The Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus
and, if given or made, such other information or representations must not
be relied upon as having been authorized by the Fund, Claymore Advisors,
LLC, the Fund's investment adviser (the "Investment Adviser"), BNY
Investment Advisors, the Fund's investment subadviser (the "Investment
Subadviser") or the Fund's distributor, Claymore Securities, Inc. This
Prospectus does not constitute an offer by the Fund or by the Fund's
distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
INTRODUCTION--CLAYMORE
EXCHANGE-TRADED FUND TRUST
The Claymore Exchange-Traded Fund Trust (the "Trust") is an investment
company currently consisting of 29 separate exchange-traded "index funds."
The investment objective of each of the funds is to replicate as closely as
possible, before fees and expenses, the performance of a specified market
index. Claymore Advisors, LLC is the investment adviser for the funds (the
"Investment Adviser").
This prospectus relates to one fund of the Trust, Claymore/Dorchester - The
Capital Markets Equity Index ETF (the "Fund"). BNY Investment Advisors is
the investment subadviser for the Fund (the "Investment Subadviser").
The Funds has applied to list its shares (the "Shares"), subject to notice
of issuance, on the American Stock Exchange LLC (the "AMEX"). The Fund's
Shares will trade at market prices that may differ to some degree from the
net asset value ("NAV") of the Shares. Unlike conventional mutual funds,
the Fund issues and redeems Shares on a continuous basis, at NAV, only in
large specified blocks of 100,000 Shares, each of which is called a
"Creation Unit." Creation Units are issued and redeemed principally in-kind
for securities included in a specified index. EXCEPT WHEN AGGREGATED IN
CREATION UNITS, SHARES ARE NOT REDEEMABLE SECURITIES OF THE FUND.
The Fund is designed for investors who seek a relatively low-cost "passive"
approach for investing in a portfolio of equity securities of companies in
a specified index. The Fund may be suitable for long-term investment in the
market represented by a specified index and may also be used as an asset
allocation tool or as a speculative trading instrument.
Unlike interests in many conventional mutual funds, the Shares are traded
throughout the day on a national securities exchange, whereas mutual fund
interests are typically only bought and sold at closing net asset values.
The Shares have been designed to be tradable in the secondary market on a
national securities exchange on an intra-day basis, and to be created and
redeemed principally in-kind in Creation Units at each day's next
calculated NAV. These arrangements are designed to protect ongoing
shareholders from adverse effects on the Fund's portfolio that could arise
from frequent cash creation and redemption transactions. In a conventional
mutual fund, redemptions can have an adverse tax impact on taxable
shareholders because of the mutual fund's need to sell portfolio securities
to obtain cash to meet fund redemptions. These sales may generate taxable
gains for the shareholders of the mutual fund, whereas the Shares' in-kind
redemption mechanism generally will not lead to a tax event for the Fund or
its ongoing shareholders.
STATEMENT OF ADDITIONAL INFORMATION
DATED [ ], 2008
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Prospectus dated [ ], 2008 for the Claymore/Dorchester -
The Capital Markets Equity Index ETF a series of the Claymore Exchange-Traded
Fund Trust (the "Trust"), as it may be revised from time to time. Capitalized
terms used herein that are not defined have the same meaning as in the
Prospectus, unless otherwise noted. A copy of the Prospectus may be obtained
without charge by writing to the Trust's Distributor, Claymore Securities, Inc.,
or by calling toll free 1-888-949-3837.
TABLE OF CONTENTS
Page
GENERAL DESCRIPTION OF THE TRUST AND THE FUND.............................2
EXCHANGE LISTING AND TRADING..............................................2
INVESTMENT RESTRICTIONS AND POLICIES......................................3
INVESTMENT POLICIES AND RISKS.............................................5
GENERAL CONSIDERATIONS AND RISKS..........................................9
MANAGEMENT...............................................................10
BROKERAGE TRANSACTIONS...................................................21
ADDITIONAL INFORMATION CONCERNING THE TRUST..............................22
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS....................25
TAXES ...................................................................34
FEDERAL TAX TREATMENT OF FUTURES AND OPTIONS CONTRACTS...................36
DETERMINATION OF NAV.....................................................36
DIVIDENDS AND DISTRIBUTIONS..............................................36
MISCELLANEOUS INFORMATION................................................37
FINANCIAL STATEMENTS.....................................................37
|
GENERAL DESCRIPTION OF THE TRUST AND THE FUND
The Trust was organized as a Delaware statutory trust on May 24, 2006
and is authorized to have multiple series or portfolios. The Trust is an
open-end management investment company, registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Trust currently consists of 29
investment portfolios. This Statement of Additional Information relates to the
following investment portfolio the Claymore/Dorchester - The Capital Markets
Equity Index ETF the "Fund" . The shares of the Fund are referred to herein as
"Shares" or "Fund Shares."
The Fund is managed by Claymore Advisors, LLC ("Claymore Advisors" or
the "Investment Adviser"). BNY Investment Advisors is the investment subadviser
for the Fund (the "Investment Subadviser").
The Fund offers and issues Shares at net asset value ("NAV") only in
aggregations of a specified number of Shares (each a "Creation Unit" or a
"Creation Unit Aggregation"), generally in exchange for a basket of equity
and/or fixed income securities included in its Underlying Index (the "Deposit
Securities"), together with the deposit of a specified cash payment (the "Cash
Component"). The Fund anticipates that its Shares will be listed on the American
Stock Exchange, LLC (the "AMEX"). Fund Shares will trade on the AMEX at market
prices that may be below, at or above NAV. Shares are redeemable only in
Creation Unit Aggregations and, generally, in exchange for portfolio securities
and a specified cash payment. Creation Units are aggregations of 100,000 Shares.
In the event of the liquidation of the Funds, the Trust may lower the number of
Shares in a Creation Unit.
The Trust reserves the right to offer a "cash" option for creations and
redemptions of Fund Shares. Fund Shares may be issued in advance of receipt of
Deposit Securities subject to various conditions including a requirement to
maintain on deposit with the Trust cash at least equal to 115% of the market
value of the missing Deposit Securities. See the "Creation and Redemption of
Creation Unit Aggregations" section. In each instance of such cash creations or
redemptions, transaction fees may be imposed that will be higher than the
transaction fees associated with in-kind creations or redemptions. In all cases,
such fees will be limited in accordance with the requirements of the Securities
and Exchange Commission (the "SEC") applicable to management investment
companies offering redeemable securities.
EXCHANGE LISTING AND TRADING
There can be no assurance that the requirements of the AMEX necessary
to maintain the listing of Shares of the Fund will continue to be met. The AMEX
may, but is not required to, remove the Shares of the Fund from listing if (i)
following the initial 12-month period beginning at the commencement of trading
of the Fund, there are fewer than 50 beneficial owners of the Shares of the
Fund for 30 or more consecutive trading days; (ii) the value of the Underlying
Index is no longer calculated or available; or (iii) such other event shall
occur or condition exist that, in the opinion of the AMEX, makes further
dealings on the AMEX inadvisable. The AMEX will remove the Shares of the Fund
from listing and trading upon termination of the Fund.
As in the case of other stocks traded on the AMEX, broker's
commissions on transactions will be based on negotiated commission rates at
customary levels.
2
The Trust reserves the right to adjust the price levels of the Shares
in the future to help maintain convenient trading ranges for investors. Any
adjustments would be accomplished through stock splits or reverse stock splits,
which would have no effect on the net assets of the Fund.
INVESTMENT RESTRICTIONS AND POLICIES
INVESTMENT OBJECTIVE
The investment objective of the Claymore/Dorchester - The Capital
Markets Equity Index ETF is to provide investment results that correspond
generally to the performance, before the Fund's fees and expenses, of an equity
index called "CPMKTE - The Capital Markets Equity Index" (the "Capital Markets
Equity Index" or the "Underlying Index").
INVESTMENT RESTRICTIONS
The Board of Trustees of the Trust (the "Board" or the "Trustees") has
adopted as fundamental policies the Fund's investment restrictions, numbered (1)
through (7) below. The Fund, as a fundamental policy, may not:
(1). Invest 25% or more of the value of its total assets in
securities of issuers in any one industry or group of industries, except to the
extent that the Underlying Index that the Fund replicates concentrates in an
industry or group of industries. This restriction does not apply to obligations
issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
(2). Borrow money, except that the Fund may (i) borrow money from
banks for temporary or emergency purposes (but not for leverage or the purchase
of investments) up to 10% of its total assets and (ii) make other investments or
engage in other transactions permissible under the 1940 Act that may involve a
borrowing, provided that the combination of (i) and (ii) shall not exceed 33
1/3% of the value of the Fund's total assets (including the amount borrowed),
less the Fund's liabilities (other than borrowings).
(3). Act as an underwriter of another issuer's securities, except
to the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933 in connection with the purchase and sale
of portfolio securities.
3
(4). Make loans to other persons, except through (i) the purchase
of debt securities permissible under the Fund's investment policies, (ii)
repurchase agreements or (iii) the lending of portfolio securities, provided
that no such loan of portfolio securities may be made by the Fund if, as a
result, the aggregate of such loans would exceed 33 1/3% of the value of the
Fund's total assets.
(5). Purchase or sell physical commodities unless acquired as a
result of ownership of securities or other instruments (but this shall not
prevent the Fund (i) from purchasing or selling options, futures contracts or
other derivative instruments, or (ii) from investing in securities or other
instruments backed by physical commodities).
(6). Purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments (but this shall not prohibit the
Fund from purchasing or selling securities or other instruments backed by real
estate or of issuers engaged in real estate activities).
(7). Issue senior securities, except as permitted under the 1940 Act.
Except for restriction (2), if a percentage restriction is adhered to
at the time of investment, a later increase in percentage resulting from a
change in market value of the investment or the total assets, or the sale of a
security out of the portfolio, will not constitute a violation of that
restriction.
The foregoing fundamental investment policies cannot be changed as to
the Fund without approval by holders of a "majority of the Fund's outstanding
voting shares." As defined in the 1940 Act, this means the vote of (i) 67% or
more of the Fund's shares present at a meeting, if the holders of more than 50%
of the Fund's shares are present or represented by proxy, or (ii) more than 50%
of the Fund's shares, whichever is less.
In addition to the foregoing fundamental investment policies, the Fund
is also subject to the following non-fundamental restrictions and policies,
which may be changed by the Board of Trustees. The Fund may not:
(1). Sell securities short, unless the Fund owns or has the right
to obtain securities equivalent in kind and amount to the securities sold short
at no added cost, and provided that transactions in options, futures contracts,
options on futures contracts or other derivative instruments are not deemed to
constitute selling securities short.
(2). Purchase securities on margin, except that the Fund may obtain
such short-term credits as are necessary for the clearance of transactions; and
provided that margin deposits in connection with futures contracts, options on
futures contracts or other derivative instruments shall not constitute
purchasing securities on margin.
(3). Purchase securities of open-end or closed-end investment
companies except in compliance with the 1940 Act.
(4). Invest in direct interests in oil, gas or other mineral
exploration programs or leases; however, the Fund may invest in the securities
of issuers that engage in these activities.
(5). Invest in illiquid securities if, as a result of such
investment, more than 15% of the Fund's net assets would be invested in illiquid
securities.
The investment objective of the Fund is a non-fundamental policy that
can be changed by the Board of Trustees without approval by shareholders.
4
INVESTMENT POLICIES AND RISKS
The Fund intends to invest cash pending settlement of any TBA
transactions in money market instruments, repurchase agreements, commercial
paper (including asset-backed commercial paper) or other high-quality, liquid
short-term instruments, which may include money market funds affiliated with the
Adviser.
Loans of Portfolio Securities. The Fund may lend its investment
securities to approved borrowers. Any gain or loss on the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. These loans cannot exceed 33 1/3% of the Fund's total
assets.
Approved borrowers are brokers, dealers, domestic and foreign banks, or
other financial institutions that meet credit or other requirements as
established by, and subject to the review of, the Trust's Board, so long as the
terms, the structure and the aggregate amount of such loans are not inconsistent
with the 1940 Act and the rules and regulations thereunder or interpretations of
the SEC, which require that (a) the borrowers pledge and maintain with the Fund
collateral consisting of cash, an irrevocable letter of credit issued by a bank,
or securities issued or guaranteed by the U.S. Government having a value at all
times of not less than 102% of the value of the securities loaned (on a
"mark-to-market" basis); (b) the loan be made subject to termination by the Fund
at any time; and (c) the Fund receives reasonable interest on the loan. From
time to time, the Fund may return a part of the interest earned from the
investment of collateral received from securities loaned to the borrower and/or
a third party that is unaffiliated with the Fund and that is acting as a finder.
Repurchase Agreements. The Fund may enter into repurchase agreements,
which are agreements pursuant to which securities are acquired by the Fund from
a third party with the understanding that they will be repurchased by the seller
at a fixed price on an agreed date. These agreements may be made with respect to
any of the portfolio securities in which the Fund is authorized to invest.
Repurchase agreements may be characterized as loans secured by the underlying
securities. The Fund may enter into repurchase agreements with (i) member banks
of the Federal Reserve System having total assets in excess of $500 million and
(ii) securities dealers ("Qualified Institutions"). The Investment Adviser will
monitor the continued creditworthiness of Qualified Institutions.
The use of repurchase agreements involves certain risks. For example,
if the seller of securities under a repurchase agreement defaults on its
obligation to repurchase the underlying securities, as a result of its
bankruptcy or otherwise, the Fund will seek to dispose of such securities, which
action could involve costs or delays. If the seller becomes insolvent and
subject to liquidation or reorganization under applicable bankruptcy or other
laws, the Fund's ability to dispose of the underlying securities may be
5
restricted. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying securities. To minimize this risk,
the securities underlying the repurchase agreement will be held by the custodian
at all times in an amount at least equal to the repurchase price, including
accrued interest. If the seller fails to repurchase the securities, the Fund may
suffer a loss to the extent proceeds from the sale of the underlying securities
are less than the repurchase price.
The resale price reflects the purchase price plus an agreed upon market
rate of interest. The collateral is marked to market daily.
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 with those securities. Such transactions are only advantageous
if the Fund has an opportunity to earn a greater rate of return 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 Investment 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 Fund's assets. The custodian bank will maintain a separate
account for the Fund with securities having a value equal to or greater than
such commitments. Under the 1940 Act, reverse repurchase agreements are
considered loans.
Money Market Instruments. The Fund may invest a portion of its assets
in high-quality money market instruments on an ongoing basis to provide
liquidity. The instruments in which the Fund may invest include: (i) short-term
obligations issued by the U.S. Government; (ii) negotiable certificates of
deposit ("CDs"), fixed time deposits and bankers' acceptances of U.S. and
foreign banks and similar institutions; (iii) commercial paper rated at the date
of purchase "Prime-1" by Moody's Investors Service, Inc. or "A-1+" or "A-1" by
Standard & Poor's or, if unrated, of comparable quality as determined by the
Investment Adviser; (iv) repurchase agreements; and (v) money market mutual
funds. CDs are short-term negotiable obligations of commercial banks. Time
deposits are non-negotiable deposits maintained in banking institutions for
specified periods of time at stated interest rates. Banker's acceptances are
time drafts drawn on commercial banks by borrowers, usually in connection with
international transactions.
Investment Companies. The Fund may invest in the securities of other
investment companies (including money market funds). Under the 1940 Act, the
Fund's investment in investment companies is limited to, subject to certain
exceptions, (i) 3% of the total outstanding voting stock of any one investment
company, (ii) 5% of the Fund's total assets with respect to any one investment
company and (iii) 10% of the Fund's total assets of investment companies in the
aggregate.
Real Estate Investment Trusts ("REITs"). The Fund may invest in the
securities of real estate investment trusts to the extent allowed by law, which
pool investors' funds for investments primarily in commercial real estate
properties. Investment in REITs may be the most practical available means for
the Fund to invest in the real estate industry. As a shareholder in a REIT, the
Fund would bear its ratable share of the REIT's expenses, including its advisory
and administration fees. At the same time, the Fund would continue to pay its
own investment advisory fees and other expenses, as a result of which the Fund
and its shareholders in effect will be absorbing duplicate levels of fees with
respect to investments in REITs.
6
Illiquid Securities. The Fund may invest up to an aggregate amount of
15% of its net assets in illiquid securities. Illiquid securities include
securities subject to contractual or other restrictions on resale and other
instruments that lack readily available markets.
Futures and Options. The Fund may utilize exchange-traded futures and
options contracts and swap agreements.
Futures contracts generally provide for the future sale by one party
and purchase by another party of a specified commodity at a specified future
time and at a specified price. Stock index futures contracts are settled daily
with a payment by one party to the other of a cash amount based on the
difference between the level of the stock index specified in the contract from
one day to the next. Futures contracts are standardized as to maturity date and
underlying instrument and are traded on futures exchanges.
Futures traders are 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 use exchange-traded futures and options, together with
positions in cash and money market instruments, to simulate full investment in
its Underlying Index. Under such circumstances, the Investment Adviser may seek
to utilize other instruments that it believes to be correlated to the underlying
index components or a subset of the components.
An option on a futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser the right, in return for the
premium paid, to assume a position in the underlying futures contract at a
specified exercise price at any time prior to the expiration date of the option.
Upon exercise of an option, the delivery of the futures position by the writer
of the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account that represents the
amount by which the market price of the futures contract exceeds (in the case of
a call) or is less than (in the case of a put) the exercise price of the option
on the futures contract. The potential for loss related to the purchase of an
option on a futures contract is limited to the premium paid for the option plus
transaction costs. Because the value of the option is fixed at the point of
purchase, there are no daily cash payments by the purchaser to reflect changes
in the value of the underlying contract; however, the value of the option
changes daily and that change would be reflected in the NAV of the Fund. The
potential for loss related to writing call options on equity securities or
indices is unlimited. The potential for loss related to writing put options is
limited only by the aggregate strike price of the put option less the premium
received.
7
The Fund may purchase and write put and call options on futures
contracts that are traded on a U.S. exchange as a hedge against changes in value
of its portfolio securities, or in anticipation of the purchase of securities,
and may enter into closing transactions with respect to such options to
terminate existing positions. There is no guarantee that such closing
transactions can be effected.
Restrictions on the Use of Futures Contracts and Options on Futures
Contracts. In connection with its management of the Trust, the Investment
Adviser has claimed such an exclusion from registration as a commodity pool
operator under the Commodity Exchange Act (the "CEA"). Therefore, it is not
subject to the registration and regulatory requirements of the CEA. Therefore,
there are no limitations on the extent to which the Fund may engage in
non-hedging transactions involving futures and options thereon, except as set
forth in the Fund's Prospectus and this Statement of Additional Information.
The Commodity Futures Trading Commission has eliminated limitations on
futures trading by certain regulated entities, including registered investment
companies, and consequently registered investment companies may engage in
unlimited futures transactions and options thereon provided that the investment
adviser to the company claims an exclusion from regulation as a commodity pool
operator.
Swap Agreements. Swap agreements are contracts between parties in which
one party agrees to make periodic payments to the other party (the
"Counterparty") based on the change in market value or level of a specified
rate, index or asset. In return, the Counterparty agrees to make periodic
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, the Fund
receiving or paying only the net amount of the two payments. The net amount of
the excess, if any, of the Fund's obligations over its entitlements with respect
to each swap is accrued on a daily basis and an amount of cash or highly liquid
securities having an aggregate value at least equal to the accrued excess is
maintained in an account at the Trust's custodian bank.
The use of 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. These transactions
generally do not involve the delivery of securities or other underlying assets
or principal.
The use of swap agreements involves certain risks. For example, if the
Counterparty under a swap agreement defaults on its obligation to make payments
due from it, as a result of its bankruptcy or otherwise, the Fund may lose such
payments altogether, or collect only a portion thereof, which collection could
involve costs or delays.
8
GENERAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with an investment in the Fund is
contained in the Prospectus in the "Principal Risks of Investing in the Fund"
and "Additional Risks" sections. The discussion below supplements, and should be
read in conjunction with, these sections of the Prospectus.
An investment in the Fund should be made with an understanding that
the value of the Fund's portfolio securities may fluctuate in accordance with
changes in the financial condition of the issuers of the portfolio securities,
the value of common stocks in general and other factors that affect the market.
An investment in the Fund should also be made with an understanding of
the risks inherent in an investment in equity securities, including the risk
that the financial condition of issuers may become impaired or that the general
condition of the stock market may deteriorate (either of which may cause a
decrease in the value of the portfolio securities and thus in the value of Fund
Shares). Common stocks are susceptible to general stock market fluctuations and
to volatile increases and decreases in value as market confidence 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 or 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, or holders of debt obligations or
preferred stocks. Further, unlike debt securities which typically have a stated
principal amount payable at maturity (whose value, however, is 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.
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 Fund's Shares will be adversely affected if trading markets for the Fund's
portfolio securities are limited or absent, or if bid/ask spreads are wide.
Risks of Futures and Options Transactions. There are several risks
accompanying the utilization of futures contracts and options on futures
contracts. First, while the Fund plans to utilize futures contracts only if an
active market exists for such contracts, there is no guarantee that a liquid
market will exist for the contract at a specified time.
Furthermore, because, by definition, futures contracts project price
levels in the future and not current levels of valuation, market circumstances
may result in a discrepancy between the price of the stock index future and the
movement in the Underlying Index. 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 a Fund has insufficient cash, it may
have to sell portfolio securities to meet daily
9
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Fund may be required to deliver the instruments underlying
futures contracts it has sold.
The risk of loss in trading futures contracts or uncovered call options
in some strategies (e.g., selling uncovered stock index futures contracts) is
potentially unlimited. The Fund does not plan to use futures and options
contracts in this way. The risk of a futures position may still be large as
traditionally measured due to the low margin deposits required. In many cases, a
relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the investor relative to the size of a required
margin deposit. The Fund, however, intends to utilize futures and options
contracts in a manner designed to limit its risk exposure to levels comparable
to direct investment in stocks.
Utilization of futures and options on futures by the Fund involves the
risk of imperfect or even negative correlation to the Underlying Index if the
index underlying the futures contract differs from the Underlying Index. 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; however, this risk is substantially minimized because (a) of
the regulatory requirement that the broker has to "segregate" customer funds
from its corporate funds, and (b) in the case of regulated exchanges in the
United States, the clearing corporation stands behind the broker to make good
losses in such a situation. The purchase of put or call options could be based
upon predictions by the Investment Adviser as to anticipated trends, which
predictions could prove to be incorrect and a part or all of the premium paid
therefore could be lost.
Because the futures market imposes less burdensome margin requirements
than the securities market, an increased amount of participation by speculators
in the futures market could result in price fluctuations. 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 by which the price of a futures contract may vary either up or down from
the previous day's settlement price at the end of a trading session. Once the
daily limit has been reached in a particular type of contract, no trades may be
made on that day at a price beyond that limit. It is possible that futures
contract prices could move to the daily limit for several consecutive trading
days with little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting the Fund to substantial losses. In the event of adverse
price movements, the Fund would be required to make daily cash payments of
variation margin.
Although each Fund intends to enter into futures contracts only if
there is an active market for such contracts, there is no assurance that an
active market will exist for the contracts at any particular time.
Risks of Swap Agreements. The risk of loss with respect to swaps
generally is limited to the net amount of payments that the Fund is
contractually obligated to make. Swap agreements are also subject to the risk
that the swap counterparty will default on its obligations. If such a default
were to occur, each Fund will have contractual remedies pursuant to the
agreements related to the transaction. However, such remedies may be subject to
bankruptcy and insolvency laws which could affect a Fund's rights as a creditor
-- (e.g., the Fund may not receive the net amount of payments that it
contractually is entitled to receive). Each Fund, however, intends to utilize
swaps in a manner designed to limit its risk exposure to levels comparable to
direct investments in stocks.
MANAGEMENT
Trustees and Officers
10
The general supervision of the duties performed by the Investment
Adviser and Investment Subadviser for the Fund under the Investment Advisory
Agreement and Investment Subadvisory Agreement, respectively, is the
responsibility of the Board of Trustees. The Trust currently has four Trustees.
Three Trustees have no affiliation or business connection with the Investment
Adviser or any of its affiliated persons and do not own any stock or other
securities issued by the Investment Adviser. These are the "non-interested" or
"independent" Trustees ("Independent Trustees"). The other Trustee (the
"Management Trustee") is affiliated with the Investment Adviser.
The Independent Trustees of the Trust, their term of office and length
of time served, their principal business occupations during the past five years,
the number of portfolios in the Fund Complex (defined below) overseen by each
Independent Trustee, and other directorships, if any, held by the Trustee are
shown below. The Fund Complex includes all open and closed-end funds (including
all of their portfolios) advised by the Investment Adviser and any funds that
have an investment adviser that is an affiliated person of the Investment
Adviser. As of the date of this SAI, the Fund Complex consists of the Trust's 29
portfolios, 11 separate portfolios of Claymore Exchange-Traded Fund Trust 2 and
16 closed-end management investment companies.
11
NUMBER OF
PORTFOLIOS IN
POSITION(S) TERM OF OFFICE FUND COMPLEX OTHER
NAME, ADDRESS AND AGE OF HELD WITH AND LENGTH OF PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
INDEPENDENT TRUSTEES* TRUST TIME SERVED** DURING PAST 5 YEARS TRUSTEES HELD BY TRUSTEES
Randall C. Barnes Trustee Since 2006 Formerly, Senior Vice 51 None.
Year of Birth: 1951 President, Treasurer
(1993-1997), President,
Pizza Hut International
(1991-1993) and Senior
Vice President,
Strategic Planning and
New Business Development
(1987-1990) of PepsiCo,
Inc. (1987-1997).
Ronald E. Toupin, Jr. Trustee Since 2006 Formerly Vice President, 51 None.
Year of Birth: 1958 Manager and Portfolio
Manager of Nuveen
Asset Management
(1998-1999), Vice
President of Nuveen
Investment Advisory
Corporation
(1993-1999), Vice
President and
Manager of Nuveen
Unit Investment
Trusts (1991-1999),
and Assistant Vice
President and
Portfolio Manager of
Nuveen Unit
Investment Trusts
(1988-1999), each of
John Nuveen &
Company, Inc.
(1982-1999).
Ronald A. Nyberg Trustee Since 2006 Principal of Nyberg & 54 None.
Year of Birth: 1953 Cassioppi, LLC, a law
firm specializing in
Corporate Law, Estate
Planning and Business
Transactions
(2000-present).
Formerly, Executive Vice
President, General
Counsel, and Corporate
Secretary of Van Kampen
Investments (1982-1999).
|
* The business address of each Trustee is c/o Claymore Advisors, LLC, 2455
Corporate West Drive, Lisle, Illinois 60532.
** This is the period for which the Trustee began serving the Trust. Each
Trustee serves an indefinite term, until his successor is elected.
The Trustee who is affiliated with the Investment Adviser or affiliates
of the Investment Adviser and executive officers of the Trust, their term of
office and length of time served, their principal business occupations during
the past five years, the number of portfolios in the Fund Complex overseen by
the Management Trustee and the other directorships, if any, held by the Trustee,
are shown below.
12
TERM OF NUMBER OF
OFFICE AND PORTFOLIOS IN
POSITION(S) LENGTH PRINCIPAL FUND COMPLEX OTHER
NAME, ADDRESS AND AGE OF HELD WITH OF TIME OCCUPATION(S) DURING OVERSEEN BY DIRECTORSHIPS
MANAGEMENT TRUSTEES* TRUST SERVED** PAST 5 YEARS TRUSTEES HELD BY TRUSTEES
---------------------------------------------------------------------------------------------------------------------
Nicholas Dalmaso*** Trustee; and Trustee Senior Managing 54 None.
Year of birth: 1965 Chief Legal since 2006 Director and Chief
and Executive Administrative Officer
Officer (2007-present) and
General Counsel
(2001-2007) of Claymore
Advisors, LLC and
Claymore Securities,
Inc. President and
Secretary of Claymore
Investments, Inc.
(2004-present). Chief
Legal and Executive
Officer of certain
funds in the Fund
Complex. Formerly,
Assistant General
Counsel, John Nuveen
and Company
(1999-2001). Formerly
Vice President and
Associate General
Counsel of Van Kampen
Investments (1992-1999).
|
* The business address of each Trustee is c/o Claymore Advisors, LLC, 2455
Corporate West Drive, Lisle, Illinois 60532.
** This is the period for which the Trustee began serving the Trust. Each
Trustee serves an indefinite term, until his successor is elected.
*** Mr. Dalmaso is an interested person of the Trust because of his position as
an officer of the Investment Adviser and certain of its affiliates.
NAME, ADDRESS AND AGE OF POSITION(S) HELD LENGTH OF TIME
EXECUTIVE OFFICERS WITH TRUST SERVED* PRINCIPAL OCCUPATION(S) DURING PAST 5 YEARS
Steven M. Hill Chief Financial Since 2006 Senior Managing Director (2005-present)
Year of birth: 1964 Officer, Chief and Managing Director (2003-2005) of
Accounting Claymore Advisors, LLC and Claymore
Officer and Securities, Inc.; Formerly, Treasurer
Treasurer of Henderson Global Funds and Operations
Manager for Henderson Global Investors (NA) Inc.
(2002-2003); Managing Director, FrontPoint
Partners LLC (2001-2002); Vice President,
Nuveen Investments (1999-2001); Chief
Financial Officer, Skyline Asset Management
LP, (1999); Vice President, Van Kampen
Investments and Assistant Treasurer,
Van Kampen mutual funds (1989-1999).
Bruce Saxon Chief Since 2006 Vice President - Fund Compliance Officer of
Year of birth: 1957 Compliance Claymore Securities, Inc. (2006-present).
Officer Formerly, Chief Compliance Officer/Assistant
Secretary of Harris Investment Management,
Inc. (2003-2006). Director-Compliance of
Harrisdirect LLC (1999-2003).
Melissa J. Nguyen Secretary Since 2006 Vice President and Asssitant General Counsel
Year of birth: 1978 of Claymore Securities, Inc. (2005-present).
Formerly, Associate, Vedder, Price, Kaufman &
Kammholz, P.C. (2003-2005).
William H. Belden III Vice President Since 2006 Managing Director of Claymore Securities, Inc.
Year of birth: 1965 (2005-present). Formerly, Vice President of
13
|
Product Management at Northern Trust Global
Investments (1999-2005); Vice President of
Product Development at Stein Roe & Farnham
(1995-1999).
James Howley Assistant Since 2006 Vice President, Fund Administration of
Year of birth: 1972 Treasurer Claymore Securities, Inc. (2004-present).
Formerly, Manager, Mutual Fund Administration
of Van Kampen Investments, Inc.
Chuck Craig Vice President Since 2006 Managing Director (2006-present), Vice
Year of birth: 1967 President (2003-2006) of Claymore Securities,
Inc. Formerly, Assistant Vice President,
First Trust Portfolios, L.P. (1999-2003);
Analyst, PMA Securities, Inc. (1996-1999).
Matt Patterson Assistant Since 2006 Vice President and Assistant General Counsel
Year of birth: 1971 Secretary of Claymore Securities, Inc. (2006-present).
Previously, Securities Counsel,
Caterpillar Inc. (2004-2006);
Associate, Skadden, Arps, Slate, Meagher &
Flom LLP (2002-2004).
|
* The business address of each Trustee is c/o Claymore Advisors, LLC, 2455
Corporate West Drive, Lisle, Illinois 60532.
** This is the period for which the Trustee/Officer began serving the Trust.
Each Officer serves an indefinite term, until his successor is elected.
For each Trustee, the dollar range of equity securities beneficially
owned by the Trustee in the Trust and in all registered investment companies
overseen by the Trustee is shown below.
AGGREGATE DOLLAR RANGE OF
DOLLAR RANGE OF EQUITY EQUITY SECURITIES IN ALL
SECURITIES IN THE REGISTERED INVESTMENT
CLAYMORE/DORCHESTER - THE COMPANIES OVERSEEN BY
CAPITAL MARKETS EQUITY TRUSTEE IN FAMILY OF
INDEX ETF INVESTMENT COMPANIES
NAME OF TRUSTEE (AS OF DECEMBER 31, 2007) (AS OF DECEMBER 31, 2007)
----------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Randall C. Barnes None over $100,000
Ronald A. Nyberg None over $100,000
Ronald E. Toupin, Jr. None None
INTERESTED TRUSTEE
Nicholas Dalmaso None None
|
As to each Independent Trustee and his immediate family members, no
person owned beneficially or of record securities in an investment adviser or
principal underwriter of a Fund, or a person
14
(other than a registered investment company) directly or indirectly controlling,
controlled by or under common control with an investment adviser or principal
underwriter of a Fund.
Messrs. Barnes, Nyberg and Toupin who are not "interested persons" of
the Trust, as defined in the 1940 Act, serve on the Trust's Nominating and
Governance Committee. The Nominating and Governance Committee is responsible for
recommending qualified candidates to the Board in the event that a position is
vacated or created. The Nominating and Governance Committee would consider
recommendations by shareholders if a vacancy were to exist. Such recommendations
should be forwarded to the Secretary of the Trust. The Trust does not have a
standing compensation committee.
Messrs. Barnes, Nyberg and Toupin who are not "interested persons" of
the Trust, as defined in the 1940 Act, serve on the Trust's Audit Committee. The
Audit Committee is generally responsible for reviewing and evaluating issues
related to the accounting and financial reporting policies and internal controls
of the Trust and, as appropriate, the internal controls of certain service
providers, overseeing the quality and objectivity of the Trust's financial
statements and the audit thereof and acting as a liason between the Board of
Trustees and the Trust's independent registered public accounting firm.
Remuneration of Trustees and Officers
The Trust, together with Claymore Exchange-Traded Fund Trust 2, pays
each Independent Trustee a fee of $25,000 per year plus $1,000 per Board or
committee meeting participated in, together with each Trustee's actual
out-of-pocket expenses relating to attendance at such meetings. Officers who are
employed by the Investment Adviser receive no compensation or expense
reimbursements from the Trust.
The table below shows the estimated compensation that is contemplated
to be paid to Trustees for the Fund's fiscal year ended May 31, 2008, assuming a
full fiscal year of operations for the fiscal year ended May 31, 2008:
PENSION OR RETIREMENT
AGGREGATE COMPENSATION BENEFITS ACCRUED AS PART OF TOTAL COMPENSATION PAID
NAME OF TRUSTEE FROM TRUST FUND EXPENSES FROM FUND COMPLEX
INDEPENDENT TRUSTEES
Randall C. Barnes $ N/A $
Ronald A. Nyberg $ N/A $
Ronald E. Toupin, Jr. $ N/A $
INTERESTED TRUSTEE
Nicholas Dalmaso N/A N/A N/A
|
The officers and Trustees of the Trust, in the aggregate, own less than
1% of the shares of the Fund.
As of the date hereof, no person owned 5% or more of the outstanding
shares of the Fund.
Investment Adviser. The Investment Adviser manages the investment and
reinvestment of the Fund's assets and administers the affairs of the Fund to the
extent requested by the Board of Trustees.
Investment Subadviser. The Investment Subadviser manages the investment
and reinvestment of each Fund's assets on an ongoing basis under the supervision
of the Investment Adviser.
15
Portfolio Manager. The Fund is managed by the Investment Subadviser's
Index Fund Management Division. The six most senior members are Kurt Zyla, David
Kwan Lloyd Buchanan, Denise Krisko, Steven Wetter, and Todd Rose. Mr. Zyla
manages this Division.
Other Accounts Managed by the Portfolio Managers. Information regarding
the other accounts managed by each Portfolio Manager is set forth below:
------------------------ ------------------------------------------- -------------------------------------------------
ACCOUNTS MANAGED ACCOUNTS WITH RESPECT TO WHICH THE ADVISORY FEE
IS BASED ON THE PERFORMANCE OF THE ACCOUNT
------------------------ ------------------------------------------- -------------------------------------------------
NAME OF PORTFOLIO CATEGORY OF NUMBER OF TOTAL ASSETS NUMBER OF ACCOUNTS IN TOTAL ASSETS IN
MANAGER ACCOUNT ACCOUNTS IN ACCOUNT IN CATEGORY ACCOUNTS IN CATEGORY
IN CATEGORY CATEGORY
------------------------ -------------- ------------ --------------- ----------------------- -------------------------
Kurt Zyla, David Kwan Registered 24 $2,624.3M 0 $0
Denise Krisko, Lloyd investment
Buchanan, Todd Rose, companies
Steve Wetter
------------------------ -------------- ------------ --------------- ----------------------- -------------------------
Other pooled 8 $6,380.1M 0 $0
investment
vehicles
------------------------ -------------- ------------ --------------- ----------------------- -------------------------
Other 52 $12,563.1M 0 $0
accounts
------------------------ -------------- ------------ --------------- ----------------------- -------------------------
|
Although the Funds in the Trust that are managed by the Portfolio
Managers may have different investment strategies, each has a portfolio
objective of replicating its underlying index. The Investment Adviser and
Investment Subadviser do not believe that management of the different Funds of
the Trust presents a material conflict of interest for the Portfolio Managers,
the Investment Adviser or the Investment Subadviser.
Portfolio Manager Compensation. As of June 30, 2007, the Investment
Subadviser's Portfolio Managers' compensation generally consists of base salary,
bonus, and various long-term incentive compensation vehicles, if eligible. In
addition, the Portfolio Managers are eligible for the standard retirement
benefits and health and welfare benefits available to all BNY employees. In the
case of Portfolio Managers who are also responsible for managing managed
accounts other than the Fund, the method used to determine their compensation
is the same for all funds and investment accounts. A Portfolio Manager's base
salary is determined by the manager's experience and performance in the role,
taking into account the ongoing compensation benchmark analyses performed by
BNY's Human Resources Department. A Portfolio Manager's base salary is generally
a fixed amount that may change as a result of periodic reviews, upon assumption
of new duties, or when a market adjustment of the position occurs. A Portfolio
Manager's bonus is determined by a number of factors. One factor is gross,
pre-tax performance of a fund relative to expectations for how the fund should
have performed, given its
16
objectives, policies, strategies and limitations, and the market environment
during the measurement period. This performance factor is not based on the value
of assets held in the Fund's portfolio. For the Fund, the performance factor
depends on how the Portfolio Manager performs relative to the Fund's benchmark
and the Fund's peer group, over one-year and three-year time periods. Additional
factors include the Portfolio Manager's contributions to the investment
management functions within the sub-asset class, contributions to the
development of other investment professionals and supporting staff, and overall
contributions to strategic planning and decisions for the investment group. The
bonus is paid on an annual basis.
The Portfolio Managers for the Fund manage multiple portfolios for
multiple clients. These accounts may include investment companies, separate
accounts (assets managed on behalf of individuals and institutions such as
pension funds, insurance companies and foundations), and bank collective and
common trust accounts. Each Portfolio Manager generally manages portfolios
having substantially the same investment style as the Fund. However, the
portfolios managed by a Portfolio Manager may not have portfolio compositions
identical to those of the Fund(s) managed by the Portfolio Manager due, for
example, to specific investment limitations or guidelines present in some
portfolio or funds but not others. The Portfolio Managers may purchase
securities for one portfolio and not another portfolio, and the performance of
securities purchased for one portfolio may vary from the performance of
securities purchased for other portfolios. A Portfolio Manager may place
transactions on behalf of other accounts that are directly or indirectly
contrary to investment decisions made on behalf of a Fund, or make investment
decisions that are similar to those made for a Fund, both of which have the
potential to adversely impact the Fund depending on market conditions. For
example, a Portfolio Manager may purchase a security in one portfolio while
appropriately selling that same security in another portfolio. In addition, some
of these portfolios have fee structures that are or have the potential to be
higher than the subadvisory fees paid to the Investment Subadviser. However, the
compensation structure for Portfolio Managers generally does not provide any
incentive to favor one account over another because that part of a manager's
bonus based on performance is not based on the performance of one account to the
exclusion of others.
Securities Ownership of the Portfolio Manager. Because the Fund is
newly organized, the portfolio managers do not own shares of the Fund.
Investment Advisory Agreement. Pursuant to an Investment Advisory
Agreement between the Investment Adviser and the Trust, the Fund has agreed to
pay an annual management fee equal to a percentage of its average daily net
assets set forth in the chart below.
-------------------------------------------------------------------------- -------------------------------------------
FUND FEE
-------------------------------------------------------------------------- -------------------------------------------
Claymore/Dorchester - The Capital Markets Equity Index ETF 0.20% of average daily net assets
-------------------------------------------------------------------------- -------------------------------------------
|
The Fund is responsible for all its expenses, including the investment
advisory fees, costs of transfer agency, custody, fund administration, legal,
audit and other services, interest, taxes, brokerage commissions and other
expenses connected with executions of portfolio transactions, any distribution
fees
17
or expenses and extraordinary expenses. The Fund's Investment Adviser has
contractually agreed to waive fees and/or pay Fund expenses to the extent
necessary to prevent the operating expenses of the Fund (excluding interest
expenses, all or a portion of the Fund's licensing fees, offering costs up to
0.25% of average net assets, brokerage commissions, taxes and extraordinary
expenses such as litigation and other expenses not incurred in the ordinary
course of the Fund's business) from exceeding the percentage of its average net
assets set forth in the chart below. The offering costs excluded from the
expense cap are: (a) legal fees pertaining to the Fund's Shares offered for
sale; (b) SEC and state registration fees; and (c) initial fees paid to be
listed on an exchange. The Trust and the Investment Adviser have entered into
the Expense Reimbursement Agreement in which the Investment Adviser has agreed
to waive its management fees and/or pay certain other operating expenses of the
Fund in order to maintain the expense ratio of the Fund at or below the expense
cap listed below (the "Expense Cap"). For a period of five years subsequent to
the Fund's commencement of operations, the Investment Adviser may recover from
the Fund fees and expenses waived or reimbursed during the prior three years if
the Fund's expense ratio, including the recovered expenses, falls below the
Expense Cap.
-------------------------------------------------------------------------- -------------------------------------------
FUND EXPENSE CAP
-------------------------------------------------------------------------- -------------------------------------------
Claymore/Dorchester - The Capital Markets Equity Index ETF 0.27% of average daily net assets
-------------------------------------------------------------------------- -------------------------------------------
|
Under the Investment Advisory Agreement, the Investment Adviser will
not be liable for any error of judgment or mistake of law or for any loss
suffered by the Fund in connection with the performance of the Investment
Advisory Agreement, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Investment Adviser in the performance of
its duties or from reckless disregard of its duties and obligations thereunder.
The Investment Advisory Agreement continues until October 16, 2009, and
thereafter only if approved annually by the Board, including a majority of the
Independent Trustees. The Agreement terminates automatically upon assignment and
is terminable at any time without penalty as to the Fund by the Board, including
a majority of the Independent Trustees, or by vote of the holders of a majority
of the Fund's outstanding voting securities on 60 days written notice to the
Investment Adviser, or by the Investment Adviser on 60 days written notice to
the Fund.
Claymore Advisors is located at 2455 Corporate West Drive, Lisle,
Illinois 60532.
Investment Subadvisory Agreement. BNY Investment Advisors acts as each
Fund's investment subadviser pursuant to a sub-advisory agreement with the
Investment Adviser (the "Investment Subadvisory Agreement"). Pursuant to the
Investment Subadvisory Agreement, the Investment Subadviser manages the
investment and reinvestment of each Fund's assets on an ongoing basis under the
supervision of the Investment Adviser.
Pursuant to the Investment Subadvisory Agreement, the Investment
Adviser pays the Investment Subadviser on a monthly basis a portion of the net
advisory fees it receives from the Fund, at the annual rate of 0.08% of average
net assets up to $200 million and 0.05% of average net assets over $200 million.
The Investment Adviser will pay the Investment Subadviser a minimum of $50,000
per year after the first year of operations.
The Sub-Adviser is located at 1633 Broadway, 13th Floor, New York, New
York, 10019.
18
Administrator. Claymore Advisors also serves as the Trust's
administrator. Pursuant to an administration agreement, Claymore Advisors
provides certain administrative, bookkeeping and accounting services to the
Trust. For the services, the Trust pays Claymore Advisors a fee, accrued daily
and paid monthly, at the annualized rate of the Fund's average daily net assets
as follows:
First $200,000,000 0.0275%
Next $300,000,000 0.0200%
Next $500,000,000 0.0150%
Over $1 billion 0.0100%
|
Custodian and Transfer Agent. The Bank of New York Mellon ("BNY"),
located at 101 Barclay Street, New York, New York 10286, also serves as
custodian for the Fund pursuant to a Custodian Agreement. As custodian, BNY
holds the Fund's assets, calculates the net asset value of Shares and
calculates net income and realized capital gains or losses. BNY also serves as
transfer agent of the Fund pursuant to a Transfer Agency Agreement. BNY may be
reimbursed by the Fund for its out-of-pocket expenses.
Pursuant to the Custodian Agreement and the Transfer Agency Agreement,
each between BNY and the Trust, the Trust has agreed to pay an annual fee for
custodial and transfer agency services at the annualized rate of the Trust's
average daily net assets as follows:
First $2 billion 0.0375%
Over $2 billion 0.0275%
Distributor. Claymore Securities, Inc. ("Claymore") is the distributor
of the Fund's Shares (in such capacity, the "Distributor"). Its principal
address is 2455 Corporate West Drive, Lisle, Illinois 60532. The Distributor has
entered into a Distribution Agreement with the Trust pursuant to which it
distributes Fund Shares. Shares are continuously offered for sale by the Fund
through the Distributor only in Creation Unit Aggregations, as described in the
Prospectus and below under the heading "Creation and Redemption of Creation
Units."
12b-1 Plan. The Trust has adopted a Distribution and Service Plan
pursuant to Rule 12b-1 under the 1940 Act (the "Plan") pursuant to which the
Fund may reimburse the Distributor up to a maximum annual rate of the percentage
of its average daily net assets as set forth in the chart below.
-------------------------------------------------------------------------- -------------------------------------------
FUND FEE
-------------------------------------------------------------------------- -------------------------------------------
Claymore/Dorchester - The Capital Markets Equity Index ETF 0.25% of average daily net assets
-------------------------------------------------------------------------- -------------------------------------------
|
Under the Plan and as required by Rule 12b-1, the Trustees will receive
and review after the end of each calendar quarter a written report provided by
the Distributor of the amounts expended under the Plan and the purpose for which
such expenditures were made.
19
The Plan was adopted in order to permit the implementation of the
Fund's method of distribution. However, no such fee is currently charged to the
Fund, and there are no plans in place to impose such a fee.
Aggregations. Fund Shares in less than Creation Unit Aggregations are
not distributed by the Distributor. The Distributor will deliver the Prospectus
and, upon request, this SAI to persons purchasing Creation Unit Aggregations 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 Distribution Agreement for the Fund provides that it may be
terminated as to the Fund at any time, without the payment of any penalty, on at
least 60 days written notice by the Trust to the Distributor (i) by vote of a
majority of the Independent Trustees or (ii) by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the Fund. The
Distribution Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
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 "Procedures for Creation of Creation Unit Aggregations" below) and
DTC Participants (as defined in "DTC Acts as Securities Depository" below).
Index Providers. Set forth below is a list of the Fund and the
Underlying Index upon which it is based. The CPMKTE-The Capital Markets
Equity Index is compiled by Dorchester Capital Management Company
("Dorchester").
------------------------------------------------------------ ---------------------------------------------------------
FUND UNDERLYING INDEX
------------------------------------------------------------ ---------------------------------------------------------
Claymore/Dorchester - The Capital Markets Equity Index ETF CPMKTE-The Capital Markets Equity Index
------------------------------------------------------------ ---------------------------------------------------------
|
Dorchester is not affiliated with the Fund or with the Investment
Adviser or Investment Subadviser. The Fund is entitled to use its respective
Underlying Index pursuant to a sub-licensing arrangement with the Investment
Adviser, which in turn has a licensing agreement with the applicable Index
Provider. The Fund reimburses the Investment Adviser for the licensing fee
payable to the applicable Index Provider.
The only relationships that Dorchester has with the Investment Adviser,
Investment Subadviser or Distributor of the Fund in connection with the Fund
is that Dorchester has licensed certain of its intellectual property, including
the determination of the component stocks of the Underlying Index and
20
the name of the Underlying Index. The Underlying Index is selected and
calculated without regard to the Investment Adviser, Investment Subadviser,
Distributor or owners of the Fund. Dorchester has no obligation to take the
specific needs of the Investment Adviser, Investment Subadviser, Distributor or
owners of the Fund into consideration in the determination and calculation of
the Underlying Index. Dorchester is not responsible for and has not participated
in the determination of pricing or the timing of the issuance or sale of the
Shares of the Fund or in the determination or calculation of the net asset value
of the Fund. Dorchester has no obligation or liability in connection with the
administration, marketing or trading of the Fund.
DORCHESTER SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR
INTERRUPTIONS RELATED TO THE FUND OR UNDERLYING INDEX. DORCHESTER MAKES NO
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE INVESTMENT
ADVISER, INVESTMENT SUBADVISER, DISTRIBUTOR OR OWNERS OF THE FUND, OR ANY OTHER
PERSON OR ENTITY, FROM THE USE OF THE UNDERLYING INDEX OR ANY DATA INCLUDED
THEREIN. DORCHESTER MAKES NO WARRANTY, EXPRESS OR IMPLIED, AND EXPRESSLY
DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE
OR USE, WITH RESPECT TO THE FUND OR TO UNDERLYING INDEX OR TO ANY DATA
INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL
DORCHESTER HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR
CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) IN CONNECTION WITH THE FUND OR
THE UNDERLYING INDEX, EVEN IF DORCHESTER IS NOTIFIED OF THE POSSIBILITY OF
SUCH DAMAGES.
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases and sales of securities 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 Trust's policy is
to pay commissions that are considered fair and reasonable without necessarily
determining that the lowest possible commissions are paid in all circumstances.
In seeking to determine the reasonableness of brokerage commissions paid in any
transaction, the Investment Subadviser relies upon its experience and knowledge
regarding commissions generally charged by various brokers. The sale of Fund
Shares by a broker-dealer is not a factor in the selection of broker-dealers.
In seeking to implement the Trust's policies, the Investment Subadviser
effects transactions with those brokers and dealers that the Investment
Subadviser believes provide the most favorable prices and are capable of
providing efficient executions. The Investment Subadviser and its affiliates do
not currently participate in soft dollar transactions.
The Investment Subadviser assumes general supervision over placing
orders on behalf of the Funds for the purchase or sale of portfolio securities.
If purchases or sales of portfolio securities by the Fund and one or more other
investment companies or clients supervised by the Investment Subadviser are
considered at or about the same time, transactions in such securities are
allocated among the Fund, the several investment companies and clients in a
manner deemed equitable to all by the Investment Subadviser. In some cases, this
procedure could have a detrimental effect on the price or volume of the security
as far as the Fund 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 Fund. The primary consideration
is prompt execution of orders at the most favorable net price.
21
ADDITIONAL INFORMATION CONCERNING THE TRUST
The Trust is an open-end management investment company registered under
the 1940 Act. The Trust was organized as a Delaware statutory trust on May 24,
2006.
The Trust is authorized to issue an unlimited number of shares in one
or more series or "funds." The Trust currently is comprised of 29 funds. The
Board of Trustees of the Trust has the right to establish additional series in
the future, to determine the preferences, voting powers, rights and privileges
thereof and to modify such preferences, voting powers, rights and privileges
without shareholder approval.
Each Share issued by the Fund has a pro rata interest in the assets of
the Fund. Fund Shares have no preemptive, exchange, subscription or conversion
rights and are freely transferable. Each Share is entitled to participate
equally in dividends and distributions declared by the Board 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 funds, including the Fund,
of the Trust vote together as a single class except as otherwise required by the
1940 Act, or if the matter being voted on affects only a particular fund, and,
if a matter affects a particular fund differently from other funds, the shares
of that fund will vote separately on such matter.
The Declaration of Trust may, except in limited circumstances, be
amended or supplemented by the Trustees without shareholder vote. The holders of
Fund Shares are required to disclose information on direct or indirect ownership
of Fund Shares as may be required to comply with various laws applicable to the
Fund, and ownership of Fund Shares may be disclosed by the Fund if so required
by law or regulation.
The Trust is not required and does not intend to hold annual meetings
of shareholders. Shareholders owning more than 51% of the outstanding shares of
the Trust have the right to call a special meeting to remove one or more
Trustees or for any other purpose.
The Trust does not have information concerning the beneficial ownership
of Shares held by DTC Participants (as defined below).
Shareholders may make inquiries by writing to the Trust, c/o the
Distributor, 2455 Corporate West Drive, Lisle, Illinois 60532.
Control Persons. No single person beneficially owns 25% or more of the
Fund's voting securities.
Book Entry Only System. The following information supplements and
should be read in conjunction with the section in the Prospectus entitled "Book
Entry."
DTC Acts as Securities Depository for Fund Shares. Shares of the Fund
are represented by securities registered in the name of DTC or its nominee and
deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of
its participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and
22
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"), the AMEX and FINRA. Access to the DTC
system is also available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a DTC
Participant, either directly or indirectly (the "Indirect Participants").
Beneficial ownership of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in Shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase and sale of
Shares.
Conveyance of all notices, statements and other communications to
Beneficial Owners is effected as follows. Pursuant to the Depositary Agreement
between the Trust and DTC, DTC is required to make available to the Trust upon
request and for a fee to be charged to the Trust a listing of the Shares of the
Fund held by each DTC Participant. The Trust shall inquire of each such DTC
Participant as to the number of Beneficial Owners holding Shares, directly or
indirectly, through such DTC Participant. The Trust shall provide each such DTC
Participant with copies of such notice, statement or other communication, in
such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be
transmitted by such DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participant a fair and
reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Fund distributions shall be made to DTC or its nominee, Cede & Co., as
the registered holder of all Fund Shares. DTC or its nominee, upon receipt of
any such distributions, shall immediately credit DTC Participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
Shares of the Fund as shown on the records of DTC or its nominee. Payments by
DTC Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the
records relating to or notices to Beneficial Owners, or payments made on account
of beneficial ownership interests in such Shares, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests, or for any other aspect of the relationship between DTC and the DTC
Participants or the relationship between such DTC Participants and the Indirect
Participants and Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to
Shares at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
Proxy Voting. The Board of Trustees of the Trust has delegated
responsibility for decisions regarding proxy voting for securities held by the
Fund to the Investment Adviser. The Investment Adviser has in turn delegated
such responsibilities to the Investment Subadviser. The Investment Subadviser
will vote such proxies in accordance with its proxy policies and procedures,
which are
23
included in Appendix A of this Statement of Additional Information. The Board of
Trustees will periodically review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund's complete proxy
voting record on Form N-PX covering the period July 1 through June 30 and file
it with the SEC no later than August 31. Form N-PX for the Fund also will be
available at no charge upon request by calling 1-888-949-3837 or by writing to
Claymore Exchange-Traded Fund Trust at 2455 Corporate West Drive, Lisle, IL
60532. The Fund's Form N-PX will also be available on the SEC's website at
www.sec.gov.
Quarterly Portfolio Schedule. The Trust is required to disclose, after
its first and third fiscal quarters, the complete schedule of the Fund's
portfolio holdings with the SEC on Form N-Q. The Trust will also disclose a
complete schedule of the Fund's portfolio holdings with the SEC on Form N-CSR
after its second and fourth quarters. Form N-Q and Form N-CSR for the Fund will
be available on the SEC's website at http://www.sec.gov. The Fund's Form N-Q
and Form N-CSR may also be reviewed and copied at the SEC's Public Reference
Room in Washington, D.C. and information on the operation of the Public
Reference Room may be obtained by calling 1-202-551-8090. The Fund's Form N-Q
and Form N-CSR will be available without charge, upon request, by calling
1-888-949-3837 or by writing to Claymore Exchange-Traded Fund Trust at 2455
Corporate West Drive, Lisle, IL 60532.
Portfolio Holdings Policy. The Trust has adopted a policy regarding the
disclosure of information about the Trust's portfolio holdings. The Fund and its
service providers may not receive compensation or any other consideration (which
includes any agreement to maintain assets in the Fund or in other investment
companies or accounts managed by the Investment Adviser or any affiliated person
of the Investment Adviser) in connection with the disclosure of portfolio
holdings information of the Fund. The Trust's Policy is implemented and overseen
by the Chief Compliance Officer of the Fund, subject to the oversight of the
Board of Trustees. Periodic reports regarding these procedures will be provided
to the Board of Trustees of the Trust. The Board of Trustees of the Trust must
approve all material amendments to this policy. The Fund's complete 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 AMEX via the National Securities Clearing
Corporation (NSCC). The basket represents one Creation Unit of the Fund. The
Trust, the Investment Adviser and Claymore will not disseminate non-public
information concerning the Trust.
Codes of Ethics. Pursuant to Rule 17j-1 under the 1940 Act, the Board
of Trustees has adopted a Code of Ethics for the Trust and approved Codes of
Ethics adopted by the Investment Adviser and the Distributor (collectively the
"Codes"). The Codes are intended to ensure that the interests of shareholders
and other clients are placed ahead of any personal interest, that no undue
personal benefit is obtained from the person's employment activities and that
actual and potential conflicts of interest are avoided.
The Codes apply to the personal investing activities of Trustees and
officers of the Trust, the Investment Adviser and the Distributor ("Access
Persons"). Rule 17j-1 and the Codes are designed to prevent unlawful practices
in connection with the purchase or sale of securities by Access Persons. Under
the Codes, Access Persons are permitted to engage in personal securities
transactions, but are required to report their personal securities transactions
for monitoring purposes. The Codes permit personnel subject to the Codes to
invest in securities subject to certain limitations, including securities that
may be purchased or held by the Fund. In addition, Access Persons are required
to obtain approval before investing in initial public offerings or private
placements. The Codes are on file with the SEC, and are available to the public.
24
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS
Creation. The Trust issues and sells Shares of the Fund only in
Creation Unit Aggregations on a continuous basis through the Distributor,
without a sales load, at its NAV next determined after receipt, on any Business
Day (as defined below), of an order in proper form.
A "Business Day" is any day on which the NYSE is open for business. As
of the date of this SAI, the NYSE observes the following holidays: New Year's
Day, Martin Luther King, Jr. Day, Washington's Birthday, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of Securities and Deposit or Delivery of Cash. The
consideration for purchase of Creation Unit Aggregations of the Fund generally
consists of the in-kind deposit of a designated portfolio of equity securities
-- the "Deposit Securities" -- per each Creation Unit Aggregation constituting a
substantial replication of the stocks included in the Underlying Index ("Fund
Securities") and an amount of cash -- the "Cash Component" -- computed as
described below. Together, the Deposit Securities and the Cash Component
constitute the "Fund Deposit," which represents the minimum initial and
subsequent investment amount for a Creation Unit Aggregation of the Fund.
The Cash Component is sometimes also referred to as the Balancing
Amount. The Cash Component serves the function of compensating for any
differences between the NAV per Creation Unit Aggregation and the Deposit Amount
(as defined below). The Cash Component is an amount equal to the difference
between the NAV of the Fund Shares (per Creation Unit Aggregation) and the
"Deposit Amount" -- an amount equal to the market value of the Deposit
Securities. If the Cash Component is a positive number (i.e., the NAV per
Creation Unit Aggregation exceeds the Deposit Amount), the creator will deliver
the Cash Component. If the Cash Component is a negative number (i.e., the NAV
per Creation Unit Aggregation is less than the Deposit Amount), the creator will
receive the Cash Component.
The Custodian, through the National Securities Clearing Corporation
("NSCC") (discussed below), makes available on each Business Day, prior to the
opening of business on the AMEX (currently 9:30 a.m., Eastern time), the list of
the names and the required number of shares of each Deposit Security to be
included in the current Fund Deposit (based on information at the end of the
previous Business Day) for the Fund.
Such Fund Deposit is applicable, subject to any adjustments as
described below, in order to effect creations of Creation Unit Aggregations of
the Fund until such time as the next-announced composition of the Deposit
Securities is made available.
The identity and number of shares of the Deposit Securities required
for a Fund Deposit for the Fund changes as rebalancing adjustments and corporate
action events are reflected within the Fund from time to time by the Investment
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 Stocks of the Underlying Index. In
addition, the Trust reserves the right to permit or require the substitution of
an amount of cash -- i.e., a "cash in lieu" amount -- to be added to the Cash
Component to replace any Deposit Security that may not be available in
sufficient quantity for delivery or that may not be eligible for transfer
through the systems of DTC or the Clearing Process (discussed below), or which
might not be eligible for trading by an Authorized Participant (as defined
below) or the investor for which it is acting or other relevant reason.
Brokerage commissions incurred in connection with the acquisition of Deposit
Securities not eligible for transfer through the systems of DTC and hence not
eligible for transfer through the Clearing Process (discussed below) will be at
the expense
25
of the Fund and will affect the value of all Shares; but the Investment Adviser,
subject to the approval of the Board of Trustees, may adjust the transaction fee
within the parameters described above to protect ongoing shareholders. The
adjustments described above will reflect changes known to the Investment Adviser
on the date of announcement to be in effect by the time of delivery of the Fund
Deposit, in the composition of the Underlying Index or resulting from certain
corporate actions.
In addition to the list of names and numbers of securities constituting
the current Deposit Securities of a Fund Deposit, the Custodian, through the
NSCC, also makes available on each Business Day, the estimated Cash Component,
effective through and including the previous Business Day, per outstanding
Creation Unit Aggregation of the Fund.
The Trust reserves the right to permit or require the substitution of
a "cash in lieu" amount to be added to the Cash Component to replace any Deposit
Security which: (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 or the Federal Reserve System for U.S.
Treasury 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, "custom
orders"). The Trust also reserves the right to: (i) permit or require the
substitution of Deposit Securities; and (ii) include or remove Deposit
Securities from the basket in anticipation of index rebalancing changes. The
adjustments described above will reflect changes, known to the Investment
Advisor 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 Creation of Creation Unit Aggregations. To be eligible
to place orders with the Distributor and to create a Creation Unit Aggregation
of the Fund, an entity must be (i) a "Participating Party," i.e., a
broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the "Clearing Process"), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
the Book Entry Only System section), and, in each case, must have executed an
agreement with the Distributor, with respect to creations and redemptions of
Creation Unit Aggregations ("Participant Agreement") (discussed below). A
Participating Party and DTC Participant are collectively referred to as an
"Authorized Participant." Investors should contact the Distributor for the names
of Authorized Participants that have signed a Participant Agreement. All Fund
Shares, however created, will be entered on the records of DTC in the name of
Cede & Co. for the account of a DTC Participant.
All orders to create Creation Unit Aggregations, whether through the
Clearing Process (through a Participating Party) or outside the Clearing Process
(through a DTC Participant), must be received by the Distributor no later than
the closing time of the regular trading session on the AMEX ("Closing Time")
(ordinarily 4:00 p.m., Eastern time) in each case on the date such order is
placed in order for creation of Creation Unit Aggregations to be effected based
on the NAV of Shares of the Funds as next determined on such date after receipt
of the order in proper form. In the case of custom orders, the order must be
received by the Distributor no later than 3:00 p.m. Eastern time on the trade
date. A custom order may be placed by an Authorized Participant in the event
that the Trust permits or requires the substitution of an amount of cash to be
added to the Cash Component to replace any Deposit Security which may not be
available in sufficient quantity for delivery or which may not be eligible for
trading by such Authorized Participant or the investor for which it is acting or
other relevant reason. The date on which an order to create Creation Unit
Aggregations (or an order to redeem Creation Unit Aggregations, as discussed
below) is placed is referred to as the "Transmittal Date." Orders must be
transmitted by an Authorized Participant by telephone or other transmission
method acceptable to the Distributor pursuant to procedures set forth in the
Participant Agreement, as described below (see the "Placement of Creation Orders
Using Clearing Process" and the "Placement of Creation Orders Outside Clearing
Process" sections). Severe economic or market disruptions or changes, or
telephone or other communication failure may impede the ability to reach the
Distributor or an Authorized Participant.
All orders from investors who are not Authorized Participants to create
Creation Unit Aggregations shall be placed with an Authorized Participant, as
applicable, in the form required by such Authorized Participant. In addition,
the Authorized Participant may request the investor to make certain
representations or enter into agreements with respect to the order, 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 create Creation Unit Aggregations of the Funds have to be
placed by the investor's 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. Those placing orders
for
26
Creation Unit Aggregations through the Clearing Process should afford
sufficient time to permit proper submission of the order to the Distributor
prior to the Closing Time on the Transmittal Date. Orders for Creation Unit
Aggregations that are effected outside the Clearing Process are likely to
require transmittal by the DTC Participant earlier on the Transmittal Date than
orders effected using the Clearing Process. Those persons placing orders outside
the Clearing Process should ascertain the deadlines applicable to DTC and the
Federal Reserve Bank wire system by contacting the operations department of the
broker or depository institution effectuating such transfer of Deposit
Securities and Cash Component.
Placement of Creation Orders Using Clearing Process. The Clearing
Process is the process of creating or redeeming Creation Unit Aggregations
through the Continuous Net Settlement System of the NSCC. Fund Deposits made
through the Clearing Process must be delivered through a Participating Party
that has executed a Participant Agreement. The Participant Agreement authorizes
the Distributor to transmit through the Custodian to NSCC, on behalf of the
Participating Party, such trade instructions as are necessary to effect the
Participating Party's creation order. Pursuant to such trade instructions to
NSCC, the Participating Party agrees to deliver the requisite Deposit Securities
and the Cash Component to the Trust, together with such additional information
as may be required by the Distributor. An order to create Creation Unit
Aggregations through the Clearing Process is deemed received by the Distributor
on the Transmittal Date if (i) such order is received by the Distributor not
later than the Closing Time on such Transmittal Date and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
Placement of Creation Orders Outside Clearing Process. Fund Deposits
made outside the Clearing Process must be delivered through a DTC Participant
that has executed a Participant Agreement pre-approved by the Investment Adviser
and the Distributor. A DTC Participant who wishes to place an order creating
Creation Unit Aggregations to be effected outside the Clearing Process does not
need to be a Participating Party, but such orders must state that the DTC
Participant is not using the Clearing Process and that the creation of Creation
Unit Aggregations will instead be effected through a transfer of securities and
cash directly through DTC. The Fund Deposit transfer must be ordered by the DTC
Participant on the Transmittal Date in a timely fashion so as to ensure the
delivery of the requisite number of Deposit Securities through DTC to the
account of the Fund by no later than 11:00 a.m., Eastern time, of the next
Business Day immediately following the Transmittal Date.
All questions as to the number of Deposit Securities to be delivered,
and the validity, form and eligibility (including time of receipt) for the
deposit of any tendered securities, will be determined by the Trust, whose
determination shall be final and binding. The amount of cash equal to 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 2:00 p.m., Eastern time, on the next Business Day
immediately following such Transmittal Date. An order to create Creation Unit
Aggregations outside the Clearing Process is deemed received by the Distributor
on the Transmittal Date if (i) such order is received by the Distributor not
later than the Closing Time on such Transmittal Date; and (ii) all other
procedures set forth in the Participant Agreement are properly followed.
However, if the Custodian does not receive both the required Deposit Securities
and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively, on the next
Business Day immediately following the Transmittal Date, such order will be
canceled. Upon written notice to the Distributor, such canceled order may be
resubmitted the following Business Day using a Fund Deposit as newly constituted
to reflect the then current Deposit Securities and Cash Component. The delivery
of Creation Unit Aggregations so created will occur no later than the third
(3rd) Business Day following the day on which the purchase order is deemed
received by the Distributor.
27
Additional transaction fees may be imposed with respect to transactions
effected outside the Clearing Process (through a DTC participant) and in the
limited circumstances in which any cash can be used in lieu of Deposit
Securities to create Creation Units. (See Creation Transaction Fee section
below).
Creation Unit Aggregations may be created in advance of receipt by the
Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the NAV of the Fund Shares on the date the order is placed in proper form
since, in addition to available Deposit Securities, cash must be deposited in an
amount equal to the sum of (i) the Cash Component, plus (ii) 115% of the market
value of the undelivered Deposit Securities (the "Additional Cash Deposit"). The
order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to 4:00 p.m.,
Eastern time, on such date, and federal funds in the appropriate amount are
deposited with the Custodian by 11:00 a.m., Eastern time, the following Business
Day. If the order is not placed in proper form by 4:00 p.m. or federal funds in
the appropriate amount are not received by 11:00 a.m. the next Business Day,
then the order may be deemed to be canceled and the Authorized Participant shall
be liable to the Fund for losses, if any, resulting therefrom. An additional
amount of cash shall be required to be deposited with the Trust, pending
delivery of the missing Deposit Securities to the extent necessary to maintain
the Additional Cash Deposit with the Trust in an amount at least equal to 115%
of the daily marked to market value of the missing Deposit Securities. To the
extent that missing Deposit Securities are not received by 1:00 p.m., Eastern
time, on the third Business Day following the day on which the purchase order is
deemed received by the Distributor or in the event a marked-to-market payment is
not made within one Business Day following notification by the Distributor that
such a payment is required, the Trust may use the cash on deposit to purchase
the missing Deposit Securities. Authorized Participants will be liable to the
Trust and the Fund for the costs incurred by the Trust in connection with any
such purchases. These costs will be deemed to include the amount by which the
actual purchase price of the Deposit Securities exceeds the market value of such
Deposit Securities on the day the purchase order was deemed received by the
Distributor plus the brokerage and related transaction costs associated with
such purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received
by the Custodian or purchased by the Trust and deposited into the Trust. In
addition, a transaction fee, as listed below, will be charged in all cases. The
delivery of Creation Unit Aggregations so created will occur no later than the
third Business Day following the day on which the purchase order is deemed
received by the Distributor.
Acceptance of Orders for Creation Unit Aggregations. The Trust reserves
the absolute right to reject a creation order transmitted to it by the
Distributor in respect of the Fund if: (i) the order is not in proper form; (ii)
the investor(s), upon obtaining the Fund Shares ordered, would own 80% or more
of the currently outstanding shares of any Fund; (iii) the Deposit Securities
delivered are not as disseminated for that date by the Custodian, as described
above; (iv) acceptance of the Deposit Securities would have certain adverse tax
consequences to the Fund; (v) acceptance of the Fund Deposit would, in the
opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit would
otherwise, in the discretion of the Trust or the Investment Adviser, have an
adverse effect on the Trust or the rights of beneficial owners; or (vii) in the
event that circumstances outside the control of the Trust, the Custodian, the
Distributor and the Investment Adviser make it for all practical purposes
impossible to process creation orders. Examples of such circumstances include
acts of God; 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 Investment Adviser, the Distributor, DTC, NSCC, the Custodian or
sub-custodian or any other participant in the creation process, and similar
extraordinary events. The Distributor shall notify a prospective creator of a
Creation Unit and/or the Authorized Participant acting on behalf of such
prospective creator of its rejection of the order of such person. The Trust, the
Custodian, any sub-custodian and the Distributor are under no duty, however, to
give notification of any
28
defects or irregularities in the delivery of Fund Deposits nor shall any of them
incur any liability for the failure to give any such notification.
All questions as to the number of shares of each security in the
Deposit Securities and the validity, form, eligibility, and acceptance for
deposit of any securities to be delivered shall be determined by the Trust, and
the Trust's determination shall be final and binding.
Creation Transaction Fee. Investors will be required to pay a fixed
creation transaction fee, described below, payable to Claymore regardless of the
number of creations made each day. An additional charge of up to four times the
fixed transaction fee (expressed as a percentage of the value of the Deposit
Securities) may be imposed for (i) creations effected outside the Clearing
Process; and (ii) cash creations (to offset the Trust's brokerage and other
transaction costs associated with using cash to purchase the requisite Deposit
Securities). Investors are responsible for the costs of transferring the
securities constituting the Deposit Securities to the account of the Trust.
The Standard Creation/Redemption Transaction Fee for the Fund will be
$1,000. The Maximum Creation/Redemption Transaction Fee for the Fund will be
$4,000.
Redemption of Fund Shares in Creation Units Aggregations. Fund Shares
may be redeemed only in Creation Unit Aggregations at its NAV next determined
after receipt of a redemption request in proper form by the Fund through the
Transfer Agent and only on a Business Day. The Fund will not redeem Shares in
amounts less than Creation Unit Aggregations. Beneficial owners must accumulate
enough Shares in the secondary market to constitute a Creation Unit Aggregation
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 Aggregation. Investors should
expect to incur brokerage and other costs in connection with assembling a
sufficient number of Fund Shares to constitute a redeemable Creation Unit
Aggregation.
With respect to the Fund, the Custodian, through the NSCC, makes
available prior to the opening of business on the AMEX (currently 9:30 a.m.,
Eastern time) on each Business Day, the identity of the Fund Securities that
will be applicable (subject to possible amendment or correction) to redemption
requests received in proper form (as described below) on that day. Fund
Securities received on redemption may not be identical to Deposit Securities
that are applicable to creations of Creation Unit Aggregations.
Unless cash redemptions are available or specified for the Fund, the
redemption proceeds for a Creation Unit Aggregation generally consist of Fund
Securities -- as announced on the Business Day of the request for redemption
received in proper form -- plus or minus cash in an amount equal to the
difference between the NAV of the Fund 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 redemption transaction fee as
listed below. In the event that the Fund Securities have a value greater than
the NAV of the Fund Shares, a compensating cash payment equal to the difference
is required to be made by or through an Authorized Participant by the redeeming
shareholder.
The right of redemption may be suspended or the date of payment
postponed (i) for any period during which the NYSE is closed (other than
customary weekend and holiday closings); (ii) for any period during which
trading on the NYSE is suspended or restricted; (iii) for any period during
which an emergency exists as a result of which disposal of the Shares of the
Fund or determination of the Fund's NAV is not reasonably practicable; or (iv)
in such other circumstances as is permitted by the SEC.
29
Redemption Transaction Fee. A redemption transaction fee is imposed to
offset transfer and other transaction costs that may be incurred by the Fund. An
additional variable charge for cash redemptions (when cash redemptions are
available or specified) for the Fund may be imposed. Investors will also bear
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 in addition to an Authorized Participant to effect a redemption of
a Creation Unit Aggregation may be charged an additional fee of up to four times
the fixed transaction fee for such services. The redemption transaction fees for
the Fund are the same as the creation fees set forth above.
Placement of Redemption Orders Using Clearing Process. Orders to redeem
Creation Unit Aggregations through the Clearing Process must be delivered
through a Participating Party that has executed the Participant Agreement. An
order to redeem Creation Unit Aggregations using the Clearing Process is deemed
received by the Trust on the Transmittal Date if (i) such order is received by
the Transfer Agent not later than 4:00 p.m., Eastern time, on such Transmittal
Date, and (ii) all other procedures set forth in the Participant Agreement are
properly followed; such order will be effected based on the NAV of the relevant
Fund as next determined. An order to redeem Creation Unit Aggregations using the
Clearing Process made in proper form but received by the Trust after 4:00 p.m.,
Eastern time, will be deemed received on the next Business Day immediately
following the Transmittal Date and will be effected at the NAV next determined
on such next Business Day. The requisite Fund Securities and the Cash Redemption
Amount will be transferred by the third NSCC Business Day following the date on
which such request for redemption is deemed received.
Placement of Redemption Orders Outside Clearing Process. Orders to
redeem Creation Unit Aggregations outside the Clearing Process must be delivered
through a DTC Participant that has executed the Participant Agreement. A DTC
Participant who wishes to place an order for redemption of Creation Unit
Aggregations to be effected outside the Clearing Process does not need to be a
Participating Party, but such orders must state that the DTC Participant is not
using the Clearing Process and that redemption of Creation Unit Aggregations
will instead be effected through transfer of Fund Shares directly through DTC.
An order to redeem Creation Unit Aggregations outside the Clearing Process is
deemed received by the Trust on the Transmittal Date if (i) such order is
received by the Transfer Agent not later than 4:00 p.m., Eastern time on such
Transmittal Date; (ii) such order is accompanied or followed by the requisite
number of Shares of the Fund, which delivery must be made through DTC to the
Custodian no later than 11:00 a.m., Eastern time (for the Fund Shares), on the
next Business Day immediately following such Transmittal Date (the "DTC
Cut-Off-Time") and 2:00 p.m., Eastern Time for any Cash Component, if any owed
to the Fund; and (iii) all other procedures set forth in the Participant
Agreement are properly followed. After the Trust has deemed an order for
redemption outside the Clearing Process received, the Trust will initiate
procedures to transfer the requisite Fund Securities which are expected to be
delivered within three Business Days and the Cash Redemption Amount, if any owed
to the redeeming Beneficial Owner to the Authorized Participant on behalf of the
redeeming Beneficial Owner by the third Business Day following the Transmittal
Date on which such redemption order is deemed received by the Trust.
The calculation of the value of the Fund Securities and the Cash
Redemption Amount to be delivered/received upon redemption will be made by the
Custodian according to the procedures set forth under Determination of NAV
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
Transfer Agent by a DTC Participant not later than Closing Time on the
Transmittal Date, and the requisite number of Shares of the Fund are delivered
to the Custodian prior to the DTC Cut-Off-Time, then the value of the Fund
Securities and the Cash Redemption Amount to be delivered/received will be
determined by the Custodian on such Transmittal Date. If, however, either (i)
the requisite number of Shares of the relevant Fund are not delivered by the DTC
Cut-Off-Time, as described above, or (ii) the redemption order is not
30
submitted in proper form, then the redemption order will not be deemed received
as of the Transmittal Date. In such case, the value of the Fund Securities and
the Cash Redemption Amount to be delivered/received will be computed on the
Business Day following the Transmittal Date provided that the Fund Shares of the
relevant Fund are delivered through DTC to the Custodian by 11:00 a.m. the
following Business Day pursuant to a properly submitted redemption order.
If it is not possible to effect deliveries of the Fund Securities, the
Trust may in its discretion exercise its option to redeem such Fund Shares in
cash, and the redeeming Beneficial Owner will be required to receive its
redemption proceeds in cash. In addition, an investor may request a redemption
in cash that the Fund may, in its sole discretion, permit. In either case, the
investor will receive a cash payment equal to the NAV of its Fund Shares based
on the NAV of Shares of the Fund next determined after the redemption request is
received in proper form (minus a redemption transaction fee and additional
charge for requested cash redemptions specified above, to offset the Fund's
brokerage and other transaction costs associated with the disposition of Fund
Securities). The Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities that differs from
the exact composition of the Fund Securities, or cash in lieu of some securities
added to the Cash Component, but in no event will the total value of the
securities delivered and the cash transmitted differ from the NAV. Redemptions
of Fund 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 Unit
Aggregations 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 stock included in the Fund Securities applicable to the redemption of
a Creation Unit Aggregation may be paid an equivalent amount of cash. The
Authorized Participant may request the redeeming Beneficial Owner of the Fund
Shares to complete an order form or to enter into agreements with respect to
such matters as compensating cash payment, beneficial ownership of shares or
delivery instructions.
The chart below describes in further detail the placement of redemption
orders outside the clearing process.
31
TRANSMITTAL DATE NEXT BUSINESS DAY (T+1) SECOND BUSINESS THIRD BUSINESS DAY
(T) DAY (T+2) (T+3)
----------------------------------------------------------------------------------------------------------------------
CREATION THROUGH NSCC
----------------------------------------------------------------------------------------------------------------------
STANDARD ORDERS 4:00 p.m. (ET) No action. No action. Creation Unit
Aggregations will be
Order must be delivered.
received by the
Distributor.
----------------------------------------------------------------------------------------------------------------------
CUSTOM ORDERS 3:00 p.m. (ET) No action. No action. Creation Unit
Aggregations will be
Order must be delivered.
received by the
Distributor.
Orders received after
3:00 p.m. (ET) will
be treated as
standard orders.
----------------------------------------------------------------------------------------------------------------------
CREATION OUTSIDE NSCC
----------------------------------------------------------------------------------------------------------------------
STANDARD ORDERS 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Creation Unit
Aggregations will be
Order in proper form Deposit Securities delivered.
must be received by must be received by
the Distributor. the Fund's account
through DTC.
2:00 p.m. (ET)
Cash Component must be
received by the
Custodian.
----------------------------------------------------------------------------------------------------------------------
STANDARD ORDERS CREATED IN 4:00 p.m. (ET) 11:00 a.m. (ET) No action. 1:00 p.m. (ET)
ADVANCE OF RECEIPT BY THE
TRUST OF ALL OR A PORTION Order in proper form Available Deposit Missing Deposit
OF THE DEPOSIT SECURITIES must be received by Securities. Securities are due
the Distributor. to the Trust or the
Cash in an amount Trust may use cash
equal to the sum of on deposit to
(i) the Cash purchase missing
Component, plus (ii) Deposit Securities.
115% of the market
value of the Creation Unit
undelivered Deposit Aggregations will be
Securities. delivered.
----------------------------------------------------------------------------------------------------------------------
CUSTOM ORDERS 3:00 p.m. (ET) 11:00 a.m. (ET) No action. Creation Unit
Aggregations will be
Order in proper form Deposit Securities delivered.
must be received by must be received by
the Distributor. the Fund's account
through DTC.
Orders received after
3:00 p.m. (ET) will 2:00 p.m. (ET)
be treated as
standard orders. Cash Component must be
received by the Orders
Custodian.
----------------------------------------------------------------------------------------------------------------------
32
|
TRANSMITTAL DATE NEXT BUSINESS DAY (T+1) SECOND BUSINESS THIRD BUSINESS DAY
(T) DAY (T+2) (T+3)
----------------------------------------------------------------------------------------------------------------------
REDEMPTION THROUGH NSCC
----------------------------------------------------------------------------------------------------------------------
STANDARD ORDERS 4:00 p.m.(ET) No action. No action. Fund Securities and
Cash Redemption
Order must be Amount will be
received by the transferred.
Transfer Agent.
Orders received after
4:00 p.m. (ET) will be
deemed received on the
next business day (T+1).
----------------------------------------------------------------------------------------------------------------------
CUSTOM ORDERS 3:00 p.m. (ET) No action. No action. Fund Securities and
Cash Redemption
Order must be Amount will be
received by the transferred.
Transfer Agent.
Orders received after
3:00 p.m.(ET) will
be treated as
standard orders.
----------------------------------------------------------------------------------------------------------------------
REDEMPTION OUTSIDE OF NSCC
----------------------------------------------------------------------------------------------------------------------
STANDARD ORDERS 4:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and
Cash Redemption
Order must be Fund Shares must be Amount is delivered
received by the delivered through DTC to the redeeming
Transfer Agent. to the Custodian. beneficial owner.
Orders received after 2:00 p.m. (ET)
4:00 p.m. (ET) will
be deemed received on Cash Component,if
the next business day any, is due.
(T+1).
*If the order is not in
proper form or the Fund
Shares are not delivered,
then the order will not be
deemed received as of T.
----------------------------------------------------------------------------------------------------------------------
CUSTOM ORDERS 3:00 p.m. (ET) 11:00 a.m. (ET) No action. Fund Securities and
Cash Redemption
Order must be Fund Shares must be Amount is delivered
received by the delivered through DTC to the redeeming
Transfer Agent. to the Custodian. beneficial owner.
Orders received after 2:00 p.m. (ET)
3:00 p.m. (ET) will
be treated as Cash Component, if
standard orders. any, is due.
*If the order is not in
proper form or the Fund
Shares are not delivered,
then the order will not be
deemed received as of T.
----------------------------------------------------------------------------------------------------------------------
|
33
TAXES
The Fund intends to qualify for and to elect to be treated as a
separate regulated investment company (a "RIC") under Subchapter M of the
Internal Revenue Code. To qualify for treatment as a RIC, a company must
annually distribute at least 90% of its net investment company taxable income
(which includes dividends, interest and net capital gains) and meet several
other requirements relating to the nature of its income and the diversification
of its assets.
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 another fund and the
requirements (other than certain organizational requirements) to qualify for RIC
status are determined at the fund level rather than at the Trust level.
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 at
least 98% of its ordinary income for the calendar year plus 98% of its net
capital gains for twelve months ended October 31 of such year. 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.
As a result of tax requirements, the Trust on behalf of the Fund has
the right to reject an order to purchase Shares 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 Trust also
has the right to require information necessary to determine beneficial Share
ownership for purposes of the 80% determination.
The Fund may make investments that are subject to special federal
income tax rules, such as investments in repurchase agreements, money market
instruments, convertible securities, structured notes, forward foreign currency
exchange contracts, and non-U.S. corporations classified as "passive foreign
investment companies." Those special tax rules can, among other things, affect
the timing of income or gain, the treatment of income as capital or ordinary and
the treatment of capital gain or loss as long-term or short-term. The
application of these special rules would therefore also affect the character of
distributions made by the Fund. The Fund may need to borrow money or dispose of
some of its investments earlier than anticipated in order to meet its
distribution requirements.
Distributions from the Fund's net investment income, including any net
short-term capital gains, if any, and distributions of income from securities
lending, are taxable as ordinary income. Distributions reinvested in additional
Shares of the Fund through the means of a dividend reinvestment service will be
taxable dividends to Shareholders acquiring such additional Shares to the same
extent as if such dividends had been received in cash. Distributions of net
long-term capital gains, if any, in excess of net short-term capital losses are
taxable as long-term capital gains, regardless of how long shareholders have
held the Shares.
Long-term capital gains tax of non-corporate taxpayers are generally
taxed at a maximum rate of 15% for taxable years beginning before January 1,
2011. In addition, some ordinary dividends declared and paid by the Fund to
non-corporate shareholders may qualify for taxation at the lower reduced tax
rates applicable to long-term capital gains, provided that holding period and
other requirements are met by the Fund and the shareholder. The Fund will report
to shareholders annually the amounts of dividends received from ordinary income,
the amount of distributions received from capital gains and the portion of
dividends which may qualify for the dividends received deduction. In addition,
the Fund will report the amount of dividends to individual shareholders eligible
for taxation at the lower reduced tax rates applicable to long-term capital
gains.
The sale, exchange or redemption of Shares may give rise to a gain or
loss. In general, any gain or loss realized upon a taxable disposition of Shares
will be treated as long-term capital gain or loss if the Shares have been held
for more than one year. Otherwise, the gain or loss on the taxable disposition
of Shares will be treated as short-term capital gain or loss. 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 automatic
reinvestment of dividends or otherwise) within a sixty-one (61) day period
beginning thirty (30) days before and ending thirty (30) days after the date
that the Shares are disposed of. In such a case, the basis of the Shares
acquired 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 capital gain dividends received by the
shareholders. Distribution of ordinary income and capital gains may also be
subject to state and local taxes.
34
Distributions of ordinary income paid to shareholders who are
nonresident aliens or foreign entities that are not effectively connected to the
conduct of a trade or business within the United States will generally 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.
However, shareholders who are nonresident aliens or foreign entities will
generally not be subject to United States withholding or income tax on gains
realized on the sale of Shares or on dividends from capital gains unless (i)
such gain or capital gain dividend is effectively connected with the conduct of
a trade or business within the United States or (ii) in the case of an
individual shareholder, the shareholder is present in the United States for a
period or periods aggregating 183 days or more during the year of the sale or
capital gain dividend and certain other conditions are met. Gains on the sale of
Share and dividends that are effectively connected with the conduct of a trade
or business within the United States will generally be subject to United States
federal net income taxation at regular income tax rates. Dividends paid by the
Fund to shareholders who are nonresident aliens or foreign entities that are
derived from short-term capital gains and qualifying net interest income
(including income from original issue discount and market discount), and that
are properly designated by the Fund as "interest-related dividends" or
"short-term capital gain dividends," will generally not be subject to United
States withholding tax, provided that the income would not be subject to federal
income tax if earned directly by the foreign shareholder. In addition, capital
gains distributions attributable to gains from U.S. real property interests
(including certain U.S. real property holding corporations and which may include
certain REITs and certain REIT capital gain dividends) will generally be subject
to United States withholding tax and will give rise to an obligation on the part
of the foreign shareholder to file a United States tax return. The provisions
discussed above relating to an exemption from withholding on distributions to
shareholders who are nonresident aliens or foreign entities generally would
apply to distributions with respect to taxable years of the Fund beginning
before January 1, 2008. In addition, capital gains distributions attributable to
gains from U.S. real property interests (including certain U.S. real property
holding corporations, which may include certain REITs and capital gains
distributions from REITs, will generally be subject to U.S. withholding tax and
will give rise to an obligation on the part of the foreign shareholder to file a
U.S. federal income tax return. Nonresident shareholders are urged to consult
their own tax advisors concerning the applicability of the U.S. withholding tax.
Some shareholders may be subject to a withholding tax on distributions
of ordinary income, capital gains and any cash received on redemption of
Creation Units ("backup withholding"). Generally, shareholders subject to backup
withholding will be those for whom no certified taxpayer identification number
is on file with the Fund or who, to the Fund's knowledge, have furnished an
incorrect number. When establishing an account, an investor must certify under
penalty of perjury that such number is correct and that such investor is not
otherwise subject to backup withholding.
Dividends and interest received by the Fund 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.
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 Federal, 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.
35
FEDERAL TAX TREATMENT OF FUTURES AND OPTIONS CONTRACTS
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 indices 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.
In order for the Fund to continue to qualify for federal income tax
treatment as a RIC, at least 90% of its gross income for a taxable year must be
derived from qualifying income, i.e., dividends, interest, income derived from
loans or securities, gains from the sale of securities or of foreign currencies
or other income derived with respect to the Fund's business of investing in
securities (including net income derived from an interest in certain "qualified
publicly traded partnerships"). It is anticipated that any net gain realized
from the closing out of futures or options contracts will be considered gain
from the sale of securities or derived with respect to the Fund's business of
investing in securities and therefore will be qualifying income for purposes of
the 90% gross income requirement.
The Fund distributes to shareholders at least annually any net capital
gains which have been recognized for federal income tax purposes, including
unrealized gains at the end of the Fund's fiscal year on futures or options
transactions. Such distributions are combined with distributions of capital
gains realized on the Fund's other investments and shareholders are advised on
the nature of the distributions.
DETERMINATION OF NAV
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Net Asset Value."
The NAV per Share of the Fund is computed by dividing the value of the
net assets of the Fund (i.e., the value of its total assets less total
liabilities) by the total number of Shares of the Fund outstanding, rounded to
the nearest cent. Expenses and fees, including without limitation, the
management and administration fees, are accrued daily and taken into account for
purposes of determining NAV. The NAV per Share is calculated by the Custodian
and determined as of 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.
In computing the Fund's NAV, the Fund's securities holdings traded on a
national securities exchange are valued based on their last sale price. Price
information on listed securities is taken from the exchange where the security
is primarily traded. Securities regularly traded in an over-the-counter market
are valued at the latest quoted sale price in such market or in the case of the
NASDAQ, at the NASDAQ official closing price. Other portfolio securities and
assets for which market quotations are not readily available are valued based on
fair value as determined in good faith in accordance with procedures adopted by
the Board.
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled "Dividends, Distributions and
Taxes."
36
General Policies. Dividends from net investment income, if any, are
declared and paid annually. 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. The Trust reserves the right to declare
special distributions if, in its reasonable discretion, such action is necessary
or advisable to preserve the status of the Fund as a RIC or to avoid imposition
of income or excise taxes on undistributed income.
Dividends and other distributions on Fund Shares are distributed, as
described below, on a pro rata basis to Beneficial Owners of such Shares.
Dividend payments are made through DTC Participants and Indirect Participants to
Beneficial Owners then of record with proceeds received from the Fund.
Dividend Reinvestment Service. No reinvestment service is provided by
the Trust. Broker-dealers may make available the DTC book-entry Dividend
Reinvestment Service for use by Beneficial Owners of the Fund for reinvestment
of their dividend distributions. Beneficial Owners should contact their broker
to determine the availability and costs of the service and the details of
participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables.
MISCELLANEOUS INFORMATION
Counsel. Clifford Chance US LLP, 31 West 52nd Street, New York, NY
10019, is counsel to the Trust.
Independent Registered Public Accounting Firm. __________, serves as
the Fund's independent registered public accounting firm. They audit the Fund's
financial statements and perform other related audit services.
FINANCIAL STATEMENTS
[TO BE INSERTED]
You may request a copy of the Trust's Annual Report at no charge by
calling 1-888-949-3837 during normal business hours.
37