of directors, we will take into consideration,
when appropriate, whether a director has a track record indicative of making objective decisions. Likewise, when assessing the
independence of directors we will also examine when a director’s service track record on multiple boards indicates a lack
of objective decision-making. Ultimately, we believe the determination of whether a director is independent or not must take into
consideration both compliance with the applicable independence listing requirements as well as judgments made by the director.
We look at each director nominee to examine
the director’s relationships with the company, the company’s executives, and other directors. We do this to evaluate
whether personal, familial, or financial relationships (not including director compensation) may impact the director’s decisions.
We believe that such relationships make it difficult for a director to put shareholders’ interests above the director’s
or the related party’s interests. We also believe that a director who owns more than 20% of a company can exert disproportionate
influence on the board and, in particular, the audit committee.
Thus, we put directors into three categories
based on an examination of the type of relationship they have with the company:
Independent
Director – An independent director has no material financial, familial or other current relationships with the company,
its executives, or other board members, except for board service and standard fees paid for that service. Relationships that existed
within three to five years1 before the inquiry are usually considered “current” for purposes of this test.
In
our view, a director who is currently serving in an interim management position should be considered an insider, while a director
who previously served in an interim management position for less than one year and is no longer serving in such capacity is considered
independent. Moreover, a director who previously served in an interim management position for over one year and is no longer serving
in such capacity is considered an affiliate for five years following the date of his/her resignation or departure from the interim
management position. Glass Lewis applies a three-year look-back period to all directors who have an affiliation with the company
other than former employment, for which we apply a five-year look-back.
1 NASDAQ originally proposed a five-year
look-back period but both it and the NYSE ultimately settled on a three-year look-back prior to finalizing their rules. A five-year
standard is more appropriate, in our view, because we believe that the unwinding of conflicting relationships between former management
and board members is more likely to be complete and final after five years. However, Glass Lewis does not apply the five-year look-back
period to directors who have previously served as executives of the company on an interim basis for less than one year.
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Affiliated
Director – An affiliated director has a material financial, familial or other relationship with the company or its
executives, but is not an employee of the company.2 This includes directors whose employers have a material financial
relationship with the company.3 In addition, we view a director who owns or controls 20% or more of the company’s
voting stock as an affiliate.4
We
view 20% shareholders as affiliates because they typically have access to and involvement with the management of a company that
is fundamentally different from that of ordinary shareholders. More importantly, 20% holders may have interests that diverge from
those of ordinary holders, for reasons such as the liquidity (or lack thereof) of their holdings, personal tax issues, etc.
Definition of “Material”:
A material relationship is one in which the dollar value exceeds:
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• | $50,000 (or where no amount is disclosed) for directors
who are paid for a service they have agreed to perform for the company, outside of their service as a director, including professional
or other services; or |
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• | $120,000 (or where no amount is disclosed) for those directors employed by a professional services
firm such as a law firm, investment bank, or consulting firm and the company pays the firm, not the individual, for services.
This dollar limit would also apply to charitable contributions to schools where a board member is a professor; or charities where
a director serves on the board or is an executive;5 and any aircraft and real estate dealings between the company and
the director’s firm; or |
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• | 1% of either company’s consolidated gross revenue for other business relationships (e.g.,
where the director is an executive officer of a company that provides services or products to or receives services or products
from the company).6 |
Definition of “Familial”: Familial relationships
include a person’s spouse, parents, children, siblings, grandparents, uncles, aunts, cousins, nieces, nephews, in-laws, and
anyone (other than domestic employees) who shares such person’s home. A director is an affiliate if: i) he or she has a family
member who is employed by the company and receives more than $120,000 in annual compensation; or, ii) he or she has a family member
who is employed by the company and the company does not disclose this individual’s compensation.
Definition of “Company”:
A company includes any parent or subsidiary in a group with the company or any entity that merged with, was acquired by, or acquired
the company.
Inside Director
– An inside director simultaneously serves as a director and as an employee of the company. This category may include
a chairman of the board who acts as an employee of the company or is paid as an employee of the company. In our view, an inside
director who derives a greater amount of income as a result of affiliated transactions with the company rather than through compensation
paid by the company (i.e., salary, bonus, etc. as a company employee) faces a conflict between making decisions that are in the
best interests of the company versus those in the director’s own best interests. Therefore, we will recommend voting against
such a director.
2 If a company classifies one of its non-employee
directors as non-independent, Glass Lewis will classify that director as an affiliate.
3 We allow a five-year grace period for former
executives of the company or merged companies who have consulting agreements with the surviving company. (We do not automatically
recommend voting against directors in such cases for the first five years.) If the consulting agreement persists after this five-year
grace period, we apply the materiality thresholds outlined in the definition of “material.”
4 This includes a director
who serves on a board as a representative (as part of his or her basic responsibilities) of an in-vestment firm with greater than
20% ownership. However, while we will generally consider him/her to be affiliated, we will not recommend voting against unless
(i) the investment firm has disproportionate board representation or (ii) the director serves on the audit committee.
5 We will generally take into consideration
the size and nature of such charitable entities in relation to the company’s size and industry along with any other relevant
factors such as the director’s role at the charity. However, unlike for other types of related party transactions, Glass
Lewis generally does not apply a look-back period to affiliated relationships involving charitable contributions; if the relationship
between the director and the school or charity ceases, or if the company discontinues its donations to the entity, we will consider
the director to be independent.
6 This includes cases where a director is
employed by, or closely affiliated with, a private equity firm that profits from an acquisition made by the company. Unless disclosure
suggests otherwise, we presume the director is affiliated.
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VOTING RECOMMENDATIONS ON THE BASIS OF BOARD
INDEPENDENCE
Glass Lewis believes a board will be most
effective in protecting shareholders’ interests if it is at least two-thirds independent. We note that each of the Business
Roundtable, the Conference Board, and the Council of Institutional Investors advocates that two-thirds of the board be independent.
Where more than one-third of the members are affiliated or inside directors, we typically7 recommend voting against
some of the inside and/or affiliated directors in order to satisfy the two-thirds threshold.
In the case of a less than two-thirds independent
board, Glass Lewis strongly supports the existence of a presiding or lead director with authority to set the meeting agendas and
to lead sessions outside the insider chairman’s presence.
In addition, we scrutinize avowedly “independent”
chairmen and lead directors. We believe that they should be unquestionably independent or the company should not tout them as such.
COMMITTEE INDEPENDENCE
We believe that only independent directors
should serve on a company’s audit, compensation, nominating, and governance committees.8 We typically recommend
that shareholders vote against any affiliated or inside director seeking appointment to an audit, compensation, nominating, or
governance committee, or who has served in that capacity in the past year.
Pursuant to Section 952 of the Dodd-Frank
Act, as of January 11, 2013, the SEC approved new listing requirements for both the NYSE and NASDAQ which require that boards apply
enhanced standards of independence when making an affirmative determination of the independence of compensation committee members.
Specifically, when making this determination, in addition to the factors considered when assessing general director independence,
the board’s considerations must include: (i) the source of compensation of the director, including any consulting, advisory
or other compensatory fee paid by the listed company to the director (the “Fees Factor”); and (ii) whether the director
is affiliated with the listing company, its subsidiaries, or affiliates of its subsidiaries (the “Affiliation Factor”).
Glass Lewis believes it is important for
boards to consider these enhanced independence factors when assessing compensation committee members. However, as discussed above
in the section titled Independence, we apply our own standards when assessing the independence of directors, and these standards
also take into account consulting and advisory fees paid to the director, as well as the director’s affiliations with the
company and its subsidiaries and affiliates. We may recommend voting against compensation committee members who are not independent
based on our standards.
INDEPENDENT CHAIRMAN
Glass Lewis believes that separating the
roles of CEO (or, more rarely, another executive position) and chairman creates a better governance structure than a combined CEO/chairman
position. An executive manages the business according to a course the board charts. Executives should report to the board regarding
their performance in achieving goals set by the board. This is needlessly complicated when a CEO chairs the board, since a CEO/chairman
presumably will have a significant influence over the board.
It can become difficult for a board to fulfill
its role of overseer and policy setter when a CEO/chairman controls the agenda and the boardroom discussion. Such control can allow
a CEO to have an entrenched
7 With a staggered board, if the affiliates
or insiders that we believe should not be on the board are not up for election, we will express our concern regarding those directors,
but we will not recommend voting against the other affiliates or insiders who are up for election just to achieve two-thirds independence.
However, we will consider recommending voting against the directors subject to our concern at their next election if the concerning
issue is not resolved.
8 We will recommend voting against an audit
committee member who owns 20% or more of the company’s stock, and we believe that there should be a maximum of one director
(or no directors if the committee is comprised of less than three directors) who owns 20% or more of the company’s stock
on the compensation, nominating, and governance committees.
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position, leading to longer-than-optimal
terms, fewer checks on management, less scrutiny of the business operation, and limitations on independent, shareholder-focused
goal-setting by the board.
A CEO should set the strategic course for
the company, with the board’s approval, and the board should enable the CEO to carry out the CEO’s vision for accomplishing
the board’s objectives. Failure to achieve the board’s objectives should lead the board to replace that CEO with someone
in whom the board has confidence.
Likewise, an independent chairman can better
oversee executives and set a pro-shareholder agenda without the management conflicts that a CEO and other executive insiders often
face. Such oversight and concern for shareholders allows for a more proactive and effective board of directors that is better able
to look out for the interests of shareholders.
Further, it is the board’s responsibility
to select a chief executive who can best serve a company and its shareholders and to replace this person when his or her duties
have not been appropriately fulfilled. Such a replacement becomes more difficult and happens less frequently when the chief executive
is also in the position of overseeing the board.
Glass Lewis believes that the installation
of an independent chairman is almost always a positive step from a corporate governance perspective and promotes the best interests
of shareholders. Further, the presence of an independent chairman fosters the creation of a thoughtful and dynamic board, not dominated
by the views of senior management. Encouragingly, many companies appear to be moving in this direction—one study even indicates
that less than 12 percent of incoming CEOs in 2009 were awarded the chairman title, versus 48 percent as recently as 2002.9
Another study finds that 45 percent of S&P 500 boards now separate the CEO and chairman roles, up from 23 percent in
2003, although the same study found that of those companies, only 25 percent have truly independent chairs.10
We do
not recommend that shareholders vote against CEOs who chair the board. However, we typically recommend that our clients support
separating the roles of chairman and CEO whenever that question is posed in a proxy (typically in the form of a shareholder proposal),
as we believe that it is in the long-term best interests of the company and its shareholders.
PERFORMANCE
The most crucial test of a board’s
commitment to the company and its shareholders lies in the actions of the board and its members. We look at the performance of
these individuals as directors and executives of the company and of other companies where they have served.
VOTING RECOMMENDATIONS ON THE BASIS OF PERFORMANCE
We disfavor directors who have a record
of not fulfilling their responsibilities to shareholders at any company where they have held a board or executive position. We
typically recommend voting against:
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1. | A director who fails to attend a minimum of 75% of board and applicable committee meetings, calculated
in the aggregate.11 |
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2. | A director who belatedly filed a significant form(s) 4 or 5, or who has a pattern of late filings
if the late filing was the director’s fault (we look at these late filing situations on a case-by-case basis). |
9 Ken Favaro, Per-Ola Karlsson and Gary Neilson.
“CEO Succession 2000-2009: A Decade of Convergence and Compression.” Booz & Company (from Strategy+Business, Issue
59, Summer 2010).
10 Spencer Stuart Board Index, 2013, p. 5
11 However, where a director has served for
less than one full year, we will typically not recommend voting against for failure to attend 75% of meetings. Rather, we will
note the poor attendance with a recommendation to track this issue going forward. We will also refrain from recommending to vote
against directors when the proxy discloses that the director missed the meetings due to serious illness or other extenuating circumstances.
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3. | A director who is also the CEO of a company where a serious and material restatement has occurred
after the CEO had previously certified the pre-restatement financial statements. |
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4. | A director who has received two against recommendations from Glass Lewis for identical reasons
within the prior year at different companies (the same situation must also apply at the company being analyzed). |
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5. | All directors who served on the board if, for the last three years, the company’s performance
has been in the bottom quartile of the sector and the directors have not taken reasonable steps to address the poor performance. |
BOARD RESPONSIVENESS
Glass Lewis believes that any time 25% or
more of shareholders vote contrary to the recommendation of management, the board should, depending on the issue, demonstrate some
level of responsiveness to address the concerns of shareholders. These include instances when 25% or more of shareholders (excluding
abstentions and broker non-votes): WITHOLD votes from (or vote AGAINST) a director nominee, vote AGAINST a management-sponsored
proposal, or vote FOR a shareholder proposal. In our view, a 25% threshold is significant enough to warrant a close examination
of the underlying issues and an evaluation of whether or not a board response was warranted and, if so, whether the board responded
appropriately following the vote. While the 25% threshold alone will not automatically generate a negative vote recommendation
from Glass Lewis on a future proposal (e.g. to recommend against a director nominee, against a say-on-pay proposal, etc.), it may
be a contributing factor if we recommend to vote against management’s recommendation in the event we determine that the board
did not respond appropriately.
As a general framework, our evaluation of
board responsiveness involves a review of publicly available disclosures (e.g. the proxy statement, annual report, 8-Ks, company
website, etc.) released following the date of the company’s last annual meeting up through the publication date of our most
current Proxy Paper. Depending on the specific issue, our focus typically includes, but is not limited to, the following:
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• | At the board level, any changes in directorships, committee memberships, disclosure of related
party transactions, meeting attendance, or other responsibilities; |
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• | Any revisions made to the company’s articles of incorporation, bylaws or other governance
documents; |
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• | Any press or news releases indicating changes in, or the adoption of, new company policies, business
practices or special reports; and |
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• | Any modifications made to the design and structure of the company’s compensation program. |
Our Proxy Paper analysis will include a
case-by-case assessment of the specific elements of board responsiveness that we examined along with an explanation of how that
assessment impacts our current vote recommendations.
THE ROLE OF A COMMITTEE CHAIRMAN
Glass Lewis believes that a designated committee
chairman maintains primary responsibility for the actions of his or her respective committee. As such, many of our committee-specific
vote recommendations deal with the applicable committee chair rather than the entire committee (depending on the seriousness of
the issue). However, in cases where we would ordinarily recommend voting against a committee chairman but the chair is not specified,
we apply the following general rules, which apply throughout our guidelines:
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• | If there is no committee chair, we recommend voting against the longest-serving committee member
or, if the longest-serving committee member cannot be determined, the longest-serving board member serving on the committee (i.e.
in either case, the “senior director”); and |
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• | If there is no committee chair, but multiple senior directors serving on the committee, we recommend
voting against both (or all) such senior directors. |
In our view, companies should provide clear
disclosure of which director is charged with overseeing each committee. In cases where that simple framework is ignored and a reasonable
analysis cannot determine which committee member is the designated leader, we believe shareholder action against the longest serving
committee member(s) is warranted. Again, this only applies if we would ordinarily recommend voting against the committee chair
but there is either no such position or no designated director in such role.
On the contrary, in cases where there is
a designated committee chair and the recommendation is to vote against the committee chair, but the chair is not up for election
because the board is staggered, we do not recommend voting against any members of the committee who are up for election; rather,
we will simply express our concern with regard to the committee chair.
AUDIT COMMITTEES AND PERFORMANCE
Audit committees play an integral role in
overseeing the financial reporting process because “[v]ibrant and stable capital markets depend on, among other things, reliable,
transparent, and objective financial information to support an efficient and effective capital market process. The vital oversight
role audit committees play in the process of producing financial information has never been more important.”12
When
assessing an audit committee’s performance, we are aware that an audit committee does not prepare financial statements, is
not responsible for making the key judgments and assumptions that affect the financial statements, and does not audit the numbers
or the disclosures provided to investors. Rather, an audit committee member monitors and oversees the process and procedures that
management and auditors perform. The 1999 Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness
of Corporate Audit Committees stated it best:
A
proper and well-functioning system exists, therefore, when the three main groups responsible for financial reporting – the
full board including the audit committee, financial management including the internal auditors, and the outside auditors –
form a ‘three legged stool’ that supports responsible financial disclosure and active participatory oversight. However,
in the view of the Committee, the audit committee must be ‘first among equals’ in this process, since the audit committee
is an extension of the full board and hence the ultimate monitor of the process.
STANDARDS FOR ASSESSING THE AUDIT COMMITTEE
For an audit committee to function
effectively on investors’ behalf, it must include members with sufficient knowledge to diligently carry out their
responsibilities. In its audit and accounting recommendations, the Conference Board Commission on Public Trust and Private
Enterprise said “members of the audit committee must be independent and have both knowledge and experience in auditing
financial matters.”13
We are skeptical of audit committees where there are members that lack expertise as a
Certified Public Accountant (CPA), Chief Financial Officer (CFO) or corporate controller, or similar experience. While
12 Audit Committee Effectiveness –
What Works Best.” PricewaterhouseCoopers. The Institute of Internal Auditors Research Foundation. 2005.
13 Commission on Public Trust and Private
Enterprise. The Conference Board. 2003.
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we will not necessarily vote against members of an audit committee
when such expertise is lacking, we are more likely to vote against committee members when a problem such as a restatement occurs
and such expertise is lacking.
Glass Lewis generally assesses audit committees against the decisions
they make with respect to their oversight and monitoring role. The quality and integrity of the financial statements and earnings
reports, the completeness of disclosures necessary for investors to make informed decisions, and the effectiveness of the internal
controls should provide reasonable assurance that the financial statements are materially free from errors. The independence of
the external auditors and the results of their work all provide useful information by which to assess the audit committee.
When assessing the decisions and actions of the audit committee,
we typically defer to its judgment and would vote in favor of its members, but we would recommend voting against the following
members under the following circumstances:14
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1. |
All members of the audit committee when options were backdated, there is a lack of adequate controls in place, there was a resulting restatement, and disclosures indicate there was a lack of documentation with respect to the option grants. |
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2. |
The audit committee chair, if the audit committee does not have a financial expert or the committee’s financial expert does not have a demonstrable financial background sufficient to understand the financial issues unique to public companies. |
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3. |
The audit committee chair, if the audit committee did not meet at least 4 times during the year. |
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4. |
The audit committee chair, if the committee has less than three members. |
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5. |
Any audit committee member who sits on more than three public company audit committees, unless the audit committee member is a retired CPA, CFO, controller or has similar experience, in which case the limit shall be four committees, taking time and availability into consideration including a review of the audit committee member’s attendance at all board and committee meetings.15 |
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6. |
All members of an audit committee who are up for election and who served on the committee at the time of the audit, if audit and audit-related fees total one-third or less of the total fees billed by the auditor. |
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7. |
The audit committee chair when tax and/or other fees are greater than audit and audit-related fees paid to the auditor for more than one year in a row (in which case we also recommend against ratification of the auditor). |
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8. |
All members of an audit committee where non-audit fees include fees for tax services (including, but not limited to, such things as tax avoidance or shelter schemes) for senior executives of the company. Such services are prohibited by the Public Company Accounting Oversight Board (“PCAOB”). |
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9. |
All members of an audit committee that reappointed an auditor that we no longer consider to be independent for reasons unrelated to fee proportions. |
14 As discussed under the section labeled “Committee Chairman,”
where the recommendation is to vote against the committee chair but the chair is not up for election because the board is staggered,
we do not recommend voting against the members of the committee who are up for election; rather, we will simply express our concern
with regard to the committee chair.
15 Glass Lewis may exempt certain audit committee members from
the above threshold if, upon further analysis of relevant factors such as the director’s experience, the size, industry-mix
and location of the companies involved and the director’s attendance at all the companies, we can reasonably determine that
the audit committee member is likely not hindered by multiple audit committee commitments.
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10. |
All members of an audit committee when audit fees are excessively low, especially when compared with other companies in the same industry. |
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11. |
The audit committee chair16 if the committee failed to put auditor ratification on the ballot for shareholder approval. However, if the non-audit fees or tax fees exceed audit plus audit-related fees in either the current or the prior year, then Glass Lewis will recommend voting against the entire audit committee. |
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12. |
All members of an audit committee where the auditor has resigned and reported that a section 10A17 letter has been issued. |
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13. |
All members of an audit committee at a time when material accounting fraud occurred at the company.18 |
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14. |
All members of an audit committee at a time when annual and/or multiple quarterly financial statements had to be restated, and any of the following factors apply: |
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The restatement involves fraud or manipulation by insiders; |
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The restatement is accompanied by an SEC inquiry or investigation; |
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The restatement involves revenue recognition; |
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The restatement results in a greater than 5% adjustment to costs of goods sold, operating expense, or operating cash flows; or |
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The restatement results in a greater than 5% adjustment to net income, 10% adjustment to assets or shareholders equity, or cash flows from financing or investing activities. |
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15. |
All members of an audit committee if the company repeatedly fails to file its financial reports in a timely fashion. For example, the company has filed two or more quarterly or annual financial statements late within the last 5 quarters. |
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16. |
All members of an audit committee when it has been disclosed that a law enforcement agency has charged the company and/or its employees with a violation of the Foreign Corrupt Practices Act (FCPA). |
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17. |
All members of an audit committee when the company has aggressive accounting policies and/ or poor disclosure or lack of sufficient transparency in its financial statements. |
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18. |
All members of the audit committee when there is a disagreement with the auditor and the auditor resigns or is dismissed (e.g., the company receives an adverse opinion on its financial statements from the auditor). |
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19. |
All members of the audit committee if the contract with the auditor specifically limits the auditor’s liability to the company for damages.19 |
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20. |
All members of the audit committee who served since the date of the company’s last annual |
16 As discussed under the section labeled “Committee Chairman,”
in all cases, if the chair of the committee is not specified, we recommend voting against the director who has been on the committee
the longest.
17 Auditors are required to report all potential illegal acts
to management and the audit committee unless they are clearly inconsequential in nature. If the audit committee or the board fails
to take appropriate action on an act that has been determined to be a violation of the law, the independent auditor is required
to send a section 10A letter to the SEC. Such letters are rare and therefore we believe should be taken seriously.
18 Recent research indicates that revenue fraud now accounts for
over 60% of SEC fraud cases, and that companies that engage in fraud experience significant negative abnormal stock price declines—facing
bankruptcy, delisting, and material asset sales at much higher rates than do non-fraud firms (Committee of Sponsoring Organizations
of the Treadway Commission. “Fraudulent Financial Reporting: 1998-2007.” May 2010).
19 The Council of Institutional Investors. “Corporate Governance
Policies,” p. 4, April 5, 2006; and “Letter from Council of Institutional Investors to the AICPA,” November 8,
2006.
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meeting, and when, since the last annual meeting, the company has reported a material weakness that has not yet been corrected, or, when the company has an ongoing material weakness from a prior year that has not yet been corrected. |
We also take a dim view of audit committee reports that are boilerplate,
and which provide little or no information or transparency to investors. When a problem such as a material weakness, restatement
or late filings occurs, we take into consideration, in forming our judgment with respect to the audit committee, the transparency
of the audit committee report.
COMPENSATION COMMITTEE
PERFORMANCE
Compensation committees have the final say in determining the
compensation of executives. This includes deciding the basis on which compensation is determined, as well as the amounts and types
of compensation to be paid. This process begins with the hiring and initial establishment of employment agreements, including the
terms for such items as pay, pensions and severance arrangements. It is important in establishing compensation arrangements that
compensation be consistent with, and based on the long-term economic performance of, the business’s long-term shareholders
returns.
Compensation committees are also responsible for the oversight
of the transparency of compensation. This oversight includes disclosure of compensation arrangements, the matrix used in assessing
pay for performance, and the use of compensation consultants. In order to ensure the independence of the compensation consultant,
we believe the compensation committee should only engage a compensation consultant that is not also providing any services to the
company or management apart from their contract with the compensation committee. It is important to investors that they have clear
and complete disclosure of all the significant terms of compensation arrangements in order to make informed decisions with respect
to the oversight and decisions of the compensation committee.
Finally, compensation committees are responsible for oversight
of internal controls over the executive compensation process. This includes controls over gathering information used to determine
compensation, establishment of equity award plans, and granting of equity awards. For example, the use of a compensation consultant
who maintains a business relationship with company management may cause the committee to make decisions based on information that
is compromised by the consultant’s conflict of interests. Lax controls can also contribute to improper awards of compensation
such as through granting of backdated or spring-loaded options, or granting of bonuses when triggers for bonus payments have not
been met.
Central to understanding the actions of a compensation committee
is a careful review of the Compensation Discussion and Analysis (“CD&A”) report included in each company’s
proxy. We review the CD&A in our evaluation of the overall compensation practices of a company, as overseen by the compensation
committee. The CD&A is also integral to the evaluation of compensation proposals at companies, such as advisory votes on executive
compensation, which allow shareholders to vote on the compensation paid to a company’s top executives.
When assessing the performance of compensation committees, we
will recommend voting against for the following:20
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1. |
All members of the compensation committee who are up for election and served at the time of poor pay-for-performance (e.g., a company receives an F grade in our pay-for-performance analysis) when shareholders are not provided with an advisory vote on executive compensation |
20 As discussed under the section labeled “Committee Chairman,”
where the recommendation is to vote against the committee chair and the chair is not up for election because the board is staggered,
we do not recommend voting against any members of the committee who are up for election; rather, we will simply express our concern
with regard to the committee chair.
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2. |
Any member of the compensation committee who has served on the compensation committee of at least two other public companies that received F grades in our pay-for-performance model and whose oversight of compensation at the company in question is suspect. |
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3. |
The compensation committee chair if the company received two D grades in consecutive years in our pay-for-performance analysis, and if during the past year the company performed the same as or worse than its peers.22 |
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4. |
All members of the compensation committee (during the relevant time period) if the company entered into excessive employment agreements and/or severance agreements. |
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5. |
All members of the compensation committee when performance goals were changed (i.e., lowered) when employees failed or were unlikely to meet original goals, or performance-based compensation was paid despite goals not being attained. |
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6. |
All members of the compensation committee if excessive employee perquisites and benefits were allowed. |
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7. |
The compensation committee chair if the compensation committee did not meet during the year, but should have (e.g., because executive compensation was restructured or a new executive was hired). |
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8. |
All members of the compensation committee when the company repriced options or completed a “self tender offer” without shareholder approval within the past two years. |
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9. |
All members of the compensation committee when vesting of in-the-money options is accelerated. |
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10. |
All members of the compensation committee when option exercise prices were backdated. Glass Lewis will recommend voting against an executive director who played a role in and participated in option backdating. |
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11. |
All members of the compensation committee when option exercise prices were spring-loaded or otherwise timed around the release of material information. |
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12. |
All members of the compensation committee when a new employment contract is given to an executive that does not include a clawback provision and the company had a material restatement, especially if the restatement was due to fraud. |
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13. |
The chair of the compensation committee where the CD&A provides insufficient or unclear information about performance metrics and goals, where the CD&A indicates that pay is not tied to performance, or where the compensation committee or management has excessive discretion to alter performance terms or increase amounts of awards in contravention of previously defined targets. |
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14. |
All members of the compensation committee during whose tenure the committee failed to |
21 Where there are multiple CEOs in one year, we will consider
not recommending against the compensation committee but will defer judgment on compensation policies and practices until the next
year or a full year after arrival of the new CEO. In addition, if a company provides shareholders with a say-on-pay proposal and
receives an F grade in our pay-for-performance model, we will recommend that shareholders only vote against the say-on-pay proposal
rather than the members of the compensation committee, unless the company exhibits egregious practices. However, if the company
receives successive F grades, we will then recommend against the members of the compensation committee in addition to recommending
voting against the say-on-pay proposal.
22 In cases where a company has received two consecutive D grades,
or if its grade improved from an F to a D in the most recent period, and during the most recent year the company performed better
than its peers (based on our analysis), we refrain from recommending to vote against the compensation committee chair. In addition,
if a company provides shareholders with a say-on-pay proposal in this instance, we will consider voting against the advisory vote
rather than the compensation committee chair unless the company exhibits unquestionably egregious practices.
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implement a shareholder proposal regarding a compensation-related issue, where the proposal received the affirmative vote of a majority of the voting shares at a shareholder meeting, and when a reasonable analysis suggests that the compensation committee (rather than the governance committee) should have taken steps to implement the request.23 |
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All members of a compensation committee during whose tenure the committee failed to address shareholder concerns following majority shareholder rejection of the say-on-pay proposal in the previous year. Where the proposal was approved but there was a significant shareholder vote (i.e., greater than 25% of votes cast) against the say-on-pay proposal in the prior year, if there is no evidence that the board responded accordingly to the vote including actively engaging shareholders on this issue, we will also consider recommending voting against the chairman of the compensation committee or all members of the compensation committee, depending on the severity and history of the compensation problems and the level of opposition. |
NOMINATING AND
GOVERNANCE COMMITTEE PERFORMANCE
The nominating and governance committee, as an agency for the
shareholders, is responsible for the governance by the board of the company and its executives. In performing this role, the board
is responsible and accountable for selection of objective and competent board members. It is also responsible for providing leadership
on governance policies adopted by the company, such as decisions to implement shareholder proposals that have received a majority
vote. (At most companies, a single committee is charged with these oversight functions; at others, the governance and nominating
responsiblities are apportioned among two separate committees.)
Consistent with Glass Lewis’ philosophy that boards should
have diverse backgrounds and members with a breadth and depth of relevant experience, we believe that nominating and governance
committees should consider diversity when making director nominations within the context of each specific company and its industry.
In our view, shareholders are best served when boards make an effort to ensure a constituency that is not only reasonably diverse
on the basis of age, race, gender and ethnicity, but also on the basis of geographic knowledge, industry experience and culture.
Regarding the committee responsible for governance, we will recommend voting against the following:24
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1. |
All members of the governance committee25 during whose tenure the board failed to implement a shareholder proposal with a direct and substantial impact on shareholders and their rights – i.e., where the proposal received enough shareholder votes (at least a majority) to allow the board to implement or begin to implement that proposal.26 Examples of these types of shareholder proposals are majority vote to elect directors and to declassify the board. |
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2. |
The governance committee chair,27 when the chairman is not independent and an independent lead or presiding director has not been appointed.28 |
23 In all other instances (i.e., a non-compensation-related shareholder
proposal should have been implemented) we recommend that shareholders vote against the members of the governance committee.
24 As discussed in the guidelines section labeled “Committee
Chairman,” where we would recommend to vote against the committee chair but the chair is not up for election because the
board is staggered, we do not recommend voting against any members of the committee who are up for election; rather, we will simply
express our concern regarding the committee chair.
25 If the board does not have a committee responsible for governance
oversight and the board did not implement a shareholder proposal that received the requisite support, we will recommend voting
against the entire board. If the shareholder proposal at issue requested that the board adopt a declassified structure, we will
recommend voting against all director nominees up for election.
26 Where a compensation-related shareholder proposal should have
been implemented, and when a reasonable analysis suggests that the members of the compensation committee (rather than the governance
committee) bear the responsibility for failing to implement the request, we recommend that shareholders only vote against members
of the compensation committee.
27 As discussed in the guidelines section labeled “Committee
Chairman,” if the committee chair is not specified, we recommend voting against the director who has been on the committee
the longest. If the longest-serving committee member cannot be determined, we will recommend voting against the longest-serving
board member serving on the committee.
28 We believe that one independent individual should be appointed
to serve as the lead or presiding director. When such a position is rotated among directors from meeting to meeting, we will recommend
voting against as if there were no lead or presiding director.
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3. |
In the absence of a nominating committee, the governance committee chair when there are less than five or the whole nominating committee when there are more than 20 members on the board. |
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The governance committee chair, when the committee fails to meet at all during the year. |
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5. |
The governance committee chair, when for two consecutive years the company provides what we consider to be “inadequate” related party transaction disclosure (i.e., the nature of such transactions and/or the monetary amounts involved are unclear or excessively vague, thereby preventing a shareholder from being able to reasonably interpret the independence status of multiple directors above and beyond what the company maintains is compliant with SEC or applicable stock exchange listing requirements). |
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6. |
The governance committee chair, when during the past year the board adopted a forum selection clause (i.e., an exclusive forum provision)29 without shareholder approval, or, if the board is currently seeking shareholder approval of a forum selection clause pursuant to a bundled bylaw amendment rather than as a separate proposal. |
Regarding the nominating committee, we will recommend voting
against the following:30
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1. |
All members of the nominating committee, when the committee nominated or renominated an individual who had a significant conflict of interest or whose past actions demonstrated a lack of integrity or inability to represent shareholder interests. |
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2. |
The nominating committee chair, if the nominating committee did not meet during the year, but should have (i.e., because new directors were nominated or appointed since the time of the last annual meeting). |
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3. |
In the absence of a governance committee, the nominating committee chair31 when the chairman is not independent, and an independent lead or presiding director has not been appointed.32 |
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4. |
The nominating committee chair, when there are less than five or the whole nominating committee when there are more than 20 members on the board.33 |
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5. |
The nominating committee chair, when a director received a greater than 50% against vote the prior year and not only was the director not removed, but the issues that raised shareholder concern were not corrected.34 |
BOARD-LEVEL RISK
MANAGEMENT OVERSIGHT
Glass Lewis evaluates the risk management function of a public
company board on a strictly case-by-case basis. Sound risk management, while necessary at all companies, is particularly important
at
29 A forum selection clause is a bylaw provision stipulating that
a certain state, typically Delaware, shall be the exclusive forum for all intra-corporate disputes (e.g. shareholder derivative
actions, assertions of claims of a breach of fiduciary duty, etc.). Such a clause effectively limits a shareholder’s legal
remedy regarding appropriate choice of venue and related relief offered under that state’s laws and rulings.
30 As discussed in the guidelines section labeled “Committee
Chairman,” where we would recommend to vote against the committee chair but the chair is not up for election because the
board is staggered, we do not recommend voting against any members of the committee who are up for election; rather, we will simply
express our concern regarding the committee chair.
31 As discussed under the section labeled “Committee Chairman,”
if the committee chair is not specified, we will recommend voting against the director who has been on the committee the longest.
If the longest-serving committee member cannot be determined, we will recommend voting against the longest-serving board member
on the committee.
32 In the absence of both a governance and a nominating committee,
we will recommend voting against the chairman of the board on this basis, unless if the chairman also serves as the CEO, in which
case we will recommend voting against the director who has served on the board the longest.
33 In the absence of both a governance
and a nominating committee, we will recommend voting against the chairman of the board on this basis, unless if the chairman also
serves as the CEO, in which case we will recommend voting against the director who has served on the board the longest.
34 Considering
that shareholder discontent clearly relates to the director who received a greater than 50% against vote rather than the nominating
chair, we review the validity of the issue(s) that initially raised shareholder concern, follow-up on such matters, and only recommend
voting against the nominating chair if a reasonable analysis suggests that it would be most appropriate. In rare cases, we will
consider recommending against the nominating chair when a director receives a substantial (i.e., 25% or more) vote against based
on the same analysis.
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financial firms which inherently maintain significant exposure to financial
risk. We believe such financial firms should have a chief risk officer reporting directly to the board and a dedicated risk committee
or a committee of the board charged with risk oversight. Moreover, many non-financial firms maintain strategies which involve a
high level of exposure to financial risk. Similarly, since many non-financial firms have complex hedging or trading strategies,
those firms should also have a chief risk officer and a risk committee.
Our views on risk oversight are consistent with those expressed
by various regulatory bodies. In its December 2009 Final Rule release on Proxy Disclosure Enhancements, the SEC noted that risk
oversight is a key competence of the board and that additional disclosures would improve investor and shareholder understanding
of the role of the board in the organization’s risk management practices. The final rules, which became effective on February
28, 2010, now explicitly require companies and mutual funds to describe (while allowing for some degree of flexibility) the board’s
role in the oversight of risk.
When analyzing the risk management practices of public companies,
we take note of any significant losses or writedowns on financial assets and/or structured transactions. In cases where a company
has disclosed a sizable loss or writedown, and where we find that the company’s board-level risk committee contributed to
the loss through poor oversight, we would recommend that shareholders vote against such committee members on that basis. In addition,
in cases where a company maintains a significant level of financial risk exposure but fails to disclose any explicit form of board-level
risk oversight (committee or otherwise)35, we will consider recommending to vote against the chairman of the board on
that basis. However, we generally would not recommend voting against a combined chairman/CEO, except in egregious cases.
EXPERIENCE
We find that a director’s past conduct is often indicative
of future conduct and performance. We often find directors with a history of overpaying executives or of serving on boards where
avoidable disasters have occurred appearing at companies that follow these same patterns. Glass Lewis has a proprietary database
of directors serving at over 8,000 of the most widely held U.S. companies. We use this database to track the performance of directors
across companies.
Voting Recommendations
on the Basis of Director Experience
We typically recommend that shareholders vote against directors
who have served on boards or as executives of companies with records of poor performance, inadequate risk oversight, excessive
compensation, audit- or accounting-related issues, and/or other indicators of mismanagement or actions against the interests of
shareholders.36
Likewise, we examine the backgrounds of those who serve on key board committees to ensure that they
have the required skills and diverse backgrounds to make informed judgments about the subject matter for which the committee is
responsible.
OTHER CONSIDERATIONS
In addition to the three key characteristics – independence,
performance, experience – that we use to evaluate board members, we consider conflict-of-interest issues as well as the size
of the board of directors when making voting recommendations.
35 A committee responsible for risk management could be a dedicated
risk committee, the audit committee, or the finance committee, depending on a given company’s board structure and method
of disclosure. At some companies, the entire board is charged with risk management.
36 We typically apply a three-year look-back to such issues and
also take into account the level of support the director has received from shareholders since the time of the failure.
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Conflicts of Interest
We believe board members should be wholly
free of identifiable and substantial conflicts of interest, regardless of the overall level of independent directors on the board.
Accordingly, we recommend that shareholders vote against the following types of directors:
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1. |
A CFO who is on the board: In our view, the CFO holds a unique position relative
to financial reporting and disclosure to shareholders. Due to the critical importance of financial disclosure and reporting,
we believe the CFO should report to the board and not be a member of it. |
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2. |
A director who is on an excessive number of boards: We will typically recommend voting against
a director who serves as an executive officer of any public company while serving on more than two other public company boards
and any other director who serves on more than six public company boards.37 Academic literature suggests that one
board takes up approximately 200 hours per year of each member’s time. We believe this limits the number of boards on
which directors can effectively serve, especially executives at other companies.38 Further, we note a recent study
has shown that the average number of outside board seats held by CEOs of S&P 500 companies is 0.6, down from 0.7 in 2008
and 1.0 in 2003.39 |
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3. |
A director, or a director who has an immediate family member, providing material consulting
or other material professional services to the company: These services may include legal, consulting, or financial services.
We question the need for the company to have consulting relationships with its directors. We view such relationships as creating
conflicts for directors, since they may be forced to weigh their own interests against shareholder interests when making board
decisions. In addition, a company’s decisions regarding where to turn for the best professional services may be compromised
when doing business with the professional services firm of one of the company’s directors. |
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4. |
A director, or a director who has an immediate family member, engaging in airplane, real estate,
or similar deals, including perquisite-type grants from the company, amounting to more than $50,000. Directors who receive
these sorts of payments from the company will have to make unnecessarily complicated decisions that may pit their interests
against shareholder interests. |
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5. |
Interlocking directorships: CEOs or other top executives who serve on each other’s
boards create an interlock that poses conflicts that should be avoided to ensure the promotion of shareholder interests above
all else.40 |
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6. |
All board members who served at a time when a poison pill with a term of longer than one year
was adopted without shareholder approval within the prior twelve months.41 In the event a board is classified and
shareholders are therefore unable to vote against all directors, we will recommend voting against the remaining directors
the next year they are up for a shareholder vote. If a poison pill with a term of one year or less was adopted without shareholder
approval, and without adequate justification, we will consider recommending that shareholders vote against all members of
the governance committee. If the board has, without seeking shareholder |
37 Glass Lewis will not recommend voting against the director
at the company where he or she serves as an executive officer, only at the other public companies where he or she serves on the
board.
38 Our guidelines are similar to the standards set forth by the
NACD in its “Report of the NACD Blue Ribbon Commission on Director Professionalism,” 2001 Edition, pp. 14-15 (also
cited approvingly by the Conference Board in its “Corporate Governance Best Practices: A Blueprint for the Post-Enron Era,”
2002, p. 17), which suggested that CEOs should not serve on more than 2 additional boards, persons with full-time work should not
serve on more than 4 additional boards, and others should not serve on more than six boards.
39 Spencer Stuart Board Index, 2013, p. 6.
40 We do not apply a look-back period for this situation. The
interlock policy applies to both public and private companies. We will also evaluate multiple board interlocks among non-insiders
(i.e., multiple directors serving on the same boards at other companies), for evidence of a pattern of poor oversight.
41 Refer to Section V. Governance Structure and the Shareholder
Franchise for further discussion of our policies regarding anti-takeover measures, including poison pills.
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approval, and without adequate justification, extended the term of a poison pill
by one year or less in two consecutive years, we will consider recommending that shareholders vote against the entire board. |
Size of the Board
of Directors
While we do not believe there is a universally
applicable optimum board size, we do believe boards should have at least five directors to ensure sufficient diversity in decision-making
and to enable the formation of key board committees with independent directors. Conversely, we believe that boards with more than
20 members will typically suffer under the weight of “too many cooks in the kitchen” and have difficulty reaching consensus
and making timely decisions. Sometimes the presence of too many voices can make it difficult to draw on the wisdom and experience
in the room by virtue of the need to limit the discussion so that each voice may be heard.
To that end, we typically recommend voting
against the chairman of the nominating committee at a board with fewer than five directors. With boards consisting of more than
20 directors, we typically recommend voting against all members of the nominating committee (or the governance committee, in the
absence of a nominating committee).42
CONTROLLED
COMPANIES
Controlled companies present an exception
to our independence recommendations. The board’s function is to protect shareholder interests; however, when an individual
or entity owns more than 50% of the voting shares, the interests of the majority of shareholders are the interests of that entity
or individual. Consequently, Glass Lewis does not apply our usual two-thirds independence rule and therefore we will not recommend
voting against boards whose composition reflects the makeup of the shareholder population.
Independence Exceptions
The independence exceptions that we make
for controlled companies are as follows:
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1. |
We do not require that controlled companies have boards that are at least two-thirds
independent. So long as the insiders and/or affiliates are connected with the controlling entity, we accept the presence of
non-independent board members. |
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2. |
The compensation committee and nominating and governance committees do not need
to consist solely of independent directors. |
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We believe that standing nominating and corporate governance committees at controlled
companies are unnecessary. Although having a committee charged with the duties of searching for, selecting, and nominating
independent directors can be beneficial, the unique composition of a controlled company’s shareholder base makes such
committees weak and irrelevant. |
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Likewise, we believe that independent compensation committees at controlled companies
are unnecessary. Although independent directors are the best choice for approving and monitoring senior executives’
pay, controlled companies serve a unique shareholder population whose voting power ensures the protection of its interests.
As such, we believe that having affiliated directors on a controlled company’s compensation committee is acceptable.
However, given that a controlled company has certain obligations to minority shareholders we feel that an insider should not
serve on the compensation committee. Therefore, Glass Lewis |
42 The Conference Board, at p. 23 in its May 2003 report “Corporate
Governance Best Practices, Id.,” quotes one of its roundtable participants as stating, “[w]hen you’ve got a 20
or 30 person corporate board, it’s one way of assuring that nothing is ever going to happen that the CEO doesn’t want
to happen.”
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will recommend voting against any insider (the CEO or otherwise) serving on the
compensation committee. |
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3. |
Controlled companies do not need an independent chairman or an independent lead
or presiding director. Although an independent director in a position of authority on the board – such as chairman or
presiding director – can best carry out the board’s duties, controlled companies serve a unique shareholder population
whose voting power ensures the protection of its interests. |
Size of the Board of Directors
We have no board size requirements for controlled
companies.
Audit
Committee Independence
We believe that audit committees should
consist solely of independent directors. Regardless of a company’s controlled status, the interests of all shareholders must
be protected by ensuring the integrity and accuracy of the company’s financial statements. Allowing affiliated directors
to oversee the preparation of financial reports could create an insurmountable conflict of interest.
UNOFFICIALLY
CONTROLLED COMPANIES AND 20-50% BENEFICIAL OWNERS
Where a shareholder group owns more than
50% of a company’s voting power but the company is not a “controlled” company as defined by relevant listing
standards, we apply a lower independence requirement of a majority of the board but believe the company should otherwise be treated
like another public company; we will therefore apply all other standards as outlined above.
Similarly, where an individual or entity
holds between 20-50% of a company’s voting power, but the company is not “controlled,” we believe it is reasonable
to allow proportional representation on the board and committees (excluding the audit committee) based on the individual or entity’s
percentage of ownership.
EXCEPTIONS
FOR RECENT IPOs
We believe companies that have recently
completed an initial public offering (“IPO”) should be allowed adequate time to fully comply with marketplace listing
requirements as well as to meet basic corporate governance standards. We believe a one-year grace period immediately following
the date of a company’s IPO is sufficient time for most companies to comply with all relevant regulatory requirements and
to meet such corporate governance standards. Except in egregious cases, Glass Lewis refrains from issuing voting recommendations
on the basis of corporate governance best practices (e.g., board independence, committee membership and structure, meeting attendance,
etc.) during the one-year period following an IPO.
However, two specific cases warrant strong
shareholder action against the board of a company that completed an IPO within the past year:
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1. |
Adoption of a poison pill: In cases
where a board implements a poison pill preceding an IPO, we will consider voting against the members of the board who served
during the period of the poison pill’s adoption if the board (i) did not also commit to submit the poison pill to a
shareholder vote within 12 months of the IPO or (ii) did not provide a sound rationale for adopting the pill and the pill
does not expire in three years or less. In our view, adopting such an anti-takeover device unfairly penalizes future shareholders
who (except for electing to buy or sell the stock) are unable to weigh in on a matter that could potentially negatively impact
their ownership interest. This notion is strengthened when a board adopts a poison pill with a five to ten year life immediately
prior to having a public shareholder base so as to insulate management for a substantial amount |
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of time while postponing and/or avoiding allowing public shareholders the ability
to vote on the pill’s adoption. Such instances are indicative of boards that may subvert shareholders’ best interests
following their IPO. |
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2. |
Adoption of an exclusive forum provision: Consistent
with our general approach to boards that adopt exclusive forum provisions without shareholder approval (refer to our discussion
of nominating and governance committee performance in Section I of the guidelines), in cases where a board adopts such a provision
for inclusion in a company’s charter or bylaws before the company’s IPO, we will recommend voting against the
chairman of the governance committee, or, in the absence of such a committee, the chairman of the board, who served during
the period of time when the provision was adopted. |
In addition, shareholders should also be
wary of companies that adopt supermajority voting requirements before their IPO. Absent explicit provisions in the articles or
bylaws stipulating that certain policies will be phased out over a certain period of time (e.g. a predetermined declassification
of the board, a planned separation of the chairman and CEO, etc.) long-term shareholders could find themselves in the predicament
of having to attain a supermajority vote to approve future proposals seeking to eliminate such policies.
DUAL-LISTED
COMPANIES
For those companies whose shares trade on
exchanges in multiple countries, and which may seek shareholder approval of proposals in accordance with varying exchange- and
country-specific rules, we will apply the governance standards most relevant in each situation. We will consider a number of factors
in determining which Glass Lewis country-specific policy to apply, including but not limited to: (i) the corporate governance structure
and features of the company including whether the board structure is unique to a particular market; (ii) the nature of the proposals;
(iii) the location of the company’s primary listing, if one can be determined; (iv) the regulatory/governance regime that
the board is reporting against; and (v) the availability and completeness of the company’s SEC filings.
MUTUAL
FUND BOARDS
Mutual funds, or investment companies, are
structured differently from regular public companies (i.e., operating companies). Typically, members of a fund’s adviser
are on the board and management takes on a different role from that of regular public companies. Thus, we focus on a short list
of requirements, although many of our guidelines remain the same.
The following mutual fund policies are similar
to the policies for regular public companies:
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1. |
Size of the board of directors: The
board should be made up of between five and twenty directors. |
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2. |
The CFO on the board: Neither the CFO of the fund
nor the CFO of the fund’s registered investment adviser should serve on the board. |
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3. |
Independence of the audit committee: The audit
committee should consist solely of independent directors. |
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4. |
Audit committee financial expert: At least one
member of the audit committee should be designated as the audit committee financial expert. |
The following differences from regular public
companies apply at mutual funds:
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1. |
Independence of the board: We believe
that three-fourths of an investment company’s board should be made up of independent directors. This is consistent with
a proposed SEC rule on |
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investment company boards. The Investment Company Act requires 40% of the board
to be independent, but in 2001, the SEC amended the Exemptive Rules to require that a majority of a mutual fund board be independent.
In 2005, the SEC proposed increasing the independence threshold to 75%. In 2006, a federal appeals court ordered that this
rule amendment be put back out for public comment, putting it back into “proposed rule” status. Since mutual fund
boards play a vital role in overseeing the relationship between the fund and its investment manager, there is greater need
for independent oversight than there is for an operating company board. |
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2. |
When the auditor is not up for ratification: We
do not recommend voting against the audit committee if the auditor is not up for ratification. Due to the different legal
structure of an investment company compared to an operating company, the auditor for the investment company (i.e., mutual
fund) does not conduct the same level of financial review for each investment company as for an operating company. |
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3. |
Non-independent chairman: The SEC has proposed
that the chairman of the fund board be independent. We agree that the roles of a mutual fund’s chairman and CEO should
be separate. Although we believe this would be best at all companies, we recommend voting against the chairman of an investment
company’s nominating committee as well as the chairman of the board if the chairman and CEO of a mutual fund are the
same person and the fund does not have an independent lead or presiding director. Seven former SEC commissioners support the
appointment of an independent chairman and we agree with them that “an independent board chairman would be better able
to create conditions favoring the long-term interests of fund shareholders than would a chairman who is an executive of the
adviser.” (See the comment letter sent to the SEC in support of the proposed rule at http://www.sec.gov/news/studies/indchair.pdf)
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4. |
Multiple funds overseen by the same director: Unlike
service on a public company board, mutual fund boards require much less of a time commitment. Mutual fund directors typically
serve on dozens of other mutual fund boards, often within the same fund complex. The Investment Company Institute’s
(“ICI”) Overview of Fund Governance Practices, 1994-2012, indicates that the average number of funds served by
an independent director in 2012 was 53. Absent evidence that a specific director is hindered from being an effective board
member at a fund due to service on other funds’ boards, we refrain from maintaining a cap on the number of outside mutual
fund boards that we believe a director can serve on. |
DECLASSIFIED
BOARDS
Glass Lewis favors the repeal of staggered
boards and the annual election of directors. We believe staggered boards are less accountable to shareholders than boards that
are elected annually. Furthermore, we feel the annual election of directors encourages board members to focus on shareholder interests.
Empirical studies have shown: (i)
companies with staggered boards reduce a firm’s value; and (ii) in the context of hostile takeovers, staggered boards
operate as a takeover defense, which entrenches management, discourages potential acquirers, and delivers a lower return to
target shareholders.
In our view, there is no evidence to demonstrate
that staggered boards improve shareholder returns in a takeover context. Research shows that shareholders are worse off when a
staggered board blocks a transaction. A study by a group of Harvard Law professors concluded that companies whose staggered boards
prevented a takeover “reduced shareholder returns for targets ... on the order of eight to ten percent in the nine months
after a hostile bid was announced.”43 When a staggered board negotiates
43 Lucian Bebchuk, John Coates IV, Guhan Subramanian, “The
Powerful Antitakeover Force of Staggered Boards: Further Findings and a Reply to Symposium Participants,” 55 Stanford Law
Review 885-917 (2002), page 1.
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a friendly transaction, no statistically
significant difference in premiums occurs.44 Further, one of those same professors found that charter-based staggered
boards “reduce the market value of a firm by 4% to 6% of its market capitalization” and that “staggered boards
bring about and not merely reflect this reduction in market value.”45 A subsequent study reaffirmed that classified
boards reduce shareholder value, finding “that the ongoing process of dismantling staggered boards, encouraged by institutional
investors, could well contribute to increasing shareholder wealth.”46
Shareholders have increasingly come to agree
with this view. In 2013, 91% of S&P 500 companies had declassified boards, up from approximately 40% a decade ago.47 Clearly,
more shareholders have supported the repeal of classified boards. Resolutions relating to the repeal of staggered boards garnered
on average over 70% support among shareholders in 2008, whereas in 1987, only 16.4% of votes cast favored board declassification.48
Given the empirical evidence suggesting
staggered boards reduce a company’s value and the increasing shareholder opposition to such a structure, Glass Lewis supports
the declassification of boards and the annual election of directors.
MANDATORY
DIRECTOR TERM AND AGE LIMITS
Glass Lewis believes that director age and
term limits typically are not in shareholders’ best interests. Too often age and term limits are used by boards as a crutch
to remove board members who have served for an extended period of time. When used in that fashion, they are indicative of a board
that has a difficult time making “tough decisions.”
Academic literature suggests that there
is no evidence of a correlation between either length of tenure or age and director performance. On occasion, term limits can be
used as a means to remove a director for boards that are unwilling to police their membership and to enforce turnover. Some shareholders
support term limits as a way to force change when boards are unwilling to do so.
While we understand that age limits can
be a way to force change where boards are unwilling to make changes on their own, the long-term impact of age limits restricts
experienced and potentially valuable board members from service through an arbitrary means. Further, age limits unfairly imply
that older (or, in rare cases, younger) directors cannot contribute to company oversight.
In our view, a director’s experience
can be a valuable asset to shareholders because of the complex, critical issues that boards face. However, we support periodic
director rotation to ensure a fresh perspective in the boardroom and the generation of new ideas and business strategies. We believe
the board should implement such rotation instead of relying on arbitrary limits. When necessary, shareholders can address the issue
of director rotation through director elections.
We believe that shareholders are better
off monitoring the board’s approach to corporate governance and the board’s stewardship of company performance rather
than imposing inflexible rules that don’t necessarily correlate with returns or benefits for shareholders.
However, if a board adopts term/age limits,
it should follow through and not waive such limits. If the board waives its term/age limits, Glass Lewis will consider recommending
shareholders vote against the nominating and/or governance committees, unless the rule was waived with sufficient explanation,
such as consummation of a corporate transaction like a merger.
44 Id. at 2 (“Examining a sample of seventy-three negotiated
transactions from 2000 to 2002, we find no systematic benefits in terms of higher premia to boards that have [staggered structures].”).
45 Lucian Bebchuk, Alma Cohen, “The Costs of Entrenched
Boards” (2004).
46 Lucian Bebchuk, Alma Cohen and Charles C.Y. Wang, “Staggered
Boards and the Wealth of Shareholders:
Evidence from a Natural Experiment,” SSRN: http://ssrn.com/abstract=1706806 (2010),
p. 26.
47 Spencer Stuart Board Index, 2013, p. 4
48 Lucian Bebchuk, John Coates IV and Guhan Subramanian, “The
Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy,” 54 Stanford Law Review 887-951 (2002).
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REQUIRING
TWO OR MORE NOMINEES PER BOARD SEAT
In an attempt to address lack of access
to the ballot, shareholders sometimes propose that the board give shareholders a choice of directors for each open board seat in
every election. However, we feel that policies requiring a selection of multiple nominees for each board seat would discourage
prospective directors from accepting nominations. A prospective director could not be confident either that he or she is the board’s
clear choice or that he or she would be elected. Therefore, Glass Lewis generally will vote against such proposals.
PROXY
ACCESS
Proxy Access has garnered significant attention
in recent years. As in 2013, we expect to see a number of shareholder proposals regarding this topic in 2014 and perhaps even some
companies unilaterally adopting some elements of proxy access. However, considering the uncertainty in this area and the inherent
case-by-case nature of those situations, we refrain from establishing any specific parameters at this time.
For a discussion of recent regulatory events
in this area, along with a detailed overview of the Glass Lewis approach to Shareholder Proposals regarding Proxy Access, refer
to Glass Lewis’ Proxy Paper Guidelines for Shareholder Initiatives.
MAJORITY
VOTE FOR THE ELECTION OF DIRECTORS
In stark contrast to the failure of shareholder
access to gain acceptance, majority voting for the election of directors is fast becoming the de facto standard in corporate board
elections. In our view, the majority voting proposals are an effort to make the case for shareholder impact on director elections
on a company-specific basis.
While this proposal would not give shareholders
the opportunity to nominate directors or lead to elections where shareholders have a choice among director candidates, if implemented,
the proposal would allow shareholders to have a voice in determining whether the nominees proposed by the board should actually
serve as the overseer-representatives of shareholders in the boardroom. We believe this would be a favorable outcome for shareholders.
During the first half of 2013, Glass Lewis
tracked approximately 30 shareholder proposals seeking to require a majority vote to elect directors at annual meetings in the
U.S. While this is roughly on par with what we have reviewed in each of the past several years, it is a sharp contrast to the 147
proposals tracked during all of 2006. This large drop in the number of proposals being submitted in recent years compared to 2006
is a result of many companies having already adopted some form of majority voting, including approximately 84% of companies in
the S&P 500 Index, up from 56% in 2008.49 During 2013, these proposals received, on average, 59% shareholder support
(excluding abstentions and broker non-votes), up from 54% in 2008. Further, nearly half of these resolutions received majority
shareholder support.
THE PLURALITY
VOTE STANDARD
Today, most US companies still elect directors
by a plurality vote standard. Under that standard, if one shareholder holding only one share votes in favor of a nominee (including
himself, if the director is a shareholder), that nominee “wins” the election and assumes a seat on the board. The common
concern among companies with a plurality voting standard is the possibility that one or more directors would not receive a majority
of votes, resulting in “failed elections.” This was of particular concern during the 1980s, an era of frequent takeovers
and contests for control of companies.
49 Spencer Stuart Board Index, 2013, p. 13
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ADVANTAGES
OF A MAJORITY VOTE STANDARD
If a majority vote standard were implemented,
a nominee would have to receive the support of a majority of the shares voted in order to be elected. Thus, shareholders could
collectively vote to reject a director they believe will not pursue their best interests. We think that this minimal amount of
protection for shareholders is reasonable and will not upset the corporate structure nor reduce the willingness of qualified shareholder-focused
directors to serve in the future.
We believe that a majority vote standard
will likely lead to more attentive directors. Occasional use of this power will likely prevent the election of directors with a
record of ignoring shareholder interests in favor of other interests that conflict with those of investors. Glass Lewis will generally
support proposals calling for the election of directors by a majority vote except for use in contested director elections.
In response to the high level of support
majority voting has garnered, many companies have voluntarily taken steps to implement majority voting or modified approaches to
majority voting. These steps range from a modified approach requiring directors that receive a majority of withheld votes to resign
(e.g., Ashland Inc.) to actually requiring a majority vote of outstanding shares to elect directors (e.g., Intel).
We feel that the modified approach does
not go far enough because requiring a director to resign is not the same as requiring a majority vote to elect a director and does
not allow shareholders a definitive voice in the election process. Further, under the modified approach, the corporate governance
committee could reject a resignation and, even if it accepts the resignation, the corporate governance committee decides on the
director’s replacement. And since the modified approach is usually adopted as a policy by the board or a board committee,
it could be altered by the same board or committee at any time.
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| III. | TRANSPARENCY AND INTEGRITY OF FINANCIAL REPORTING |
AUDITOR RATIFICATION
The auditor’s role as gatekeeper is
crucial in ensuring the integrity and transparency of the financial information necessary for protecting shareholder value. Shareholders
rely on the auditor to ask tough questions and to do a thorough analysis of a company’s books to ensure that the information
provided to shareholders is complete, accurate, fair, and that it is a reasonable representation of a company’s financial
position. The only way shareholders can make rational investment decisions is if the market is equipped with accurate information
about a company’s fiscal health. As stated in the October 6, 2008 Final Report of the Advisory Committee on the Auditing
Profession to the U.S. Department of the Treasury:
“The auditor is expected to offer
critical and objective judgment on the financial matters under consideration, and actual and perceived absence of conflicts is
critical to that expectation. The Committee believes that auditors, investors, public companies, and other market participants
must understand the independence requirements and their objectives, and that auditors must adopt a mindset of skepticism when facing
situations that may compromise their independence.”
As such, shareholders should demand an objective,
competent and diligent auditor who performs at or above professional standards at every company in which the investors hold an
interest. Like directors, auditors should be free from conflicts of interest and should avoid situations requiring a choice between
the auditor’s interests and the public’s interests. Almost without exception, shareholders should be able to annually
review an auditor’s performance and to annually ratify a board’s auditor selection. Moreover, in October 2008, the
Advisory Committee on the Auditing Profession went even further, and recommended that “to further enhance audit committee
oversight and auditor accountability... disclosure in the company proxy statement regarding shareholder ratification [should]
include the name(s) of the senior auditing partner(s) staffed on the engagement.”50
On August 16, 2011, the PCAOB issued a Concept
Release seeking public comment on ways that auditor independence, objectivity and professional skepticism could be enhanced, with
a specific emphasis on mandatory audit firm rotation. The PCAOB convened several public roundtable meetings during 2012 to further
discuss such matters. Glass Lewis believes auditor rotation can ensure both the independence of the auditor and the integrity of
the audit; we will typically recommend supporting proposals to require auditor rotation when the proposal uses a reasonable period
of time (usually not less than 5-7 years), particularly at
companies with a history of accounting problems.
VOTING RECOMMENDATIONS ON AUDITOR RATIFICATION
We generally support management’s
choice of auditor except when we believe the auditor’s independence or audit integrity has been compromised. Where a board
has not allowed shareholders to review and ratify an auditor, we typically recommend voting against the audit committee chairman.
When there have been material restatements of annual financial statements or material weaknesses in internal controls, we usually
recommend voting against the entire audit committee.
50 “Final Report of the Advisory Committee on the Auditing
Profession to the U.S. Department of the Treasury.” p. VIII:20, October 6, 2008.
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Reasons why we may not recommend ratification of an auditor include:
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When audit fees plus audit-related fees total less than the tax fees and/or other non-audit fees. |
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Recent material restatements of annual financial statements, including those resulting in the reporting of material weaknesses in internal controls and including late filings by the company where the auditor bears some responsibility for the restatement or late filing.51 |
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When the auditor performs prohibited services such as tax-shelter work, tax services for the CEO or CFO, or contingent-fee work, such as a fee based on a percentage of economic benefit to the company. |
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When audit fees are excessively low, especially when compared with other companies in the same industry. |
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When the company has aggressive accounting policies. |
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When the company has poor disclosure or lack of transparency in its financial statements. |
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Where the auditor limited its liability through its contract with the company or the audit contract requires the corporation to use alternative dispute resolution procedures without adequate justification. |
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We also look for other relationships or concerns with the auditor that might suggest a conflict between the auditor’s interests and shareholder interests. |
PENSION ACCOUNTING ISSUES
A pension accounting question often raised
in proxy proposals is what effect, if any, projected returns on employee pension assets should have on a company’s net income.
This issue often arises in the executive-compensation context in a discussion of the extent to which pension accounting should
be reflected in business performance for purposes of calculating payments to executives.
Glass Lewis believes that pension credits
should not be included in measuring income that is used to award performance-based compensation. Because many of the assumptions
used in accounting for retirement plans are subject to the company’s discretion, management would have an obvious conflict
of interest if pay were tied to pension income. In our view, projected income from pensions does not truly reflect a company’s
performance.
51 An auditor does not audit interim financial
statements. Thus, we generally do not believe that an auditor should be opposed due to a restatement of interim financial statements
unless the nature of the misstatement is clear from a reading of the incorrect financial statements.
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| IV. |
THE LINK BETWEEN COMPENSATION
AND PERFORMANCE |
Glass Lewis carefully reviews the compensation
awarded to senior executives, as we believe that this is an important area in which the board’s priorities are revealed.
Glass Lewis strongly believes executive compensation should be linked directly with the performance of the business the executive
is charged with managing. We believe the most effective compensation arrangements provide for an appropriate mix of performance-based
short- and long-term incentives in addition to fixed pay elements.
Glass Lewis believes that comprehensive,
timely and transparent disclosure of executive pay is critical to allowing shareholders to evaluate the extent to which pay is
keeping pace with company performance. When reviewing proxy materials, Glass Lewis examines whether the company discloses the performance
metrics used to determine executive compensation. We recognize performance metrics must necessarily vary depending on the company
and industry, among other factors, and may include a wide variety of financial measures as well as industry-specific performance
indicators. However, we believe companies should disclose why the specific performance metrics were selected and how the actions
they are designed to incentivize will lead to better corporate performance.
Moreover, it is rarely in shareholders’
interests to disclose competitive data about individual salaries below the senior executive level. Such disclosure could create
internal personnel discord that would be counterproductive for the company and its shareholders. While we favor full disclosure
for senior executives and we view pay disclosure at the aggregate level (e.g., the number of employees being paid over a certain
amount or in certain categories) as potentially useful, we do not believe shareholders need or will benefit from detailed reports
about individual management employees other than the most senior executives.
ADVISORY VOTE
ON EXECUTIVE COMPENSATION (“SAY-ON-PAY”)
The Dodd-Frank Wall Street Reform and Consumer
Protection Act (the “Dodd-Frank Act”) required companies to hold an advisory vote on executive compensation at the
first shareholder meeting that occurs six months after enactment of the bill (January 21, 2011).
This practice of allowing shareholders a
non-binding vote on a company’s compensation report is standard practice in many non-US countries, and has been a requirement
for most companies in the United Kingdom since 2003 and in Australia since 2005. Although say-on-pay proposals are non-binding,
a high level of “against” or “abstain” votes indicates substantial
shareholder concern about a company’s compensation policies and procedures.
Given the complexity of most companies’
compensation programs, Glass Lewis applies a highly nuanced approach when analyzing advisory votes on executive compensation. We
review each company’s compensation on a case-by-case basis, recognizing that each company must be examined in the context
of industry, size, maturity, performance, financial condition, its historic pay for performance practices, and any other relevant
internal or external factors.
We believe that each company should design
and apply specific compensation policies and practices that are appropriate to the circumstances of the company and, in particular,
will attract and retain competent executives and other staff, while motivating them to grow the company’s long-term shareholder
value.
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Where we find those specific policies and
practices serve to reasonably align compensation with performance, and such practices are adequately disclosed, Glass Lewis will
recommend supporting the company’s approach. If, however, those specific policies and practices fail to demonstrably link
compensation with performance, Glass Lewis will generally recommend voting against the say-on-pay proposal.
Glass Lewis focuses on four main areas when
reviewing say-on-pay proposals:
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The overall design and structure of the company’s executive compensation program including performance metrics; |
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The quality and content of the company’s disclosure; |
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The quantum paid to executives; and |
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The link between compensation and performance as indicated by the company’s current and past pay-for-performance grades. |
We also review any significant changes or
modifications, and rationale for such changes, made to the company’s compensation structure or award amounts, including base
salaries.
SAY-ON-PAY VOTING
RECOMMENDATIONS
In cases where we find deficiencies in a
company’s compensation program’s design, implementation or management, we will recommend that shareholders vote against
the say-on-pay proposal. Generally such instances include evidence of a pattern of poor pay-for-performance practices (i.e., deficient
or failing pay for performance grades), unclear or questionable disclosure regarding the overall compensation structure (e.g.,
limited information regarding benchmarking processes, limited rationale for bonus performance metrics and targets, etc.), questionable
adjustments to certain aspects of the overall compensation structure (e.g., limited rationale for significant changes to performance
targets or metrics, the payout of guaranteed bonuses or sizable retention grants, etc.), and/or other egregious compensation practices.
Although not an exhaustive list, the following
issues when weighed together may cause Glass Lewis to recommend voting against a say-on-pay vote:
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Inappropriate peer group and/or benchmarking issues; |
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Inadequate or no rationale for changes to peer groups; |
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Egregious or excessive bonuses, equity awards or severance payments, including golden handshakes and golden parachutes; |
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Guaranteed bonuses; |
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Targeting overall levels of compensation at higher than median without adequate justification; |
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Bonus or long-term plan targets set at less than mean or negative performance levels; |
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Performance targets not sufficiently challenging, and/or providing for high potential payouts; |
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Performance targets lowered without justification; |
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Discretionary bonuses paid when short- or long-term incentive plan targets were not met; |
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Executive pay high relative to peers not justified by outstanding company performance; and |
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The terms of the long-term incentive plans are inappropriate (please see “Long-Term Incentives” on page 28). |
In instances where a company has simply
failed to provide sufficient disclosure of its policies, we may recommend shareholders vote against this proposal solely on this
basis, regardless of the appropriateness of compensation levels.
COMPANY RESPONSIVENESS
At companies that received a significant
level of shareholder disapproval (25% or greater) to their say-on-pay proposal at the previous annual meeting, we believe the board
should demonstrate some level of engagement and responsiveness to the shareholder concerns behind the discontent. While we recognize
that sweeping changes cannot be made to a compensation program without due consideration and that a majority of shareholders voted
in favor of the proposal, we will look for disclosure in the proxy statement and other publicly-disclosed filings that indicates
the compensation committee is responding to the prior year’s vote results including engaging with large shareholders to identify
the concerns causing the substantial vote against. In the absence of any evidence that the board is actively engaging shareholders
on these issues and responding accordingly, we may recommend holding compensation committee members accountable for failing to
adequately respond to shareholder opposition, giving careful consideration to the level of shareholder protest and the severity
and history of compensation problems.
Where we identify egregious compensation
practices, we may also recommend voting against the compensation committee based on the practices or actions of its members during
the year, such as approving large one-off payments, the inappropriate, unjustified use of discretion, or sustained poor pay for
performance practices.
PAY FOR PERFORMANCE
Glass Lewis believes an integral part of
a well-structured compensation package is a successful link between pay and performance. Our proprietary pay-for-performance model
was developed to better evaluate the link between pay and performance of the top five executives at US companies. Our model benchmarks
these executives’ pay and company performance against peers selected by Equilar’s market-based peer groups and across
five performance metrics. By measuring the magnitude of the gap between two weighted-average percentile rankings (executive compensation
and performance), we grade companies from a school letter system: “A”, “B”, “F”, etc. The grades
guide our evaluation of compensation committee effectiveness and we generally recommend voting against compensation committee of
companies with a pattern of failing our pay-for-performance analysis.
We also use this analysis to inform our
voting decisions on say-on-pay proposals. As such, if a company receives a failing grade from our proprietary model, we are likely
to recommend that shareholders vote against
the say-on-pay proposal. However, there may be exceptions to this rule such as when a company makes significant enhancements to
its compensation programs that may not be reflected yet in a quantitative assessment.
SHORT-TERM INCENTIVES
A short-term bonus or incentive (“STI”)
should be demonstrably tied to performance. Whenever possible, we believe a mix of corporate and individual performance measures
is appropriate. We would normally expect performance measures for STIs to be based on company-wide or divisional financial measures
as well as non-financial factors such as those related to safety, environmental issues, and customer satisfaction. While we recognize
that companies operating in different sectors or markets may seek to utilize a wide range of metrics, we expect such measures to
be appropriately tied to a company’s business drivers.
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Further, the target and potential maximum awards that can be
achieved under STI awards should be disclosed. Shareholders should expect stretching performance targets for the maximum award
to be achieved. Any increase in the potential maximum award should be clearly justified to shareholders.
Glass Lewis recognizes that disclosure of some measures may include
commercially confidential information. Therefore, we believe it may be reasonable to exclude such information in some cases as
long as the company provides sufficient justification for non-disclosure. However, where a short-term bonus has been paid, companies
should disclose the extent to which performance has been achieved against relevant targets, including disclosure of the actual
target achieved.
Where management has received significant STIs but short-term
performance over the previous year prima facie appears to be poor or negative, we believe the company should provide a clear explanation
of why these significant short-term payments were made.
LONG-TERM INCENTIVES
Glass Lewis recognizes the value of equity-based incentive programs.
When used appropriately, they can provide a vehicle for linking an executive’s pay to company performance, thereby aligning
their interests with those of shareholders. In addition, equity-based compensation can be an effective way to attract, retain and
motivate key employees.
There are certain elements that Glass Lewis believes are common
to most well-structured long-term incentive (“LTI”) plans. These include:
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No re-testing or lowering of performance conditions; |
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Performance metrics that cannot be easily manipulated by management; |
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Two or more performance metrics; |
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At least one relative performance metric that compares the company’s performance to a relevant peer group or index; |
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Performance periods of at least three years; |
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Stretching metrics that incentivize executives to strive for outstanding performance while not encouraging excessive risk-taking; and |
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Individual limits expressed as a percentage of base salary. |
Performance measures should be carefully selected and should
relate to the specific business/industry in which the company operates and, especially, the key value drivers of the company’s
business.
While cognizant of the inherent complexity of certain performance
metrics, Glass Lewis generally believes that measuring a company’s performance with multiple metrics serves to provide a
more complete picture of the company’s performance than a single metric, which may focus too much management attention on
a single target and is therefore more susceptible to manipulation. When utilized for relative measurements, external benchmarks
such as a sector index or peer group should be disclosed and transparent. The rationale behind the selection of a specific index
or peer group should also be disclosed. Internal benchmarks should also be disclosed and transparent, unless a cogent case for
confidentiality is made and fully explained.
We also believe shareholders should
evaluate the relative success of a company’s compensation programs, particularly with regard to existing equity-based
incentive plans, in linking pay and performance in evaluating new LTI plans to determine the impact of additional stock
awards. We
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will therefore review the company’s pay-for-performance
grade (see below for more information) and specifically the proportion of total compensation that is stock-based.
RECOUPMENT (“CLAWBACK”)
PROVISIONS
Section 954 of the Dodd-Frank Act requires the SEC to create
a rule requiring listed companies to adopt policies for recouping certain compensation during a three-year look-back period. The
rule applies to incentive-based compensation paid to current or former executives if the company is required to prepare an accounting
restatement due to erroneous data resulting from material non-compliance with any financial reporting requirements under the securities
laws.
These recoupment provisions are more stringent than under Section
304 of the Sarbanes-Oxley Act in three respects: (i) the provisions extend to current or former executive officers rather than
only to the CEO and CFO; (ii) it has a three-year look-back period (rather than a twelve-month look-back period); and (iii) it
allows for recovery of compensation based upon a financial restatement due to erroneous data, and therefore does not require misconduct
on the part of the executive or other employees.
HEDGING OF STOCK
Glass Lewis believes that the hedging of shares by executives
in the shares of the companies where they are employed severs the alignment of interests of the executive with shareholders. We
believe companies should adopt strict policies to prohibit executives from hedging the economic risk associated with their shareownership
in the company.
PLEDGING OF STOCK
Glass Lewis believes that shareholders should examine the facts
and circumstances of each company rather than apply a one-size-fits-all policy regarding employee stock pledging. Glass Lewis believes
that shareholders benefit when employees, particularly senior executives have “skin-in-the-game” and therefore recognizes
the benefits of measures designed to encourage employees to both buy shares out of their own pocket and to retain shares they have
been granted; blanket policies prohibiting stock pledging may discourage executives and employees from doing either.
However, we also recognize that the pledging of shares can present
a risk that, depending on a host of factors, an executive with significant pledged shares and limited other assets may have an
incentive to take steps to avoid a forced sale of shares in the face of a rapid stock price decline. Therefore, to avoid substantial
losses from a forced sale to meet the terms of the loan, the executive may have an incentive to boost the stock price in the short
term in a manner that is unsustainable, thus hurting shareholders in the long-term. We also recognize concerns regarding pledging
may not apply to less senior employees, given the latter group’s significantly more limited influence over a company’s
stock price. Therefore, we believe that the issue of pledging shares should be reviewed in that context, as should polices that
distinguish between the two groups.
Glass Lewis believes that the benefits of stock ownership by
executives and employees may outweigh the risks of stock pledging, depending on many factors. As such, Glass Lewis reviews all
relevant factors in evaluating proposed policies, limitations and prohibitions on pledging stock, including:
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The number of shares pledged; |
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The percentage executives’ pledged shares are of outstanding shares; |
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The percentage executives’ pledged shares are of each executive’s shares and total assets; |
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Whether the pledged shares were purchased by the employee or granted by the company; |
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Whether there are different policies for purchased and granted shares; |
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Whether the granted shares were time-based or performance-based; |
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The overall governance profile of the company; |
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The volatility of the company’s stock (in order to determine the likelihood of a sudden stock price drop); |
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The nature and cyclicality, if applicable, of the company’s industry; |
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The participation and eligibility of executives and employees in pledging; |
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The company’s current policies regarding pledging and any waiver from these policies for employees and executives; and |
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Disclosure of the extent of any pledging, particularly among senior executives. |
COMPENSATION CONSULTANT
INDEPENDENCE
As mandated by Section 952 of the Dodd-Frank Act, as of January
11, 2013, the SEC approved new listing requirements for both the NYSE and NASDAQ which require compensation committees to consider
six factors in assessing compensation advisor independence. These factors include: (1) provision of other services to the company;
(2) fees paid by the company as a percentage of the advisor’s total annual revenue; (3) policies and procedures of the advisor
to mitigate conflicts of interests; (4) any business or personal relationships of the consultant with any member of the compensation
committee; (5) any company stock held by the consultant; and (6) any business or personal relationships of the consultant with
any executive officer of the company. According to the SEC, “no one factor should be viewed as a determinative factor.”
Glass Lewis believes this six-factor assessment is an important process for every compensation committee to undertake.
We believe compensation consultants are engaged to provide objective,
disinterested, expert advice to the compensation committee. When the consultant or its affiliates receive substantial income from
providing other services to the company, we believe the potential for a conflict of interest arises and the independence of the
consultant may be jeopardized. Therefore, Glass Lewis will, when relevant, note the potential for a conflict of interest when the
fees paid to the advisor or its affiliates for other services exceeds those paid for compensation consulting.
FREQUENCY OF
SAY-ON-PAY
The Dodd-Frank Act also requires companies to allow shareholders
a non-binding vote on the frequency of say-on-pay votes, i.e. every one, two or three years. Additionally, Dodd-Frank requires
companies to hold such votes on the frequency of say-on-pay votes at least once every six years.
We believe companies should submit say-on-pay votes to shareholders
every year. We believe that the time and financial burdens to a company with regard to an annual vote are relatively small and
incremental and are outweighed by the benefits to shareholders through more frequent accountability. Implementing biannual or triennial
votes on executive compensation limits shareholders’ ability to hold the board accountable for its compensation practices
through means other than voting against the compensation committee. Unless a company provides a compelling rationale or unique
circumstances for say-on-pay votes less frequent than annually, we will generally recommend that shareholders support annual votes
on compensation.
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VOTE ON GOLDEN
PARACHUTE ARRANGEMENTS
The Dodd-Frank Act also requires companies to provide shareholders
with a separate non-binding vote on approval of golden parachute compensation arrangements in connection with certain change-in-control
transactions. However, if the golden parachute arrangements have previously been subject to a say-on-pay vote which shareholders
approved, then this required vote is waived.
Glass Lewis believes the narrative and tabular disclosure of
golden parachute arrangements benefits all shareholders. Glass Lewis analyzes each golden parachute arrangement on a case-by-case
basis, taking into account, among other items: the ultimate value of the payments particularly compared to the value of the transaction,
the tenure and position of the executives in question, and the type of triggers involved (single vs. double).
EQUITY-BASED
COMPENSATION PLAN PROPOSALS
We believe that equity compensation awards are useful, when not
abused, for retaining employees and providing an incentive for them to act in a way that will improve company performance. Glass
Lewis evaluates equity-based compensation plans using a detailed model and analytical review.
Equity-based compensation programs have important differences
from cash compensation plans and bonus programs. Accordingly, our model and analysis takes into account factors such as plan administration,
the method and terms of exercise, repricing history, express or implied rights to reprice, and the presence of evergreen provisions.
Our analysis is primarily quantitative and focused on the plan’s
cost as compared with the business’s operating metrics. We run twenty different analyses, comparing the program with absolute
limits we believe are key to equity value creation and with a carefully chosen peer group. In general, our model seeks to determine
whether the proposed plan is either absolutely excessive or is more than one standard deviation away from the average plan for
the peer group on a range of criteria, including dilution to shareholders and the projected annual cost relative to the company’s
financial performance. Each of the twenty analyses (and their constituent parts) is weighted and the plan is scored in accordance
with that weight.
In our analysis, we compare the program’s expected annual
expense with the business’s operating metrics to help determine whether the plan is excessive in light of company performance.
We also compare the plan’s expected annual cost to the enterprise value of the firm rather than to market capitalization
because the employees, managers and directors of the firm contribute to the creation of enterprise value but not necessarily market
capitalization (the biggest difference is seen where cash represents the vast majority of market capitalization). Finally, we do
not rely exclusively on relative comparisons with averages because, in addition to creeping averages serving to inflate compensation,
we believe that some absolute limits are warranted.
We evaluate equity plans based on certain overarching principles:
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Companies should seek more shares only when needed; |
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Requested share amounts should be small enough that companies seek shareholder approval every three to four years (or more frequently); |
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If a plan is relatively expensive, it should not grant options solely to senior executives and board members; |
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Annual net share count and voting power dilution should be limited; |
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Annual cost of the plan (especially if not shown on the income statement) should be reasonable as a percentage of financial results and should be in line with the peer group; |
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The expected annual cost of the plan should be proportional to the business’s value; |
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The intrinsic value that option grantees received in the past should be reasonable compared with the business’s financial results; |
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Plans should deliver value on a per-employee basis when compared with programs at peer companies; |
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Plans should not permit re-pricing of stock options; |
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Plans should not contain excessively liberal administrative or payment terms; |
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Plans should not count shares in ways that understate the potential dilution, or cost, to common shareholders. This refers to “inverse” full-value award multipliers; |
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Selected performance metrics should be challenging and appropriate, and should be subject to relative performance measurements; and |
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Stock grants should be subject to minimum vesting and/or holding periods sufficient to ensure sustainable performance and promote retention. |
OPTION EXCHANGES
Glass Lewis views option repricing plans and option exchange
programs with great skepticism. Shareholders have substantial risk in owning stock and we believe that the employees, officers,
and directors who receive stock options should be similarly situated to align their interests with shareholder interests.
We are concerned that option grantees who believe they will be
“rescued” from underwater options will be more inclined to take unjustifiable risks. Moreover, a predictable pattern
of repricing or exchanges substantially alters a stock option’s value because options that will practically never expire
deeply out of the money are worth far more than options that carry a risk of expiration.
In short, repricings and option exchange programs change the
bargain between shareholders and employees after the bargain has been struck.
There is one circumstance in which a repricing or option exchange
program is acceptable: if macroeconomic or industry trends, rather than specific company issues, cause a stock’s value to
decline dramatically and the repricing is necessary to motivate and retain employees. In this circumstance, we think it fair to
conclude that option grantees may be suffering from a risk that was not foreseeable when the original “bargain” was
struck. In such a circumstance, we will recommend supporting a repricing only if the following conditions are true:
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Officers and board members cannot participate in the program; |
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The stock decline mirrors the market or industry price decline in terms of timing and approximates the decline in magnitude; |
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The exchange is
value-neutral or value-creative to shareholders using very conservative assumptions and with a recognition of the adverse
selection problems inherent in voluntary programs; and |
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Management and the board make a cogent case for needing to motivate and retain existing employees, such as being in a competitive employment market. |
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OPTION BACKDATING,
SPRING-LOADING AND BULLET-DODGING
Glass Lewis views option backdating, and the related practices
of spring-loading and bullet-dodging, as egregious actions that warrant holding the appropriate management and board members responsible.
These practices are similar to re-pricing options and eliminate much of the downside risk inherent in an option grant that is designed
to induce recipients to maximize shareholder return.
Backdating an option is the act of changing an option’s
grant date from the actual grant date to an earlier date when the market price of the underlying stock was lower, resulting in
a lower exercise price for the option. Since 2006, Glass Lewis has identified over 270 companies that have disclosed internal or
government investigations into their past stock-option grants.
Spring-loading is granting stock options while in possession
of material, positive information that has not been disclosed publicly. Bullet-dodging is delaying the grants of stock options
until after the release of material, negative information. This can allow option grants to be made at a lower price either before
the release of positive news or following the release of negative news, assuming the stock’s price will move up or down in
response to the information. This raises a concern similar to that of insider trading, or the trading on material non-public information.
The exercise price for an option is determined on the day of
grant, providing the recipient with the same market risk as an investor who bought shares on that date. However, where options
were backdated, the executive or the board (or the compensation committee) changed the grant date retroactively. The new date may
be at or near the lowest price for the year or period. This would be like allowing an investor to look back and select the lowest
price of the year at which to buy shares.
A 2006 study of option grants made between 1996 and 2005 at 8,000
companies found that option backdating can be an indication of poor internal controls. The study found that option backdating was
more likely to occur at companies without a majority independent board and with a long-serving CEO; both factors, the study concluded,
were associated with greater CEO influence on the company’s compensation and governance practices.52
Where a company
granted backdated options to an executive who is also a director, Glass Lewis will recommend voting against that executive/director,
regardless of who decided to make the award. In addition, Glass Lewis will recommend voting against those directors who either
approved or allowed the backdating. Glass Lewis feels that executives and directors who either benefited from backdated options
or authorized the practice have breached their fiduciary responsibility to shareholders.
Given the severe tax and legal liabilities to the company from
backdating, Glass Lewis will consider recommending voting against members of the audit committee who served when options were backdated,
a restatement occurs, material weaknesses in internal controls exist and disclosures indicate there was a lack of documentation.
These committee members failed in their responsibility to ensure the integrity of the company’s financial reports.
When a company has engaged in
spring-loading or bullet-dodging, Glass Lewis will consider recommending voting against the compensation committee members
where there has been a pattern of granting options at or near historic lows. Glass Lewis will also recommend voting against
executives serving on the board who benefited from the spring-loading or bullet-dodging.
DIRECTOR COMPENSATION
PLANS
Glass Lewis believes that non-employee directors should receive
reasonable and appropriate compensation for the time and effort they spend serving on the board and its committees. However, a
52 Lucian Bebchuk, Yaniv Grinstein and Urs Peyer. “LUCKY
CEOs.” November, 2006.
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balance is required. Fees should be competitive in order to retain
and attract qualified individuals, but excessive fees represent a financial cost to the company and potentially compromise the
objectivity and independence of non-employee directors. We will consider recommending supporting compensation plans that include
option grants or other equity-based awards that help to align the interests of outside directors with those of shareholders. However,
equity grants to directors should not be performance-based to ensure directors are not incentivized in the same manner as executives
but rather serve as a check on imprudent risk-taking in executive compensation plan design.
Glass Lewis uses a proprietary model and analyst review to evaluate
the costs of equity plans compared to the plans of peer companies with similar market capitalizations. We use the results of this
model to guide our voting recommendations on stock-based director compensation plans.
EXECUTIVE COMPENSATION
TAX DEDUCTIBILITY (IRS 162(M) COMPLIANCE)
Section 162(m) of the Internal Revenue Code allows companies
to deduct compensation in excess of $1 million for the CEO and the next three most highly compensated executive officers, excluding
the CFO, if the compensation is performance-based and is paid under shareholder-approved plans. Companies therefore submit incentive
plans for shareholder approval to take of advantage of the tax deductibility afforded under 162(m) for certain types of compensation.
We believe the best practice for companies is to provide robust
disclosure to shareholders so that they can make fully-informed judgments about the reasonableness of the proposed compensation
plan. To allow for meaningful shareholder review, we prefer that disclosure should include specific performance metrics, a maximum
award pool, and a maximum award amount per employee. We also believe it is important to analyze the estimated grants to see if
they are reasonable and in line with the company’s peers.
We typically recommend voting against a 162(m) proposal where:
(i) a company fails to provide at least a list of performance targets; (ii) a company fails to provide one of either a total maximum
or an individual maximum; or (iii) the proposed plan is excessive when compared with the plans of the company’s peers.
The company’s record of aligning pay with performance (as
evaluated using our proprietary pay-for-performance model) also plays a role in our recommendation. Where a company has a record
of setting reasonable pay relative to business performance, we generally recommend voting in favor of a plan even if the plan caps
seem large relative to peers because we recognize the value in special pay arrangements for continued exceptional performance.
As with all other issues we review, our goal is to provide consistent
but contextual advice given the specifics of the company and ongoing performance. Overall, we recognize that it is generally not
in shareholders’ best interests to vote against such a plan and forgo the potential tax benefit since shareholder rejection
of such plans will not curtail the awards; it will only prevent the tax deduction associated with them.
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| V. | GOVERNANCE STRUCTURE AND THE SHAREHOLDER FRANCHISE |
ANTI-TAKEOVER
MEASURES
POISON
PILLS (SHAREHOLDER RIGHTS PLANS)
Glass Lewis believes that poison pill plans
are not generally in shareholders’ best interests. They can reduce management accountability by substantially limiting opportunities
for corporate takeovers. Rights plans can thus prevent shareholders from receiving a buy-out premium for their stock. Typically
we recommend that shareholders vote against these plans to protect their financial interests and ensure that they have an opportunity
to consider any offer for their shares, especially those at a premium.
We believe boards should be given wide latitude
in directing company activities and in charting the company’s course. However, on an issue such as this, where the link between
the shareholders’ financial interests and their right to consider and accept buyout offers is substantial, we believe that
shareholders should be allowed to vote on whether they support such a plan’s implementation. This issue is different from
other matters that are typically left to board discretion. Its potential impact on and relation to shareholders is direct and substantial.
It is also an issue in which management interests may be different from those of shareholders; thus, ensuring that shareholders
have a voice is the only way to safeguard their interests.
In certain circumstances, we will support
a poison pill that is limited in scope to accomplish a particular objective, such as the closing of an important merger, or a pill
that contains what we believe to be a reasonable qualifying offer clause. We will consider supporting a poison pill plan if the
qualifying offer clause includes each of the following attributes:
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The form of offer is not required to be an all-cash transaction; |
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The offer is not required to remain open for more than 90 business days; |
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The offeror is permitted to amend the offer, reduce the offer, or otherwise change the terms; |
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There is no fairness opinion requirement; and |
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There is a low to no premium requirement. |
Where these requirements are met, we typically
feel comfortable that shareholders will have the opportunity to voice their opinion on any legitimate offer.
NOL
POISON PILLS
Similarly, Glass Lewis may consider
supporting a limited poison pill in the unique event that a company seeks shareholder approval of a rights plan for the
express purpose of preserving Net Operating Losses (NOLs). While companies with NOLs can generally carry these losses forward
to offset future taxable income, Section 382 of the Internal Revenue Code limits companies’ ability to use NOLs in the
event of a “change of ownership.”53 In this case, a company may adopt or amend a poison pill
(“NOL pill”) in order to prevent an inadvertent change of ownership by multiple investors purchasing small
53 Section 382 of the Internal Revenue Code
refers to a “change of ownership” of more than 50 percentage points by one or more 5% shareholders within a three-year
period. The statute is intended to deter the “trafficking” of net operating losses.
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chunks of stock at the same time, and thereby
preserve the ability to carry the NOLs forward. Often such NOL pills have trigger thresholds much lower than the common 15% or
20% thresholds, with some NOL pill triggers as low as 5%.
Glass Lewis evaluates NOL pills on a strictly
case-by-case basis taking into consideration, among other factors, the value of the NOLs to the company, the likelihood of a change
of ownership based on the size of the holding and the nature of the larger shareholders, the trigger threshold and whether the
term of the plan is limited in duration (i.e., whether it contains a reasonable “sunset” provision) or is subject to
periodic board review and/or shareholder ratification. However, we will recommend that shareholders vote against a proposal to
adopt or amend a pill to include NOL protective provisions if the company has adopted a more narrowly tailored means of preventing
a change in control to preserve its NOLs. For example, a company may limit share transfers in its charter to prevent a change of
ownership from occurring.
Furthermore, we believe that shareholders
should be offered the opportunity to vote on any adoption or renewal of a NOL pill regardless of any potential tax benefit that
it offers a company. As such, we will consider recommending voting against those members of the board who served at the time when
an NOL pill was adopted without shareholder approval within the prior twelve months and where the NOL pill is not subject to shareholder
ratification.
FAIR
PRICE PROVISIONS
Fair price provisions, which are rare, require
that certain minimum price and procedural requirements be observed by any party that acquires more than a specified percentage
of a corporation’s common stock. The provision is intended to protect minority shareholder value when an acquirer seeks to
accomplish a merger or other transaction which would eliminate or change the interests of the minority stockholders. The provision
is generally applied against the acquirer unless the takeover is approved by a majority of ”continuing directors” and
holders of a majority, in some cases a supermajority as high as 80%, of the combined voting power of all stock entitled to vote
to alter, amend, or repeal the above provisions.
The effect of a fair price provision is
to require approval of any merger or business combination with an “interested stockholder” by 51% of the voting stock
of the company, excluding the shares held by the interested stockholder. An interested stockholder is generally considered to be
a holder of 10% or more of the company’s outstanding stock, but the trigger can vary.
Generally, provisions are put in place for
the ostensible purpose of preventing a back-end merger where the interested stockholder would be able to pay a lower price for
the remaining shares of the company than he or she paid to gain control. The effect of a fair price provision on shareholders,
however, is to limit their ability to gain a premium for their shares through a partial tender offer or open market acquisition
which typically raise the share price, often significantly. A fair price provision discourages such transactions because of the
potential costs of seeking shareholder approval and because of the restrictions on purchase price for completing a merger or other
transaction at a later time.
Glass Lewis believes that fair price
provisions, while sometimes protecting shareholders from abuse in a takeover situation, more often act as an impediment to
takeovers, potentially limiting gains to shareholders from a variety of transactions that could significantly increase share
price. In some cases, even the independent directors of the board cannot make exceptions when such exceptions may be in the
best interests of shareholders. Given the existence of state law protections for minority shareholders such as Section 203 of
the Delaware Corporations Code, we believe it is in the best interests of shareholders to remove fair price provisions.
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REINCORPORATION
In general, Glass Lewis believes that the
board is in the best position to determine the appropriate jurisdiction of incorporation for the company. When examining a management
proposal to reincorporate to a different state or country, we review the relevant financial benefits, generally related to improved
corporate tax treatment, as well as changes in corporate governance provisions, especially those relating to shareholder rights,
resulting from the change in domicile. Where the financial benefits are de minimis and there is a decrease in shareholder rights,
we will recommend voting against the transaction.
However, costly, shareholder-initiated reincorporations
are typically not the best route to achieve the furtherance of shareholder rights. We believe shareholders are generally better
served by proposing specific shareholder resolutions addressing pertinent issues which may be implemented at a lower cost, and
perhaps even with board approval. However, when shareholders propose a shift into a jurisdiction with enhanced shareholder rights,
Glass Lewis examines the significant ways would the company benefit from shifting jurisdictions including the following:
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Is the board sufficiently independent? |
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Does the company have anti-takeover protections such as a poison pill or classified board in place? |
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Has the board been previously unresponsive to shareholders (such as failing to implement a shareholder proposal that received majority shareholder support)? |
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Do shareholders have the right to call special meetings of shareholders? |
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Are there other material governance issues at the company? |
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Has the company’s performance matched or exceeded its peers in the past one and three years? |
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How has the company ranked in Glass Lewis’ pay-for-performance analysis during the last three years? |
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Does the company have an independent chairman? |
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We note, however, that we will only support
shareholder proposals to change a company’s place of incorporation in exceptional circumstances.
EXCLUSIVE
FORUM PROVISIONS
Glass Lewis believes that charter or bylaw
provisions limiting a shareholder’s choice of legal venue are not in the best interests of shareholders. Such clauses may
effectively discourage the use of shareholder derivative claims by increasing their associated costs and making them more difficult
to pursue. As such, shareholders should be wary about approving any limitation on their legal recourse including limiting themselves
to a single jurisdiction (e.g. Delaware) without compelling evidence that it will benefit shareholders.
For this reason, we recommend that shareholders
vote against any bylaw or charter amendment seeking to adopt an exclusive forum provision unless the company: (i) provides a compelling
argument on why the provision would directly benefit shareholders; (ii) provides evidence of abuse of legal process in other, non-favored
jurisdictions; and (ii) maintains a strong record of good corporate governance practices.
Moreover, in the event a board seeks shareholder
approval of a forum selection clause pursuant to a bundled bylaw amendment rather than as a separate proposal, we will weigh the
importance of
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the other bundled provisions when determining
the vote recommendation on the proposal. We will nonetheless recommend voting against the chairman of the governance committee
for bundling disparate proposals into a single proposal (refer to our discussion of nominating and governance committee performance
in Section I of the guidelines).
AUTHORIZED
SHARES
Glass Lewis believes that adequate capital
stock is important to a company’s operation. When analyzing a request for additional shares, we typically review four common
reasons why a company might need additional capital stock:
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Stock Split – We typically consider three metrics when evaluating whether we think a stock split is likely or necessary: The historical stock pre-split price, if any; the current price relative to the company’s most common trading price over the past 52 weeks; and some absolute limits on stock price that, in our view, either always make a stock split appropriate if desired by management or would almost never be a reasonable price at which to split a stock. |
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Shareholder Defenses – Additional authorized shares could be used to bolster takeover defenses such as a poison pill. Proxy filings often discuss the usefulness of additional shares in defending against or discouraging a hostile takeover as a reason for a requested increase. Glass Lewis is typically against such defenses and will oppose actions intended to bolster such defenses. |
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Financing for Acquisitions – We look at whether the company has a history of using stock for acquisitions and attempt to determine what levels of stock have typically been required to accomplish such transactions. Likewise, we look to see whether this is discussed as a reason for additional shares in the proxy. |
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Financing for Operations – We review the company’s cash position and its ability to secure financing through borrowing or other means. We look at the company’s history of capitalization and whether the company has had to use stock in the recent past as a means of raising capital. |
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Issuing additional shares can dilute existing
holders in limited circumstances. Further, the availability of additional shares, where the board has discretion to implement a
poison pill, can often serve as a deterrent to interested suitors. Accordingly, where we find that the company has not detailed
a plan for use of the proposed shares, or where the number of shares far exceeds those needed to accomplish a detailed plan, we
typically recommend against the authorization of additional shares. Similar concerns may also lead us to recommend against a proposal
to conduct a reverse stock split if the board does not state that it will reduce the number of authorized common shares in a ratio
proportionate to the split.
While we think that having adequate shares
to allow management to make quick decisions and effectively operate the business is critical, we prefer that, for significant transactions,
management come to shareholders to justify their use of additional shares rather than providing a blank check in the form of a
large pool of unallocated shares available for any purpose.
ADVANCE
NOTICE REQUIREMENTS
We typically recommend that shareholders
vote against proposals that would require advance notice of shareholder proposals or of director nominees.
These proposals typically attempt to require
a certain amount of notice before shareholders are allowed to place proposals on the ballot. Notice requirements typically range
between three to six months prior to the annual meeting. Advance notice requirements typically make it impossible for a shareholder
who misses the deadline to present a shareholder proposal or a director nominee that might be in the best interests of the company
and its shareholders.
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We believe shareholders should be able to
review and vote on all proposals and director nominees. Shareholders can always vote against proposals that appear with little
prior notice. Shareholders, as owners of a business, are capable of identifying issues on which they have sufficient information
and ignoring issues on which they have insufficient information. Setting arbitrary notice restrictions limits the opportunity for
shareholders to raise issues that may come up after the window closes.
VOTING
STRUCTURE
CUMULATIVE
VOTING
Cumulative voting increases the ability
of minority shareholders to elect a director by allowing shareholders to cast as many shares of the stock they own multiplied by
the number of directors to be elected. As companies generally have multiple nominees up for election, cumulative voting allows
shareholders to cast all of their votes for a single nominee, or a smaller number of nominees than up for election, thereby raising
the likelihood of electing one or more of their preferred nominees to the board. It can be important when a board is controlled
by insiders or affiliates and where the company’s ownership structure includes one or more shareholders who control a majority-voting
block of company stock.
Glass Lewis believes that cumulative voting
generally acts as a safeguard for shareholders by ensuring that those who hold a significant minority of shares can elect a candidate
of their choosing to the board. This allows the creation of boards that are responsive to the interests of all shareholders rather
than just a small group of large holders.
However, academic literature indicates that
where a highly independent board is in place and the company has a shareholder-friendly governance structure, shareholders may
be better off without cumulative voting. The analysis underlying this literature indicates that shareholder returns at firms with
good governance structures are lower and that boards can become factionalized and prone to evaluating the needs of special interests
over the general interests of shareholders collectively.
We review cumulative voting proposals on
a case-by-case basis, factoring in the independence of the board and the status of the company’s governance structure. But
we typically find these proposals on ballots at companies where independence is lacking and where the appropriate checks and balances
favoring shareholders are not in place. In those instances we typically recommend in favor of cumulative voting.
Where a company has adopted a true majority
vote standard (i.e., where a director must receive a majority of votes cast to be elected, as opposed to a modified policy indicated
by a resignation policy only), Glass Lewis will recommend voting against cumulative voting proposals due to the incompatibility
of the two election methods. For companies that have not adopted a true majority voting standard but have adopted some form of
majority voting, Glass Lewis will also generally recommend voting against cumulative voting proposals if the company has not adopted
antitakeover protections and has been responsive to shareholders.
Where a company has not adopted a
majority voting standard and is facing both a shareholder proposal to adopt majority voting and a shareholder proposal to
adopt cumulative voting, Glass Lewis will support only the majority voting proposal. When a company has both majority voting
and cumulative voting in place, there is a higher likelihood of one or more directors not being elected as a result of not
receiving a majority vote. This is because shareholders exercising the right to cumulate their votes could unintentionally
cause the failed election of one or more directors for whom shareholders do not cumulate votes.
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SUPERMAJORITY
VOTE REQUIREMENTS
Glass Lewis believes that supermajority
vote requirements impede shareholder action on ballot items critical to shareholder interests. An example is in the takeover context,
where supermajority vote requirements can strongly limit the voice of shareholders in making decisions on such crucial matters
as selling the business. This in turn degrades share value and can limit the possibility of buyout premiums to shareholders. Moreover,
we believe that a supermajority vote requirement can enable a small group of shareholders to overrule the will of the majority
shareholders. We believe that a simple majority is appropriate to approve all matters presented to shareholders.
TRANSACTION
OF OTHER BUSINESS
We typically recommend that shareholders
not give their proxy to management to vote on any other business items that may properly come before an annual or special meeting.
In our opinion, granting unfettered discretion is unwise.
ANTI-GREENMAIL
PROPOSALS
Glass Lewis will support proposals to adopt
a provision preventing the payment of greenmail, which would serve to prevent companies from buying back company stock at significant
premiums from a certain shareholder. Since a large or majority shareholder could attempt to compel a board into purchasing its
shares at a large premium, the anti-greenmail provision would generally require that a majority of shareholders other than the
majority shareholder approve the buyback.
MUTUAL
FUNDS: INVESTMENT POLICIES AND ADVISORY AGREEMENTS
Glass Lewis believes that decisions about
a fund’s structure and/or a fund’s relationship with its investment advisor or sub-advisors are generally best left
to management and the members of the board, absent a showing of egregious or illegal conduct that might threaten shareholder value.
As such, we focus our analyses of such proposals on the following main areas:
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The terms of any amended advisory or sub-advisory agreement; |
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Any changes in the fee structure paid to the investment advisor; and |
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Any material changes to the fund’s investment objective or strategy. |
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We generally support amendments to a fund’s
investment advisory agreement absent a material change that is not in the best interests of shareholders. A significant increase
in the fees paid to an investment advisor would be reason for us to consider recommending voting against a proposed amendment to
an investment advisory agreement. However, in certain cases, we are more inclined to support an increase in advisory fees if such
increases result from being performance-based rather than asset-based. Furthermore, we generally support sub-advisory agreements
between a fund’s advisor and sub-advisor, primarily because the fees received by the sub-advisor are paid by the advisor,
and not by the fund.
In matters pertaining to a fund’s
investment objective or strategy, we believe shareholders are best served when a fund’s objective or strategy closely resembles
the investment discipline shareholders understood and selected when they initially bought into the fund. As such, we generally
recommend voting against amendments to a fund’s investment objective or strategy when the proposed changes would leave shareholders
with stakes in a fund that is noticeably different than when originally contemplated, and which could therefore potentially negatively
impact some investors’ diversification strategies.
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REAL
ESTATE INVESTMENT TRUSTS
The complex organizational, operational,
tax and compliance requirements of Real Estate Investment Trusts (“REITs”) provide for a unique shareholder evaluation.
In simple terms, a REIT must have a minimum of 100 shareholders (the “100 Shareholder Test”) and no more than 50% of
the value of its shares can be held by five or fewer individuals (the “5/50 Test”). At least 75% of a REITs’
assets must be in real estate, it must derive 75% of its gross income from rents or mortgage interest, and it must pay out 90%
of its taxable earnings as dividends. In addition, as a publicly traded security listed on a stock exchange, a REIT must comply
with the same general listing requirements as a publicly traded equity.
In order to comply with such requirements,
REITs typically include percentage ownership limitations in their organizational documents, usually in the range of 5% to 10% of
the REITs outstanding shares. Given the complexities of REITs as an asset class, Glass Lewis applies a highly nuanced approach
in our evaluation of REIT proposals, especially regarding changes in authorized share capital, including preferred stock.
PREFERRED
STOCK ISSUANCES AT REITS
Glass Lewis is generally against the authorization
of preferred shares that allows the board to determine the preferences, limitations and rights of the preferred shares (known as
“blank-check preferred stock”). We believe that granting such broad discretion should be of concern to common shareholders,
since blank-check preferred stock could be used as an antitakeover device or in some other fashion that adversely affects the voting
power or financial interests of common shareholders. However, given the requirement that a REIT must distribute 90% of its net
income annually, it is inhibited from retaining capital to make investments in its business. As such, we recognize that equity
financing likely plays a key role in a REIT’s growth and creation of shareholder value. Moreover, shareholder concern regarding
the use of preferred stock as an anti-takeover mechanism may be allayed by the fact that most REITs maintain ownership limitations
in their certificates of incorporation. For these reasons, along with the fact that REITs typically do not engage in private placements
of preferred stock (which result in the rights of common shareholders being adversely impacted), we may support requests to authorize
shares of blank-check preferred stock at REITs.
BUSINESS
DEVELOPMENT COMPANIES
Business Development Companies (“BDCs”)
were created by the U.S. Congress in 1980; they are regulated under the Investment Company Act of 1940 and are taxed as regulated
investment companies (“RICs”) under the Internal Revenue Code. BDCs typically operate as publicly traded private equity
firms that invest in early stage to mature private companies as well as small public companies. BDCs realize operating income when
their investments are sold off, and therefore maintain complex organizational, operational, tax and compliance requirements that
are similar to those of REITs—the most evident of which is that BDCs must distribute at least 90% of their taxable earnings
as dividends.
AUTHORIZATION
TO SELL SHARES AT A PRICE BELOW NET ASSET VALUE
Considering that BDCs are required to
distribute nearly all their earnings to shareholders, they sometimes need to offer additional shares of common stock in the
public markets to finance operations and acquisitions. However, shareholder approval is required in order for a BDC to sell
shares of common stock at a price below Net Asset Value (“NAV”). Glass Lewis evaluates these proposals using a
case-by-case approach, but will recommend supporting such requests if the following conditions are met:
|
41 |
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| |
• |
The authorization to allow share issuances below NAV has an expiration date of one year or less from the date that shareholders approve the underlying proposal (i.e. the meeting date); |
| |
|
|
| |
• |
The proposed discount below NAV is minimal (ideally no greater than 20%); |
| |
|
|
| |
• |
The board specifies that the issuance will have a minimal or modest dilutive effect (ideally no greater than 25% of the company’s then-outstanding common stock prior to the issuance); and |
| |
|
|
| |
• |
A majority of the company’s independent directors who do not have a financial interest in the issuance approve the sale. |
| |
|
|
In short, we believe BDCs should demonstrate
a responsible approach to issuing shares below NAV, by proactively addressing shareholder concerns regarding the potential dilution
of the requested share issuance, and explaining if and how the company’s past below-NAV share issuances have benefitted the
company.
|
42 |
|
| VI. | COMPENSATION,
ENVIRONMENTAL, SOCIAL AND GOVERNANCE SHAREHOLDER INITIATIVES OVERVIEW |
Glass Lewis typically prefers to leave decisions
regarding day-to-day management and policy decisions, including those related to social, environmental or political issues, to
management and the board, except when there is a clear link between the proposal and value enhancement or risk mitigation. We feel
strongly that shareholders should not attempt to micromanage the company, its businesses or its executives through the shareholder
initiative process. Rather, we believe shareholders should use their influence to push for governance structures that protect shareholders
and promote director accountability. Shareholders should then put in place a board they can trust to make informed decisions that
are in the best interests of the business and its owners, and then hold directors accountable for management and policy decisions
through board elections. However, we recognize that support of appropriately crafted shareholder initiatives may at times serve
to promote or protect shareholder value.
To this end, Glass Lewis evaluates shareholder
proposals on a case-by-case basis. We generally recommend supporting shareholder proposals calling for the elimination of, as well
as to require shareholder approval of, antitakeover devices such as poison pills and classified boards. We generally recommend
supporting proposals likely to increase and/or protect shareholder value and also those that promote the furtherance of shareholder
rights. In addition, we also generally recommend supporting proposals that promote director accountability and those that seek
to improve compensation practices, especially those promoting a closer link between compensation and performance.
For a detailed review of our policies
concerning compensation, environmental, social and governance shareholder initiatives, please refer to our comprehensive Proxy
Paper Guidelines for Shareholder Initiatives.
|
43 |
|
DISCLAIMER
This document sets forth the proxy voting
policy and guidelines of Glass, Lewis & Co., LLC. The policies included herein have been developed based on Glass Lewis’
experience with proxy voting and corporate governance issues and are not tailored to any specific person. Moreover, these guidelines
are not intended to be exhaustive and do not include all potential voting issues. The information included herein is reviewed periodically
and updated or revised as necessary. Glass Lewis is not responsible for any actions taken or not taken on the basis of this information.
This document may not be reproduced or distributed in any manner without the written permission of Glass Lewis.
Copyright © 2014 Glass, Lewis &
Co., LLC. All Rights Reserved.
|
44 |
|
— — — — — — — — — — — — — — — —
SAN FRANCISCO
Headquarters
Glass, Lewis & Co., LLC
One Sansome Street
Suite 3300
San Francisco, CA 94104
Tel: +1 415-678-4110
Tel: +1 888-800-7001
Fax: +1 415-357-0200
— — — — — — — — — — — — — — — —
NEW YORK
Glass, Lewis & Co., LLC
48 Wall Street
15th Floor
New York, N.Y. 10005
Tel: +1 212-797-3777
Fax: +1 212-980-4716
— — — — — — — — — — — — — — — —
AUSTRALIA
CGI Glass Lewis Pty Limited
Suite 8.01, Level 8,
261 George St
Sydney NSW 2000
Australia
Tel: +61 2 9299 9266
Fax: +61 2 9299 1866
— — — — — — — — — — — — — — — —
IRELAND
Glass Lewis Europe, Ltd.
15 Henry Street
Limerick, Ireland
Phone: +353 61 292 800
Fax: +353 61 292 899
— — — — — — — — — — — — — — — —
PROXY
PAPERTM
GUIDELINES
2014 PROXY SEASON
AN OVERVIEW OF THE GLASS LEWIS
APPROACH TO PROXY ADVICE
INTERNATIONAL
COPYRIGHT 2014 GLASS LEWIS, & CO., LLC
CONTENTS
| I. ELECTION OF DIRECTORS |
|
1 |
| |
|
|
|
| |
Board
Composition |
|
1 |
| |
Slate
Elections |
|
2 |
| |
Board
Committee Composition |
|
2 |
| |
Review
of Risk Management Controls |
|
2 |
| |
Classified
Boards |
|
2 |
| |
|
|
|
| II. FINANCIAL REPORTING |
|
3 |
| |
|
|
|
| |
Accounts
and Reports |
|
3 |
| |
Income
Allocation (Distribution of Dividend) |
|
3 |
| |
Appointment
of Auditors and Authority to Set Fees |
|
3 |
| |
|
|
|
| III. COMPENSATION |
|
4 |
| |
|
|
|
| |
Compensation
Report/Compensation Policy |
|
4 |
| |
Long
Term Incentive Plans |
|
4 |
| |
Performance-Based
Equity Compensation |
|
4 |
| |
Director
Compensation |
|
5 |
| |
Retirement
Benefits for Directors |
|
5 |
| |
Limits
on Executive Compensation |
|
5 |
| |
|
|
|
| IV. GOVERNANCE STRUCTURE |
|
6 |
| |
|
|
|
| |
Amendments
to the Articles of Association |
|
6 |
| |
Anti-Takeover
Measures |
|
6 |
| |
Poison
Pills (Shareholder Rights Plans) |
|
6 |
| |
Supermajority
Vote Requirements |
|
6 |
| |
Increase
in Authorized Shares |
|
6 |
| |
Issuance
of Shares |
|
7 |
| |
Repurchase
of Shares |
|
7 |
| |
|
|
|
| V. ENVIRONMENTAL AND SOCIAL RISK |
|
8 |
|
I |
|
Boards are put in place to represent shareholders
and protect their interests. Glass Lewis seeks boards with a proven record of protecting shareholders and delivering value over
the medium- and long-term. In our view, boards working to protect and enhance the best interests of shareholders typically include
some independent directors (the percentage will vary by local market practice and regulations), boast a record of positive performance,
have directors with diverse backgrounds, and appoint directors with a breadth and depth of experience.
BOARD COMPOSITION
When companies disclose sufficient relevant
information, we look at each individual on the board and examine his or her relationships with the company, the company’s
executives and with other board members. The purpose of this inquiry is to determine whether pre-existing personal, familial or
financial relationships are likely to impact the decisions of that board member. Where the company does not disclose the names
and backgrounds of director nominees with sufficient time in advance of the shareholder meeting to evaluate their independence
and performance, we will consider recommending abstaining on the directors’ election.
We vote in favor of governance structures
that will drive positive performance and enhance shareholder value. The most crucial test of a board’s commitment to the
company and to its shareholders is the performance of the board and its members. The performance of directors in their capacity
as board members and as executives of the company, when applicable, and in their roles at other companies where they serve is critical
to this evaluation.
We believe a director is independent if
he or she has no material financial, familial or other current relationships with the company, its executives or other board members
except for service on the board and standard fees paid for that service. Relationships that have existed within the three-five
years prior to the inquiry are usually considered to be “current” for purposes of this test.
In our view, a director is affiliated if
he or she has a material financial, familial or other relationship with the company or its executives, but is not an employee of
the company. This includes directors whose employers have a material financial relationship with the Company. This also includes
a director who owns or controls 10-20% or more of the company’s voting stock.
We define an inside director as one who
simultaneously serves as a director and as an employee of the company. This category may include a chairman of the board who acts
as an employee of the company or is paid as an employee of the company.
Although we typically vote for the election
of directors, we will recommend voting against directors for the following reasons:
| |
• |
A director who attends less than 75% of the board and applicable committee meetings. |
| |
|
|
| |
• |
A director who is also the CEO of a company where a serious restatement has occurred after the CEO certified the pre-restatement financial statements. |
We also feel that the following conflicts of interest may hinder
a director’s performance and will therefore recommend voting against a:
| |
• |
CFO who presently sits on the board. |
| |
|
|
| |
• |
Director who presently sits on an excessive number of boards. |
|
1 |
|
| |
• |
Director, or a director whose immediate family member, provides material professional services to the company at any time during the past five years. |
| |
|
|
| |
• |
Director, or a director whose immediate family member, engages in airplane, real estate or other similar deals, including perquisite type grants from the company. |
| |
|
|
| |
• |
Director with an interlocking directorship. |
SLATE ELECTIONS
In some countries, companies elect their
board members as a slate, whereby shareholders are unable to vote on the election of each individual director, but rather are limited
to voting for or against the board as a whole. If significant issues exist concerning one or more of the nominees or in markets
where directors are generally elected individually, we will recommend voting against the entire slate of directors.
BOARD COMMITTEE COMPOSITION
We believe that independent directors should
serve on a company’s audit, compensation, nominating and governance committees. We will support boards with such a structure
and encourage change where this is not the case.
REVIEW OF RISK MANAGEMENT CONTROLS
We believe companies, particularly financial
firms, should have a dedicated risk committee, or a committee of the board charged with risk oversight, as well as a chief risk
officer who reports directly to that committee, not to the CEO or another executive. In cases where a company has disclosed a sizable
loss or writedown, and where a reasonable analysis indicates that the company’s board-level risk committee should be held
accountable for poor oversight, we would recommend that shareholders vote against such committee members on that basis. In addition,
in cases where a company maintains a significant level of financial risk exposure but fails to disclose any explicit form of board-level
risk oversight (committee or otherwise), we will consider recommending to vote against the chairman of the board on that basis.
CLASSIFIED BOARDS
Glass Lewis favors the repeal of staggered
boards in favor of the annual election of directors. We believe that staggered boards are less accountable to shareholders than
annually elected boards. Furthermore, we feel that the annual election of directors encourages board members to focus on protecting
the interests of shareholders.
|
2 |
|
ACCOUNTS AND REPORTS
Many countries require companies to submit
the annual financial statements, director reports and independent auditors’ reports to shareholders at a general meeting.
Shareholder approval of such a proposal does not discharge the board or management. We will usually recommend voting in favor of
these proposals except when there are concerns about the integrity of the statements/reports. However, should the audited financial
statements, auditor’s report and/or annual report not be published at the writing of our report, we will recommend that shareholders
abstain from voting on this proposal.
INCOME ALLOCATION (DISTRIBUTION OF DIVIDEND)
In many countries, companies must submit
the allocation of income for shareholder approval. We will generally recommend voting for such a proposal. However, we will give
particular scrutiny to cases where the company’s dividend payout ratio is exceptionally low or excessively high relative
to its peers and the company has not provided a satisfactory explanation.
APPOINTMENT OF AUDITORS AND AUTHORITY TO SET
FEES
We believe that role of the auditor is crucial
in protecting shareholder value. Like directors, auditors should be free from conflicts of interest and should assiduously avoid
situations that require them to make choices between their own interests and the interests of the shareholders.
We generally support management’s
recommendation regarding the selection of an auditor and support granting the board the authority to fix auditor fees except in
cases where we believe the independence of an incumbent auditor or the integrity of the audit has been compromised.
However, we recommend voting against ratification
of the auditor and/or authorizing the board to set auditor fees for the following reasons:
| |
• |
When audit fees added to audit-related fees total less than one-half of total fees. |
| |
|
|
| |
• |
When there have been any recent restatements or late filings by the company where the auditor bears some responsibility for the restatement or late filing (e.g., a restatement due to a reporting error). |
| |
|
|
| |
• |
When the company has aggressive accounting policies. |
| |
|
|
| |
• |
When the company has poor disclosure or lack of transparency in financial statements. |
| |
|
|
| |
• |
When there are other relationships or issues of concern with the auditor that might suggest a conflict between the interest of the auditor and the interests of shareholders. |
| |
|
|
| |
• |
When the company is changing auditors as a result of a disagreement between the company and the auditor on a matter of accounting principles or practices, financial statement disclosure or auditing scope or procedures. |
|
3 |
|
COMPENSATION REPORT/COMPENSATION POLICY
We closely review companies’ remuneration
practices and disclosure as outlined in company filings to evaluate management-submitted advisory compensation report and policy
vote proposals. In evaluating these proposals, which can be binding or non-binding depending on the country, we examine how well
the company has disclosed information pertinent to its compensation programs, the extent to which overall compensation is tied
to performance, the performance metrics selected by the company and the levels of remuneration in comparison to company performance
and that of its peers.
We will usually recommend voting against approval of the compensation
report or policy when the following occur:
| |
• |
Gross disconnect between pay and performance; |
| |
|
|
| |
• |
Performance goals and metrics are inappropriate or insufficiently challenging; |
| |
|
|
| |
• |
Lack of disclosure regarding performance metrics and goals as well as the extent to which the performance metrics, targets and goals are implemented to enhance company performance and encourage prudent risk-taking; |
| |
|
|
| |
• |
Excessive discretion afforded to or exercised by management or the compensation committee to deviate from defined performance metrics and goals in making awards; |
| |
|
|
| |
• |
Ex gratia or other non-contractual payments have been made and the reasons for making the payments have not been fully explained or the explanation is unconvincing; |
| |
|
|
| |
• |
Guaranteed bonuses are established; |
| |
|
|
| |
• |
There is no clawback policy; or |
| |
|
|
| |
• |
Egregious or excessive bonuses, equity awards or severance payments. |
LONG TERM INCENTIVE PLANS
Glass Lewis recognizes the value of equity-based
incentive programs. When used appropriately, they can provide a vehicle for linking an employee’s pay to a company’s
performance, thereby aligning their interests with those of shareholders. Tying a portion of an employee’s compensation to
the performance of the Company provides an incentive to maximize share value. In addition, equity-based compensation is an effective
way to attract, retain and motivate key employees.
In order to allow for meaningful shareholder
review, we believe that incentive programs should generally include: (i) specific and appropriate performance goals; (ii) a maximum
award pool; and (iii) a maximum award amount per employee. In addition, the payments made should be reasonable relative to the
performance of the business and total compensation to those covered by the plan should be in line with compensation paid by the
Company’s peers.
PERFORMANCE-BASED EQUITY COMPENSATION
Glass Lewis believes in performance-based
equity compensation plans for senior executives. We feel that executives should be compensated with equity when their performance
and that of the company warrants such rewards. While we do not believe that equity-based compensation plans for all employees need
to be based on overall company performance, we do support such limitations for grants to senior executives (although even some
equity-based compensation of senior executives
|
4 |
|
without performance criteria is acceptable,
such as in the case of moderate incentive grants made in an initial offer of employment).
Boards often argue that such a proposal
would hinder them in attracting talent. We believe that boards can develop a consistent, reliable approach, as boards of many companies
have, that would still attract executives who believe in their ability to guide the company to achieve its targets. We generally
recommend that shareholders vote in favor of performance-based option requirements.
There should be no retesting of performance
conditions for all share- and option- based incentive schemes. We will generally recommend that shareholders vote against performance-based
equity compensation plans that allow for re-testing.
DIRECTOR COMPENSATION
Glass Lewis believes that non-employee directors
should receive appropriate types and levels of compensation for the time and effort they spend serving on the board and its committees.
Director fees should be reasonable in order to retain and attract qualified individuals. In particular, we support compensation
plans that include non performance-based equity awards, which help to align the interests of outside directors with those of shareholders.
Glass Lewis compares the costs of these
plans to the plans of peer companies with similar market capitalizations in the same country to help inform its judgment on this
issue.
RETIREMENT BENEFITS FOR DIRECTORS
We will typically recommend voting against
proposals to grant retirement benefits to non-executive directors. Such extended payments can impair the objectivity and independence
of these board members. Directors should receive adequate compensation for their board service through initial and annual fees.
LIMITS ON EXECUTIVE COMPENSATION
As a general rule, Glass Lewis believes
that shareholders should not be involved in setting executive compensation. Such matters should be left to the board’s compensation
committee. We view the election of directors, and specifically those who sit on the compensation committee, as the appropriate
mechanism for shareholders to express their disapproval or support of board policy on this issue. Further, we believe that companies
whose pay-for-performance is in line with their peers should be granted the flexibility to compensate their executives in a manner
that drives growth and profit.
However, Glass Lewis favors performance-based
compensation as an effective means of motivating executives to act in the best interests of shareholders. Performance-based compensation
may be limited if a chief executive’s pay is capped at a low level rather than flexibly tied to the performance of the company.
|
5 |
|
AMENDMENTS TO THE ARTICLES OF ASSOCIATION
We will evaluate proposed amendments to
a company’s articles of association on a case-by-case basis. We are opposed to the practice of bundling several amendments
under a single proposal because it prevents shareholders from evaluating each amendment on its own merits. In such cases, we will
analyze each change individually and will recommend voting for the proposal only when we believe that the amendments on balance
are in the best interests of shareholders.
ANTI-TAKEOVER MEASURES
POISON PILLS (SHAREHOLDER RIGHTS PLANS)
Glass Lewis believes that poison pill plans
generally are not in the best interests of shareholders. Specifically, they can reduce management accountability by substantially
limiting opportunities for corporate takeovers. Rights plans can thus prevent shareholders from receiving a buy-out premium for
their stock.
We believe that boards should be given wide
latitude in directing the activities of the company and charting the company’s course. However, on an issue such as this
where the link between the financial interests of shareholders and their right to consider and accept buyout offers is so substantial,
we believe that shareholders should be allowed to vote on whether or not they support such a plan’s implementation.
In certain limited circumstances, we will
support a limited poison pill to accomplish a particular objective, such as the closing of an important merger, or a pill that
contains what we believe to be a reasonable ‘qualifying offer’ clause.
SUPERMAJORITY VOTE REQUIREMENTS
Glass Lewis favors a simple majority voting
structure. Supermajority vote requirements act as impediments to shareholder action on ballot items that are critical to our interests.
One key example is in the takeover context where supermajority vote requirements can strongly limit shareholders’ input in
making decisions on such crucial matters as selling the business.
INCREASE IN AUTHORIZED SHARES
Glass Lewis believes that having adequate
capital stock available for issuance is important to the operation of a company. We will generally support proposals when a company
could reasonably use the requested shares for financing, stock splits and stock dividends. While we think that having adequate
shares to allow management to make quick decisions and effectively operate the business is critical, we prefer that, for significant
transactions, management come to shareholders to justify their use of additional shares rather than providing a blank check in
the form of large pools of unallocated shares available for any purpose.
In general, we will support proposals to
increase authorized shares up to 100% of the number of shares currently authorized unless, after the increase the company would
be left with less than 30% of its authorized shares outstanding.
|
6 |
|
ISSUANCE OF SHARES
Issuing additional shares can dilute existing
holders in some circumstances. Further, the availability of additional shares, where the board has discretion to implement a poison
pill, can often serve as a deterrent to interested suitors. Accordingly, where we find that the company has not disclosed a detailed
plan for use of the proposed shares, or where the number of shares requested are excessive, we typically recommend against the
issuance. In the case of a private placement, we will also consider whether the company is offering a discount to its share price.
In general, we will support proposals to
issue shares (with pre-emption rights) when the requested increase is the lesser of (i) the unissued ordinary share capital; or
(ii) a sum equal to one-third of the issued ordinary share capital. This authority should not exceed five years. In some countries,
if the proposal contains a figure greater than one-third, the company should explain the nature of the additional amounts.
We will also generally support proposals
to suspend pre-emption rights for a maximum of 5-20% of the issued ordinary share capital of the company, depending on the country
in which the company is located. This authority should not exceed five years, or less for some countries.
REPURCHASE OF SHARES
We will recommend voting in favor of a proposal
to repurchase shares when the plan includes the following provisions: (i) a maximum number of shares which may be purchased (typically
not more than 15% of the issued share capital); and (ii) a maximum price which may be paid for each share (as a percentage of the
market price).
|
7 |
|
| V. | ENVIRONMENTAL AND SOCIAL RISK |
We believe companies should actively evaluate
risks to long-term shareholder value stemming from exposure to environmental and social risks and should incorporate this information
into their overall business risk profile. In addition, we believe companies should consider their exposure to changes in environmental
or social regulation with respect to their operations as well as related legal and reputational risks. Companies should disclose
to shareholders both the nature and magnitude of such risks as well as steps they have taken or will take to mitigate those risks.
When we identify situations where shareholder
value is at risk, we may recommend voting in favor of a reasonable and well-targeted proposal if we believe supporting the proposal
will promote disclosure of and/or mitigate significant risk exposure. In limited cases where a company has failed to adequately
mitigate risks stemming from environmental or social practices, we will recommend shareholders vote against: (i) ratification of
board and/or management acts; (ii) approving a company’s accounts and reports and/or; (iii) directors (in egregious cases).
|
8 |
|
DISCLAIMER
This document sets forth the proxy voting
policy and guidelines of Glass, Lewis & Co., LLC. The policies included herein have been developed based on Glass Lewis’
experience with proxy voting and corporate governance issues and are not tailored to any specific person. Moreover, these guidelines
are not intended to be exhaustive and do not include all potential voting issues. The information included herein is reviewed periodically
and updated or revised as necessary. Glass Lewis is not responsible for any actions taken or not taken on the basis of this information.
This document may not be reproduced or distributed in any manner without the written permission of Glass Lewis.
Copyright © 2014 Glass, Lewis & Co., LLC.
All Rights Reserved.
|
9 |
|
— — — — — — — — — — — — — — — —
SAN FRANCISCO
Headquarters
Glass, Lewis & Co., LLC
One Sansome Street
Suite 3300
San Francisco, CA 94104
Tel: +1 415-678-4110
Tel: +1 888-800-7001
Fax: +1 415-357-0200
— — — — — — — — — — — — — — — —
NEW YORK
Glass, Lewis & Co., LLC
48 Wall Street
15th Floor
New York, N.Y. 10005
Tel: +1 212-797-3777
Fax: +1 212-980-4716
— — — — — — — — — — — — — — — —
AUSTRALIA
CGI Glass Lewis Pty Limited
Suite 8.01, Level 8,
261 George St
Sydney NSW 2000
Australia
Tel: +61 2 9299 9266
Fax: +61 2 9299 1866
— — — — — — — — — — — — — — — —
IRELAND
Glass Lewis Europe, Ltd.
15 Henry Street
Limerick, Ireland
Phone: +353 61 292 800
Fax: +353 61 292 899
— — — — — — — — — — — — — — — —
PART C: OTHER INFORMATION
| (a) |
Amended and Restated Declaration of Trust.46 |
| (b) |
Amended and Restated Bylaws of the Trust.46 |
| (c) |
Not applicable. |
| (d)(1) |
Form of Investment Management Agreement between the Trust and Van Eck Associates Corporation (with respect to Market Vectors—Gold Miners ETF).1 |
| (d)(2) |
Form of Investment Management Agreement between the Trust and Van Eck Associates Corporation (with respect to all portfolios except for Market Vectors—Gold Miners ETF).3 |
| (d)(3) |
Form of Investment Management Agreement between the Trust and Van Eck Associates Corporation (with respect to certain municipal portfolios).25 |
| (d)(4) |
Form of Sub-Investment Advisory Agreement between China Asset Management (Hong Kong) Limited and Van Eck Associates Corporation (with respect to Market Vectors ChinaAMC A-Share ETF f/k/a Market Vectors China ETF).47 |
| (e)(1) |
Form of Distribution Agreement between the Trust and Van Eck Securities Corporation.2 |
| (e)(2) |
Form of Participant Agreement.1 |
| (f) |
Not applicable. |
| (g) |
Form of Custodian Agreement between the Trust and The Bank of New York.1 |
| (h)(1) |
Form of Fund Accounting Agreement between the Trust and The Bank of New York.1 |
| (h)(2) |
Form of Transfer Agency Services Agreement between the Trust and The Bank of New York.1 |
| (h)(3) |
Form of Sub-License Agreement between the Trust and the Van Eck Associates Corp.1 |
| (i)(1) |
Opinion and consent of Clifford Chance US LLP (with respect to Market Vectors—Environmental Services ETF, Market Vectors—Gold Miners ETF and Market Vectors—Steel ETF).3 |
| (i)(2) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors—Global Alternative Energy ETF and Market Vectors—Russia ETF).4 |
| (i)(3) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors—Global Agribusiness ETF and Market Vectors—Global Nuclear Energy ETF).5 |
| (i)(4) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors—Lehman Brothers Intermediate Municipal ETF, Market Vectors—Lehman Brothers Long Municipal ETF, Market Vectors—Lehman Brothers 1-5 Year Municipal ETF, Market Vectors—Lehman Brothers Non-Investment Grade Municipal ETF, Market Vectors—Lehman Brothers California Municipal ETF and Market Vectors—Lehman Brothers New York Municipal ETF).6 |
| (i)(5) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors—Coal ETF and Market Vectors—Gaming ETF).7 |
| (i)(6) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors—Lehman Brothers AMT-Free Massachusetts Municipal Index ETF, Market Vectors—Lehman Brothers AMT-Free New Jersey Municipal Index ETF, Market Vectors—Lehman Brothers AMT-Free Ohio Municipal Index ETF and Market Vectors—Lehman Brothers AMT-Free Pennsylvania Municipal Index ETF).8 |
| (i)(7) |
Opinion of Clifford Chance US LLP (with respect to Market Vectors—Hard Assets ETF and Market Vectors—Solar Energy ETF).9 |
| (i)(8) |
Opinion and consent of Clifford Chance US LLP with respect to Market Vectors—Africa Index ETF, Market Vectors—Emerging Eurasia Index ETF, Market Vectors—Global Frontier Index ETF and Market Vectors—Gulf States Index ETF).10 |
| (i)(9) |
Consent of Clifford Chance US LLP (with respect to Market Vectors—Lehman Brothers High-Yield Municipal Index ETF).11 |
| (i)(10) |
Opinion and consent of Clifford Chance US LLP (with respect to Market Vectors Indonesia Index ETF).12 |
| (i)(11) |
Opinion and consent of Clifford Chance US LLP (with respect to Market Vectors Vietnam ETF).13 |
| (i)(12) |
Opinion and consent of Clifford Chance US LLP (with respect to Market Vectors Pre-Refunded Municipal Index ETF).14 |
| (i)(13) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Egypt Index ETF).21 |
| (i)(14) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Kuwait Index ETF).21 |
| (i)(15) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Latin America Small-Cap Index ETF).22 |
| (i)(16) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors ChinaAMC A-Share ETF f/k/a Market Vectors China ETF).18 |
| (i)(17) |
Opinion and Consent of Clifford Chance US LLP (with respect to Market Vectors Brazil Small-Cap ETF).17 |
| (i)(18) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Junior Gold Miners ETF).19 |
| (i)(19) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Poland ETF).20 |
| (i)(20) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors India Small-Cap Index ETF).23 |
| (i)(21) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Emerging Markets Local Currency Bond ETF).24 |
| (i)(22) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors GDP – International Equity ETF and Market Vectors GDP – Emerging Markets Equity ETF).9 |
| (i)(23) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Investment Grade Floating Rate Bond ETF).24 |
| (i)(24) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Rare Earth/Strategic Metals ETF).26 |
| (i)(25) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Emerging Markets Aggregate Bond ETF f/k/a Market Vectors LatAm Aggregate Bond ETF).29 |
| (i)(26) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors High Yield Floating Rate ETF).47 |
| (i)(27) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Fixed Income II ETF).47 |
| (i)(28) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Colombia ETF).27 |
| (i)(29) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors CM Commodity Index ETF).47 |
| (i)(30) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Russia Small-Cap ETF).28 |
| (i)(31) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Germany Small-Cap ETF).28 |
| (i)(32) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors CEF Municipal Income ETF).30 |
| (i)(33) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors GDP – Emerging Markets Small-Cap Equity ETF).47 |
| (i)(34) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors European Currency High Yield Bond ETF).34 |
| (i)(35) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors European Sovereign Bond ETF).47 |
| (i)(36) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Asia ex-Japan Aggregate Bond ETF).47 |
| (i)(37) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Mortgage REIT Income ETF).31 |
| (i)(38) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors International High Yield Bond ETF).38 |
| (i)(39) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors BDC Income ETF).45 |
| (i)(40) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Mongolia ETF).47 |
| (i)(41) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Nigeria ETF).47 |
| (i)(42) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Greater China Corporate Bond ETF).47 |
| (i)(43) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Greater China High Yield Bond ETF).47 |
| (i)(44) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Renminbi Bond ETF).33 |
| (i)(45) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Biotech ETF, Market Vectors Bank and Brokerage ETF, Market Vectors Oil Services ETF, Market Vectors Pharmaceutical ETF, Market Vectors Retail ETF and Market Vectors Semiconductor ETF).35 |
| (i)(46) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Indonesia Small-Cap ETF).37 |
| (i)(47) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Yuan Bond ETF).47 |
| (i)(48) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Unconventional Oil & Gas ETF).36 |
| (i)(49) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Wide Moat ETF).40 |
| (i)(50) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Emerging Markets High Yield Bond ETF).39 |
| (i)(51) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Global High Yield Bond ETF).47 |
| (i)(52) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Fallen Angel High Yield Bond ETF).39 |
| (i)(53) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Global Chemicals ETF).47 |
| (i)(54) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Preferred Securities ex Financials ETF).42 |
| (i)(55) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Saudi Arabia ETF).47 |
| (i)(56) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Saudi Arabia Small-Cap ETF).47 |
| (i)(57) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Short High-Yield Municipal Index ETF).46 |
| (i)(58) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Emerging Markets Aggregate Bond ETF).29 |
| (i)(59) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Non-Agency RMBS ETF).47 |
| (i)(60) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Defaulted & Distressed Bond ETF).47 |
| (i)(61) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Treasury-Hedged High Yield Bond ETF).44 |
| (i)(62) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Israel ETF).47 |
| (i)(63) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Puerto Rico Municipal Index ETF).47 |
| (i)(64) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors Emerging Markets Short-Term Corporate Bond ETF).47 |
| (i)(65) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors All China ETF).47 |
| (i)(66) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors China A Small-Cap ETF). 47 |
| (i)(67) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors China A Consumer Demand ETF). 47 |
| (i)(68) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors China A Quality ETF). 47 |
| (i)(69) |
Opinion and Consent of Dechert LLP (with respect to Market Vectors China A Quality Dividend ETF). 47 |
| (i)(70) |
Opinion and Consent of Dechert LLP (with respect
to Market Vectors |
| |
MSCI International Quality ETF and Market Vectors MSCI International Quality Dividend ETF).48 |
| (j) |
Not applicable. |
| (k) |
Not applicable. |
| (l) |
Not applicable. |
| (m) |
Not applicable. |
| (n) |
Not applicable. |
| (o) |
Not applicable. |
| (p)(1) |
Code of Ethics of Van Eck Associates Corporation and Van Eck Securities Corporation.43 |
| 1 |
Incorporated by reference to the Registrant’s Registration Statement filed on April 28, 2006. |
| 2 |
Incorporated by reference to the Registrant’s Registration Statement filed on May 11, 2006. |
| 3 |
Incorporated by reference to the Registrant’s Registration Statement filed on October 6, 2006. |
| 4 |
Incorporated by reference to the Registrant’s Registration Statement filed on April 9, 2007. |
| 5 |
Incorporated by reference to the Registrant’s Registration Statement filed on July 30, 2007. |
| 6 |
Incorporated by reference to the Registrant’s Registration Statement filed on November 2, 2007. |
| 7 |
Incorporated by reference to the Registrant’s Registration Statement filed on December 31, 2007. |
| 8 |
Incorporated by reference to the Registrant’s Registration Statement filed on February 15, 2008. |
| 9 |
Incorporated by reference to the Registrant’s Registration Statement filed on April 21, 2008. |
| 10 |
Incorporated by reference to the Registrant’s Registration Statement filed on July 8, 2008. |
| 11 |
Incorporated by reference to the Registrant’s Registration Statement filed on August 8, 2008. |
| 12 |
Incorporated by reference to the Registrant’s Registration Statement filed on November 25, 2008. |
| 13 |
Incorporated by reference to the Registrant’s Registration Statement filed on December 23, 2008. |
| 14 |
Incorporated by reference to the Registrant’s Registration Statement filed on January 28, 2009. |
| 15 |
Incorporated by reference to the Registrant’s Registration Statement filed on February 6, 2009. |
| 16 |
Incorporated by reference to the Registrant’s Registration Statement filed on April 21, 2009. |
| 17 |
Incorporated by reference to the Registrant’s Registration Statement filed on May 8, 2009. |
| 18 |
Incorporated by reference to the Registrant’s Registration Statement filed on September 4, 2009. |
| 19 |
Incorporated by reference to the Registrant’s Registration Statement filed on November 9, 2009. |
| 20 |
Incorporated by reference to the Registrant’s Registration Statement filed on November 20, 2009. |
| 21 |
Incorporated by reference to the Registrant’s Registration Statement filed on February 16, 2010. |
| 22 |
Incorporated by reference to the Registrant’s Registration Statement filed on March 29, 2010. |
| 23 |
Incorporated by reference to the Registrant’s Registration Statement filed on April 5, 2010. |
| 24 |
Incorporated by reference to the Registrant’s Registration Statement filed on June 28, 2010. |
| 25 |
Incorporated by reference to the Registrant’s Registration Statement filed on August 27, 2010. |
| 26 |
Incorporated by reference to the Registrant’s Registration Statement filed on October 20, 2010. |
| 27 |
Incorporated by reference to the Registrant’s Registration Statement filed on March 4, 2011. |
| 28 |
Incorporated by reference to the Registrant’s Registration Statement filed on April 1, 2011. |
| 29 |
Incorporated by reference to the Registrant’s Registration Statement filed on May 10, 2011. |
| 30 |
Incorporated by reference to the Registrant’s Registration Statement filed on July 7, 2011. |
| 31 |
Incorporated by reference to the Registrant’s Registration Statement filed on August 15, 2011. |
| 32 |
Incorporated by reference to the Registrant’s Registration Statement filed on August 24, 2011. |
| 33 |
Incorporated by reference to the Registrant’s Registration Statement filed on October 11, 2011. |
| 34 |
Incorporated by reference to the Registrant’s Registration Statement filed on October 26, 2011. |
| 35 |
Incorporated by reference to the Registrant’s Registration Statement filed on October 31, 2011. |
| 36 |
Incorporated by reference to the Registrant’s Registration Statement filed on February 8, 2012. |
| 37 |
Incorporated by reference to the Registrant’s Registration Statement filed on March 14, 2012. |
| 38 |
Incorporated by reference to the Registrant’s Registration Statement filed on March 29, 2012. |
| 39 |
Incorporated by reference to the Registrant’s Registration Statement filed on April 3, 2012. |
| 40 |
Incorporated by reference to the Registrant’s Registration Statement filed on April 13, 2012. |
| 41 |
Incorporated by reference to the Registrant’s Registration Statement filed on May 17, 2012. |
| 42 |
Incorporated by reference to the Registrant’s Registration Statement filed on July 5, 2012. |
| 43 |
Incorporated by reference to the Registrant’s Registration Statement filed on January 24, 2013. |
| 44 |
Incorporated by reference to the Registrant’s Registration Statement filed on February 1, 2013. |
| 45 |
Incorporated by reference to the Registrant’s Registration Statement filed on February 7, 2013. |
| 46 |
Incorporated by reference to the Registrant’s Registration Statement filed on December 20, 2013. |
| 47 |
To be filed by amendment. |
| 48 |
Filed herewith. |
| Item 29. |
Persons Controlled by or Under Common Control with Registrant |
None.
Pursuant to Section
10.2 of the Amended and Restated Declaration of Trust, all persons that are or have been a Trustee or officer of the Trust (collectively,
the “Covered Persons”) shall be indemnified by the Trust to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by him in connection with any claim, action, suit, or proceeding in which he or
she becomes involved as a party or otherwise by virtue of his being or having been a Trustee or officer and against amounts paid
or incurred by him in the settlement thereof. No indemnification will be provided to a Covered Person who shall have been adjudicated
by a court or body before which the proceeding was brought 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 not to have acted in good
faith in the reasonable belief that his action was in the best interest of the Trust; or 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.
Article XII of the
Trust’s Bylaws, to the maximum extent permitted by Delaware law in effect from time to time, the Trust shall indemnify and,
without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former trustee or officer of
the Trust and who is made a party to the proceeding by reason of his or her service in that capacity or (b) any individual who,
while a director of the Trust and at the request of the Trust, serves or has served as a trustee, officer, partner or trustee of
another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise
and who is made a party to the proceeding by reason of his or her service in that capacity. The Trust may, with the approval of
its Board of Trustees, provide such indemnification and advance for expenses to a person who served a predecessor of the Trust
in any of the capacities described in (a) or (b) above and to any employee or agent of the Trust or a predecessor of the Trust;
provided that no provision of Article XII shall be effective to protect or purport to protect any trustee or officer of
the Trust against liability to the Trust or its stockholders to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
The Trust has agreed
to indemnify and hold harmless the Trustees against any and all expenses actually and reasonably incurred by the Trustee in any
proceeding arising out of or in connection with the Trustee’s service to the Trust, to the fullest extent permitted by the
Amended and Restated Agreement and Declaration of Trust and Bylaws of the Fund and Title 12, Part V, Chapter 38 of the Delaware
Code, and applicable law.
| Item 31. |
Business and Other Connections of Investment Manager |
See “Management”
in the Statement of Additional Information. Information as to the directors and officers of the Adviser is included in its Form
ADV filed with the SEC and is incorporated herein by reference thereto.
| Item 32. |
Principal Underwriters |
| (a) | Van Eck Securities Corporation is the Trust’s principal underwriter. Van Eck Securities Corporation
also acts as a principal underwriter, depositor, or investment manager for the following other investment companies: each series
of Van Eck Funds and Van Eck VIP Trust. |
| (b) | The following is a list of the officers, directors and partners of Van Eck Securities Corporation: |
Name and Principal
Business Address |
|
Positions and Offices
with Underwriter |
|
Positions and Offices with
Trust |
Jan F. van Eck
335 Madison Avenue
New York, NY 10017 |
|
Director and President |
|
President, Chief Executive
Officer and Trustee |
| |
|
|
|
|
Joseph J. McBrien
335 Madison Avenue
New York, NY 10017 |
|
Director, Senior Vice President,
General Counsel and Secretary |
|
Senior Vice President, Secretary
and Chief Legal Officer |
| |
|
|
|
|
Bruce J. Smith
335 Madison Avenue
New York, NY 10017 |
|
Director, Senior Vice President,
Chief Financial Officer,
Treasurer and Controller |
|
Senior Vice President |
| |
|
|
|
|
Susan Marino
335 Madison Avenue
New York, NY 10017 |
|
Senior Vice President |
|
N/A |
| |
|
|
|
|
Harvey Hirsch
335 Madison Avenue
New York, NY 10017 |
|
Senior Vice President |
|
N/A |
| |
|
|
|
|
John J. Crimmins
335 Madison Avenue
New York, NY 10017 |
|
Vice President |
|
Vice President, Treasurer, Chief
Financial Officer and Principal
Accounting Officer |
| |
|
|
|
|
Susan C. Lashley
335 Madison Avenue
New York, NY 10017 |
|
Vice President |
|
Vice President |
| |
|
|
|
|
Jonathan R. Simon
335 Madison Avenue
New York, NY 10017 |
|
Vice President, Associate
General Counsel and Assistant
Secretary |
|
Vice President and Assistant
Secretary |
| |
|
|
|
|
John Wolfe
335 Madison Avenue
New York, NY 10017 |
|
Vice President and Chief
Administrative Officer |
|
N/A |
| |
|
|
|
|
Laura I. Martinez
335 Madison Avenue |
|
Assistant Vice President and
Assistant Secretary |
|
Assistant Vice President and
Assistant Secretary |
Name and Principal
Business Address |
|
Positions and Offices
with Underwriter |
|
Positions and Offices with
Trust |
| New York, NY 10017 |
|
|
|
|
| |
|
|
|
|
Wu-Kwan Kit
335 Madison Avenue
New York, NY 10017 |
|
Assistant Vice President and
Assistant Secretary |
|
Assistant Vice President and
Assistant Secretary |
| |
|
|
|
|
Glenn Smith
335 Madison Avenue
New York, NY 10017 |
|
Vice President |
|
N/A |
| |
|
|
|
|
Allison Lovett
335 Madison Avenue
New York, NY 10017 |
|
Vice President |
|
N/A |
| |
|
|
|
|
Patrick Lulley
335 Madison Avenue
New York, NY 10017 |
|
Vice President |
|
N/A |
| |
|
|
|
|
Bryan S. Paisley
335 Madison Avenue
New York, NY 10017 |
|
Assistant Vice President |
|
N/A |
| Item 33. |
Location of Accounts and Records |
All accounts, books
and other documents required to be maintained by Section 31(a) of the 1940 Act and the Rules thereunder will be maintained at the
offices of The Bank of New York Mellon, 101 Barclay Street, New York, New York 10286.
| Item 34. |
Management Services |
Not applicable.
Not applicable.
SIGNATURES
Pursuant to the requirements
of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all the requirements
for effectiveness under Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New York and State of New York on the 17th day of January
2014.
| |
MARKET VECTORS ETF TRUST |
| |
|
|
| |
|
By: |
/s/ Jan F. van Eck |
| |
|
|
Name: Jan F. van Eck |
| |
|
|
Title: President and Chief Executive Officer |
Pursuant to the requirements
of the Securities Act of 1933, this Registration Statement has been signed below by the following person in the capacities and
on the date indicated.
| /s/ David H. Chow* |
|
Trustee |
|
January 17, 2014 |
| David H. Chow |
|
|
|
|
| |
|
|
|
|
| /s/ R. Alastair Short* |
|
Trustee |
|
January 17, 2014 |
| R. Alastair Short |
|
|
|
|
| |
|
|
|
|
| /s/ Peter J. Sidebottom* |
|
Trustee |
|
January 17, 2014 |
| Peter J. Sidebottom |
|
|
|
|
| |
|
|
|
|
| /s/ Richard D. Stamberger* |
|
Trustee |
|
January 17, 2014 |
| Richard D. Stamberger |
|
|
|
|
| |
|
|
|
|
| /s/ Jan F. van Eck |
|
President, Chief Executive Officer and Trustee |
|
January 17, 2014 |
| Jan F. van Eck |
|
|
|
|
| |
|
|
|
|
| /s/ John J. Crimmins* |
|
Treasurer, Chief Financial Officer and Principal |
|
January 17, 2014 |
| John J. Crimmins |
|
Accounting Officer |
|
|
| *By: |
/s/ Jonathan R. Simon |
| |
Jonathan R. Simon |
| |
Attorney in Fact |
EXHIBIT INDEX
| (i)(70) |
Opinion
and Consent of Dechert LLP (with respect to Market Vectors MSCI International
Quality ETF and Market Vectors MSCI International Quality Dividend ETF). |
