MANAGEMENT
ADVISER. SSgA FM serves as the investment adviser to the Fund and, subject to the supervision of the Board, is responsible for the investment management of the Fund. The Adviser provides an
investment management program for the Fund and manages the investment of the Funds assets. The Adviser and other affiliates of State Street Corporation make up State Street Global Advisors (SSgA), the investment management arm of
State Street Corporation. As of , 2013 the Adviser managed approximately $ billion in assets and SSgA
managed approximately $ trillion in assets. The Advisers principal business address is State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111.
For the services provided to the Fund under the Investment Advisory Agreement, the Fund expects to pay the Adviser the annual fee based on a
percentage of the Funds average daily net assets as set forth below:
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SPDR Russell Small Cap Completeness ETF
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From time to time, the Adviser may waive all or a portion of its fee, although it does not currently intend to do so. The
Adviser pays all expenses of the Fund other than the management fee, distribution fee pursuant to the Funds Distribution and Service Plan, if any, brokerage, taxes, interest, fees and expenses of the Independent Trustees (including any
Trustees counsel fees), litigation expenses, acquired fund fees and expenses and other extraordinary expenses.
A discussion regarding
the Boards consideration of the Investment Advisory Agreement will be available in the Trusts Annual Report to Shareholders for the period ended June 30, 2013.
The Adviser and the Trust are seeking an exemptive order from the SEC that will permit the Adviser, with the approval of the Independent Trustees of the Trust, to retain and amend existing sub-advisory
agreements with unaffiliated investment sub-advisers for the Fund without submitting the sub-advisory agreement to a vote of the Funds shareholders. The Trust will notify shareholders in the event of any change in the identity of such
sub-adviser or sub-advisers. The Adviser has ultimate responsibility for the investment performance of the Fund due to its responsibility to oversee a sub-adviser and recommend their hiring, termination and replacement. If the exemptive relief is
obtained, the Adviser will not be required to disclose fees paid to sub-advisers.
PORTFOLIO MANAGERS. The Adviser manages the Fund using
a team of investment professionals. The team approach is used to create an environment that encourages the flow of investment ideas. The portfolio managers within each team work together in a cohesive manner to develop and enhance techniques that
drive the investment process for the respective investment strategy. This approach requires portfolio managers to share a variety of responsibilities, including investment strategy and analysis, while retaining responsibility for the implementation
of the strategy within any particular portfolio. The approach also enables the team to draw upon the resources of other groups within SSgA. The Advisers portfolio management teams are overseen by the SSgA Investment Committee.
The professionals primarily responsible for the day-to-day management of the Fund are:
MIKE FEEHILY. Mr. Feehily, CFA, is a Senior Managing Director of SSgA and the Adviser and Co-Head of Passive Equity Strategies in North America in the Global Equity Beta Solutions Group. In this
capacity, Mr. Feehily has oversight of the North American Passive Equity teams in Boston and Montreal. In addition, Mr. Feehily is a member of the Senior Management Group. Mr. Feehily rejoined SSgA in 2010 after spending the previous
four years at State Street Global Markets LLC, where he helped to build the Exposure Solutions business. This group created and managed portfolios that were designed to meet the short-term market exposure needs of institutional clients. Prior to
this, Mr. Feehily had been Head of the US Passive Equity Team within SSgA. He joined SSgA in 1997. Mr. Feehily received a Bachelor of Science Degree from Babson College in Finance, Investments, and Economics. He received an MBA in Finance
from Bentley College and also earned the Chartered Financial Analyst designation. He is a member of the Boston Security Analysts Society and the CFA Institute. Mr. Feehily is also a former member of the Russell Index Client Advisory Board.
JOHN TUCKER. Mr. Tucker, CFA, is a Senior Managing Director of SSgA and the Adviser and Co-Head of Passive Equity Strategies in
North America in the Global Equity Beta Solutions Group. He joined the firm in 1988 and is responsible for overseeing the management of all equity index strategies and Exchange Traded Funds managed in North America. He is a member of the Senior
Management Group. Previously, Mr. Tucker was head of the Structured Products Group in SSgAs London office where he was responsible for the management of all index strategies in SSgAs second largest investment center. Mr. Tucker
received a BA in Economics from Trinity College and an MS in Finance from Boston College. He is a member of the Boston Security Analysts Society and the CFA Institute.
ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT. State Street, part of State Street Corporation, is the Administrator for the Fund, the Custodian for the Funds assets and serves as Transfer Agent
to the Fund.
LENDING AGENT. State Street is the securities lending agent for the Trust. For its services, the lending agent would
typically receive a portion of the net investment income, if any, earned on the collateral for the securities loaned.
9
DISTRIBUTOR. State Street Global Markets, LLC (the Distributor), part of State Street
Corporation, is the distributor of the Funds Shares. The Distributor will not distribute Shares in less than Creation Units, and it does not maintain a secondary market in the Shares. The Distributor may enter into selected dealer agreements
with other broker-dealers or other qualified financial institutions for the sale of Creation Units of Shares.
INDEX/TRADEMARK LICENSES/DISCLAIMERS
The Index Provider is not affiliated with the Trust, the Adviser, the Funds administrator, custodian, transfer agent or distributor, or any of their respective affiliates. The Adviser
(Licensee) has entered into a license agreement with the Index Provider pursuant to which the Adviser pays a fee to use the Indexes. The Adviser is sub-licensing rights to the Indexes to the Funds at no charge.
The Product is not sponsored, endorsed, sold or promoted by Russell Investment Group (Russell). Russell makes no
representation or warranty, express or implied, to the owners of the Product or any member of the public regarding the advisability of investing in securities generally or in the Product particularly or the ability of the Russell Small Cap
Completeness
®
Index to track general stock market performance or a segment of the same. Russells
publication of the Russell Small Cap Completeness Index in no way suggests or implies an opinion by Russell as to the advisability of investment in any or all of the securities upon which the Russell Small Cap Completeness Index is based.
Russells only relationship to the SPDR Russell Small Cap Completeness ETF is the licensing of certain trademarks and trade names of Russell and of the Russell Small Cap Completeness Index which is determined, composed and calculated by Russell
without regard to the SPDR Russell Small Cap Completeness ETF or the Product. Russell is not responsible for and has not reviewed the Product nor any associated literature or publications and Russell makes no representation or warranty express or
implied as to their accuracy or completeness, or otherwise. Russell reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the Russell Small Cap Completeness Index. Russell has no obligation or liability
in connection with the administration, marketing or trading of the Product.
RUSSELL DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS
OF ANY OF THE INDEX OR ANY DATA INCLUDED THEREIN AND RUSSELL SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. RUSSELL MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUND, INVESTORS, OWNERS OF
THE PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. RUSSELL MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL RUSSELL HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF
THE POSSIBILITY OF SUCH DAMAGES.
SPDR TRADEMARK. The SPDR trademark is used under license from Standard and Poors
Financial Services, LLC, an affiliate of The McGraw Hill Companies (S&P). No financial product offered by the Trust or its affiliates is sponsored, endorsed, sold or promoted by S&P. S&P makes no representation or warranty,
express or implied, to the owners of any financial product or any member of the public regarding the advisability of investing in securities generally or in financial products particularly or the ability of the index on which financial products are
based to track general stock market performance. S&P is not responsible for and has not participated in any determination or calculation made with respect to issuance or redemption of financial products. S&P has no obligation or liability in
connection with the administration, marketing or trading of financial products.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
ADDITIONAL PURCHASE AND SALE INFORMATION
The Shares are listed
for secondary trading on the Exchange and individual Fund Shares may only be purchased and sold in the secondary market through a broker-dealer. The secondary markets are closed on weekends and also are generally closed on the following
holidays: New Years Day, Dr. Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Exchange may close early on the business day
before certain holidays and on the day after Thanksgiving Day. Exchange holiday schedules are subject to change without notice. If you buy or sell Shares in the secondary market, you will pay the secondary market price for Shares. In addition, you
may incur customary brokerage commissions and charges and may pay some or all of the spread between the bid and the offered price in the secondary market on each leg of a round trip (purchase and sale) transaction.
The trading prices of the Funds Shares will fluctuate continuously throughout trading hours based on market supply and demand rather than the
Funds net asset value, which is calculated at the end of each business day. The Shares will trade on the Exchange at prices that may be above (
i.e.,
at a premium) or below (
i.e.,
at a discount), to varying degrees, the
10
daily net asset value of the Shares. The trading prices of the Funds Shares may deviate significantly from its net asset value during periods of market volatility. Given, however, that
Shares can be issued and redeemed daily in Creation Units, the Adviser believes that large discounts and premiums to net asset value should not be sustained over long periods. Information showing the number of days the market price of the
Funds Shares was greater than the Funds net asset value and the number of days it was less than the Funds net asset value (
i.e.
, premium or discount) for various time periods is available by visiting the Funds website
at
http://www.spdrs.com.
The Exchange will disseminate, every fifteen seconds during the regular trading day, an indicative optimized
portfolio value (IOPV) relating to the Fund. The IOPV calculations are estimates of the value of the Funds net asset value per Share using market data converted into U.S. dollars at the current currency rates. The IOPV price
is based on quotes and closing prices from the securities local market and may not reflect events that occur subsequent to the local markets close. Premiums and discounts between the IOPV and the market price may occur. This should not
be viewed as a real-time update of the net asset value per Share of the Fund, which is calculated only once a day. Neither the Fund, nor the Adviser or any of their affiliates are involved in, or responsible for, the calculation or
dissemination of such IOPVs and make no warranty as to their accuracy.
The Fund does not impose any restrictions on the frequency of
purchases and redemptions; however, the Fund reserve the right to reject or limit purchases at any time, as described in the SAI. When considering that no restriction or policy was necessary, the Board evaluated the risks posed by market timing
activities, such as whether frequent purchases and redemptions would interfere with the efficient implementation of the Funds investment strategy, or whether they would cause the Fund to experience increased transaction costs. The Board
considered that, unlike traditional mutual funds, Fund Shares are issued and redeemed only in large quantities of Shares known as Creation Units available only from the Fund directly, and that most trading in the Fund occurs on the Exchange at
prevailing market prices and does not involve the Fund directly. Given this structure, the Board determined that it is unlikely that (a) market timing would be attempted by the Funds shareholders or (b) any attempts to market time
the Fund by shareholders would result in negative impact to the Fund or its shareholders.
OTHER CONSIDERATIONS
DISTRIBUTION AND SERVICE PLAN. The Fund has adopted a Distribution and Service Plan in accordance with Rule 12b-1 under the 1940
Act pursuant to which payments of up to 0.25% of the Funds average daily net assets may be made for the sale and distribution of its Shares. No payments pursuant to the Distribution and Service Plan will be made through at least the next
twelve (12) months of operation. Additionally, the implementation of any such payments would have to be approved by the Board prior to implementation. Because these fees would be paid out of the Funds assets on an ongoing basis, if
payments are made in the future, these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
DISTRIBUTIONS
DIVIDENDS AND CAPITAL GAINS. As a Fund
shareholder, you are entitled to your share of the Funds income and net realized gains on its investments. The Fund pays out substantially all of its net earnings to its shareholders as distributions.
The Fund typically earns interest from debt securities and, if participating, securities lending income. These amounts, net of expenses and taxes (if
applicable), are passed along to Fund shareholders as income dividend distributions. The Fund realizes capital gains or losses whenever it sells securities. Net long-term capital gains are distributed to shareholders as capital
gain distributions.
Income dividend distributions, if any, are generally distributed to shareholders quarterly, but may vary
significantly from period to period. Net capital gains are distributed at least annually. Dividends may be declared and paid more frequently to improve Index tracking or to comply with the distribution requirements of the Internal Revenue Code of
1986, as amended.
Distributions in cash may be reinvested automatically in additional whole Shares only if the broker through whom you
purchased Shares makes such option available. Dividends which are reinvested will nevertheless be taxable to the same extent as if such dividends had not been reinvested.
PORTFOLIO HOLDINGS
A description of the Trusts policies
and procedures with respect to the disclosure of the Funds portfolio securities is available in the SAI.
ADDITIONAL TAX INFORMATION
As with any investment, you should consider how your Fund investment will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional
about the tax consequences of an investment in the Fund.
11
Unless your investment in the Fund is through a tax-exempt entity or tax deferred retirement account, such
as a 401(k) plan, you need to be aware of the possible tax consequences when:
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The Fund makes distributions;
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You sell Shares listed on the Exchange; and
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You create or redeem Creation Units.
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TAXES ON DISTRIBUTIONS. In general, your distributions are subject to federal income tax when they are paid, whether you take them in cash or reinvest them in the Fund. The income dividends and
short-term capital gains distributions you receive from the Fund will be taxed as either ordinary income or qualified dividend income. Dividends that are reported as qualified dividend income are eligible for a reduced maximum rate to individuals of
20% (for individuals not subject to the maximum tax rate on ordinary income, a 15% or 0% maximum rate will apply to qualified dividend income) to the extent that the Fund receives qualified dividend income and subject to certain limitations. Any
distributions of the excess of the Funds net long-term capital gain over its net short-term capital loss are taxable as long-term capital gain regardless of how long you have owned your Shares. Long-term capital gains are taxed to noncorporate
shareholders at a maximum rate of 20% (for individuals not subject to the maximum tax rate on ordinary income, a 15% or 0% maximum rate will apply to long-term capital gains). Distributions in excess of the Funds current and accumulated
earnings and profits are treated as a tax-free return of capital to the extent of your basis in the Shares, and as capital gain thereafter. Holding periods may be suspended for these purposes for stock that is hedged.
Dividends will be qualified dividend income to you if they are attributable to qualified dividend income received by the Fund which, in general, includes
dividend income from taxable U.S. corporations and certain foreign corporations (e.g., foreign corporations incorporated in a possession of the United States or in certain countries with a comprehensive tax treaty with the United States, or the
stock of which is readily tradable on an established securities market in the United States), provided that the Fund satisfies certain holding period requirements in respect of the stock of such corporations and has not hedged its position in the
stock in certain ways. A dividend will not be treated as qualified dividend income if the dividend is received with respect to any share of stock held by the Fund, or Shares of the Fund held by you, for fewer than 61 days during the 121-day
period beginning at the date which is 60 days before the date on which such Share becomes ex-dividend with respect to such dividend or, in the case of certain preferred stock, for fewer than 91 days during the 181-day period beginning
90 days before such date.
As of January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and
filing jointly), are also subject to a 3.8% Medicare contribution tax on their net investment income, which includes taxable interest, dividends and capital gains (including capital gains realized upon the sale or exchange of
Fund Shares). This 3.8% tax also applies to all or a portion of the undistributed net investment income of certain shareholders that are estates and trusts.
If the Fund redeems Creation Units in cash, those redemptions may result in more capital gains being recognized by the Fund as compared to exchange traded funds that redeem Creation Units in-kind.
If you lend your Fund Shares pursuant to securities lending arrangements you may lose the ability to treat Fund dividends (paid while
the Shares are held by the borrower) as qualified dividend income. You should consult your financial intermediaries or tax advisor.
Distributions paid in January, but declared by the Fund in October, November or December of the previous year, payable to shareholders of record in such
a month, may be taxable to you in the calendar year in which they were declared. The Fund will inform you of the amount of your ordinary income dividends, qualified dividend income and capital gain distributions shortly after the close of each
calendar year.
A distribution will reduce the Funds net asset value per Share and may be taxable to you as ordinary income or capital
gain even though, from an investment standpoint, the distribution may constitute a return of capital.
DERIVATIVES AND OTHER COMPLEX
SECURITIES. The Fund may invest in complex securities. These investments may be subject to numerous special and complex rules. These rules could affect whether gains and losses recognized by the Fund are treated as ordinary income or capital
gain, accelerate the recognition of income to the Fund and/or defer the Funds ability to recognize losses. In turn, these rules may affect the amount, timing or character of the income distributed to you by the Fund.
TAXES ON EXCHANGE-LISTED SHARE SALES. Currently, any capital gain or loss realized upon a sale of Shares is generally treated as long-term capital
gain or loss if the Shares have been held for more than one year and as short-term capital gain or loss if the Shares have been held for one year or less, except that any capital loss on the sale of Shares held for six months or less is treated as
long-term capital loss to the extent that capital gain dividends were paid with respect to such Shares.
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TAXES ON CREATIONS AND REDEMPTIONS OF CREATION UNITS. A person who exchanges securities for Creation
Units generally will recognize a gain or loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and the exchangers aggregate basis in the securities surrendered plus any cash paid for
the Creation Units. A person who exchanges Creation Units for securities will generally recognize a gain or loss equal to the difference between the exchangers basis in the Creation Units and the aggregate market value of the securities and
the amount of cash received. The Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing wash sales, or on the basis that
there has been no significant change in economic position. Persons exchanging securities should consult their own tax advisor with respect to whether wash sale rules apply and when a loss might be deductible.
Under current federal tax laws, any capital gain or loss realized upon a redemption of Creation Units is generally treated as long-term capital gain or
loss if the Shares have been held for more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less.
If you create or redeem Creation Units, you will be sent a confirmation statement showing how many Shares you purchased or sold and at what price.
CERTAIN TAX EXEMPT INVESTORS. The Fund, if investing in certain limited real estate investments and other publicly traded partnerships, may be required to pass-through certain excess inclusion
income and other income as unrelated business taxable income (UBTI). Prior to investing in the Fund, tax-exempt investors sensitive to UBTI should consult their tax advisors regarding this issue and recent IRS
pronouncements addressing the treatment of such income in the hands of such investors.
BACKUP WITHHOLDING. The Fund will be required in
certain cases to withhold (as backup withholding) on amounts payable to any shareholder who (1) has provided the Fund either an incorrect tax identification number or no number at all, (2) is subject to backup withholding by
the Internal Revenue Service for failure to properly report payments of interest or dividends, (3) has failed to certify to the Fund that such shareholder is not subject to backup withholding, or (4) has not certified that such shareholder
is a U.S. person (including a U.S. resident alien). The backup withholding rate is 28%. Backup withholding will not be applied to payments that have been subject to the 30% withholding tax on shareholders who are neither citizens nor
permanent residents of the U.S.
The foregoing discussion summarizes some of the consequences under current federal income tax law of an
investment in the Fund. It is not a substitute for personal tax advice. Consult your personal tax advisor about the potential tax consequences of an investment in the Fund under all applicable tax laws.
As with any investment, you should consider how your Fund investment will be taxed. The tax information in this Prospectus is provided as general
information. You should consult your own tax professional about the tax consequences of an investment in the Fund.
GENERAL INFORMATION
The Trust was organized as a Massachusetts business trust on June 12, 1998. If shareholders of the Fund are required to vote on any matters, shareholders are entitled to one vote for each Share they
own. Annual meetings of shareholders will not be held except as required by the 1940 Act and other applicable law. See the SAI for more information concerning the Trusts form of organization.
For purposes of the 1940 Act, Shares of the Trust are issued by the respective series of the Trust and the acquisition of Shares by investment companies
is subject to the restrictions of section 12(d)(1) of the 1940 Act. The Trust has received exemptive relief from Section 12(d)(1) to allow registered investment companies to invest in the Fund beyond the limits set forth in
Section 12(d)(1), subject to certain terms and conditions as set forth in an SEC exemptive order issued to the Trust, including that such investment companies enter into an agreement with the Trust.
From time to time, the Fund may advertise yield and total return figures. Yield is a historical measure of dividend income, and total return is a measure
of past dividend income (assuming that it has been reinvested) plus capital appreciation. Neither yield nor total return should be used to predict the future performance of the Fund.
Bingham McCutchen LLP serves as counsel to the Trust, including the Fund. [ ] serves as the independent registered public accounting
firm and will audit the Funds financial statements annually.
13
PREMIUM/DISCOUNT INFORMATION
The Fund had not commenced operations prior to the date of this Prospectus and therefore do not have information regarding how often the Shares of the
Fund traded on the Exchange at a price above (
i.e.,
at a premium) or below (
i.e.,
at a discount) the net asset value of the Fund during the past calendar year. When available, such information will be provided
at
http://www.spdrs.com.
STATEMENT OF ADDITIONAL INFORMATION
Dated [ ], 2013
This
Statement of Additional Information (SAI) is not a Prospectus. With respect to the Trusts series listed below, this SAI should be read in conjunction with the Prospectus dated
[ ], 2013, as may be revised from time to time.
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ETF
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TICKER
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SPDR RUSSELL SMALL CAP COMPLETENESS ETF
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RSCO
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Principal U.S. Listing Exchange for the ETF: NYSE Arca, Inc.
The SPDR Russell Small Cap Completeness ETF (the Fund) is an exchange-traded fund which is a series of the Trust, and is discussed in this SAI. SSgA Funds Management, Inc. is the investment
adviser (referred to herein as SSgA FM or the Adviser) for the Fund. State Street Global Markets, LLC is the principal underwriter (referred to herein as Distributor or Principal Underwriter) for the
Funds shares.
The Fund had not commenced operations as of the date of this SAI and therefore did not have financial information to
report for the Trusts June 30, 2012 fiscal year end.
Capitalized terms used herein that are not defined have the same meaning as
in the Prospectus, unless otherwise noted. Copies of the Prospectus may be obtained without charge by writing to State Street Global Markets, LLC, State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111, by visiting the
Trusts website at www.spdrs.com or by calling 1-866-787-2257.
1
TABLE OF CONTENTS
2
GENERAL DESCRIPTION OF THE TRUST
The Trust is an open-end management investment company, registered under the Investment Company Act of 1940, as amended (the 1940 Act),
consisting of multiple investment series including the Fund. The Trust was organized as a Massachusetts business trust on June 12, 1998. The offering of the Funds shares (Shares) is registered under the Securities Act of 1933,
as amended (the Securities Act). The investment objective of the Fund is to provide investment results that, before fees and expenses, correspond generally to the total return, or the price and yield performance, of a specified market
index (the Index). SSgA FM serves as the investment adviser for the Fund.
The Fund offers and issues Shares at their net asset
value (sometimes referred to herein as NAV) only in aggregations of a specified number of Shares (each, a Creation Unit). The Fund generally offers and issues Shares in exchange for a basket of securities included in the
Index (Deposit Securities) together with the deposit of a specified cash payment (Cash Component). The Trust reserves the right to permit or require the substitution of a cash in lieu amount (Deposit
Cash) to be added to the Cash Component to replace any Deposit Security. The Shares have been approved for listing and secondary trading on a national securities exchange (the Exchange). The Shares will trade on the Exchange at
market prices. These prices may differ from the Shares net asset values. The Shares are also redeemable only in Creation Unit aggregations, and generally in exchange for portfolio securities and a specified cash payment. A Creation Unit of the
Fund consists of 50,000 Shares as set forth in the Prospectus.
Shares may be issued in advance of receipt of all Deposit Securities subject
to various conditions including a requirement to maintain on deposit with the Trust cash at least equal to a specified percentage of the market value of the missing Deposit Securities as set forth in the Participant Agreement (as defined below). See
Purchase and Redemption of Creation Units. The Trust may impose a transaction fee for each creation or redemption. In all cases, such fees will be limited in accordance with the requirements of the U.S. Securities and Exchange Commission
(the SEC) applicable to management investment companies offering redeemable securities. In addition to the fixed creation or redemption transaction fee, an additional transaction fee of up to three times the fixed creation or redemption
transaction fee and/or an additional variable charge may apply.
ADDITIONAL INDEX INFORMATION
The Russell 3000 Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S.
equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.
INVESTMENT POLICIES
PRINCIPAL INVESTMENT STRATEGIES
DIVERSIFICATION
The Fund is classified as a non-diversified investment company under the 1940 Act. A non-diversified classification means that the Fund is not
limited by the 1940 Act with regard to the percentage of its assets that may be invested in the securities of a single issuer. This means that the Fund may invest a greater portion of its assets in the securities of a single issuer than a
diversified fund. The securities of a particular issuer may constitute a greater portion of the Index and, therefore, the securities may constitute a greater portion of the Funds portfolio. This may have an adverse effect on the Funds
performance or subject the Funds Shares to greater price volatility than more diversified investment companies.
Although the Fund is
non-diversified for purposes of the 1940 Act, the Fund intends to maintain the required level of diversification and otherwise conduct its operations so as to qualify as a regulated investment company for purposes of the
Internal Revenue Code of 1986, as amended (Internal Revenue Code), and to relieve the Fund of any liability for federal income tax to the extent that its earnings are distributed to shareholders. Compliance with the diversification
requirements of the Internal Revenue Code may severely limit the investment flexibility of the Fund and may make it less likely that the Fund will meet its investment objectives.
3
CONCENTRATION
The Funds investments will generally be concentrated in a particular industry or group of industries to the extent that the Funds underlying Index is concentrated in a particular industry or
group of industries. The securities of issuers in particular industries may dominate the benchmark Index of the Fund and consequently the Funds investment portfolio. This may adversely affect the Funds performance or subject its Shares
to greater price volatility than that experienced by less concentrated investment companies.
In pursuing its objective, the Fund may hold the
securities of a single issuer in an amount exceeding 10% of the market value of the outstanding securities of the issuer, subject to restrictions imposed by the Internal Revenue Code. In particular, as the Funds size grows and its assets
increase, it will be more likely to hold more than 10% of the securities of a single issuer if the issuer has a relatively small public float as compared to other components in its benchmark Index.
FUTURES CONTRACTS, OPTIONS AND SWAP AGREEMENTS
The Fund may invest up to 20% of its assets in derivatives, including exchange-traded futures and options contracts and swap agreements (including credit
default swaps). The Fund will segregate cash and/or appropriate liquid assets if required to do so by SEC or Commodity Futures Trading Commission (CFTC) regulation or interpretation.
Futures contracts generally provide for the future sale by one party and purchase by another party of a specified commodity or security at a specified
future time and at a specified price. 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 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 Fund is required to
make a good faith margin deposit in cash or U.S. 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 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, 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. In such case, the Fund would expect to earn interest income on its margin deposits. 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.
The Fund may purchase and sell put and call options. Such options may relate to particular securities and may or may not be listed on a
national securities exchange and issued by The Options Clearing Corporation. Options trading is a highly specialized activity that entails greater than ordinary investment risk. Options on particular securities may be more volatile than the
underlying securities, and therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment in the underlying securities themselves.
Regulation under the Commodities Exchange Act. The Fund intends to use futures and options in accordance with Rule 4.5 of the Commodity Exchange Act (CEA). The Fund may use exchange-traded
futures and options, together with positions in cash and money market instruments, to simulate full investment in its underlying Index. Exchange-traded futures and options contracts may not be currently available for the Index. Under such
circumstances, the Adviser may seek to utilize other instruments that it believes to be correlated to the Index components or a subset of the components. The Trust, on behalf of the Fund, has filed a notice of eligibility for exclusion from the
definition of the term commodity pool operator in accordance with Rule 4.5 so that the Fund is not subject to registration or regulation as a commodity pool operator under the CEA.
4
In connection with its management of the Fund, the Adviser has claimed an exclusion from registration as a
commodity trading advisor under the CEA and, therefore, is not subject to the registration and regulatory requirements of the CEA. In February 2012, the CFTC announced substantial amendments to certain exemptions, and to the conditions for reliance
on those exemptions, from registration as a commodity pool operator. Under amendments to the exemption provided under CFTC Rule 4.5, if the Fund uses futures, options on futures, or swaps other than for bona fide hedging purposes (as defined by the
CFTC), the aggregate initial margin and premiums on these positions (after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are in-the-money at the time of
purchase are in-the-money) may not exceed 5% of the Funds net asset value, or alternatively, the aggregate net notional value of those positions may not exceed 100% of the Funds net asset value (after taking into account
unrealized profits and unrealized losses on any such positions). The CFTC amendments to Rule 4.5 went into effect on December 31, 2012. As a result of these amendments, should the Fund no longer be able to rely on amended Rule 4.5, the Adviser
will be required to register with the CFTC, with respect to the Fund, as a commodity pool operator. Registration by the Adviser as a commodity pool operator with respect to the Fund would subject the Fund to regulation by both the CFTC and SEC.
Currently, rules have not been finalized that are intended to harmonize compliance obligations of the two different regulatory regimes. The Fund reserves the right to engage in transactions involving futures and options thereon to the
extent allowed by the CFTC regulations in effect from time to time and in accordance with the Funds policies. The Fund would take steps to prevent its futures positions from leveraging its securities holdings. When it has a long
futures position, it will maintain with its custodian bank, cash or equivalents. When it has a short futures position, it will maintain with its custodian bank assets substantially identical to those underlying the contract or cash and equivalents
(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).
Short Sales Against the Box. The Fund may engage in short sales against the box. In a short sale against the box, the Fund agrees to sell at a future date a security that it either
contemporaneously owns or has the right to acquire at no extra cost. If the price of the security has declined at the time the Fund is required to deliver the security, the Fund will benefit from the difference in the price. If the price of the
security has increased, the Fund will be required to pay the difference.
Swap Agreements. The Fund may enter into swap agreements; including
interest rate, index, and total return swap agreements. Swap agreements are contracts between parties in which one party agrees to make periodic payments to the other party based on the change in market value or level of a specified rate, index or
asset. In return, the other party agrees to make payments to the first party based on the return of a different specified rate, index or asset. Swap agreements will usually be done on a net basis, i.e., where the two parties make net payments with
the Fund receiving or paying, as the case may be, only the net amount of the two payments. The net amount of the excess, if any, of the Funds obligations over its entitlements with respect to each swap is accrued on a daily basis and an amount
of cash or equivalents having an aggregate value at least equal to the accrued excess is maintained by the Fund.
In the case of a credit
default swap (CDS), the contract gives one party (the buyer) the right to recoup the economic value of a decline in the value of debt securities of the reference issuer if the credit event (a downgrade or default) occurs. This value is
obtained by delivering a debt security of the reference issuer to the party in return for a previously agreed payment from the other party (frequently, the par value of the debt security). As the seller of a CDS contract, the Fund would be required
to pay the par (or other agreed upon) value of a referenced debt obligation to the counterparty in the event of a default or other credit event by the reference issuer, such as a U.S. or foreign corporate issuer, with respect to debt obligations. In
return, the Fund would receive from the counterparty a periodic stream of payments over the term of the contract provided that no event of default has occurred. If no default occurs, the Fund would keep the stream of payments and would have no
payment obligations. As the seller, the Fund would be subject to investment exposure on the notional amount of the swap.
CDSs may require
initial premium (discount) payments as well as periodic payments (receipts) related to the interest leg of the swap or to the default of a reference obligation. The Fund will segregate assets necessary to meet any accrued payment obligations when it
is the buyer of CDS. In cases where the Fund is a seller of a CDS, if the CDS is physically settled, the Fund will be required to segregate the full notional amount of the CDS. Such segregation will not limit the Funds exposure to loss.
CDS agreements involve greater risks than if the Fund had invested in the reference obligation directly since, in addition to general market
risks, illiquidity risk associated with a particular issuer, and credit risk, each of which will be similar in either case, CDSs are subject to the risk of illiquidity within the CDS market on the whole, as well as counterparty risk. The Fund will
enter into CDS agreements only with counterparties that meet certain standards of creditworthiness. The Fund will only enter into CDSs for purposes of better tracking the performance of its Index.
5
FUTURE DEVELOPMENTS
The Fund may take advantage of opportunities in the area of options and futures contracts, options on futures contracts, warrants, swaps and any other investments which are not presently contemplated for
use by the Fund or which are not currently available but which may be developed, to the extent such opportunities are both consistent with the Funds investment objective and legally permissible for the Fund. Before entering into such
transactions or making any such investment, the Fund will provide appropriate disclosure.
NON-PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT COMPANIES
The Fund
may invest in the securities of other investment companies, including affiliated funds and money market funds, subject to applicable limitations under Section 12(d)(1) of the 1940 Act. Pursuant to Section 12(d)(1), the Fund may invest in
the securities of another investment company (the acquired company) provided that the Fund, immediately after such purchase or acquisition, does not own in the aggregate: (i) more than 3% of the total outstanding voting stock of the
acquired company; (ii) securities issued by the acquired company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) securities issued by the acquired company and all other investment companies
(other than Treasury stock of the Fund) having an aggregate value in excess of 10% of the value of the total assets of the Fund. To the extent allowed by law, regulation, the Funds investment restrictions and the Trusts exemptive relief,
the Fund may invest its assets in securities of investment companies that are affiliated funds and/or money market funds, in excess of the limits discussed above.
If the Fund invests in, and, thus, is a shareholder of, another investment company, the Funds shareholders will indirectly bear the Funds proportionate share of the fees and expenses paid by
such other investment company, including advisory fees, in addition to both the management fees payable directly by the Fund to the Funds own investment adviser and the other expenses that the Fund bears directly in connection with the
Funds own operations.
LENDING PORTFOLIO SECURITIES
The Fund may lend portfolio securities to certain creditworthy borrowers in U.S. and non-U.S. markets in an amount not to exceed one third (33 1/3%) of the value of its total assets. The borrowers provide
collateral that is marked to market daily, in an amount at least equal to the current market value of the securities loaned. The Fund may terminate a loan at any time and obtain the securities loaned. The Fund receives the value of any interest or
cash or non-cash distributions paid on the loaned securities. The Fund cannot vote proxies for securities on loan, but may recall loans to vote proxies if a material issue affecting the Funds economic interest in the investment is to be voted
upon. Distributions received on loaned securities in lieu of dividend payments (
i.e.,
substitute payments) would not be considered qualified dividend income.
With respect to loans that are collateralized by cash, the borrower will be entitled to receive a fee based on the amount of cash collateral. The Fund is compensated by the difference between the amount
earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case of collateral other than cash, the Fund is compensated by a fee paid by the borrower equal to a percentage of the market value of the loaned securities. Any
cash collateral may be reinvested in certain short-term instruments either directly on behalf of the lending Fund or through one or more joint accounts or money market funds, which may include those managed by the Adviser.
The Fund may pay a portion of the interest or fees earned from securities lending to a borrower as described above, and to one or more securities lending
agents approved by the Board of Trustees of the Trust (the Board) who administer the lending program for the Fund in accordance with guidelines approved by the Board. In such capacity, the lending agent causes the delivery of loaned
securities from the Fund to borrowers, arranges for the return of loaned securities to the Fund at the termination of a loan, requests deposit of collateral, monitors the daily value of the loaned securities and collateral, requests that borrowers
add to the collateral when required by the loan agreements, and provides recordkeeping and accounting services necessary for the operation of the program. State Street Bank and Trust Company (State Street), an affiliate of the Trust, has
been approved by the Board to serve
6
as securities lending agent for the Fund and the Trust has entered into an agreement with State Street for such services. Among other matters, the Trust has agreed to indemnify State Street for
certain liabilities. State Street has received an order of exemption from the SEC under Sections 17(a) and 12(d)(1) under the 1940 Act to serve as the lending agent for affiliated investment companies such as the Trust and to invest the cash
collateral received from loan transactions to be invested in an affiliated cash collateral fund.
Securities lending involves exposure to
certain risks, including operational risk (i.e., the risk of losses resulting from problems in the settlement and accounting process especially so in certain international markets such as Taiwan), gap risk (i.e., the risk of a
mismatch between the return on cash collateral reinvestments and the fees the Fund has agreed to pay a borrower), risk of loss of collateral, credit, legal, counterparty and market risk. Although State Street has agreed to provide the Fund with
indemnification in the event of a borrower default, the Fund is still exposed to the risk of losses in the event a borrower does not return the Funds securities as agreed. For example, delays in recovery of lent securities may cause the Fund
to lose the opportunity to sell the securities at a desirable price.
LEVERAGING
While the Fund does not anticipate doing so, the Fund may borrow money in an amount greater than 5% of the value of the Funds total assets. However, the Fund may not borrow money from a bank in
an amount greater than 33 1/3% of the value of the Funds total assets. Borrowing for investment purposes is one form of leverage. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that
increases investment risk, but also increases investment opportunity. Because substantially all of the Funds assets will fluctuate in value, whereas the interest obligations on borrowings may be fixed, the NAV of the Fund will increase
more when the Funds portfolio assets increase in value and decrease more when the Funds portfolio assets decrease in value than would otherwise be the case. Moreover, interest costs on borrowings may fluctuate with changing market
rates of interest and may partially offset or exceed the returns on the borrowed funds.
REPURCHASE AGREEMENTS
The Fund may invest in repurchase agreements with commercial banks, brokers or dealers to generate income from its excess cash balances and to invest
securities lending cash collateral. A repurchase agreement is an agreement under which the Fund acquires a financial instrument (e.g., a security issued by the U.S. government or an agency thereof, a bankers 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 as defined below). 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 the Fund and is unrelated to the interest rate on the underlying instrument.
In these repurchase agreement transactions, the securities acquired by the Fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and
are held by the Custodian until repurchased. No more than an aggregate of 15% of the Funds net assets will be invested in illiquid securities, including repurchase agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale, or for which there are no readily available market quotations.
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 Fund 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 U.S. Bankruptcy Code or other laws, a court may determine that the underlying security is collateral for a loan by the Fund not
within the control of the Fund and, therefore, the Fund 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.
REVERSE REPURCHASE AGREEMENTS
The Fund may
enter into reverse repurchase agreements, which involve the sale of securities with an agreement to repurchase the securities at an agreed-upon price, date and interest payment and have the characteristics of borrowing. The securities purchased with
the funds obtained from the agreement and securities collateralizing the agreement will have maturity dates no later than the repayment date. Generally the effect of such transactions is that the Fund can recover all or most of the cash invested in
the portfolio securities involved during the term of the reverse repurchase agreement, while in many cases the Fund is able to keep some of the interest income associated
7
with those securities. Such transactions are only advantageous if the Fund has an opportunity to earn a greater rate of interest on the cash derived from these transactions than the interest cost
of obtaining the same amount of cash. Opportunities to realize earnings from the use of the proceeds equal to or greater than the interest required to be paid may not always be available and the Fund intends to use the reverse repurchase technique
only when the Adviser believes it will be advantageous to the Fund. The use of reverse repurchase agreements may exaggerate any interim increase or decrease in the value of the Funds assets. The Funds exposure to reverse repurchase
agreements will be covered by securities having a value equal to or greater than such commitments. Under the 1940 Act, reverse repurchase agreements are considered borrowings. Although there is no limit on the percentage of Fund assets that can be
used in connection with reverse repurchase agreements, the Fund does not expect to engage, under normal circumstances, in reverse repurchase agreements with respect to more than 33 1/3% of its total assets.
RESTRICTED SECURITIES
The Fund may invest in
restricted securities. Restricted Securities are securities that are not registered under the Securities Act, but which can be offered and sold to qualified institutional buyers under Rule 144A under the Securities Act. Institutional
markets for restricted securities have developed as a result of the promulgation of Rule 144A under the Securities Act, which provides a safe harbor from Securities Act registration requirements for qualifying sales to institutional
investors. When Rule 144A restricted securities present an attractive investment opportunity and meet other selection criteria, the Fund may make such investments whether or not such securities are illiquid depending on the market that
exists for the particular security. The Board has delegated the responsibility for determining the liquidity of Rule 144A restricted securities that the Fund may invest in to the Adviser. In reaching liquidity decisions, the Adviser may consider the
following factors: the frequency of trades and quotes for the security; the number of dealers wishing to purchase or sell the security and the number of other potential purchasers; dealer undertakings to make a market in the security; and the nature
of the security and the nature of the marketplace in which it trades (
e.g.
, the time needed to dispose of the security, the method of soliciting offers and the mechanics of transfer).
COMMERCIAL PAPER
The Fund may invest in commercial paper as described in the Prospectus.
Commercial paper consists of short-term, promissory notes issued by banks, corporations and other entities to finance short-term credit needs. These securities generally are discounted but sometimes may be interest bearing.
OTHER SHORT-TERM INSTRUMENTS
In addition to
repurchase agreements, the Fund may invest in short-term instruments, including money market instruments, (including money market funds advised by the Adviser), cash and cash equivalents, on an ongoing basis to provide liquidity or for other
reasons. Money market instruments are generally short-term investments that may include but are not limited to: (i) shares of money market funds (including those advised by the Adviser); (ii) obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities (including government-sponsored enterprises); (iii) negotiable certificates of deposit (CDs), bankers acceptances, fixed time deposits and other obligations of U.S. and foreign
banks (including foreign branches) and similar institutions; (iv) commercial paper rated at the date of purchase Prime-1 by Moodys Investors Service (Moodys) or A-1 by Standard &
Poors (S&P), or if unrated, of comparable quality as determined by the Adviser; (v) non-convertible corporate debt securities (e.g., bonds and debentures) with remaining maturities at the date of purchase of not more than
397 days and that satisfy the rating requirements set forth in Rule 2a-7 under the 1940 Act; and (vi) short-term U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that, in the opinion of the Adviser, are of
comparable quality to obligations of U.S. banks which may be purchased by the Fund. Any of these instruments may be purchased on a current or a forward-settled basis. Money market instruments also include shares of money market funds. Time deposits
are non-negotiable deposits maintained in banking institutions for specified periods of time at stated interest rates. Bankers acceptances are time drafts drawn on commercial banks by borrowers, usually in connection with international
transactions.
SPECIAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with an investment in the Fund is contained in the Prospectus. The discussion below supplements, and should be read
in conjunction with, the Prospectus.
8
PRINCIPAL RISKS
GENERAL
Investment in the Fund should be made with an understanding that the value of the
Funds 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 the Fund should also be made with an understanding of the risks inherent in an investment in securities, including the risk that the
financial condition of issuers may become impaired or that the general condition of the securities markets may deteriorate (either of which may cause a decrease in the value of the portfolio securities and thus in the value of Shares). Securities
are susceptible to general 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.
The principal trading market for some of the securities in an Index 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 the Funds Shares will be
adversely affected if trading markets for the Funds portfolio securities are limited or absent or if bid/ask spreads are wide.
FUTURES
AND OPTIONS TRANSACTIONS
Positions in futures contracts and options may be closed out only on an exchange which provides a secondary market
for such financial instruments. 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 Fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if the 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 Fund may be required to make delivery of the instruments underlying futures contracts it has sold.
The Fund will minimize the risk that it 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 index futures contracts)
is potentially unlimited. The Fund does not plan to use futures and options contracts, when available, in this manner. 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. The Fund, however, may utilize futures and options contracts in a
manner designed to limit its risk exposure to that which is comparable to what it would have incurred through direct investment in securities.
Utilization of futures transactions by the Fund involves the risk of imperfect or even negative correlation to its benchmark Index if the index
underlying the futures contracts differs from the benchmark Index or if the futures contracts do not track the benchmark index as expected. There is also the risk of loss by the Fund of margin deposits in the event of bankruptcy of a broker with
whom the Fund has an open position in the futures contract or option.
9
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 days 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 futures positions and
subjecting some futures traders to substantial losses.
RISKS OF SWAP AGREEMENTS
Swap agreements are subject to the risk that the swap counterparty will default on its obligations. If such a default occurs, the Fund will have contractual remedies pursuant to the agreements related to
the transaction, but such remedies may be subject to bankruptcy and insolvency laws which could affect the Funds rights as a creditor.
The use of interest-rate and index swaps is a highly specialized activity that involves investment techniques and risks different from those associated
with ordinary portfolio security transactions. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all
possible market conditions. These transactions generally do not involve the delivery of securities or other underlying assets or principal.
The swaps market is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely
affect the Funds ability to terminate existing swap agreements or to realize amounts to be received under such agreements.
Because they
are two party contracts that may be subject to contractual restrictions on transferability and termination and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid and subject to the Funds
limitation on investments in illiquid securities. To the extent that a swap is not liquid, it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. Like most
other investments, swap agreements are subject to the risk that the market value of the instrument will change in a way detrimental to the Funds interest.
If the Fund uses a swap as a hedge against, or as a substitute for, a portfolio investment, the Fund will be exposed to the risk that the swap will have or will develop imperfect or no correlation with
the portfolio investment. This could cause substantial losses for the Fund. While hedging strategies involving swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting
favorable price movements in other Fund investments. Many swaps are complex and often valued subjectively.
NON-PRINCIPAL RISKS
TAX RISKS
As with any investment, you should
consider how your investment in Shares of the Fund will be taxed. The tax information in the Prospectus and this SAI is provided as general information. You should consult your own tax professional about the tax consequences of an investment in
Shares of the Fund.
Unless your investment in Shares is made through a tax-exempt entity or tax-deferred retirement account, such as an
individual retirement account, you need to be aware of the possible tax consequences when the Fund makes distributions or you sell Fund Shares.
10
CONTINUOUS OFFERING
The method by which Creation Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an
ongoing basis, at any point a distribution, as such term is used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their
being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an order with the
Distributor, breaks them down into constituent Shares, and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for
Shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the
examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter.
Broker-dealer firms should also note that dealers who are not underwriters but are effecting transactions in Shares, whether or not participating in the distribution of Shares, are generally
required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. Firms that incur a
prospectus-delivery obligation with respect to Shares of the Fund are reminded that under Securities Act Rule 153, a prospectus-delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in connection with a sale
on the Exchange is satisfied by the fact that the Funds Prospectus is available at the Exchange upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions as fundamental policies with respect to the Fund. These restrictions cannot be changed without the approval of the holders of a majority of the
Funds outstanding voting securities. For purposes of the 1940 Act, a majority of the outstanding voting securities of the 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. Except with the approval of a majority of the outstanding voting securities, the Fund may not:
1. Concentrate its investments in securities of issuers in the same industry, except as may be necessary to approximate the composition of the Funds underlying Index
1
;
2. Make loans to another person except as permitted by the 1940 Act or other governing statute, by the rules thereunder, or by the SEC or other regulatory agency with authority over the Fund;
3. Issue senior securities or borrow money, except as permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or
other regulatory agency with authority over the Fund;
4. Invest directly in real estate unless the real estate is acquired as a result of
ownership of securities or other instruments. This restriction shall not preclude the Fund from investing in companies that deal in real estate or in instruments that are backed or secured by real estate;
5. Act as an underwriter of another issuers securities, except to the extent the Fund may be deemed to be an underwriter within the meaning of the
Securities Act of 1933 in connection with the Funds purchase and sale of portfolio securities; or
6. Invest in commodities except as
permitted by the 1940 Act or other governing statute, by the Rules thereunder, or by the SEC or other regulatory agency with authority over the Fund.
1
|
The SEC Staff considers concentration to involve more than 25% of a funds assets to be invested in an industry or group of industries.
|
11
In addition to the investment restrictions adopted as fundamental policies as set forth above, the Fund
observes the following restrictions, which may be changed by the Board without a shareholder vote. The Fund will not:
1. Invest in the
securities of a company for the purpose of exercising management or control, provided that the Trust may vote the investment securities owned by the Fund in accordance with its views;
2. Hold illiquid assets in excess of 15% of its net assets. An illiquid asset is any asset which may not be sold or disposed of in the ordinary course of business within seven days at approximately the
value at which the Fund has valued the investment; or
3. Under normal circumstances invest less than 80% of its total assets in component
securities that comprise its benchmark Index or in ADRs or GDRs based on the securities in its Index;
Prior to any change in the Funds
80% investment policy, the Fund will provide shareholders with 60 days written notice. The Fund defines the foregoing terms in accordance with the definition of such terms per the Index.
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 observed continuously. With respect to the limitation on illiquid securities, in the event that a subsequent
change in net assets or other circumstances cause the Fund to exceed its limitation, the Fund will take steps to bring the aggregate amount of illiquid instruments back within the limitations as soon as reasonably practicable.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an investment in the Fund is contained in the Prospectus under PURCHASE AND SALE INFORMATION and ADDITIONAL PURCHASE
AND SALE INFORMATION. The discussion below supplements, and should be read in conjunction with, such sections of the Prospectus.
The
Shares of the Fund are approved for listing and trading on the Exchange, subject to notice of issuance. The Shares trade on the Exchange at prices that may differ to some degree from their net asset value. There can be no assurance that the
requirements of the Exchange necessary to maintain the listing of Shares of the Fund will continue to be met.
The Exchange may, but is not
required to, remove the Shares of the Fund from listing if: (1) following the initial twelve-month period beginning upon the commencement of trading of the Fund, there are fewer than 50 beneficial holders of the Shares for 30 or more
consecutive trading days; (2) the value of its underlying Index or portfolio of securities on which the Fund is based is no longer calculated or available; (3) the indicative optimized portfolio value (IOPV) of the
Fund is no longer calculated or available; or (4) 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 or the Fund.
The Trust reserves the right to adjust the Share price of the Fund in the
future to maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of the Fund.
As in the case of other publicly-traded securities, brokers commissions on transactions will be based on negotiated commission rates at customary
levels.
The base and trading currencies of the Fund is the U.S. dollar. The base currency is the currency in which the Funds net asset
value per Share is calculated and the trading currency is the currency in which Shares of the Fund are listed and traded on the Exchange.
12
MANAGEMENT OF THE TRUST
The following information supplements and should be read in conjunction with the section in the Prospectus entitled MANAGEMENT.
Board Responsibilities.
The management and affairs of the Trust and its series, including the Fund described in this SAI, are overseen by the
Trustees. The Board has approved contracts, as described in this SAI, under which certain companies provide essential management services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is performed by third party service providers, such as the Adviser, Distributor and Administrator. The
Trustees are responsible for overseeing the Trusts service providers and, thus, have oversight responsibility with respect to risk management performed by those service providers. Risk management seeks 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 Fund. The Fund and its service providers employ a variety of processes, procedures and
controls to identify various of those 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. Each service provider is responsible for one or
more discrete aspects of the Trusts business (e.g., a Sub-Adviser is responsible for the day-to-day management of a Funds portfolio investments) and, consequently, for managing the risks associated with that business. The Board has
emphasized to the Funds service providers the importance of maintaining vigorous risk management.
The Trustees role in risk
oversight begins before the inception of the Fund, at which time the Funds Adviser presents the Board with information concerning the investment objectives, strategies and risks of the Fund, as well as proposed investment limitations for the
Fund. Additionally, the Funds Adviser provides the Board with an overview of, among other things, their investment philosophies, brokerage practices and compliance infrastructures. Thereafter, the Board continues its oversight function as
various personnel, including the Trusts Chief Compliance Officer, as well as personnel of the Adviser and other service providers, such as the Funds independent accountants, make periodic reports to the Audit Committee or to the Board
with respect to various aspects of risk management. The Board and the Audit Committee oversee efforts by management and service providers to manage risks to which the Fund may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to the Fund by the Adviser and receives information about those services at its regular meetings. In
addition, on an annual basis, in connection with its consideration of whether to renew the Advisory Agreement with the Adviser, the Board meets with the Adviser to review such services. Among other things, the Board regularly considers the
Advisers adherence to the Funds investment restrictions and compliance with various Fund policies and procedures and with applicable securities regulations. The Board also reviews information about the Funds investments.
The Trusts Chief Compliance Officer reports regularly to the Board to review and discuss compliance issues. At least annually, the
Trusts Chief Compliance Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trusts policies and procedures and those of its service providers, including the Adviser. The report addresses the operation
of the policies and procedures of the Trust and each service provider since the date of the last report; any material changes to the policies and procedures since the date of the last report; any recommendations for material changes to the policies
and procedures; and any material compliance matters since the date of the last report.
The Board receives reports from the Funds
service providers regarding operational risks and risks related to the valuation and liquidity of portfolio securities. Regular reports are made to the Board concerning investments for which market quotations are not readily available. Annually, the
independent registered public accounting firm reviews with the Audit Committee its audit of the Funds financial statements, focusing on major areas of risk encountered by the Fund and noting any significant deficiencies or material weaknesses
in the Funds internal controls. Additionally, in connection with its oversight function, the Board oversees Fund managements implementation of disclosure controls and procedures, which are designed to ensure that information required to
be disclosed by the Trust in its periodic reports with the SEC are recorded, processed, summarized, and reported within the required time periods. The Board also oversees the Trusts internal controls over financial reporting, which comprise
policies and procedures designed to provide reasonable assurance regarding the reliability of the Trusts financial reporting and the preparation of the Trusts financial statements.
From their review of these reports and discussions with the Adviser, the Chief Compliance Officer, the independent registered public accounting firm and
other service providers, the Board and the Audit Committee learn in detail about the material risks of the Fund, thereby facilitating a dialogue about how management and service providers identify and mitigate those risks.
13
The Board recognizes that not all risks that may affect the Fund can be identified and/or quantified, that
it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be necessary to bear certain risks (such as investment-related risks) to achieve the Funds goals, and that the processes, procedures and controls
employed to address certain risks may be limited in their effectiveness. Moreover, reports received by the Trustees as to risk management matters are typically summaries of the relevant information. Most of the Funds investment management and
business affairs are carried out by or through the Funds Adviser and other service providers, each of which has an independent interest in risk management but whose policies and the methods by which one or more risk management functions are
carried out may differ from the Funds and each others in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Boards ability to monitor
and manage risk, as a practical matter, is subject to limitations.
Trustees and Officers.
There are six members of the Board of
Trustees, five of whom are not interested persons of the Trust, as that term is defined in the 1940 Act (Independent Trustees). Frank Nesvet, an Independent Trustee, serves as Chairman of the Board. The Board has determined its
leadership structure is appropriate given the specific characteristics and circumstances of the Trust. The Board made this determination in consideration of, among other things, the fact that the Independent Trustees constitute a super-majority
(greater than 75%) of the Board, the fact that the chairperson of each Committee of the Board is an Independent Trustee, the amount of assets under management in the Trust, and the number of funds (and classes of shares) overseen by the Board. The
Board also believes that its leadership structure facilitates the orderly and efficient flow of information to the Independent Trustees from fund management.
The Board of Trustees has three standing committees: the Audit Committee, Trustee Committee and Pricing and Investment Committee. The Audit Committee and Trustee Committee are each chaired by an
Independent Trustee and composed of all of the Independent Trustees. The Pricing and Investment Committee is composed of Officers of the Trust, investment management personnel of the Adviser and senior operations and administrative personnel of
State Street.
Set forth below are the names, year of birth, position with the Trust, length of term of office, and the principal occupations
during the last five years and other directorships held of each of the persons currently serving as a Trustee or Officer of the Trust.
14
TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
NAME, ADDRESS
AND YEAR OF BIRTH
|
|
POSITION(S)
WITH FUND
|
|
TERM OF
OFFICE AND
LENGTH OF
TIME SERVED
|
|
PRINCIPAL
OCCUPATION(S)
DURING PAST
5 YEARS
|
|
NUMBER OF
PORTFOLIOS
IN FUND
COMPLEX
OVERSEEN
BY TRUSTEE
|
|
OTHER
DIRECTORSHIPS
HELD BY
TRUSTEE
|
|
|
|
|
|
|
INDEPENDENT TRUSTEES
|
|
|
|
|
|
|
|
|
|
|
FRANK NESVET
c/o SPDR Series
Trust
State Street Financial Center
One Lincoln Street
Boston, MA
02111-2900
1943
|
|
Independent Trustee, Chairman, Trustee Committee Chair
|
|
Term: Unlimited
Served:
since
September 2000
|
|
Chief Executive Officer, Libra Group, Inc. (1998-present) (a financial services consulting company).
|
|
[140]
|
|
SPDR Index Shares Funds
(Trustee); SSgA Active ETF Trust (Trustee); SSgA Master Trust (Trustee).
|
|
|
|
|
|
|
DAVID M. KELLY
c/o SPDR Series
Trust
State Street Financial Center
One Lincoln Street
Boston, MA
02111-2900
1938
|
|
Independent
Trustee, Audit
Committee Chair
|
|
Term: Unlimited
Served:
since
September 2000
|
|
Retired.
|
|
[140]
|
|
Penson Worldwide Inc. (Director); CHX Holdings, Inc. and Chicago Stock Exchange (Director); SPDR Index Shares Funds (Trustee) ; SSgA Active ETF Trust (Trustee); SSgA Master Trust
(Trustee).
|
|
|
|
|
|
|
BONNY EUGENIA BOATMAN
c/o SPDR
Series Trust
State Street Financial Center
One Lincoln Street
Boston, MA 02111-2900
1950
|
|
Independent Trustee
|
|
Term: Unlimited
Served:
since
April 2010
|
|
Retired (2005-present);
Managing Director, Columbia Management Group, Bank of America (1984-2005).
|
|
[140]
|
|
SPDR Index Shares Funds (Trustee); SSgA Active ETF Trust (Trustee); SSgA Master Trust (Trustee).
|
|
|
|
|
|
|
DWIGHT D. CHURCHILL
c/o SPDR
Series Trust
State Street Financial Center
One Lincoln Street
Boston, MA 02111-2900
1953
|
|
Independent Trustee
|
|
Term: Unlimited
Served:
since
April 2010
|
|
Self-employed consultant since 2010; Head of Fixed Income and other Senior Management roles, Fidelity Investments (1993-2009).
|
|
[140]
|
|
Affiliated Managers Group, Inc. (Director); SPDR Index Shares Funds (Trustee); SSgA Active ETF Trust (Trustee); SSgA Master Trust (Trustee).
|
|
|
|
|
|
|
CARL G. VERBONCOEUR
c/o SPDR
Series Trust
State Street Financial Center
One Lincoln Street
Boston, MA 02111-2900
1952
|
|
Independent Trustee
|
|
Term: Unlimited
Served:
since
April 2010
|
|
Self-employed consultant since 2009; Chief Executive Officer, Rydex Investments
(2003-2009).
|
|
[140]
|
|
The Motley Fool Funds Trust (Trustee); SPDR Index Shares Funds (Trustee); SSgA Active ETF Trust (Trustee); SSgA Master Trust (Trustee).
|
|
|
|
|
|
|
INTERESTED TRUSTEE
|
|
|
|
|
|
|
|
|
|
|
JAMES E. ROSS*
SSgA Funds
Management, Inc.
State Street Financial Center
One Lincoln Street
Boston, MA 02111
1965
|
|
Interested
Trustee
|
|
Term: Unlimited
Served
as
Trustee: since
April
2010
|
|
Chairman and Director, SSgA Funds Management, Inc. (2005-present); President, SSgA Funds Management, Inc. (2005-2012); Senior Managing Director, State Street Global
Advisors
(2006-present); Principal State Street Global Advisors (2006-present).
|
|
[170]
|
|
SPDR Index Shares Funds (Trustee); SSgA Active ETF Trust (Trustee); SSgA Master Trust (Trustee); Select Sector SPDR Trust (Trustee);
State Street Master Funds (Trustee); and State Street Institutional
Investment Trust
(Trustee).
|
*
|
Mr. Ross is an Interested Trustee because of his employment with the Adviser and ownership interest in an affiliate of the Adviser. Mr. Ross previously served
as an Interested Trustee from November 2005 to December 2009.
|
15
OFFICERS
|
|
|
|
|
|
|
NAME, ADDRESS
AND YEAR OF BIRTH
|
|
POSITION(S)
WITH FUND
|
|
TERM OF
OFFICE AND
LENGTH OF
TIME SERVED
|
|
PRINCIPAL
OCCUPATION(S)
DURING PAST
5 YEARS
|
ELLEN M. NEEDHAM
SSgA Funds
Management, Inc.
State Street Financial Center
One Lincoln Street
Boston, MA 02111
1967
|
|
President
|
|
Term: Unlimited
Served:
since
October 2012
|
|
President and Director, SSgA Funds Management, Inc. (June 2012-present); Chief Operating Officer, SSgA Funds Management, Inc. (May 2010-June 2012); Senior Managing Director, SSgA
Funds Management, Inc. (1992-2012)*; Senior Managing Director, State Street Global Advisors (1992-present).*
|
|
|
|
|
ANN M. CARPENTER
SSgA Funds
Management, Inc.
State Street Financial Center
One Lincoln Street
Boston, MA 02111
1966
|
|
Vice
President
|
|
Term: Unlimited
Served:
since
August 2012
|
|
Vice President, State Street Global Advisors and SSgA Funds Management, Inc.
(2005-present).*
|
|
|
|
|
MICHAEL P. RILEY
SSgA Funds
Management, Inc.
State Street Financial Center
One Lincoln Street
Boston, MA 02111
1969
|
|
Vice
President
|
|
Term: Unlimited
Served:
since
February 2005
|
|
Vice President, State Street Global Advisors and SSgA Funds Management, Inc.
(2008-present); Principal, State Street Global Advisors and SSgA Funds Management, Inc.
(2005-2008).
|
|
|
|
|
RYAN M. LOUVAR
State Street
Bank and Trust Company
Four Copley Place, CPH0326
Boston, MA 02116
1972
|
|
Secretary
|
|
Term: Unlimited
Served:
since
August 2008
|
|
Vice President and Senior Managing Counsel, State Street Bank and Trust Company (2005-present).*
|
|
|
|
|
MARK E. TUTTLE
State Street
Bank and Trust Company
Four Copley Place, CPH0326
Boston, MA 02116
1970
|
|
Assistant
Secretary
|
|
Term: Unlimited
Served:
since
August 2007
|
|
Vice President and Counsel, State Street
Bank and Trust Company (2007-present)*; Assistant Counsel, BISYS Group, Inc. (2005-2007)* (a financial services company).
|
|
|
|
|
SCOTT E. HABEEB
State Street
Bank and Trust Company
Four Copley Place, CPH0326
Boston, MA 02116
1968
|
|
Assistant
Secretary
|
|
Term: Unlimited
Served:
since
August 2011
|
|
Vice President and Counsel, State Street Bank and Trust Company (2007-present).*
|
|
|
|
|
CHAD C. HALLETT
State Street
Bank and Trust Company
Four Copley Place, CPH03
Boston, MA 02116
1969
|
|
Treasurer
|
|
Term: Unlimited
Served:
since
November 2010
|
|
Vice President, State Street Bank and Trust Company (2001-present).*
|
|
|
|
|
MATTHEW FLAHERTY
State Street
Bank and Trust Company
Four Copley Place, CPH03
Boston, MA 02116
1971
|
|
Assistant
Treasurer
|
|
Term: Unlimited
Served:
since
May 2005
|
|
Vice President, State Street Bank and Trust Company (1994-present).*
|
|
|
|
|
LAURA F. DELL
State Street
Bank and Trust Company
Four Copley Place, CPH03
Boston, MA 02116
1964
|
|
Assistant
Treasurer
|
|
Term: Unlimited
Served:
since
November 2007
|
|
Vice President, State Street Bank and Trust Company (2002-present).*
|
|
|
|
|
JACQUELINE ANGELL
State Street
Bank and Trust Company
20 Churchill Place
London, UK E14 5HJ
1974
|
|
Chief
Compliance
Officer
|
|
Term: Unlimited
Served:
since
February 2011
|
|
Head of UK Compliance, State Street Bank and Trust Company (July 2012-present); Vice President, State Street Global Advisors and SSgA
Funds Management, Inc. (2008-2012); Director of Investment Adviser Oversight, Fidelity Investments
(2006-2008).
|
*
|
Served in various capacities and/or with various affiliated companies during noted time period.
|
16
Individual Trustee Qualifications
The Board has concluded that each of the Trustees should serve on the Board because of his or her ability to review and understand information about the Fund provided to him or her by management, to
identify and request other information he or she may deem relevant to the performance of his or her duties, to question management and other service providers regarding material factors bearing on the management and administration of the Fund, and
to exercise his or her business judgment in a manner that serves the best interests of the Funds shareholders. The Board has concluded that each of the Trustees should serve as a Trustee based on his or her own experience, qualifications,
attributes and skills as described below.
The Board has concluded that Mr. Nesvet should serve as Trustee because of the experience he
has gained serving as the Chief Executive Officer of a financial services consulting company, serving on the boards of other investment companies, and serving as chief financial officer of a major financial services company; his knowledge of the
financial services industry, and the experience he has gained serving as Trustee of the Trust since 2000.
The Board has concluded that
Mr. Kelly should serve as Trustee because of the experience he gained serving as the President and Chief Executive Officer of the National Securities Clearing Corporation, his previous and current directorship experience, and the experience he
has gained serving as Trustee of the Trust since 2000.
The Board has concluded that Ms. Boatman should serve as Trustee because of the
experience she gained serving as Managing Director of the primary investment division of one of the nations leading financial institutions and her knowledge of the financial services industry. Ms. Boatman was elected to serve as Trustee
of the Trust in April 2010.
The Board has concluded that Mr. Churchill should serve as Trustee because of the experience he gained
serving as the Head of the Fixed Income Division of one of the nations leading mutual fund companies and provider of financial services and his knowledge of the financial services industry. Mr. Churchill was elected to serve as Trustee of
the Trust in April 2010.
The Board has concluded that Mr. Verboncoeur should serve as Trustee because of the experience he gained
serving as the Chief Executive Officer of a large financial services and investment management company, his knowledge of the financial services industry and his experience serving on the boards of other investment companies. Mr. Verboncoeur was
elected to serve as Trustee of the Trust in April 2010.
The Board has concluded that Mr. Ross should serve as Trustee because of the
experience he has gained in his various roles with the Adviser, his knowledge of the financial services industry, and the experience he has gained serving as Trustee of the Trust since 2005 (Mr. Ross did not serve as Trustee from December 2009 until
April 2010).
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary individual skills and
experience of the individual Trustees primarily in the broader context of the Boards overall composition so that the Board, as a body, possesses the appropriate (and appropriately diverse) skills and experience to oversee the business of the
Fund.
REMUNERATION OF THE TRUSTEES AND OFFICERS
No officer, director or employee of the Adviser, its parent or subsidiaries receives any compensation from the Trust for serving as an officer or Trustee of the Trust. The Trust, SPDR Index Shares Funds
(SIS), SSgA Master Trust and SSgA Active ETF Trust (together with the Trust, the Trusts) pay, in the aggregate, each Independent Trustee an annual fee of $150,000 plus $10,000 per in-person meeting attended. An Independent
Trustee will receive $1,250 for each telephonic or video conference meeting attended. The Chairman of the Board receives an additional annual fee of $50,000 and the Chairman of the Audit Committee receives an additional annual fee of $20,000. Prior
to July 1, 2012, each Independent Trustee received an annual fee of $132,500 plus $7,500 per in-person meeting attended and $1,250 for each telephonic or video conference meeting attended. The Chairman of the Board received an additional annual
fee of $37,500 and the Chairman of the Audit Committee received an additional annual fee of $15,000. The Trusts also reimburse each Independent Trustee for travel and other out-of-pocket expenses incurred by him/her in connection with attending such
meetings and in connection with attending industry seminars and meetings. Trustee fees are allocated between the Trusts and each of their respective series in such a manner as deemed equitable, taking into consideration the relative net assets of
the series.
17
The table below shows the compensation that the Independent Trustees received during the Trusts fiscal
year ended June 30, 2012.
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|
|
|
NAME OF INDEPENDENT TRUSTEE
|
|
AGGREGATE
COMPENSATION
FROM THE
TRUST
|
|
|
PENSION OR
RETIREMENT
BENEFITS
ACCRUED AS
PART
OF
TRUST
EXPENSES
|
|
|
ESTIMATED
ANNUAL
BENEFITS
UPON
RETIREMENT
|
|
|
TOTAL
COMPENSATION
FROM THE
TRUST AND
FUND COMPLEX
PAID TO
TRUSTEES
(1)
|
|
Frank Nesvet
|
|
$
|
179,112
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
222,500
|
|
Bonny Boatman
|
|
$
|
148,925
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
185,000
|
|
Dwight Churchill
|
|
$
|
143,893
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
178,750
|
|
David M. Kelly
|
|
$
|
155,968
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
193,750
|
|
Carl Verboncoeur
|
|
$
|
143,893
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
$
|
178,750
|
|
(1)
|
The Fund Complex includes the Trust.
|
STANDING
COMMITTEES
Audit Committee. The Board has an Audit Committee consisting of all Independent Trustees. Mr. Kelly serves as Chair. The Audit
Committee meets with the Trusts independent auditors to review and approve the scope and results of their professional services; to review the procedures for evaluating the adequacy of the Trusts accounting controls; to consider the
range of audit fees; and to make recommendations to the Board regarding the engagement of the Trusts independent auditors. The Audit Committee met four (4) times during the fiscal year ended June 30, 2012.
Trustee Committee. The Board has established a Trustee Committee consisting of all Independent Trustees. Mr. Nesvet serves as Chair. The
responsibilities of the Trustee Committee are to: 1) nominate Independent Trustees; 2) review on a periodic basis the governance structures and procedures of the Funds; 3) review proposed resolutions and conflicts of interest that may arise in the
business of the Funds and may have an impact on the investors of the Funds; 4) review matters that are referred to the Committee by the Chief Legal Officer or other counsel to the Trust; and 5) provide general oversight of the Funds on behalf of the
investors of the Funds. The Trustee Committee met five (5) times during the fiscal year ended June 30, 2012.
Pricing and Investment
Committee. The Board also has established a Pricing and Investment Committee that is composed of Officers of the Trust, investment management personnel of the Adviser and senior operations and administrative personnel of State Street. The Pricing
and Investment Committee is responsible for the valuation and revaluation of any portfolio investments for which market quotations or prices are not readily available. The Pricing and Investment Committee meets only when necessary. The Board met
four (4) times during the fiscal year ended June 30, 2012 to review and ratify fair value pricing determinations of the Pricing and Investment Committee. The Pricing and Investment Committee reports to the Board on a quarterly basis.
OWNERSHIP OF FUND SHARES
As of
December 31, 2012, neither the Independent Trustees nor their immediate family members owned beneficially or of record any securities in the Adviser, Principal Underwriter or any person controlling, controlled by, or under common control with
the Adviser or Principal Underwriter.
18
The following table shows as of December 31, 2012, the amount of equity securities beneficially owned
by the Trustees in the Trust:
|
|
|
|
|
|
|
Name of Trustee
|
|
Fund
|
|
Dollar Range
of Equity
Securities in
the Trust
|
|
Aggregate
Dollar Range of
Equity Securities
in All Funds
Overseen
by
Trustee in
Family of
Investment
Companies
|
|
|
|
|
Independent Trustees:
|
|
|
|
|
|
|
Frank Nesvet
|
|
None
|
|
None
|
|
None
|
Bonny Eugenia Boatman
|
|
None
|
|
None
|
|
None
|
Dwight D. Churchill
|
|
None
|
|
None
|
|
None
|
David M. Kelly
|
|
None
|
|
None
|
|
None
|
Carl G. Verboncoeur
|
|
None
|
|
None
|
|
$1 - $10,000
|
|
|
|
|
Interested Trustee:
|
|
|
|
|
|
|
James Ross
|
|
None
|
|
None
|
|
Over $100,000
|
CODES OF ETHICS
The Trust and the Adviser (which includes applicable reporting personnel of the Distributor) each have adopted a code of ethics as required by applicable
law, which is designed to prevent affiliated persons of the Trust, the Adviser and the Distributor from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Fund (which may also be
held by persons subject to the codes of ethics).
There can be no assurance that the codes of ethics will be effective in preventing such
activities. Each code of ethics, filed as exhibits to this registration statement, may be examined at the office of the SEC in Washington, D.C. or on the Internet at the SECs website at http://www.sec.gov.
PROXY VOTING POLICIES
The Board believes that
the voting of proxies on securities held by the Fund is an important element of the overall investment process. As such, the Board has delegated the responsibility to vote such proxies to the Adviser. The Advisers proxy voting policy is
attached at the end of this SAI. Information regarding how the Fund voted proxies relating to its portfolio securities during the most recent twelve-month period ended June 30 is available: (1) without charge by calling 1-866-787-2257;
(2) on the Funds website at
www.spdrs.com
; and (3) on the SECs website at http://www.sec.gov.
DISCLOSURE OF
PORTFOLIO HOLDINGS POLICY
The Trust has adopted a policy regarding the disclosure of information about the Trusts portfolio holdings.
The Board must approve all material amendments to this policy. The Funds 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 Fund Shares, together with estimates and actual cash components, is publicly disseminated daily prior to the opening
of the Exchange via the National Securities Clearing Corporation (NSCC). The basket represents one Creation Unit of the Fund. The Trust, the Adviser or State Street will not disseminate non-public information concerning the Trust,
except: (i) to a party for a legitimate business purpose related to the day-to-day operations of the Fund or (ii) to any other party for a legitimate business or regulatory purpose, upon waiver or exception.
THE INVESTMENT ADVISER
SSgA FM acts as
investment adviser to the Trust and, subject to the supervision of the Board, is responsible for the investment management of the Fund. As of , 2013,
the Adviser managed approximately $ billion. The Advisers principal address is State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111. The Adviser,
a Massachusetts corporation, is a wholly owned subsidiary of State Street Corporation, a publicly held bank holding company. State Street Global Advisors (SSgA), consisting of the Adviser and other investment advisory affiliates of State
Street Corporation, is the investment management arm of State Street Corporation.
The Adviser serves as investment adviser to the Fund
pursuant to an investment advisory agreement (Investment Advisory Agreement) between the Trust and the Adviser. The Investment Advisory Agreement, with respect to the Fund, continues in effect for two years from its effective date, and
thereafter is subject to annual approval by (1) the
19
Board or (2) vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the 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. The Investment Advisory Agreement with respect to the Fund 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 the Funds outstanding voting securities. The Investment Advisory 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).
Under the Investment Advisory
Agreement, the Adviser, subject to the supervision of the Board and in conformity with the stated investment policies of the 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 Fund. Pursuant to the Investment Advisory 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.
A discussion regarding the basis for the Boards approval of the Investment Advisory Agreement regarding the Fund will be available in the
Trusts Annual Report to Shareholders for the period ended June 30, 2013.
For the services provided to the Fund under the
Investment Advisory Agreement, the Fund pays the Adviser monthly fees based on a percentage of the Funds average daily net assets as set forth in the Funds Prospectus. From time to time, the Adviser may waive all or a portion of its fee.
The Adviser pays all expenses of the Fund other than the management fee, brokerage, taxes, interest, fees and expenses of the Independent Trustees (including any Trustees counsel fees), acquired fund fees and expenses, litigation expenses and
other extraordinary expenses.
The Fund had not commenced operations as of September 30, 2012 and therefore did not pay fees to the
Adviser for the past three fiscal years.
PORTFOLIO MANAGERS
The Adviser manages the Fund using a team of investment professionals. The professionals primarily responsible for the day-to-day portfolio management of the Fund are:
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Fund
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|
Portfolio Managers
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SPDR Russell Small Cap Completeness ETF
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Mike Feehily and John Tucker
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The following table lists the number and types of accounts managed by each of the key professionals involved in the
day-to-day portfolio management for the Fund and assets under management in those accounts. The total number of accounts and assets have been allocated to each respective manager. Therefore, some accounts and assets have been counted twice.
Other Accounts Managed as of June 30, 2012
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|
|
|
|
|
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|
|
|
|
|
|
|
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|
|
|
|
|
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Portfolio Manager
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Registered
Investment
Company
Accounts
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Assets
Managed
(billions)*
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|
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Pooled
Investment
Vehicle
Accounts
|
|
|
Assets
Managed
(billions)*
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|
|
Other
Accounts
|
|
|
Assets
Managed
(billions)*
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|
|
Total
Assets
Managed
(billions)*
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|
|
|
|
|
|
|
|
|
Mike Feehily
|
|
|
75
|
|
|
$
|
77.63
|
|
|
|
250
|
|
|
$
|
270.47
|
|
|
|
374
|
|
|
$
|
339.69
|
|
|
$
|
687.79
|
|
|
|
|
|
|
|
|
|
John Tucker
|
|
|
75
|
|
|
$
|
77.63
|
|
|
|
250
|
|
|
$
|
270.47
|
|
|
|
374
|
|
|
$
|
339.69
|
|
|
$
|
687.79
|
|
*
|
There are no performance fees associated with these portfolios.
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The Fund had not commenced operations prior to the date of this SAI and therefore the portfolio managers did not beneficially own any Fund Shares.
20
A portfolio manager that has responsibility for managing more than one account may be subject to potential
conflicts of interest because he or she is responsible for other accounts in addition to the Fund. Those conflicts could include preferential treatment of one account over others in terms of: (a) the portfolio managers execution of
different investment strategies for various accounts; or (b) the allocation of resources or of investment opportunities. The Adviser has adopted policies and procedures designed to address these potential material conflicts. For instance,
portfolio managers are normally responsible for all accounts within a certain investment discipline, and do not, absent special circumstances, differentiate among the various accounts when allocating resources. Additionally, the Adviser and its
advisory affiliates have processes and procedures for allocating investment opportunities among portfolios that are designed to provide a fair and equitable allocation among the portfolio managers accounts with the same strategy.
Portfolio managers may manage numerous accounts for multiple clients. These accounts may include registered investment companies, other types of pooled
accounts (e.g., collective investment funds), and separate accounts (i.e., accounts managed on behalf of individuals or public or private institutions). Portfolio managers make investment decisions for each account based on the investment objectives
and policies and other relevant investment considerations applicable to that portfolio. A potential conflict of interest may arise as a result of the portfolio managers responsibility for multiple accounts with similar investment guidelines.
Under these circumstances, a potential investment may be suitable for more than one of the portfolio managers accounts, but the quantity of the investment available for purchase is less than the aggregate amount the accounts would ideally
devote to the opportunity. Similar conflicts may arise when multiple accounts seek to dispose of the same investment. The portfolio managers may also manage accounts whose objectives and policies differ from that of the Fund. These differences may
be such that under certain circumstances, trading activity appropriate for one account managed by the portfolio manager may have adverse consequences for another account managed by the portfolio manager. For example, an account may sell a
significant position in a security, which could cause the market price of that security to decrease, while the fund maintained its position in that security.
A potential conflict may arise when the portfolio managers are responsible for accounts that have different advisory feesthe difference in fees could create an incentive for the portfolio manager to
favor one account over another, for example, in terms of access to investment opportunities. Another potential conflict may arise when the portfolio manager has an investment in one or more accounts that participate in transactions with other
accounts. His or her investment(s) may create an incentive for the portfolio manager to favor one account over another. The Adviser has adopted policies and procedures reasonably designed to address these potential material conflicts. For instance,
portfolio managers are normally responsible for all accounts within a certain investment discipline, and do not, absent special circumstances, differentiate among the various accounts when allocating resources. Additionally, the Adviser and its
advisory affiliates have processes and procedures for allocating investment opportunities among portfolios that are designed to provide a fair and equitable allocation.
The compensation of the Advisers investment professionals is based on a number of factors. The first factor considered is external market. Through a compensation survey process, the Adviser seeks to
understand what its competitors are paying people to perform similar roles. This data is then used to determine a competitive baseline in the areas of base pay, bonus, and long term incentive (i.e. equity). The second factor taken into consideration
is the size of the pool available for this compensation. The Adviser is a part of State Street Corporation, and therefore works within its corporate environment on determining the overall level of its incentive compensation pool. Once determined,
this pool is then allocated to the various locations and departments of the Adviser and its affiliates. The discretionary determination of the allocation amounts to these locations and departments is influenced by the competitive market data, as
well as the overall performance of the group, and in the case of investment teams, the investment performance of their strategies. The pool is then allocated on a discretionary basis to individual employees based on their individual performance.
There is no fixed formula for determining these amounts, nor is anyones compensation directly tied to the investment performance or asset value of a product or strategy. The same process is followed in determining incentive equity allocations.
THE ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
State Street, State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111, serves as Administrator for the Trust pursuant to an administration agreement (Administration
Agreement). Under the Administration Agreement, State Street is responsible for certain administrative services associated with day-to-day operations of the Fund.
21
Pursuant to the Administration Agreement, the Trust has agreed to a limitation on damages and to indemnify
the Administrator for certain liabilities, including certain liabilities arising under the federal securities laws; provided, however, such indemnity of the Administrator shall not apply in the case of the Administrators negligence or willful
misconduct in the performance of its duties. Under the Custodian Agreement and Transfer Agency Agreement, as described below, the Trust has also provided indemnities to State Street for certain liabilities.
State Street also serves as Custodian for the Fund pursuant to a custodian agreement (Custodian Agreement). As Custodian, State Street holds
the Funds assets, calculates the net asset value of the Shares and calculates net income and realized capital gains or losses. State Street and the Trust will comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
State Street also serves as Transfer Agent of the Fund pursuant to a transfer agency agreement (Transfer Agency Agreement).
Compensation.
As compensation for its services under the Administration Agreement, the Custodian Agreement and Transfer Agency
Agreement, State Street shall receive a fee for its services, calculated based on the average aggregate net assets of the Trust and SIS, as follows: 0.045% on the first $4.5 billion, 0.040% on the next $4.5 billion, and 0.0225% on the next $3.5
billion, and 0.0125% thereafter. For the Fund, after the first six months of operations, a $75,000 minimum fee per series applies. The greater of the minimum fee or the asset based fee will be charged. In addition, State Street shall receive global
safekeeping and transaction fees, which are calculated on a per-country basis, in-kind creation (purchase) and redemption transaction fees (as described below) and revenue on certain cash balances. State Street may be reimbursed by the Fund for its
out-of-pocket expenses. The Investment Advisory Agreement provides that the Adviser will pay certain operating expenses of the Trust, including the fees due to State Street under each of the Administration Agreement, the Custodian Agreement and the
Transfer Agency Agreement.
THE DISTRIBUTOR
State Street Global Markets, LLC is the principal underwriter and Distributor of Shares. Its principal address is State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111. Investor
information can be obtained by calling 1-866-787-2257. The Distributor has entered into a distribution agreement (Distribution Agreement) with the Trust pursuant to which it distributes Shares of the Fund. The Distribution Agreement will
continue for two years from its effective date and is renewable annually thereafter. Shares will be continuously offered for sale by the Trust through the Distributor only in Creation Units, as described in the Prospectus and below under
PURCHASE AND REDEMPTION OF CREATION UNITS. Shares in less than Creation Units are not distributed by the Distributor. The Distributor will deliver the Prospectus to persons purchasing Creation Units and will maintain records of both
orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the Securities Exchange Act of 1934 (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 assist Authorized Participants (as defined below) in assembling
shares to purchase Creation Units or upon redemption, for which it may receive commissions or other fees from such Authorized Participants. The Distributor also receives compensation from State Street for providing on-line creation and redemption
functionality to Authorized Participants through its Fund Connect application.
The Adviser or Distributor, or an affiliate of the Adviser or
Distributor, may directly or indirectly make cash payments to certain broker-dealers for participating in activities that are designed to make registered representatives and other professionals more knowledgeable about exchange traded products,
including the Fund, or for other activities, such as participation in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. Payments to a broker-dealer or
intermediary may create potential conflicts of interest between the broker-dealer or intermediary and its clients. These amounts, which may be significant, are paid by the Adviser and/or Distributor from their own resources and not from the assets
of the Fund.
The Distribution Agreement provides that it may be terminated at any time, without the payment of any penalty, as to the Fund:
(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 Fund, 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).
22
The continuation of the Distribution Agreement, any Investor Services Agreements and any other related
agreements is subject to annual approval of the Board, including by a majority of the Independent Trustees, as described above.
Each of the
Investor Services Agreements will provide 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 of the outstanding voting securities
(as defined in the 1940 Act) of the relevant Fund, on at least 60 days written notice to the other party. Each of the Distribution Agreement and the Investor Services Agreements 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). Each Investor Services Agreement is also terminable by the applicable Investor Service Organization upon 60 days notice to the other party thereto.
The allocation among the Funds of fees and expenses payable under the Distribution Agreement and the Investor Services Agreements will be
made pro rata in accordance with the daily net assets of the respective Funds.
The Distributor may also enter into agreements with securities
dealers (Soliciting Dealers) who will solicit purchases of Creation Unit aggregations of Fund Shares. Such Soliciting Dealers may also be Participating Parties (as defined in the Book Entry Only System section below), DTC
Participants (as defined below) and/or Investor Services Organizations.
Pursuant to the Distribution Agreement, the Trust has agreed to
indemnify the Distributor, and may indemnify Soliciting Dealers and Authorized Participants (as described below) entering into agreements with the Distributor, 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 under the Distribution Agreement or other
agreement, as applicable.
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases and sales of securities for the Fund is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, the Trusts policy is to pay commissions which are considered fair and reasonable without
necessarily determining that the lowest possible commissions are paid in all circumstances. The Trust believes that a requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude the Fund
and the Adviser from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, the Adviser relies upon its experience and knowledge regarding commissions
generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction. Such determinations are necessarily subjective and imprecise, as in most cases an exact
dollar value for those services is not ascertainable. The Trust has adopted policies and procedures that prohibit the consideration of sales of the Funds Shares as a factor in the selection of a broker or dealer to execute its portfolio
transactions.
In selecting a broker/dealer for each specific transaction, the Adviser chooses the broker/dealer deemed most capable of
providing the services necessary to obtain the most favorable execution and does not take the sale of Fund Shares into account. The Adviser considers the full range of brokerage services applicable to a particular transaction that may be considered
when making this judgment, which may include, but is not limited to: liquidity, price, commission, timing, aggregated trades, capable floor brokers or traders, competent block trading coverage, ability to position, capital strength and stability,
reliable and accurate communications and settlement processing, use of automation, knowledge of other buyers or sellers, arbitrage skills, administrative ability, underwriting and provision of information on a particular security or market in which
the transaction is to occur. The specific criteria will vary depending upon the nature of the transaction, the market in which it is executed, and the extent to which it is possible to select from among multiple broker/dealers. The Adviser will also
use electronic crossing networks when appropriate.
23
The Adviser does not currently use the Funds assets for, or participate in, third party soft dollar
arrangements, although the Adviser may receive proprietary research from various full service brokers, the cost of which is bundled with the cost of the brokers execution services. The Adviser does not pay up for the value of any
such proprietary research. The Adviser may aggregate trades with clients of SSgA, whose commission dollars may be used to generate soft dollar credits for SSgA. Although the Advisers clients commissions are not used for third party soft
dollars, the Advisers and SSgAs clients may benefit from the soft dollar products/services received by SSgA.
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 and consistent with its fiduciary obligations 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 prompt execution of orders at the most favorable net price.
The Fund will not deal with affiliates in principal transactions unless permitted by exemptive order or applicable rule or regulation. The Fund had not
commenced operations as of September 30, 2012 and therefore did not pay brokerage commissions during the past fiscal year.
Securities of
Regular Broker-Dealer. The Fund is required to identify any securities of its regular brokers and dealers (as such term is defined in the 1940 Act) which it may hold at the close of its most recent fiscal year. Regular
brokers or dealers of the Trust are the ten brokers or dealers that, during the most recent fiscal year: (i) received the greatest dollar amounts of brokerage commissions from the Trusts portfolio transactions; (ii) engaged as
principal in the largest dollar amounts of portfolio transactions of the Trust; or (iii) sold the largest dollar amounts of the Trusts shares. The Fund was not operational and has not engaged in transactions prior to the date of this SAI.
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 or transaction costs. The portfolio turnover rate for the Fund is expected to be under 100%. The Fund may also experience higher portfolio turnover when migrating to a different benchmark index. The overall reasonableness of
brokerage commissions and transaction costs is evaluated by the Adviser based upon its knowledge of available information as to the general level of commissions and transaction costs 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 Prospectus entitled ADDITIONAL PURCHASE AND SALE INFORMATION.
The Depository Trust Company (DTC) acts as securities depositary for the Shares. Shares of the Fund are represented by securities registered
in the name of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in the limited circumstance provided below, 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 the FINRA. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (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.
24
Conveyance of all notices, statements and other communications to Beneficial Owners is effected as follows.
Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the Shares of the Fund held by each DTC Participant. The Trust, either
directly or through a third party service, 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, either directly or through a third party
service, 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 and/or third party service a fair and reasonable amount as reimbursement for
the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions shall be
made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants accounts with payments in amounts proportionate to
their respective beneficial interests in Shares of the Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners of Shares held through such DTC Participants will be governed by
standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a street name, and will be the responsibility of such DTC Participants.
The Trust has no responsibility or liability for any 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 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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The Fund had not commenced operations prior to the date of this SAI and therefore did not have any beneficial owners that owned greater than 5% of the
outstanding voting securities as of the date of this SAI.
An Authorized Participant (as defined below) may hold of record more than 25% of
the outstanding Shares of the Fund. From time to time, Authorized Participants may be a beneficial and/or legal owner of the Fund, may be affiliated with an index provider, may be deemed to have control of the Fund and/or may be able to affect the
outcome of matters presented for a vote of the shareholders of the Fund. Authorized Participants may execute an irrevocable proxy granting the Distributor or another affiliate of State Street (the Agent) power to vote or abstain from
voting such Authorized Participants beneficially or legally owned Shares of the Fund. In such cases, the Agent shall mirror vote (or abstain from voting) such Shares in the same proportion as all other beneficial owners of the Fund.
The Trustees and Officers of the Trust, as a group, own less than 1% of the Trusts voting securities as of the date of this SAI.
PURCHASE AND REDEMPTION OF CREATION UNITS
The Fund issues and redeems its Shares on a continuous basis, at net asset value, only in a large specified number of Shares called a Creation Unit, either principally in-kind for securities
included in the relevant Index or in cash for the value of such securities. The value of the Fund is determined once each business day, normally as of the Closing Time. Creation Unit sizes are 50,000 Shares per Creation Unit.
25
PURCHASE (CREATION). The Trust issues and sells Shares of the Fund only: in Creation Units on a continuous
basis through the Principal Underwriter, without a sales load (but subject to transaction fees), at their NAV per share next determined after receipt of an order, on any Business Day (as defined below), in proper form pursuant to the terms of the
Authorized Participant Agreement (Participant Agreement). A Business Day with respect to the Fund is, generally, any day on which the NYSE is open for business.
FUND DEPOSIT. The consideration for purchase of a Creation Unit of the Fund generally consists of either (i) the in-kind deposit of a designated portfolio of securities (the Deposit
Securities) per each Creation Unit, constituting a substantial replication, or a portfolio sampling representation, of the securities included in the relevant Funds benchmark Index and the Cash Component (defined below), computed as
described below or (ii) the cash value of the Deposit Securities (Deposit Cash) and Cash Component, computed as described below. When accepting purchases of Creation Units for cash, the Fund may incur additional costs
associated with the acquisition of Deposit Securities that would otherwise be provided by an in-kind purchaser.
Together, the Deposit
Securities or Deposit Cash, as applicable, and the Cash Component constitute the Fund Deposit, which represents the minimum initial and subsequent investment amount for a Creation Unit of the Fund. The Cash Component is an
amount equal to the difference between the net asset value of the Shares (per Creation Unit) and the market value of the Deposit Securities or Deposit Cash, as applicable. If the Cash Component is a positive number (i.e., the net asset value per
Creation Unit exceeds the market value of the Deposit Securities or Deposit Cash, as applicable), the Cash Component shall be such positive amount. If the Cash Component is a negative number (i.e., the net asset value per Creation Unit is less than
the market value of the Deposit Securities or Deposit Cash, as applicable), the Cash Component shall be such negative amount and the creator will be entitled to receive cash in an amount equal to the Cash Component. The Cash Component serves the
function of compensating for any differences between the net asset value per Creation Unit and the market value of the Deposit Securities or Deposit Cash, as applicable. Computation of the Cash Component excludes any stamp duty or other similar fees
and expenses payable upon transfer of beneficial ownership of the Deposit Securities, if applicable, which shall be the sole responsibility of the Authorized Participant (as defined below).
The Custodian, through 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 or the required amount of Deposit Cash, as applicable, to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for the Fund. Such Fund Deposit is subject to
any applicable adjustments as described below, in order to effect purchases of Creation Units of the Fund until such time as the next-announced composition of the Deposit Securities or the required amount of Deposit Cash, as applicable, is made
available.
The identity and number of shares of the Deposit Securities or the amount of Deposit Cash, as applicable, required for the Fund
Deposit for the 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 the Fund. The composition of the Deposit Securities may also change in
response to adjustments to the weighting or composition of the component securities of the Funds Index.
As noted above, the Trust
reserves the right to permit or require the substitution of Deposit Cash to replace any Deposit Security, which shall be added to the Cash Component, including, without limitation, in situations where the Deposit Security: (i) may not be
available in sufficient quantity for delivery; (ii) may not be eligible for transfer through the systems of DTC for corporate securities and municipal securities; (iii) may not be eligible for trading by an Authorized Participant (as
defined below) or the investor for which it is acting; (iv) would be restricted under the securities laws or where the delivery of the Deposit Security to the Authorized Participant would result in the disposition of the Deposit Security by the
Authorized Participant becoming restricted under the securities laws; or (v) in certain other situations (collectively, non-standard orders). The Trust also reserves the right to include or remove Deposit Securities from the basket
in anticipation of index rebalancing changes. 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 subject Index
being tracked by the relevant Fund or resulting from certain corporate actions.
PROCEDURES FOR PURCHASE OF CREATION UNITS. To be eligible to
place orders with the Principal Underwriter, as facilitated via the Transfer Agent, to purchase a Creation Unit of the Fund, an entity must be (i) a Participating Party, i.e., a broker-dealer or other participant in the clearing
process through the Continuous Net Settlement System of the NSCC (the Clearing Process), a clearing agency that is registered with the SEC; or (ii) a
26
DTC Participant (see BOOK ENTRY ONLY SYSTEM). In addition, each Participating Party or DTC Participant (each, an Authorized Participant) must execute a Participant
Agreement that has been agreed to by the Principal Underwriter and the Transfer Agent, and that has been accepted by the Trust, with respect to purchases and redemptions of Creation Units. Each Authorized Participant will agree, pursuant to the
terms of a Participant Agreement, on behalf of itself or any investor on whose behalf it will act, to certain conditions, including that it will pay to the Trust, an amount of cash sufficient to pay the Cash Component together with the creation
transaction fee (described below) and any other applicable fees, taxes and additional variable charge.
All orders to purchase Shares directly
from the Fund, including non-standard orders, must be placed for one or more Creation Units and in the manner and by the time set forth in the Participant Agreement and/or applicable order form. The date on which an order to purchase Creation Units
(or an order to redeem Creation Units, as set forth below) is received and accepted is referred to as the Order Placement Date.
An Authorized Participant may require an investor to make certain representations or enter into agreements with respect to the order, (e.g., to provide
for payments of cash, when required). Investors should be aware that their particular broker may not have executed a Participant Agreement and that, therefore, orders to purchase Shares directly from the Fund in Creation Units have to be placed by
the investors broker through an Authorized Participant that has executed a Participant Agreement. In such cases there may be additional charges to such investor. At any given time, there may be only a limited number of broker-dealers that have
executed a Participant Agreement and only a small number of such Authorized Participants may have international capabilities.
On days when
the Exchange closes earlier than normal, the Fund may require orders to create Creation Units to be placed earlier in the day. Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the
Distributor pursuant to procedures set forth in the Participant Agreement and in accordance with the applicable order form. Those placing orders through an Authorized Participant should allow sufficient time to permit proper submission of the
purchase order by the cut-off time on such Business Day. Economic or market disruptions or changes, or telephone or other communication failure may impede the ability to reach the Distributor or an Authorized Participant.
Fund Deposits must be delivered by an Authorized Participant through the Federal Reserve System (for cash) or through DTC (for corporate securities),
through a subcustody agent for (for foreign securities) and/or through such other arrangements allowed by the Trust or its agents. With respect to foreign Deposit Securities, the Custodian shall cause the subcustodian of the Fund to maintain an
account into which the Authorized Participant shall deliver, on behalf of itself or the party on whose behalf it is acting, such Deposit Securities. Foreign Deposit Securities must be delivered to an account maintained at the applicable local
subcustodian. The Fund Deposit transfer must be ordered by the Authorized Participant in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities or Deposit Cash, as applicable, to the account of the Fund or its
agents by no later than the Settlement Date. The Settlement Date for the Fund is generally the third Business Day after the Order Placement Date. All questions as to the number of Deposit Securities or Deposit Cash to be delivered, as
applicable, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities or cash, as applicable, will be determined by the Trust, whose determination shall be final and binding. The amount of cash
represented by the Cash Component must be transferred directly to the Custodian through the Federal Reserve Bank wire transfer system in a timely manner so as to be received by the Custodian no later than the Settlement Date. If the Cash Component
and the Deposit Securities or Deposit Cash, as applicable, are not received in a timely manner by the Settlement Date, the creation order may be cancelled. Upon written notice to the Distributor, such canceled order may be resubmitted the following
Business Day using the Fund Deposit as newly constituted to reflect the then current NAV of the Fund. The delivery of Creation Units so created generally will occur no later than the third Business Day following the day on which the purchase order
is deemed received by the Distributor.
The order shall be deemed to be received on the Business Day on which the order is placed provided
that the order is placed in proper form prior to the applicable cut-off time and the federal funds in the appropriate amount are deposited by 2:00 p.m. or 3:00 p.m. Eastern time (per applicable instructions), with the Custodian on the Settlement
Date. If the order is not placed in proper form as required, or federal funds in the appropriate amount are not received by 2:00 p.m. or 3:00 p.m. Eastern time (per applicable instructions) on the Settlement Date, then the order may be deemed to be
rejected and the Authorized Participant shall be liable to the Fund for losses, if any, resulting therefrom. A creation request is considered to be in proper form if all procedures set forth in the Participant Agreement, order form and
this SAI are properly followed.
27
ISSUANCE OF A CREATION UNIT. Except as provided herein, Creation Units will not be issued until the transfer
of good title to the Trust of the Deposit Securities or payment of Deposit Cash, as applicable, 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 or subcustodians, the Principal Underwriter and the Adviser shall be notified of such delivery, and the Trust will issue and cause the delivery of the Creation
Units.
In instances where the Trust accepts Deposit Securities for the purchase of a Creation Unit, the Creation Unit may be purchased in
advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a value greater than the net asset value of the Shares on the date the order is placed
in proper form since in addition to available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) an additional amount of cash equal to a percentage of the market value as set forth
in the Participant Agreement, of the undelivered Deposit Securities (the Additional Cash Deposit), which shall be maintained in a general non-interest bearing collateral account. An additional amount of cash shall be required to be
deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to the applicable percentage, as set forth in the Participant
Agreement, of the daily marked to market value of the missing Deposit Securities. The Trust may use such Additional Cash Deposit to buy the missing Deposit Securities at any time. Authorized Participants will be liable to the Trust for all costs,
expenses, dividends, income and taxes associated with missing Deposit Securities, including the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of
the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received by the Principal Underwriter plus the brokerage and related transaction costs associated with such purchases. The Trust will
return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian or purchased by the Trust and deposited into the Trust. In addition, a transaction fee as set forth
below under Creation Transaction Fees will be charged in all cases and an additional variable charge may also be applied. The delivery of Creation Units so created generally will occur no later than the Settlement Date.
ACCEPTANCE OF ORDERS OF CREATION UNITS. The Trust reserves the absolute right to reject an order for Creation Units transmitted in respect of the Fund at
its discretion, including, without limitation, if (a) the order is not in proper form; (b) the Deposit Securities or Deposit Cash, as applicable, delivered by the Participant are not as disseminated through the facilities of the NSCC for
that date by the Custodian; (c) the investor(s), upon obtaining the Shares ordered, would own 80% or more of the currently outstanding Shares of the Fund; (d) acceptance of the Deposit Securities would have certain adverse tax consequences
to the 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; (g) the acceptance or receipt of the order for a Creation Unit would, in the opinion of counsel to the Trust, be unlawful; or (h) in the event that circumstances outside the control of the Trust, the
Custodian, the Transfer Agent and/or the Adviser make it for all practical purposes not feasible to process orders for Creation Units. Examples of such circumstances include acts of God or public service or utility problems such as fires, floods,
extreme weather conditions and power outages resulting in telephone, telecopy and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Trust, the
Principal Underwriter, the Custodian, the Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant in the creation process, and other extraordinary events. The Trust or its agents shall communicate to the Authorized Participant
its rejection of an order. The Trust, the Transfer Agent, the Custodian and the Principal Underwriter are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits nor shall either of them incur
any liability for the failure to give any such notification. The Trust, the Transfer Agent, the Custodian and the Principal Underwriter shall not be liable for the rejection of any purchase order for Creation Units.
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 Trusts determination shall be final and binding.
REDEMPTION.
Shares may be redeemed only in Creation Units at their net asset value next determined after receipt of a redemption request in proper form by the Fund through the Transfer Agent and only on a Business Day. EXCEPT UPON LIQUIDATION OF THE FUND, THE
TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Investors must accumulate enough Shares in the secondary market to constitute
28
a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit
assembly of a Creation Unit. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
With respect to the Fund, the Custodian, through the NSCC, makes available immediately prior to the opening of business on the Exchange (currently 9:30 a.m. Eastern time) on each Business Day, the list of
the names and share quantities of the Funds portfolio securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day (Fund Securities).
Fund Securities received on redemption may not be identical to Deposit Securities.
Redemption proceeds for a Creation Unit are paid either
in-kind or in cash, or a combination thereof, as determined by the Trust. With respect to in-kind redemptions of the Fund, redemption proceeds for a Creation Unit will consist of Fund Securities as announced by the Custodian on the Business
Day of the request for redemption received in proper form plus cash in an amount equal to the difference between the net asset value of the Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the
Fund Securities (the Cash Redemption Amount), less a fixed redemption transaction fee and any applicable additional variable charge as set forth below. In the event that the Fund Securities have a value greater than the net asset value
of the Shares, a compensating cash payment equal to the differential is required to be made by or through an Authorized Participant by the redeeming shareholder. Notwithstanding the foregoing, at the Trusts discretion, an Authorized
Participant may receive the corresponding cash value of the securities in lieu of the in-kind securities value representing one or more Fund Securities.
PROCEDURES FOR REDEMPTION OF CREATION UNITS. After the Trust has deemed an order for redemption received, the Trust will initiate procedures to transfer the requisite Fund Securities and the Cash
Redemption Amount to the Authorized Participant by the Settlement Date. With respect to in-kind redemptions of the Fund, the calculation of the value of the Fund Securities and the Cash Redemption Amount to be delivered upon redemption will be made
by the Custodian according to the procedures set forth under Determination of Net Asset Value, computed on the Business Day on which a redemption order is deemed received by the Trust. Therefore, if a redemption order in proper form is
submitted to the Principal Underwriter by a DTC Participant by the specified time on the Order Placement Date, and the requisite number of Shares of the Fund are delivered to the Custodian prior to 2:00 p.m. or 3:00 p.m. Eastern time (per applicable
instructions) on the Settlement Date, then the value of the Fund Securities and the Cash Redemption Amount to be delivered will be determined by the Custodian on such Order Placement Date. If the requisite number of Shares of the Fund are not
delivered by 2:00 p.m. or 3:00 p.m. Eastern time (per applicable instructions) on the Settlement Date, the Fund will not release the underlying securities for delivery unless collateral is posted in such percentage amount of missing Shares as set
forth in the Participant Agreement (marked to market daily).
With respect to in kind redemptions of the Fund, in connection with taking
delivery of shares of Fund Securities upon redemption of Creation Units, an Authorized Participant 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 (or such other arrangements as allowed by the Trust or its agents), to which account such Fund Securities will be delivered. Deliveries of redemption proceeds generally will be made within three Business
Days of the trade date. Due to the schedule of holidays in certain countries, however, the delivery of in-kind redemption proceeds may take longer than three business days after the day on which the redemption request is received in proper form. The
section below entitled Local Market Holidays Schedules identifies the instances where more than seven days would be needed to deliver redemption proceeds. Pursuant to an order of the SEC, in respect of the Fund, the Trust will make
delivery of in-kind redemption proceeds within the number of days stated in the Local Market Holidays section to be the maximum number of days necessary to deliver redemption proceeds. If the Authorized Participant has not made 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 jurisdiction, the Trust
may, in its discretion, exercise its option to redeem such Shares in cash, and the Authorized Participant will be required to receive its redemption proceeds in cash.
If it is not possible to make other such arrangements, or if it is not possible to effect deliveries of the Fund Securities, the Trust may in its discretion exercise its option to redeem such Shares in
cash, and the redeeming investor will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash that the Fund may, in its sole discretion, permit. In either case, the investor will receive a
cash
29
payment equal to the NAV of its Shares based on the NAV of Shares of the relevant Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee
and additional charge for requested cash redemptions specified above, to offset the Trusts brokerage and other transaction costs associated with the disposition of Fund Securities). The Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities that differs from the exact composition of the Fund Securities but does not differ in net asset value.
An Authorized Participant submitting a redemption request is deemed to represent to the Trust that it (or its client) (i) owns outright or has full legal authority and legal beneficial right to
tender for redemption the requisite number of Shares to be redeemed and can receive the entire proceeds of the redemption, and (ii) the Shares to be redeemed have not been loaned or pledged to another party nor are they the subject of a
repurchase agreement, securities lending agreement or such other arrangement which would preclude the delivery of such Shares to the Trust. The Trust reserves the right to verify these representations at its discretion, but will typically require
verification with respect to a redemption request from the Fund in connection with higher levels of redemption activity and/or short interest in the Fund. If the Authorized Participant, upon receipt of a verification request, does not provide
sufficient verification of its representations as determined by the Trust, the redemption request will not be considered to have been received in proper form and may be rejected by the Trust.
Redemptions of Shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and the Fund (whether or not it otherwise permits cash redemptions) reserves the
right to redeem Creation Units for cash to the extent that the Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An Authorized Participant or
an investor for which it is acting subject to a legal restriction with respect to a particular security included in the Fund Securities applicable to the redemption of Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of the Shares to complete an order form or to enter into agreements with respect to such matters as compensating cash payment. Further, an Authorized Participant that is not a qualified
institutional buyer, (QIB) as such term is defined under Rule 144A of the Securities Act, will not be able to receive Fund Securities that are restricted securities eligible for resale under Rule 144A. An Authorized Participant may
be required by the Trust to provide a written confirmation with respect to QIB status in order to receive Fund Securities.
The right of
redemption may be suspended or the date of payment postponed with respect to the Fund (1) for any period during which the Exchange is closed (other than customary weekend and holiday closings); (2) for any period during which trading on
the Exchange is suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the Shares of the Fund or determination of the NAV of the Shares is not reasonably practicable; or (4) in such
other circumstance as is permitted by the SEC.
CREATION AND REDEMPTION TRANSACTION FEES. A transaction fee, as set forth in the table
below, is imposed for the transfer and other transaction costs associated with the purchase or redemption of Creation Units, as applicable. Authorized Participants will be required to pay a fixed creation transaction fee and/or a fixed redemption
transaction fee, as applicable, on a given day regardless of the number of Creation Units created or redeemed on that day. The Fund may adjust the transaction fee from time to time. An additional charge or a variable charge (discussed below) will be
applied to certain creation and redemption transactions, including non-standard orders and whole or partial cash purchases or redemptions. With respect to creation orders, Authorized Participants are responsible for the costs of transferring the
securities constituting the Deposit Securities to the account of the Trust and with respect to redemption orders, Authorized Participants are responsible for the costs of transferring the Fund Securities from the Trust to their account or on their
order. Investors who use the services of a broker or other such intermediary may also be charged a fee for such services.
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FUND
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TRANSACTION
FEE*,**
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MAXIMUM
TRANSACTION
FEE*,**
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SPDR Russell Small Cap Completeness ETF
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$
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[
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]
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$
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[
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]
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*
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From time to time, the Fund may waive all or a portion of its applicable transaction fee(s). An additional charge of up to three (3) times the standard transaction
fee may be charged to the extent a transaction is outside the clearing process.
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**
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In addition to the transaction fees listed above, the Fund may charge an
additional
variable fee for creations and redemptions in cash to offset brokerage and
impact expenses associated with the cash transaction. The variable transaction fee will be calculated based on historical transaction cost data and the Advisers view of current market conditions; however, the actual variable fee charged for a
given transaction may be lower or higher than the trading expenses incurred by the Fund with respect to that transaction.
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30
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction with the sections in the Prospectus entitled PURCHASE AND SALE
INFORMATION and ADDITIONAL PURCHASE AND SALE INFORMATION.
Net asset value per Share for the Fund is computed by dividing
the value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by the total number of Shares outstanding. Expenses and fees, including the management fees, are accrued daily and taken into account for purposes
of determining net asset value. The net asset value of the Fund is calculated by the Custodian and determined at the close of the regular trading session on the NYSE (ordinarily 4:00 p.m. Eastern time) on each day that such exchange is open.
Fixed-income assets are generally valued as of the announced closing time for trading in fixed-income instruments on any day that the Securities Industry and Financial Markets Association (SIFMA) (or applicable exchange or market on
which the Funds investments are traded) announces an early closing time. Creation/redemption order cut-off times may also be earlier on such days.
In calculating the Funds net asset value per Share, the Funds investments are generally valued using market valuations. A market valuation generally means a valuation (i) obtained from an
exchange, a pricing service, or a major market maker (or dealer), (ii) based on a price quotation or other equivalent indication of value supplied by an exchange, a pricing service, or a major market maker (or dealer) or (iii) based on
amortized cost. In the case of shares of other funds that are not traded on an exchange, a market valuation means such funds published net asset value per share. The Adviser may use various pricing services, or discontinue the use of any
pricing service, as approved by the Board from time to time. A price obtained from a pricing service based on such pricing services valuation matrix may be considered a market valuation. 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.
In the event that current market valuations are not readily available or such valuations do not reflect current market value, the Trusts procedures require the Pricing and Investment Committee to
determine a securitys fair value if a market price is not readily available. In determining such value the Pricing and Investment Committee may consider, among other things, (i) price comparisons among multiple sources, (ii) a review
of corporate actions and news events, and (iii) a review of relevant financial indicators (e.g., movement in interest rates, market indices, and prices from the Funds Index Provider). In these cases, the Funds net asset value may
reflect certain portfolio securities fair values rather than their market prices. Fair value pricing involves subjective judgments and it is possible that the 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 the Funds net asset value and the prices used by the Funds benchmark Index. This may
result in a difference between the Funds performance and the performance of the Funds benchmark Index. With respect to securities that are primarily listed on foreign exchanges, the value of the Funds 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 Prospectus entitled
DISTRIBUTIONS.
31
GENERAL POLICIES
Dividends from net investment income, if any, are generally declared and paid periodically, as described in the Prospectus, but may vary significantly from period to period. Distributions of net realized
securities gains, if any, generally are declared and paid once a year, but the Trust may make distributions on a more frequent basis for the Fund to improve 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.
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.
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 Funds eligibility for treatment as a regulated investment company (RIC) under the Internal Revenue Code or to avoid imposition of income or excise taxes at the Fund level.
DIVIDEND REINVESTMENT
Broker dealers, at their
own discretion, may offer a dividend reinvestment service under which Shares are purchased in the secondary market at current market prices. Investors should consult their broker dealer for further information regarding any dividend reinvestment
service offered by such broker dealer.
TAXES
The following is a summary of certain federal income tax considerations generally affecting the Fund and its shareholders that supplements the discussion
in the Prospectus. No attempt is made to present a detailed explanation of the federal, state, local or foreign tax treatment of the Fund or its shareholders, and the discussion here and in the Prospectus is not intended to be a substitute for
careful tax planning.
The following general discussion of certain federal income tax consequences is based on the Internal Revenue Code and
the regulations issued thereunder as in effect on the date of this Statement of Additional Information. New legislation, as well as administrative changes or court decisions, may significantly change the conclusions expressed herein, and may have a
retroactive effect with respect to the transactions contemplated herein.
The following information should be read in conjunction with the
section in the Prospectus entitled ADDITIONAL TAX INFORMATION.
TAXATION OF THE FUND. The Fund intends to qualify for and to elect
treatment as a RIC under Subchapter M of the Internal Revenue Code. As such, the Fund should not be subject to federal income tax on its net investment income and capital gains, if any, to the extent that it timely distributes such income and
capital gains to its shareholders. In order to qualify for treatment as a RIC, the Fund must distribute to its shareholders at least the sum of 90% of its net investment income (generally net investment income plus the excess of net short-term
capital gains over net long-term capital losses) and 90% of its net tax exempt interest income, if any, for each tax year to its shareholders (Distribution Requirement) and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of the Funds gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, gains from the sale or other disposition of stock,
securities or foreign currencies, or other income derived with respect to its business of investing in such stock, securities or currencies, and net income derived from interests in qualified publicly traded partnerships (the Qualifying Income
Requirement); and (ii) at the end of each quarter of the Funds taxable year, its assets must be diversified so that (a) at least 50% of the market value of its total assets must be represented by cash and cash items, U.S.
government securities, securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of the Funds total assets or more than 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the value of its total assets is invested in the securities (other than U.S. government securities or securities of other RICs) of any one issuer, the securities (other than
securities of other RICs) of two or more issuers that it controls and that are engaged in the same, similar, or related trades or businesses, or the securities of one or more qualified publicly traded partnerships (the Diversification
Requirement).
The Fund is treated as a separate corporation for federal income tax purposes. The Fund therefore is considered to be a
separate entity in determining its treatment under the rules for RICs described herein and in the Prospectus. Losses in one Fund do not offset gains in any other Fund and the requirements (other than certain organizational requirements) for
qualifying RIC status are determined at the Fund level rather than at the Trust level.
32
If the Fund fails to satisfy the Qualifying Income Requirement or the Diversification Requirement in any
taxable year, the Fund may be eligible for relief provisions if the failures are due to reasonable cause and not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the applicable requirements. Additionally, relief
is provided for certain
de minimis
failures of the Diversification Requirement where the Fund corrects the failure within a specified period of time. In order to be eligible for the relief provisions with respect to a failure to meet the
Diversification Requirement, the Fund may be required to dispose of certain assets. If these relief provisions are not available to the Fund and it fails to qualify for treatment as a RIC for a taxable year, all of its taxable income would be
subject to tax at regular corporate rates without any deduction for distributions to shareholders, and its distributions (including capital gains distributions) generally would be taxable as ordinary income dividends to its shareholders, subject to
the dividends-received deduction for corporate shareholders the lower tax rates on qualified dividend income received by noncorporate shareholders. To requalify for treatment as a RIC in a subsequent taxable year, the Fund would be required to
satisfy the RIC qualification requirements for that year and to distribute any earnings and profits from any year in which the Fund failed to qualify for tax treatment as a RIC. If the Fund failed to qualify as a RIC for a period greater than two
taxable years, it would generally be required to pay the Fund-level tax on certain net built-in gains recognized with respect to certain of its assets upon a disposition of such assets within ten years of qualifying as a RIC in a subsequent year.
The Board reserves the right not to maintain the qualification of the Fund for treatment as a RIC if it determines such course of action to be beneficial to shareholders.
The Fund intends to distribute substantially all of its net investment income and its capital gains for each taxable year. If the Fund meets the Distribution Requirement but retains some or all of its
income or gains, it will be subject to federal income tax to the extent any such income or gains are not distributed. The Fund may designate certain amounts retained as undistributed net capital gain in a notice to its shareholders, who
(i) will be required to include in income for U.S. federal income tax purposes, as long-term capital gain, their proportionate shares of the undistributed amount so designated, (ii) will be entitled to credit their proportionate shares of
the income tax paid by the Fund on that undistributed amount against their federal income tax liabilities and to claim refunds to the extent such credits exceed their liabilities and (iii) will be entitled to increase their tax basis, for
federal income tax purposes, in their Shares in the Fund by an amount equal to the excess of the amount of undistributed net capital gain included in their respective income over their respective income tax credits.
The 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 an amount
at least equal to 98% of its ordinary income for the calendar year plus 98.2% of its capital gain net income for the twelve months ended October 31 of such year, subject to an increase for any shortfall in the prior years distribution.
The 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.
The Fund may elect to treat part or all of any qualified late year loss as if it had been incurred in the succeeding taxable year in determining the Funds taxable income, net capital
gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such qualified late year loss as if it had been incurred in the succeeding taxable year in characterizing Fund distributions for any
calendar year. A qualified late year loss generally includes net capital loss, net long-term capital loss, or net short-term capital loss incurred after October 31 of the current taxable year (commonly referred to as
post-October losses) and certain other late-year losses.
Capital losses in excess of capital gains (net capital
losses) are not permitted to be deducted against a RICs net investment income. Instead, for U.S. federal income tax purposes, potentially subject to certain limitations, the Fund may carry net capital losses from any taxable year forward
to offset capital gains in future years. The Fund is permitted to carry forward indefinitely a net capital loss from any taxable year that began after December 22, 2010 to offset its capital gains, if any, in years following the year of the
loss. To the extent subsequent capital gains are offset by such losses, they would not result in U.S. federal income tax liability to the Fund and may not be distributed as such to shareholders. Generally, the Fund may not carry forward any losses
other than net capital losses.
TAXATION OF SHAREHOLDERS DISTRIBUTIONS. The Fund intends to distribute annually to its shareholders
substantially all of its investment company taxable income (computed without regard to the deduction for dividends paid), its net tax-exempt income and any net capital gain (net recognized long-term capital gains in excess of net recognized
short-term capital losses, taking into account any capital loss carryovers). The Fund will report to shareholders annually the amounts of dividends paid from ordinary income, the amount of distributions of net capital gain, the portion of dividends
which may qualify for the dividends received deduction, and the portion of dividends which may qualify for treatment as qualified dividend income, if any.
33
A portion of the dividends received from the Fund may be treated as qualified dividend income (eligible for
the reduced maximum rate to individuals of 20% (for individuals not subject to the maximum tax rate on ordinary income, a 15% or 0% maximum rate will apply to qualified dividend income) if the Fund receives qualified dividend income. Qualified
dividend income includes, in general, subject to certain holding period requirements and other requirements, dividend income from certain U.S. and foreign corporations. Subject to certain limitations, eligible foreign corporations include those
incorporated in possessions of the United States, those incorporated in certain countries with comprehensive tax treaties with the United States and other foreign corporations if the stock with respect to which the dividends are paid is tradable on
an established securities market in the United States. A dividend from the Fund will not be treated as qualified dividend income to the extent that (i) the shareholder has not held the Shares of the Fund on which the dividend was paid for more
than 60 days during the 121-day period that begins on the date that is 60 days before the date on which the Shares of the Fund become ex-dividend with respect to such dividend or, in the case of certain preferred stock, for fewer than 91 days during
the 181-day period beginning 90 days before such date (or the Fund fails to satisfy this holding period requirement with respect to the shares of the underlying dividend-paying stock), (ii) the shareholder is under an obligation (whether
pursuant to a short sale or otherwise) to make related payments with respect to substantially similar or related property, or (iii) the shareholder elects to treat such dividend as investment income under section 163(d)(4)(B) of the Internal
Revenue Code. Dividends received by the Fund from a REIT or another RIC may be treated as qualified dividend income only to the extent the dividend distributions are attributable to qualified dividend income received by such REIT or RIC. It is
expected that dividends received by the Fund from a REIT and distributed to a shareholder generally will be taxable to the shareholder as ordinary income.
Distributions from net short-term capital gains will be taxable to shareholders as ordinary income. Distributions from net capital gain will be taxable to you at long-term capital gains rates, regardless
of how long you have held your Shares in the Fund. Long-term capital gains are taxed at a maximum rate of 20% (for individuals not subject to the maximum tax rate on ordinary income, a 15% or 0% maximum rate will apply to long-term capital gains).
Although dividends generally will be treated as distributed when paid, any dividend declared by the Fund in October, November or December and
payable to shareholders of record in such a month that is paid during the following January will be treated for U.S. federal income tax purposes as received by shareholders on December 31 of the calendar year in which it was declared.
If the Funds distributions exceed its earnings and profits, all or a portion of the distributions made in the taxable year may be
treated as a return of capital to shareholders. A return of capital distribution generally will not be taxable but will reduce the shareholders cost basis and result in a higher capital gain or lower capital loss when the Shares on which the
distribution was received are sold. After a shareholders basis in the Shares has been reduced to zero, distributions in excess of earnings and profits will be treated as gain from the sale of the shareholders Shares.
Distributions that are reinvested in additional Shares of the Fund through the means of a dividend reinvestment service, if offered by your
broker-dealer, will nevertheless be taxable dividends to the same extent as if such dividends had been received in cash.
As of
January 1, 2013, U.S. individuals with income exceeding $200,000 ($250,000 if married and filing jointly) are also subject to a 3.8% Medicare contribution tax on their net investment income, which includes taxable interest,
dividends, and certain capital gains (including capital gains realized on the sale or exchange of Shares). This 3.8% tax also applies to all or a portion of the undistributed net investment income of certain shareholders that are estates and trusts.
Distributions of ordinary income and capital gains may also be subject to foreign, state and local taxes depending on a shareholders
circumstances.
TAXATION OF SHAREHOLDERS SALE OR EXCHANGE OF SHARES. In general, a sale or exchange 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. Fund Shares held for a period of one year or less at the time of such sale or exchange 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. The maximum tax rate on long-term capital gains available to non-corporate shareholders generally is 20%
(for individuals not subject to the maximum tax rate on ordinary income, a 15% or 0% maximum rate will apply to long-term capital gains).
34
Gain or loss on the sale or exchange of Shares in the Fund is measured by the difference between the amount
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 Shares.
A loss realized on a sale or exchange of Shares of the Fund may be disallowed if other substantially identical Shares are acquired (whether through the
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
must be adjusted to reflect the disallowed loss. Any loss upon the sale or exchange of Shares held for six (6) months or less is treated as long-term capital loss to the extent of any amounts treated as distributions to the shareholder of
long-term capital gain (including any amounts credited to the shareholder as undistributed capital gains).
TAXATION OF FUND INVESTMENTS.
Dividends and interest received by Funds holding foreign securities 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 the
Fund meets certain requirements, which include a requirement that more than 50% of the value of the Funds total assets at the close of its respective taxable year consists of stocks or securities of foreign corporations, then the Fund should
be eligible to file an election with the Internal Revenue Service (the IRS) that may enable its shareholders, in effect, to receive either the benefit of a foreign tax credit, or a tax deduction, with respect to certain foreign and U.S.
possessions income taxes paid by the Fund, subject to certain limitations. Pursuant to this election, the Fund will treat those taxes as dividends paid to its shareholders. Each such shareholder will be required to include a proportionate share of
those taxes in gross income as income received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in
computing his or her taxable income or, alternatively, use the foregoing information in calculating any foreign tax credit the shareholder may be entitled to use against such shareholders federal income tax. If the Fund makes this election,
the Fund will report annually to its shareholders the respective amounts per share of the Funds income from sources within, and taxes paid to, foreign countries and U.S. possessions.
If the Fund does not make this election, the Fund will be entitled to claim a deduction for certain foreign taxes incurred by the Fund. In certain instances, the Fund might not elect to apply otherwise
allowable U.S. federal income tax deductions for those foreign taxes, whether or not credits or deductions for those foreign taxes could be passed through to its shareholders pursuant to the election described above. If the Fund in which you invest
does not elect to apply these deductions, taxable distributions you receive from the Fund may be larger than they would have been if the Fund had taken deductions for such taxes.
Certain of the Funds investments may be subject to complex provisions of the Internal Revenue Code (including provisions relating to hedging transactions, straddles, integrated transactions, foreign
currency contracts, forward foreign currency contracts, and notional principal contracts) that, among other things, may affect the character of gains and losses realized by the Fund (
i.e.
, may affect whether gains or losses are ordinary or
capital), accelerate recognition of income to the Fund and defer losses. These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions also may require the Fund to mark-to-market certain types
of positions in their portfolios (i.e., treat them as if they were closed out) which may cause the Fund to recognize income without receiving cash with which to make distributions in amounts necessary to satisfy the RIC distribution requirements for
avoiding income and excise taxes. The Fund intends to monitor its transactions, intends to make appropriate tax elections, and intends to make appropriate entries in its books and records in order to mitigate the effect of these rules and preserve
the Funds qualification for treatment as a RIC.
If the Fund acquires any equity interest (under Treasury regulations that may be
promulgated in the future, generally including not only stock but also an option to acquire stock such as is inherent in a convertible bond) in certain foreign corporations (i) that receive at least 75% of their annual gross income from passive
sources (such as interest, dividends, certain rents and royalties, or capital gains) or (ii) where at least 50% of the corporations assets (computed based on average fair market value) either produce or are held for the production of
passive income (passive foreign investment companies or PFICs), the fund could be subject to U.S. federal income tax and nondeductible interest charges on excess distributions received from such companies or on
gain from the sale of
35
stock in such companies, even if all income or gain actually received by the fund is timely distributed to its shareholders. The fund would not be able to pass through to its shareholders any
credit or deduction for such a tax. A qualified electing fund election or a mark to market election may generally be available that would ameliorate these adverse tax consequences, but such elections could require the Fund to
recognize taxable income or gain (subject to the distribution requirements applicable to RICs, as described above) without the concurrent receipt of cash. In order to satisfy the distribution requirements and avoid a tax at the Fund level, a fund
may be required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss to the Fund. Gains from the sale of stock of PFICs may also be treated as ordinary income. In
order for the Fund to make a qualified electing fund election with respect to a PFIC, the PFIC would have to agree to provide certain tax information to the fund on an annual basis, which it might not agree to do. The Fund may limit and/or manage
its holdings in PFICs to limit its tax liability or maximize its returns from these investments.
The Fund is required for federal income tax
purposes to mark-to-market and recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. Gain or loss from futures and
options 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. The Fund may be
required to defer the recognition of losses on futures contracts, options contracts and swaps to the extent of any unrecognized gains on offsetting positions held by the Fund. It is anticipated that certain net gain realized from the closing out of
futures or options contracts will be considered gain from the sale of securities and therefore will be qualifying income for purposes of the Qualifying Income Requirement.
TAX-EXEMPT SHAREHOLDERS. Certain tax-exempt shareholders, including qualified pension plans, individual retirement accounts, salary deferral arrangements, 401(k)s, and other tax-exempt entities, generally
are exempt from federal income taxation except with respect to their unrelated business taxable income (UBTI). Under current law, the Fund generally serves to block UBTI from being realized by their tax-exempt
shareholders. However, notwithstanding the foregoing, tax-exempt shareholders could realize UBTI by virtue of their investment in the Fund where, for example, (i) the Fund invests in REITs that hold residual interests in real estate
mortgage investment conduits (REMICs) or (ii) Shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of section 514(b) of the Internal Revenue Code. Charitable remainder
trusts are subject to special rules and should consult their tax advisors. There are no restrictions preventing the Fund from holding investments in REITs that hold residual interests in REMICs, and the Fund may do so. The IRS has issued
guidance with respect to these issues and prospective shareholders, especially charitable remainder trusts, are strongly encouraged to consult with their tax advisors regarding these issues.
FOREIGN SHAREHOLDERS. Dividends paid by the Fund to shareholders who are nonresident aliens or foreign entities (other than qualified short-term capital gain dividends and
interest-related dividends, described below) will be subject to a 30% United States withholding tax unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law to the extent derived from
investment income and short-term capital gain or unless such income is effectively connected with a U.S. trade or business carried on through a permanent establishment in the United States. Nonresident shareholders are urged to consult their own tax
advisors concerning the applicability of the United States withholding tax and the proper withholding form(s) to be submitted to the Fund. A non-U.S. shareholder who fails to provide an appropriate IRS Form W-8 may be subject to backup withholding
at the appropriate rate.
The Fund may, under certain circumstances, report all or a portion of a dividend as an interest-related
dividend that if received by a nonresident alien or foreign entity generally would be exempt from the 30% U.S. withholding tax, provided that certain other requirements are met. The Fund may also, under certain circumstances, report all or a
portion of a dividend as a qualified short-term capital gain dividend which if received by a nonresident alien or foreign entity generally would be exempt from the 30% U.S. withholding tax, unless the foreign person is a nonresident
alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year. In the case of Shares held through an intermediary, the intermediary may withhold even if the Fund reports the payment as an
interest-related dividend or as a qualified short-term capital gain dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their accounts. Absent future legislation, the withholding
exemptions for interest-related dividends and qualified short-term capital gain dividends only applies to dividends with respect to taxable years of the Fund beginning before January 1, 2014.
36
Unless certain non-U.S. entities that hold Fund Shares comply with IRS requirements that will generally
require them to report information regarding U.S. persons investing in, or holding accounts with, such entities, a 30% withholding tax may apply to Fund distributions (other than exempt-interest dividends) payable to such entities after
December 31, 2013 (or, in certain cases, after later dates) and redemptions and certain capital gain dividends payable to such entities after December 31, 2016. A non-U.S. shareholder who is resident or doing business in a country that has
entered into an intergovernmental agreement with the U.S. to implement a similar reporting regime may be exempt from the withholding described in this paragraph, provided that the shareholder and the applicable foreign government comply with the
terms of such agreement.
Non-U.S. persons are subject to U.S. tax on disposition of a United States real property interest (a
USRPI). Gain on such a disposition is sometimes referred to as FIRPTA gain. The Internal Revenue Code provides a look-through rule for distributions of FIRPTA gain if certain requirements are met. If the
look-through rule applies, certain distributions attributable to income received by the Fund from REITs may be treated as gain from the disposition of a USRPI, causing distributions to be subject to U.S. withholding tax at rates of up to 35%, and
requiring non-U.S. investors to file nonresident U.S. income tax returns. Also, gain may be subject to a 30% branch profits tax in the hands of a non-U.S. shareholder that is treated as a corporation for federal income tax purposes. Under
certain circumstances, the Fund may itself qualify as a USRPI, which would result in similar consequences to certain non-U.S. investors.
BACKUP WITHHOLDING. The Fund will be required in certain cases to withhold (as backup withholding) on amounts payable to any shareholder who
(1) has provided the Fund either an incorrect tax identification number or no number at all, (2) is subject to backup withholding by the IRS for failure to properly report payments of interest or dividends, (3) has failed to certify
to the Fund that such shareholder is not subject to backup withholding, or (4) has not certified that such shareholder is a U.S. person (including a U.S. resident alien). The backup withholding rate is 28%. Backup withholding will not be
applied to payments that have been subject to the 30% withholding tax on shareholders who are neither citizens nor permanent residents of the U.S.
CREATION UNITS. An Authorized Participant who exchanges securities for Creation Units generally will recognize a gain or a loss. The gain or loss will be equal to the difference between the market value
of the Creation Units at the time and the sum of the exchangers aggregate basis in the securities surrendered plus the amount of cash paid for such Creation Units. A person who redeems Creation Units will generally recognize a gain or loss
equal to the difference between the exchangers basis in the Creation Units and the sum of the aggregate market value of any securities received plus the amount of any cash received for such Creation Units. The IRS, however, may assert that a
loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing wash sales, or on the basis that there has been no significant change in economic position.
Any capital gain or loss realized upon the creation of Creation Units will generally be treated as long-term capital gain or loss if the securities
exchanged for such Creation Units have been held for more than one year. Any capital gain or loss realized upon the redemption of Creation Units will generally be treated as long-term capital gain or loss if the Shares comprising the Creation Units
have been held for more than one year. Otherwise, such capital gains or losses will generally be treated as short-term capital gains or losses. Any loss upon a redemption of Creation Units held for six (6) months or less will be treated as
long-term capital loss to the extent of any amounts treated as distributions to the applicable Authorized Participant of long-term capital gain with respect to the Creation Units (including any amounts credited to the Authorized Participant as
undistributed capital gains).
The Fund has the right to reject an order for Creation Units if the purchaser (or group of purchasers) would,
upon obtaining the Shares so ordered, own 80% or more of the outstanding shares of the Fund and if, pursuant to section 351 of the Internal Revenue Code, the Fund would have a basis in the deposit securities different from the market value of such
securities on the date of deposit. The Fund also has the right to require information necessary to determine beneficial Share ownership for purposes of the 80% determination. If the Fund does issue Creation Units to a purchaser (or group of
purchasers) that would, upon obtaining the Shares so ordered, own 80% or more of the outstanding shares of the Fund, the purchaser (or group of purchasers) may not recognize gain or loss upon the exchange of securities for Creation Units.
Persons purchasing or redeeming Creation Units should consult their own tax advisors with respect to the tax treatment of any creation or
redemption transaction.
37
CERTAIN POTENTIAL TAX REPORTING REQUIREMENTS. Under promulgated Treasury regulations, if a shareholder
recognizes a loss on disposition of the Funds Shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder (or certain greater amounts over a combination of years), 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 are not excepted. 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 taxpayers treatment of the loss is proper. Shareholders
should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
The
foregoing discussion is a summary only and is not intended as a substitute for careful tax planning. Purchasers of Shares should consult their own tax advisors 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.
CAPITAL STOCK AND
SHAREHOLDER REPORTS
The Fund issues Shares of beneficial interest, par value $.01 per Share. The Board may designate additional funds.
Each Share issued by the Trust has a pro rata interest in the assets of the corresponding series of the Trust. Shares have no preemptive,
exchange, subscription or conversion rights and are freely transferable. Each Share is entitled to participate equally in dividends and distributions declared by the Board with respect to the Fund, and in the net distributable assets of the Fund on
liquidation.
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. Shares of all series of the Trust (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 Massachusetts 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 (regardless of the fund) have noncumulative voting rights for the election of Trustees. Under
Massachusetts law, Trustees of the Trust may be removed by vote of the shareholders.
Under Massachusetts law, shareholders of a business
trust may, under certain circumstances, be held personally liable as partners for obligations of the Trust. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust, requires that
Trust obligations include such disclaimer, and provides for indemnification and reimbursement of expenses out of the Trusts property for any shareholder held personally liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to circumstances in which the Trust itself would be unable to meet its obligations. Given the above limitations on shareholder personal liability, and the nature of the
Funds assets and operations, the risk to shareholders of personal liability is believed to be remote.
Shareholder inquiries may be made
by writing to the Trust, c/o the Distributor, State Street Global Markets, LLC at State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Bingham
McCutchen LLP, 2020 K Street, NW, Washington, DC 20006, serves as counsel to the Trust. [ ], [
address
], serves as the independent registered public accounting firm for the
Trust. [ ] performs annual audits of the Funds financial statements and provides other audit, tax and related services.
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PROXY VOTING POLICY
March 2012
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STATE STREET GLOBAL ADVISORS
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Introduction
SSgA Funds Management, Inc. (SSgA FM) is a registered investment adviser and a wholly owned subsidiary of State Street Corporation, a leading provider of financial services to institutional
investors. As an investment manager, SSgA FM has discretionary proxy voting authority over most of its client accounts, and SSgA FM votes these proxies in the manner that we believe will most likely protect and promote the long term economic value
of client investments and as set forth in the SSgA FM Proxy Voting Guidelines (the Proxy Voting Guidelines).
Proxy Voting
Procedure
Oversight
The
SSgA FM Corporate Governance Team is responsible for implementing the Proxy Voting Guidelines, case-by-case voting items, issuer engagement activities, and research and analysis of governance-related issues impacting shareholder value. The
implementation of the Proxy Voting Guidelines is overseen by the SSgA FM Global Proxy Review Committee (SSgA FM PRC), a committee of investment, compliance and legal professionals, who provide guidance on proxy issues as described in
more detail below. The SSgA FM PRC reports to the SSgA Investment Committee, and may refer certain significant proxy items to that committee. In addition to voting proxies, SSgA:
1) describes its proxy voting procedures to its clients in Part II of its Form ADV;
2) provides the client with this written proxy policy, upon request;
3) discloses to its clients how they may obtain information on how FM voted the clients proxies;
4) matches proxies received with holdings as of record date;
5) generally applies its proxy voting policy consistently and keeps records of votes for each client;
6) documents the reason(s) for voting for all non-routine items; and
7) keeps
records of such proxy voting available for inspection by the client or governmental agencies.
Oversight of the proxy voting process is
ultimately the responsibility of the SSgA Investment Committee. The SSgA Investment Committee reviews and approves amendments to the Proxy Voting Guidelines.
Proxy Voting Process
SSgA FM retains Institutional Shareholder Services Inc.
(ISS), a firm with expertise in proxy voting and corporate governance, to support our proxy voting process. SSgA FM utilizes ISSs services in three ways: (1) as SSgA FMs proxy voting agent (providing SSgA FM with vote
execution and administration services); (2) applying SSgA FMs Proxy Voting Guidelines; and (3) provides research and analysis relating to general corporate governance issues and specific proxy items.
On most routine proxy voting items (e.g., retention of auditors), ISS will effect the proxy votes in accordance with the Proxy Voting Guidelines and our
standing instructions, which the SSgA FM Corporate Governance Team reviews with ISS on an annual basis or on a case-by-case basis as required. The guidance permits ISS to apply the Proxy Voting Guidelines without consulting us on each proxy and in a
manner that is consistent with our investment view. On matters not directly covered by the Proxy Voting Guidelines, and we conclude there is no likelihood of impacting shareholder value, ISS may effect proxy votes in accordance with its own
recommendations.
39
In other cases, the Corporate Governance Team will evaluate the proxy solicitation to determine how to vote
consistent with SSgA FMs investment views and to maximize the value of our client accounts. In general, the Corporate Governance Team will engage in this additional review for:
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(i)
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proxies that involve special circumstances and require additional research and discussion (e.g. a material merger or acquisition, or a material governance issue with
the potential to become a significant precedent in corporate governance); and
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(ii)
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proxies that are not directly addressed by our policies and which are reasonably anticipated to have an impact on the current or potential value of a security or which
we do not consider to be routine.
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In some instances, the SSgA FM Corporate Governance Team may refer significant issues which
are not addressed by our Proxy Voting Guidelines or guidance to ISS to the SSgA FM PRC for a determination of the proxy vote. In addition, in determining whether to refer a proxy vote to the SSgA FM PRC, the SSgA FM Corporate Governance Team will
examine whether there is a material conflict of interest between the interests of our client and those of SSgA FM or its affiliates (as explained in greater detail below under Conflict of Interest). If there is no material conflict, we
examine the proposals that involve special circumstances or are not addressed by our policy or guidance in detail in seeking to determine what vote would be in the best interest of our clients (i.e., to maximize the economic value of our
clients securities).
Conflict of Interest
From time to time, SSgA FM will review a proxy which may present a potential conflict of interest. In general, we do not believe matters that fall within our Proxy Voting Guidelines and are voted
consistently with the Proxy Voting Guidelines present any potential conflicts, since the vote on the matter has effectively been determined without reference to the soliciting entity; however, where matters do not fall within our Proxy Voting
Guidelines or where we believe that voting in accordance with the Proxy Voting Guidelines is unwarranted, we conduct an additional review to determine whether there is a conflict of interest. Although various relationships could be deemed to give
rise to a conflict of interest, SSgA has determined that two categories of relationships present a serious concern to warrant an alternative process: (1) clients of SSgA FM or its affiliates which are among the top 100 clients of State Street
Corporation or its affiliates based upon revenue; and (2) the 10 largest broker-dealers used by SSgA, based upon revenue (a Material Relationship).
In circumstances where either (i) the matter does not fall clearly within the Proxy Voting Guidelines or (ii) SSgA FM determines that voting in accordance with such policies or guidance is not
in the best interests of its clients, the Director of SSgA FMs Corporate Governance Team will determine whether a Material Relationship exists. If so the matter is referred to the SSgA FM PRC. The SSgA FM PRC then reviews the matter and
determines whether a conflict of interest exists, and if so, how to best resolve such conflict. For example, the SSgA FM PRC may (i) determine that the proxy vote does not give rise to a conflict due to the issues presented, (ii) refer the
matter to the SSgA Investment Committee for further evaluation or (iii) retain an independent fiduciary to determine the appropriate vote.
Engagement
SSgA FM conducts issuer
engagement activity to support SSgA FMs voting principles. SSgA FM believes engagement with portfolio companies is often the most active and productive way shareholders can exercise their ownership rights, with the goal of increasing
shareholder value. SSgA FM regularly engages with companies to discuss corporate governance issues and to provide insight about the principles and practices that drive our voting decisions. In our discussions, we highlight the attributes and
practices that we believe enhance the quality of corporate governance at companies. Some engagement topics include takeover defenses, merger transactions,
40
proxy contests, board elections, sustainability issues, executive compensation, equity compensation plans and other topical issues of interest to our clients as shareholders. Through our
discussions, we seek to strengthen the quality of corporate governance with boards and management, which helps protect shareholder value.
The
SSgA FM Governance Team is dedicated to providing governance research, analysis, issuer engagement and voting services. The SSgA FM Governance Team has no fixed set of priorities that dictate engagement practices. Instead, we view engagement
practices as being dependent upon facts and circumstances, while giving consideration to the size of our total position of the issuer and/or the potential negative governance practices, performance profile, and circumstance at hand.
Nature and Form of Engagement
SSgA FM
believes issuer engagement can take many forms and be triggered under numerous circumstances. The following methods represent how SSgA FM defines engagement methods:
Reactive
Reactive engagement is initiated by the issuers and typically
represents a majority of SSgA FMs engagement activity. SSgA FM routinely discusses specific voting issues and items with the issuer community. These are viewed as an opportunity to address not only voting items, but also a wide range of
governance items that impact shareholder value.
Recurring
Recurring engagement takes advantage of SSgA FMs strong relationships with many of its largest holdings. SSgA FM maintains regular
face-to-face meetings with these issuers, allowing SSgA FM to reinforce key tenets of good corporate governance and actively advise these issuers around concerns that SSgA FM feels may impact long-term shareholder value.
Dynamic
Using screening tools designed to capture a mix of SSgA FMs largest exposures to issuers demonstrating severe negative governance
profiles, SSgA FM will actively seek direct dialogue with the board and management. In these cases, the dynamic engagement process represents the most meaningful chance for SSgA FM to protect long-term shareholder value from excessive risk due to
governance related risks.
SSgA FM believes active engagement is best conducted individually and directly with company management or board
members. Collaborative engagement, where multiple shareholders communicate with company representatives, such as shareholder conference calls, can serve as a potential forum for issues that are not identified by SSgA FM as requiring active
engagement.
When Does SSgA FM Engage Issuers?
SSgA FM uses various methods to monitor its investments to determine which issuers require dynamic engagement. A blend of quantitative and qualitative research and data is used to identify potential
engagement opportunities. SSgA FM sources internal and external research and screening tools to support the engagement process.
Voting and
Engagement
SSgA FM believes engagement and voting activity have a direct relationship. Issuer engagement seeks to address significant
shareholder concerns and governance issues. Logically, successful issuer engagement should reduce the need to vote against management. The integration and exercise of both these rights leads to a meaningful shareholder tool that seeks to achieve
enhanced shareholder value on behalf of SSgA FM clients.
Developed and Non-Developed Markets
SSgA FM engagement philosophy applies across all global markets. We have found the opportunity and effectiveness of engagement activity directly
correlates to the level of ownership and voting rights provided by local market laws. From market to market, engagement activity may take different forms in order to best achieve long term engagement goals.
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Engagement in developed markets is a mature process for SSgA FM. In some cases, engagement activity is
institutionalized into local best practices, such as the UK Stewardship Code overseen by Financial Reporting Commission (FRC). In the UK, disclosure standards are high, allowing shareholders simple access to the key components of governance, such as
board and by-law structure, remuneration policies and practices, sustainability data and reporting, among others. Further, shareholder rights are relatively high allowing for SSgA FM to engage on a variety of issues.
In many non-OECD markets we often supplement direct company engagement with participation in shareholder advocacy groups that seek change at a market
level. This type of top-down approach should have a positive long-term impact by addressing shortcomings in local market laws on disclosure and shareholder rights.
Summary of Proxy Voting Guidelines
Directors and Boards
The election of directors is one of the most important fiduciary duties SSgA FM performs as a shareholder. SSgA FM believes that well-governed companies
can protect and pursue shareholder interests better and withstand the challenges of an uncertain economic environment. As such, SSgA FM seeks to vote director elections, in a way, which we as a fiduciary, believe will maximize the monetary value of
each portfolios holdings.
The role of the board, in SSgA FMs view, is to carry out its responsibilities in the best long-term
interest of the company and its shareholders. A strong and effective board oversees management, provides guidance on strategic matters, selects the CEO and other senior executives, creates a succession plan, and performs risk oversight and
performance assessment of the CEO and management. In contrast, management implements the business strategy and runs the companys day-to-day operations. As part of SSgA FMs engagement process, SSgA FM routinely discusses the importance of
the board with issuers.
SSgA FM believes the quality of a board is a measure of director independence and company governance practices. In
voting to elect nominees, SSgA FM considers many factors. SSgA FM believes independent directors are crucial to good corporate governance and help management establish sound corporate governance policies and practices. A sufficiently independent
board will most effectively monitor management, maintain appropriate governance practices, and perform oversight functions necessary to protect shareholder interests.
Accounting and Audit Related Issues
SSgA FM believes audit committees are critical and
necessary as part of the boards risk oversight role. We expect auditors to provide assurance as of a companys financial condition. Having trust in the accuracy of financial statements is important for shareholders to make decisions.
Subsequently, SSgA FM believes that it is imperative for audit committees to select outside auditors who are independent from management.
SSgA FM believes the audit committee is responsible for appointing, compensating, retaining and overseeing the issuers outside audit firm. In
addition, SSgA FM believes the audit committee should approve audit and non-audit services performed by outside audit firms.
Capital
Structure, Reorganization and Mergers
Though SSgA FM does not seek involvement in the day-to-day operations of an organization, SSgA FM
recognizes the need for oversight and input into management decisions that may affect a companys value. Altering the capital structure of a company is a critical decision for management, and in making such a critical decision, SSgA FM believes
the company should have a well explained business rationale that is consistent with corporate strategy and should not overly dilute its shareholders.
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The organizational structure of a company or proposed modifications to a company, may improve the
effectiveness of a companys operations, thereby enhancing shareholder value. M&A issues may result in a substantial economic impact to a corporation. SSgA FM evaluates mergers and acquisitions on a case-by-case basis. SSgA FM considers the
adequacy of the consideration and the impact of the corporate governance provisions to shareholders. In all cases, SSgA FM uses its discretion in order to maximize shareholder value.
Occasionally, companies add anti-takeover provisions that reduce the chances of a potential acquirer making an offer or reducing the likelihood of a successful offer. SSgA FM does not support proposals
that reduce shareholders rights, entrench management or reduce the likelihood of shareholders right to vote on reasonable offers.
Compensation
SSgA FM considers the
boards responsibility to include setting the appropriate level of executive compensation. Despite the differences among the types of plans and the awards possible, there is a simple underlying philosophy that guides SSgA FMs analysis of
executive compensation; there should be a direct relationship between executive compensation and company performance over the long term.
General/Routine
Although SSgA FM does
not seek involvement in the day-to-day operations of an organization, SSgA FM recognizes the need for conscientious oversight and input into management decisions that may affect a companys value. SSgA FM supports proposals that encourage
economically advantageous corporate practices and governance, while leaving decisions that are deemed to be routine or constitute ordinary business to management and the board of directors.
Environmental and Social Issues
Proposals relating to social and environmental issues,
typically initiated by shareholders, generally request that the company disclose or amend certain business practices. Often, proposals may address concerns with which SSgA FM philosophically agrees, but absent a compelling economic impact on
shareholder value, SSgA FM will typically abstain from voting on these proposals.
International Statement
SSgA FM reviews proxies of non-US issuers consistent with our Principles and Proxy Voting Guidelines; however, SSgA FM also endeavors to show sensitivity
to local market practices when voting non-US proxies. This may lead to contrasting votes as corporate governance standards, disclosure requirements and voting mechanics differ from market to market. SSgA will vote issues in the context of our Proxy
Voting Guidelines, as well as local market standards, where appropriate.
SSgA FM votes in all markets where it is feasible; however, SSgA FM
may refrain from voting meetings when power of attorney documentation is required, where voting will have a material impact on our ability to trade the security, or where issuer-specific special documentation is required or various market or issuer
certifications are required. SSgA FM is unable to vote proxies when certain custodians, used by our clients, do not offer proxy voting in a jurisdiction or when they charge a meeting specific fee in excess of the typical custody service agreement.
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SSgA FM Proxy Voting Guidelines
State Street Global Advisors Funds Management (SSgA FM) seeks to vote proxies for which it has discretionary authority in the best interests
SSgA FM clients. This means that SSgA FM will make voting decisions in the manner SSgA believes will most likely protect and promote the long term economic value of client accounts. Absent unusual circumstances or specific client instructions, SSgA
FM votes proxies on a particular matter in the same way for all clients, regardless of their investment style or strategies. SSgA FM takes the view that voting in a manner consistent with maximizing the monetary value of our clients holdings
will benefit our direct clients (e.g. fund shareholders).
I. DIRECTOR RELATED ITEMS
Director related proposals concern issues submitted to shareholders that deal with the composition of the board or impact the members of a
corporations board of directors. In deciding which director nominee to support, SSgA FM considers numerous factors.
Director
Elections
SSgAs director election policy focuses on companies governance profile to identify if a company demonstrates
appropriate governance practices or if it exhibits negative governance practices. Factors SSgA considers when evaluating governance practices include, but are not limited to the following:
If a
company demonstrates appropriate governance practices
, SSgA believes a director should be classified as independent based on the relevant listing standards or local market practice standards. In such cases, the composition of the key oversight
committees of a board should meet the minimum standards of independence. Accordingly, SSgA will vote against a nominee at a company with appropriate governance practices if the director is classified as non-independent under relevant listing
standards or local market practice AND serves on a key committee of the board (compensation, audit, nominating or committees required to be fully independent by local market standards).
Conversely,
if a company demonstrates negative governance practices
, SSgA believes the classification standards for director independence should be elevated. In such circumstances, we will evaluate
all director nominees based on the following classification standards:
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Is the nominee an employee of or related to an employee of the issuer or its auditor,
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Does the nominee provides professional services to the issuer,
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Has the nominee attended an appropriate number of board meetings, or
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Has the nominee received non-board related compensation from the issuer.
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Where companies demonstrate negative governance practices,
these stricter standards will apply not only to directors who are a member of a key committee but to all directors on the board as market
practice permits. Accordingly, SSgA will vote against a nominee (with the exception of the CEO) where the board has inappropriate governance practices and is considered not independent based on the above independence criteria.
Additionally, SSgA may withhold votes based on the following:
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CEOs of public companies who sit on more than three public company boards.
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Nominees who sit on more than six public company boards.
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SSgA may withhold votes from all director nominees at companies that have ignored a shareholder proposal which received a majority of the shares
outstanding at the last annual or special meeting, unless management submits the proposal(s) on the ballot as a binding management proposal, recommending shareholders vote for the particular proposal(s).
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SSgA may withhold votes from compensation committee members where there is a weak relationship between executive pay and performance over a five-year
period.
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SSgA will withhold votes from audit committee members if non-audit fees exceed 50% of total fees paid to the auditors.
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SSgA will withhold votes from directors who appear to have been remiss in their duties.
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Director Related Proposals
SSgA FM
generally votes for the following director related proposals:
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Discharge of board members duties, in the absence of pending litigation, governmental investigation, charges of fraud or other indications of
significant concern.
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Proposals to restore shareholders ability to remove directors with or without cause.
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Proposals that permit shareholders to elect directors to fill board vacancies.
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Shareholder proposals seeking disclosure regarding the company, board, or compensation committees use of compensation consultants, such as
company name, business relationship(s) and fees paid.
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SSgA FM generally votes against the following director related
proposals:
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Requirements that candidates for directorships own large amounts of stock before being eligible to be elected.
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Proposals that relate to the transaction of other business as properly comes before the meeting, which extend blank check
powers to those acting as proxy.
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Shareholder proposals requiring two candidates per board seat.
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Majority Voting
SSgA FM will generally support a majority vote standard based on votes
cast for the election of directors.
SSgA FM will generally vote to support amendments to bylaws that would require simple majority of voting
shares (i.e. shares cast) to pass or repeal certain provisions.
Annual Elections
SSgA FM generally supports the establishment of annual elections of the board of directors. Consideration is given to the overall level of board
independence and the independence of the key committees as well as whether there is a shareholders rights plan.
Cumulative Voting
SSgA FM does not support cumulative voting structures for the election of directors.
Separation Chair/CEO
SSgA FM analyzes
proposals for the separation of Chair/CEO on a case-by-case basis taking into consideration numerous factors, including but not limited to, a companys performance and the overall governance structure of the company.
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Proxy Access
SSgA will consider proposals relating to Proxy Access on a case-by-case basis:
SSgA will
evaluate the companys specific circumstances, the impact of the proposal on the target company and its potential effect on shareholder value.
Considerations include but are not limited to the following:
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The ownership thresholds and holding duration proposed in the resolution;
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The binding nature of the proposal;
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The number of directors that shareholders may be nominate each year;
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Company governance structure;
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Shareholder rights; and
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Age/Term Limits
Generally, SSgA FM will
vote against limits to tenure.
Approve Remuneration of Directors
Generally, SSgA FM will support directors compensation, provided the amounts are not excessive relative to other issuers in the market or industry. In making our determination, we review whether the
compensation is overly dilutive to existing shareholders.
Indemnification
Generally, SSgA FM supports proposals to limit directors liability and/or expand indemnification and liability protection if he or she has not acted in bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office.
Classified Boards
SSgA FM generally supports annual elections for the board of directors. In certain cases, SSgA FM will support a classified board structure, if the board
is composed of 80 percent of independent directors, the boards key committees (auditing, nominating and compensation) are composed of independent directors, and SSgA FM will consider other governance factors, including antitakeover devices.
Confidential Voting
SSgA FM
will support confidential voting.
Board Size
SSgA FM will support proposals seeking to fix the board size or designate a range for the board size and will vote against proposals that give management the ability to alter the size of the board outside
of a specified range without shareholder approval.
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II. AUDIT RELATED ITEMS
Ratifying Auditors and Approving Auditor Compensation
SSgA FM supports the approval of
auditors and auditor compensation provided that the issuer has properly disclosed audit and non-audit fees relative to market practice and the audit fees are not deemed excessive. SSgA FM deems audit fees to be excessive if the non-audit fees for
the prior year constituted 50% or more of the total fees paid to the auditor. SSgA FM will support the disclosure of auditor and consulting relationships when the same or related entities are conducting both activities and will support the
establishment of a selection committee responsible for the final approval of significant management consultant contract awards where existing firms are already acting in an auditing function.
In circumstances where other fees include fees related to initial public offerings, bankruptcy emergence, and spin-offs, and the company makes public disclosure of the amount and nature of
those fees which are determined to be an exception to the standard non-audit fee category, then such fees may be excluded from the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/fax compliance
and preparation for purposes of determining whether non-audit fees are excessive.
SSgA FM will support the discharge of auditors and
requirements that auditors attend the annual meeting of shareholders.
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Accept Financial Statements Consolidated Financial Statements and Statutory Reports
It is the auditors responsibility to provide assurance as of the companys financial condition. Accordingly, in the absence of
pending litigation, governmental investigation, charges of fraud or other indicia of significant concern, SSgA FM will accept the financial statement, allocation of income and/or statutory report.
III. CAPITAL STRUCTURE
Capital
structure proposals include requests by management for approval of amendments to the certificate of incorporation that will alter the capital structure of the company. The most common request is for an increase in the number of authorized shares of
common stock, usually in conjunction with a stock split or dividend. Typically, requests that are not unreasonably dilutive or enhance the rights of common shareholders are supported. In considering authorized share proposals, the typical threshold
for approval is 100% over current authorized shares. However, the threshold may be increased if the company offers a specific need or purpose (merger, stock splits, growth purposes, etc.). All proposals are evaluated on a case-by-case basis taking
into account the companys specific financial situation.
Increase in Authorized Common Shares
In general, SSgA FM supports share increases for general corporate purposes up to 100% of current authorized stock.
SSgA FM supports increases for specific corporate purposes up to 100% of the specific need plus 50% of current authorized common stock for U.S. firms and
plus 100% of current authorized stock for international firms.
When applying the thresholds, SSgA FM will also consider the nature of the
specific need, such as mergers and acquisitions and stock splits.
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Common for non-US issuers; request from the issuer to discharge from liability the directors or auditors with respect to actions taken by them during the previous year.
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Increase in Authorized Preferred Shares
SSgA FM votes on a case-by-case basis on proposals to increase the number of preferred shares.
Generally, SSgA FM will vote for the authorization of preferred stock in cases where the company specifies the voting, dividend, conversion, and other
rights of such stock and the terms of the preferred stock appear reasonable.
SSgA FM will support proposals to create declawed
blank check preferred stock (stock that cannot be used as a takeover defense).
However, SSgA FM will vote against proposals to increase the
number of blank check preferred stock authorized for issuance when no shares have been issued or reserved for a specific purpose.
Preemptive Rights and Non-Preemptive Rights
In general, SSgA FM supports issuance authority requests up to 100% of current share capital with preemptive rights. Requests for the authority to remove preemptive rights will be supported for share
issuances that are less than a certain percentage (ranging from 5-20%, based on market practice) of the outstanding shares, unless even such a small amount could have a material dilutive effect on existing shareholders (e.g. illiquid markets).
For Hong Kong, SSgA FM does not support issuances that do not place limits on discounts or do not provide the authority to refresh the share
issuance amounts without prior shareholder approval.
Unequal Voting Rights
SSgA FM will not support proposals authorizing the creation of new classes of common stock with superior voting rights and will vote against new classes of preferred stock with unspecified voting,
conversion, dividend distribution, and other rights. In addition, SSgA FM will not support capitalization changes that add blank check classes of stock (i.e. classes of stock with undefined voting rights) or classes that dilute the
voting interests of existing shareholders.
However, SSgA FM will support capitalization changes that eliminate other classes of stock and/or
unequal voting rights.
Dividends and Share Repurchase Programs
SSgA FM generally supports dividend payouts that are greater than or equal to country and industry standards; we generally support a dividend which constitutes 30% or more of net income. SSgA FM may vote
against the dividend payouts if the dividend payout ratio has been consistently below 30% without adequate explanation; or, the payout is excessive given the companys financial position.
Generally, SSgA FM votes for the authorization of share repurchase programs, unless the issuer does not clearly state the business purpose for the
program, a definitive number of shares to be repurchased, and the time frame for the repurchase.
IV. MERGERS AND ACQUISITIONS
Mergers and the reorganization structure of a company often involve proposals relating to reincorporation, restructurings, mergers,
liquidations, and other major changes to the corporation. Proposals that are in the best interests of the shareholders, demonstrated by enhancing share value or improving the effectiveness of the companys operations, will be supported. In
general, provisions that are not viewed as economically sound or are thought to be destructive to shareholders rights are not supported.
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SSgA FM will generally support transactions that maximize shareholder value. Some of the considerations
include, but are not limited to the following:
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Board oversight of the process for the recommended transaction, including, director and/or management conflicts of interest
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Offers made at a premium and where there are no other higher bidders
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Offers in which the secondary market price is substantially lower than the net asset value
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SSgA FM may vote against a transaction considering the following:
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Offers with potentially damaging consequences for minority shareholders because of illiquid stock, especially in some non-US markets
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Offers where we believe there is a reasonable prospect for an enhanced bid or other bidders
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At the time of voting, the current market price of the security exceeds the bid price
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V. ANTI-TAKEOVER MEASURES
Typically,
proposals relating to requests by management to amend the certificate of incorporation or bylaws to add or delete a provision are deemed to have an antitakeover effect. The majority of these proposals deal with managements attempt to add some
provision that makes a hostile takeover more difficult or will protect incumbent management in the event of a change in control of the company.
Proposals that reduce shareholders rights or have the effect of entrenching incumbent management will not be supported. Proposals that enhance the
right of shareholders to make their own choices as to the desirability of a merger or other proposal are supported.
Shareholder Rights
Plans
SSgA FM will support mandates requiring shareholder approval of a shareholder rights plans (poison pill) and repeals of
various anti-takeover related provisions.
In general, SSgA FM will vote against the
adoption or renewal of a US issuers
shareholder rights plan (poison pill).
SSgA FM will support the
adoption or renewal of a non-US issuers
shareholder
rights plans (poison pill) if the following conditions are met: (i) minimum trigger, flip-in or flip-over of 20%, (ii) maximum term of three years, (iii) no dead hand, slow hand, no hand
or similar feature that limits the ability of a future board to redeem the pill, and (iv) inclusion of a shareholder redemption feature (qualifying offer clause), permitting ten percent of the shares to call a special meeting or seek a written
consent to vote on rescinding the pill if the board refuses to redeem the pill 90 days after a qualifying offer is announced.
SSgA FM will
vote for an
amendment
to a shareholder rights plan (poison pill) where the terms of the new plans are more favorable to shareholders ability to accept unsolicited offers (i.e. if one of the following conditions are met:
(i) minimum trigger, flip-in or flip-over of 20%, (ii) maximum term of three years, (iii) no dead hand, slow hand, no hand or similar feature that limits the ability of a future board to redeem the
pill, and (iv) inclusion of a shareholder redemption feature (qualifying offer clause), permitting ten percent of the shares to call a special meeting or seek a written consent to vote on rescinding the pill if the board refuses to redeem the
pill 90 days after a qualifying offer is announced).
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Special Meetings
SSgA will vote
for
shareholder proposals related to special meetings at companies that do not provide shareholders the right to call for a special meeting in their by-laws if:
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The company also does not allow shareholders to act by written consent, OR
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The company allows shareholders to act by written consent but the ownership threshold for acting by written consent is set above 25% of outstanding
shares.
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SSgA will vote
for
shareholder proposals related to special meetings at companies that give shareholders
(with a minimum 10% ownership threshold) the right to call for a special meeting in their by-laws if:
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The current ownership threshold to call for a special meeting is above 25% of outstanding shares.
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SSgA will vote for management proposals related to special meetings.
Written Consent
SSgA will vote
for
shareholder proposals on written consent at
companies if:
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The company does not have provisions in their by-laws giving shareholders the right to call for a special meeting, OR
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The company allows shareholders the right to call for a special meeting but the current ownership threshold to call for a special meeting is above 25%
of outstanding shares, AND
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The company has a poor governance profile.
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SSgA will vote management proposals on written consent on a case-by-case basis.
Super-Majority
SSgA FM will generally
vote against amendments to by-laws requiring super-majority shareholder votes to pass or repeal certain provisions. SSgA FM will vote for the reduction or elimination of super-majority vote requirements, unless management of the issuer was
concurrently seeking to or had previously made such a reduction or elimination.
VI. REMUNERATION
Despite the differences among the types of plans and the awards possible there is a simple underlying philosophy that guides the analysis of all
compensation plans; namely, are the terms of the plan designed to provide an incentive for executives and/or employees to align their interests with those of the shareholders and thus work toward enhancing shareholder value. Plans which benefit
participants only when the shareholders also benefit are those most likely to be supported.
Advisory Vote on Executive Compensation and
Frequency
SSgA FM supports management proposals on executive compensation where there is a strong relationship between executive pay and
performance over a five-year period.
SSgA FM supports an annual advisory vote on executive compensation.
Approve Remuneration Report
SSgA FM
will generally support remuneration reports that are judged to be in-line with local market practices. SSgA FM will generally vote against the approval of the remuneration report if the company fails to disclose information regarding any element of
CEO remuneration including but not limited to, base salary, annual bonuses, and special bonuses relative to market practice.
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If the companys schemes allows for retesting of performance criteria over extended time period or for
retesting if the original performance criteria was not met during the initial time period, SSgA FM may vote against the remuneration report.
Employee Equity Award Plans
SSgA FM
considers numerous criteria when examining equity award proposals. Generally, SSgA FM does not vote against plans for lack of performance or vesting criteria. Rather, the main criteria that will result in a vote against an equity award plan are:
Excessive voting power dilution
: To assess the dilutive effect, we divide the number of shares required to fully fund the proposed
plan, the number of authorized but unissued shares and the issued but unexercised shares by the fully diluted share count. SSgA reviews that number in light of certain factors, including the industry of the issuer.
Other criteria include the following:
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Number of participants or eligible employees;
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The variety of awards possible
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The period of time covered by the plan
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There are numerous factors that we view as negative, and together, may result in a vote against a proposal:
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Grants to individuals or very small groups of participants;
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Gun-jumping grants which anticipate shareholder approval of a plan or amendment;
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The power of the board to exchange underwater options without shareholder approval this pertains to the ability of a company to reprice
options, not the actual act of repricing described above;
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Below market rate loans to officers to exercise their options;
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The ability to grant options at less than fair market value;
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Acceleration of vesting automatically upon a change in control;
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Excessive compensation (i.e. compensation plans which are deemed by SSgA FM to be overly dilutive).
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Historical option grants
: Excessive historical option grants over the past three years. Plans that provide for historical grant patterns of
greater than eight to twelve percent are generally not supported.
Repricing:
SSgA FM will vote against any plan where repricing is
expressly permitted. If a company has a history of repricing underwater options, the plan will not be supported.
Share Repurchases
: If
a company makes a clear connection between a share repurchase program and its intent to offset dilution created from option plans and the company fully discloses the amount of shares being repurchased, the voting dilution calculation may be adjusted
to account for the impact of the buy back.
Companies who do not (i) clearly state the intentions of any proposed share buy-back plan or
(ii) do not disclose a definitive number of the shares to be bought back and, (iii) the time frame during which the shares will be bought back will not have any such repurchase plan factored into the dilution calculation.
162(m) Plan Amendments
: If a plan would not normally meet SSgA FM criteria described above, but is primarily being amended to add specific
performance criteria to be used with awards designed to qualify for performance-based exception from the tax deductibility limitations of Section 162(m) of the Internal Revenue Code, then SSgA FM will support the proposal to amend the plan.
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Employee Stock Option Plans
SSgA FM generally votes for stock purchase plans with an exercise price of not less than 85% of fair market value. However, SSgA FM takes market practice into consideration.
Compensation Related Items
SSgA FM will
generally support the following proposals:
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Expansions to reporting of financial or compensation-related information, within reason
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Proposals requiring the disclosure of executive retirement benefits if the issuer does not have an independent compensation committee
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SSgA FM will generally vote against the following proposals:
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Retirement bonuses for non-executive directors and auditors
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VII. MISCELLANEOUS/ROUTINE ITEMS
SSgA FM generally supports the following
miscellaneous/routine governance items:
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Reimbursement of all appropriate proxy solicitation expenses associated with the election when voting in conjunction with support of a dissident slate
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Opting out of business combination provision
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Proposals that remove restrictions on the right of shareholders to act independently of management
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Liquidation of the company if the company will file for bankruptcy if the proposal is not approved
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Shareholder proposals to put option repricings to a shareholder vote
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General updating of or corrective amendments to charter and by-laws not otherwise specifically addressed herein, unless such amendments would
reasonably be expected to diminish shareholder rights (e.g. extension of directors term limits, amending shareholder vote requirement to amend the charter documents, insufficient information provided as to the reason behind the amendment)
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Change in corporation name
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Mandates that amendments to bylaws or charters have shareholder approval
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Management proposals to change the date, time, and/or location of the annual meeting unless the proposed change is unreasonable
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Repeals, prohibitions or adoption of anti-greenmail provisions
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Management proposals to implement a reverse stock split when the number of authorized shares will be proportionately reduced and proposals to implement
a reverse stock split to avoid delisting
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Exclusive forum provisions
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SSgA FM generally does not support the following miscellaneous/routine governance items:
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Proposals asking companies to adopt full tenure holding periods for their executives
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Reincorporation to a location that we believe has more negative attributes than its current location of incorporation
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Shareholder proposals to change the date, time, and/or location of the annual meeting unless the current scheduling or location is unreasonable
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Proposals to approve other business when it appears as voting item
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Proposals giving the board exclusive authority to amend the bylaws
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Proposals to reduce quorum requirements for shareholder meetings below a majority of the shares outstanding unless there are compelling reasons to
support the proposal
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VIII. ENVIRONMENTAL AND SOCIAL ISSUES
Proposals relating to social and environmental issues, typically initiated by shareholders, generally request that the company disclose or amend certain business practices. Where it appears there is a
potential effect on shareholder or economic value of a company that is related to a specific environmental or social issue, SSgA FM evaluates the shareholder proposal addressing the issue on a case-by-case basis. Absent a compelling economic impact
on shareholder value, SSgA FM will typically abstain from voting on these proposals.
Record Keeping
In accordance with applicable law, FM shall retain the following documents for not less than five years from the end of the year in which the proxies were
voted, the first two years in FMs office:
1) FMs Proxy Voting Policy and any additional procedures created
pursuant to such Policy;
2) a copy of each proxy statement FM receives regarding securities held by its clients (note: this
requirement may be satisfied by a third party who has agreed in writing to do so or by obtaining a copy of the proxy statement from the EDGAR database);
3) a record of each vote cast by FM (note: this requirement may be satisfied by a third party who has agreed in writing to do so);
4) a copy of any document created by FM that was material in making its voting decision or that memorializes the basis for such decision; and
5) a copy of each written request from a client, and response to the client, for information on how FM voted the clients proxies.
More Information
Any client
who wishes to receive information on how its proxies were voted should contact its SSgA FM relationship manager.
SPDRISFDSAI
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