Securities Act Registration No. 333-178833
Investment Company Act Registration No. 811-22655
Washington, D. C. 20549
Approximate date of proposed public offering: As soon as
practicable after the effective date of the Registration Statement.
This Prospectus provides important information
about each Fund that you should know before investing. Please read it carefully and keep it for future reference.
These securities have not been approved
or disapproved by the Securities and Exchange Commission nor has the Securities and Exchange Commission passed upon the accuracy
or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
Beginning on January 1,
2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Funds’ shareholder
reports will no longer be sent by mail unless you specifically request paper copies of the reports from the Funds or from your
financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on the Funds’ website
www.thinknewfoundfunds.com, and you will be notified by mail each time a report is posted and provided with a website link to access
the report.
If you have already elected to receive shareholder
reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder
reports and other communications from the Funds electronically by contacting your financial intermediary (such as a broker-dealer
or bank).
You may elect to receive all future reports
in paper free of charge. If you are a direct investor, you can inform the Funds or your financial intermediary that you wish to
continue receiving paper copies of your shareholder reports by following the instructions included with paper Fund documents that
have been mailed to you. Your election to receive reports in paper will apply to all funds held with the fund complex.
The Example assumes that you invest $10,000
in the Fund for the time periods indicated and then redeem all of your shares at the end of those periods. The Example also assumes
that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual
costs may be higher or lower, based upon these assumptions your costs would be:
In selecting securities for the Fund’s
portfolio, the Adviser focuses on whether the global equity market offers the potential for acceptable risk-adjusted returns. If
so, the Fund invests in domestic and foreign equities and/or Equity ETFs. If not, the Fund invests in investment grade short-term
fixed income securities or Fixed Income ETFs.
The Adviser utilizes rules-based, quantitative
systems to measure market risk and select securities to buy and sell for the Fund. The Adviser adjusts the Fund’s equity
market exposure based upon its proprietary models. These models may utilize factors including, but not limited to, momentum and
trend (e.g., price return), market structure (e.g., liquidity), volatility, cross-asset signals (e.g, correlation), seasonality,
and fundamentals (e.g., earnings growth).
The Fund may invest in 5- and 10-Year U.S.
Treasury Note futures contracts when the Adviser’s proprietary models indicate that such a position may offer a positive
expected return or meaningful diversification benefits for the portfolio. These models may utilize factors including, but not limited
to, value (e.g., real yield), trend (e.g., price return), carry (e.g., steepness of the yield curve), and correlation.
The Fund may buy put options (or put spreads)
on equity indices and Equity ETFs when the Adviser’s proprietary models indicate that such a position may offer a hedge against
a sharp decline in the domestic or foreign equity markets. The Fund may buy call options (or call spreads) on equity indices and
equity ETFs when the Adviser’s proprietary models indicate that the domestic or foreign markets may experience a sharp rally
in domestic or foreign equity markets.
The Fund has the flexibility to invest in
any combination of the securities described above, which include domestic and foreign common stock, preferred stock, depositary
receipts, equity swaps, options, equity index futures, and ETFs that invest in these types of securities. When the Fund invests
in equity securities, it primarily invests in securities of large capitalization companies; however, it may also invest in medium
capitalization companies which the Adviser defines as companies with market capitalizations of between $2 billion and $10 billion.
Under normal circumstances, the Fund invests
at least 40% of its total assets in securities of non-U.S. issuers organized or having their principal place of business in countries
outside the U.S., including emerging market countries, or doing a substantial amount (more than 50%) of business outside the U.S.,
including emerging market countries. Emerging markets are generally those with a less-developed economy and per-capital income
significantly lower than the U.S. Investments in ETFs based on non-U.S. market indexes are considered investments outside the U.S.
for purposes of the 40% requirement noted above.
The Fund may use investment leverage as
part of its principal investment strategy. The Fund typically expects to invest an amount approximately equal to its net assets
directly in a portfolio of large capitalization equity securities and/or ETFs while also maintaining notional exposure to 5- and
10-Year U.S. Treasury Notes through futures contracts. The Fund’s total investment exposure will typically be less than 200%
of the Fund’s NAV.
Losses from investments in derivatives
can result from a lack of correlation between the value of those derivatives and the value of the portfolio assets (if any) being
hedged. In addition, there is a risk that the performance of the derivatives or other instruments used by the Adviser to replicate
the performance of a particular asset class may not accurately track the performance of that asset class. Derivatives are also
subject to risks arising from margin requirements. There is also risk of loss if the Adviser is incorrect in its expectation of
the timing or level of fluctuations in securities prices, interest rates or currency prices.
HOW SHARES ARE PRICED
Shares of the Funds are sold at NAV. The NAV
of each Fund is determined at close of regular trading (normally 4:00 p.m. Eastern Time) on each day the New York Stock Exchange
(“NYSE”) is open for business. NAV is computed by determining, on a per class basis, the aggregate market value of
all assets of each Fund, less its liabilities, divided by the total number of shares outstanding ((assets-liabilities)/number of
shares = NAV). The NYSE is closed on weekends and New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The NAV takes into account, on a per class
basis, the expenses and fees of each Fund, including management, administration, and distribution fees, which are accrued daily.
The determination of NAV for a share class for a particular day is applicable to all applications for the purchase of shares, as
well as all requests for the redemption of shares, received by each Fund (or an authorized broker or agent, or its authorized designee)
before the close of trading on the NYSE on that day.
Generally, each Fund’s securities are
valued each day at the last quoted sales price on each security’s primary exchange. Securities traded or dealt in upon one
or more securities exchanges (whether domestic or foreign) for which market quotations are readily available and not subject to
restrictions against resale shall be valued at the last quoted sales price on the primary exchange or, in the absence of a sale
on the primary exchange, at the mean between the current bid ask prices on such exchanges. Securities primarily traded in the National
Association of Securities Dealers’ Automated Quotation System (“NASDAQ”) National Market System for which market
quotations are readily available shall be valued using the NASDAQ Official Closing Price. Securities that are not traded or dealt
in any securities exchange (whether domestic or foreign) and for which over-the-counter market quotations are readily available
generally shall be valued at the last sale price or, in the absence of a sale, at the mean between the current bid and ask price
on such over-the- counter market. Debt securities not traded on an exchange may be valued at prices supplied by a pricing agent(s)
based on broker or dealer supplied valuations or matrix pricing, a method of valuing securities by reference to the value of other
securities with similar characteristics, such as rating, interest rate and maturity.
If market quotations are not readily available,
securities will be valued at their fair market value as determined using the “fair value” procedures approved by the
Board. Fair value pricing involves subjective judgments and it is possible that the fair value determined for a security may be
materially different from the value that could be realized upon the sale of that security. The fair value prices can differ from
market prices when they become available or when a price becomes available. The Board has delegated execution of these procedures
to a fair value committee composed of one or more officers from each of the (i) Trust, (ii) administrator, and (iii) Adviser. The
committee may also enlist third party consultants such as an audit firm or financial officer of a security issuer on an as-needed
basis to assist in determining a security-specific fair value. The Board reviews and ratifies the execution of this process and
the resultant fair value prices at least quarterly to assure the process produces reliable results.
Each Fund may use independent pricing services
to assist in calculating the value of each Fund’s securities. In addition, market prices for foreign securities are not determined
at the same time of day as the NAV for each Fund. Because each Fund may invest in underlying ETFs which hold portfolio securities
primarily listed on foreign exchanges, and these exchanges may trade on weekends or other days when the underlying ETFs do not
price their shares, the value of some of each Fund’s portfolio securities may change on days when you may not be able to
buy or sell Fund shares.
In computing the NAV, each Fund values foreign
securities held by each Fund at the latest closing price on the exchange in which they are traded immediately prior to closing
of the NYSE. Prices of foreign securities quoted in foreign currencies are translated into U.S. dollars at current rates. If events
materially affecting the value of a security in each Fund’s portfolio, particularly foreign securities, occur after the close
of trading on a foreign market but before each Fund prices its shares, the security will be valued at fair value. For example,
if trading in a portfolio security is halted and does not resume before each Fund calculates its NAV, the Adviser may need to price
the security using each Fund’s fair value pricing guidelines. Without a fair value price, short-term traders could take advantage
of the arbitrage opportunity and dilute the NAV of long-term investors. Fair valuation of Each Fund’s portfolio securities
can serve to reduce arbitrage opportunities available to short-term traders, but there is no assurance that fair value pricing
policies will prevent dilution of each Fund’s NAV by short term traders. The determination of fair value involves subjective
judgments. As a result, using fair value to price a security may result in a price materially different from the prices used by
other mutual funds to determine NAV, or from the price that may be realized upon the actual sale of the security.
With respect to any portion of each Fund’s
assets that are invested in one or more open-end management investment companies registered under the 1940 Act, each Fund’s
NAV is calculated based upon the NAVs of those open-end management investment companies, and the prospectuses for these companies
explain the circumstances under which those companies will use fair value pricing and the effects of using fair value pricing.
HOW TO PURCHASE SHARES
Share Classes
This Prospectus describes two classes of
shares offered by the Funds: Class A and Class I. Each Fund offers these classes of shares so that you can choose the class that
best suits your investment needs. Refer to the information below so that you can choose the class that best suits your investment
needs. The main differences between each class are sales charges, ongoing fees and minimum investment. For information on ongoing
distribution fees, see Distribution Fees on page [ ] of this Prospectus. Each class of shares in each Fund represents
interest in the same portfolio of investments within each Fund. There is no investment minimum on reinvested distributions and
each Fund may change investment minimums at any time. Each Fund reserves the right to waive sales charges, as described below.
Each Fund and the Adviser may each waive investment minimums at their individual discretion. Not all share classes may be available
for purchase in all states.
Factors to Consider When Choosing a Share Class
When deciding which class of shares of a Fund
to purchase, you should consider your investment goals, present and future amounts you may invest in each Fund, and the length
of time you intend to hold your shares. To help you make a determination as to which class of shares to buy, please refer back
to the examples of each Fund's expenses over time in the Fees and Expenses of each Fund section for each Fund in this Prospectus.
You also may wish to consult with your financial adviser for advice with regard to which share class would be most appropriate
for you.
Class A Shares
Class A shares are offered at the public offering
price, which is NAV per share plus the applicable sales charge and are subject to 12b-1 distribution fees of up to 0.25% on an
annualized basis of the average daily net assets as reimbursement or compensation for service and distribution-related activities
with respect to the Funds and/or shareholder services (also known as “12b-1 fees”). The sales charge varies, depending
on how much you invest. There are no sales charges on reinvested distributions. You can also qualify for a sales charge reduction
or waiver through a right of accumulation or a letter of intent if you are a U.S. resident. See the discussions of “Right
of Accumulation” and “Letter of Intent” below. The Funds reserve the right to waive any load as described below.
The following sales charges apply to your purchases of Class A Shares of the Funds.
|
Amount Invested
|
Sales Charge as a% of Offering Price(1)
|
Sales Charge as a% of Amount Invested
|
Dealer Reallowance(1)
|
|
Under $25,000
|
5.75%
|
6.10%
|
5.00%
|
|
$25,000 - $49,999
|
5.00%
|
5.26%
|
4.25%
|
|
$50,000 - $99,999
|
4.75%
|
4.99%
|
4.00%
|
|
$100,000 - $249,999
|
3.75%
|
3.83%
|
3.25%
|
|
$250,000 - $499,999
|
2.50%
|
2.56%
|
2.00%
|
|
$500,000 - $999,999
|
2.00%
|
2.04%
|
1.75%
|
|
$1,000,000 and above
|
1.00%
|
1.01%
|
1.00%
|
|
|
(1)
|
Offering price includes the front-end sales load. The sales charge
you pay may differ slightly from the amount set forth above because of rounding that occurs in the calculations used to determine
your sales charge.
|
|
|
(2)
|
Dealer reallowance is the amount of sales charge paid to the selling
broker-dealer, while the distributor retains the balance.
|
How to Reduce Your Sales Charge
You may be eligible to purchase Class A shares
at a reduced sales charge. To qualify for these reductions, you must notify the Funds’ distributor, Northern Lights Distributors,
LLC (the “distributor”), in writing and supply your account number at the time of purchase. You may combine your purchase
with those of your “immediate family” (your spouse and your children under the age of 21) for purposes of determining
eligibility. If applicable, you will need to provide the account numbers of your spouse and your minor children as well as the
ages of your minor children.
Rights of Accumulation: To qualify for
the lower sales charge rates that apply to larger purchases of Class A shares, you may combine your new purchases of Class A shares
with Class A shares of each Fund that you already own. The applicable initial sales charge for the new purchase is based on the
total of your current purchase and the current value of all other Class A shares that you own. The reduced sales charge will apply
only to current purchases and must be requested in writing when you buy your shares.
Shares of the Funds held as follows cannot
be combined with your current purchase for purposes of reduced sales charges:
-
Shares held indirectly through financial intermediaries other than
your current purchase broker-dealer (for example, a different broker-dealer, a bank, a separate insurance company account or an
investment adviser);
-
Shares held through an administrator or trustee/custodian of an Employer
Sponsored Retirement Plan (for example, a 401(k) plan) other than employer-sponsored IRAs; and
-
Shares held directly in a Fund account on which the broker-dealer (financial
adviser) of record is different than your current purchase broker-dealer.
Letters of Intent: Under a Letter of
Intent (“LOI”), you commit to purchase a specified dollar amount of Class A shares of a Fund, with a minimum of $25,000,
during a 13-month period. The 13-month period begins upon the date of the LOI. At your written request, Class A shares purchases
made during the 90 days prior to the LOI may be included. The amount you agree to purchase determines the initial sales charge
you pay. If the full-face amount of the LOI is not invested by the end of the 13-month period, your account will be adjusted to
the higher initial sales charge level for the amount actually invested. You are not legally bound by the terms of your LOI to purchase
the amount of your shares stated in the LOI. The LOI does, however, authorize a Fund to hold in escrow 5% of the total amount you
intend to purchase. If you do not complete the total intended purchase at the end of the 13-month period, the Funds’ transfer
agent will redeem the necessary portion of the escrowed shares to make up the difference between the reduced rate sales charge
(based on the amount you intended to purchase) and the sales charge that would normally apply (based on the actual amount you purchased).
Repurchase of Class A Shares: If you
have redeemed Class A shares of a Fund within the past 120 days, you may repurchase an equivalent amount of Class A shares of the
Fund at NAV, without the normal front-end sales charge. In effect, this allows you to reacquire shares that you may have had to
redeem, without repaying the front-end sales charge. You may exercise this privilege only once and must notify the applicable Fund
that you intend to do so in writing. A Fund must receive your purchase order within 120 days of your redemption. Note that if you
reacquire shares through separate installments (e.g., through monthly or quarterly repurchases), the sales charge waiver will only
apply to those portions of your repurchase order received within 120 days of your redemption.
Sales Charge Waivers
The sales charge on purchases of Class
A shares is waived for certain types of investors, including:
-
Current and retired directors and officers of each Fund sponsored by
the Adviser or any of its subsidiaries, their immediate families (i.e., spouse, children, mother or father) and any purchases referred
through the Adviser.
-
Employees of the Adviser and their families, or any full-time employee
or registered representative of the distributor or of broker-dealers having dealer agreements with the distributor (a “Selling
Broker”) and their immediate families (or any trust, pension, profit sharing or other benefit plan for the benefit of such
persons).
-
Any full-time employee of a bank, savings and loan, credit union or
other financial institution that utilizes a Selling Broker to clear purchases of each fund's shares and their immediate families.
-
Participants in certain “wrap-fee” or asset allocation
programs or other fee-based arrangements sponsored by broker-dealers and other financial institutions that have entered into agreements
with the distributor.
-
Clients of financial intermediaries that have entered into arrangements
with the distributor providing for the shares to be used in particular investment products made available to such clients and for
which such registered investment advisers may charge a separate fee.
-
Institutional investors (which may include bank trust departments and
registered investment advisers).
-
Any accounts established on behalf of registered investment advisers
or their clients by broker-dealers that charge a transaction fee and that have entered into agreements with the distributor.
-
Separate accounts used to fund certain unregistered variable annuity
contracts or Section 403(b) or 401(a) or (k) accounts.
-
Employer-sponsored retirement or benefit plans with total plan assets
in excess of $5 million where the plan's investments in each Fund are part of an omnibus account. A minimum initial investment
of $1 million in each Fund is required. The distributor in its sole discretion may waive these minimum dollar requirements.
Each Fund does not waive sales charges for
the reinvestment of proceeds from the sale of shares of a different fund where those shares were subject to a front-end sales charge
(sometimes called an “NAV transfer”). Whether a sales charge is available for your retirement plan or charitable account
depends upon the policies and procedures of your intermediary. Please consult your financial adviser for further information.
Class I Shares
Class I shares of each Fund are sold at NAV
without an initial sales charge and are not subject to 12b-1 distribution fees, but have a higher minimum initial investment than
the Fund’s other class shares. This means that 100% of your initial investment is placed into shares of the Funds.
Minimum
and Additional Investment Amounts: The minimum initial and subsequent investment by class of shares is:
|
Class
|
Initial Investment
|
Subsequent Investment
|
|
Regular Account
|
Retirement Account
|
Regular Account
|
Retirement Account
|
|
A
|
$2,500
|
$1,000
|
$250
|
$100
|
|
I
|
$100,000
|
$100,000
|
$10,000
|
$10,000
|
Each Fund reserves the right to waive
any minimum. There is no minimum investment requirement when you are buying shares by reinvesting dividends and distributions from
each Fund.
Exchange Privilege: Shares of one class
of a Fund may be exchanged, at a shareholder’s option, directly for shares of another class of the same Fund (an “intra-fund
exchange”), subject to the terms and conditions described below and to such other fees and charges applicable to such class
(including the imposition or waiver of any sales charge (load)), provided that the shareholder for whom the intra-fund exchange
is being requested meets the eligibility requirements of the class into which such shareholder seeks to exchange. Shares of a Fund
will be exchanged for shares of a different class of the same Fund on the basis of their respective NAVs, and no redemption fee
will apply to intra-fund exchanges. Ongoing fees and expenses incurred by a given share class will differ from those of other share
classes, and a shareholder receiving new shares in an intra-fund exchange may be subject to higher or lower total expenses following
such exchange. In addition to changes in ongoing fees and expenses, a shareholder receiving new shares in an intra-fund exchange
may be required to pay an initial sales charge (load). Generally, intra-fund exchanges into Class A shares will be subject to a
Class A sales charge unless eligible for reduced fee or waiver of such sales charge. Shareholders generally should not recognize
gain or loss for U.S. federal income tax purposes upon such an intra-fund exchange, provided that the transaction is undertaken
and processed, with respect to any shareholder, as a direct exchange under this paragraph. If an intra-fund exchange incurs a sales
charge, Fund shares may be redeemed to pay such charge, and that redemption will be taxable. Shareholders should consult their
tax advisers as to the federal, state, local and non-U.S. tax consequences of an intra-fund exchange.
The Funds reserve the right to change and/or
discontinue this exchange privilege, or to temporarily suspend the privilege during unusual market conditions when, in the judgment
of the Adviser, such change or discontinuance is in the best interests of each Fund.
You may make an exchange request by sending
a written request to the Funds’ transfer agent or, if authorized, by calling the transfer agent at [ ].
Purchasing Shares:
You may purchase shares of a Fund by sending
a completed application form to the following address:
|
Regular Mail
Newfound Risk Managed Global Sectors Fund
Newfound Multi-Asset Income Fund
Newfound Risk Managed U.S. Sectors Fund
c/o Gemini Fund Services, LLC
PO Box 541150
Omaha, Nebraska 68154
|
Express/Overnight Mail
Newfound Risk Managed Global Sectors Fund
Newfound Multi-Asset Income Fund
Newfound Risk Managed U.S. Sectors Fund
c/o Gemini Fund Services, LLC
4221 North 203rd Street, Suite
100
Elkhorn, Nebraska 68022
|
The USA PATRIOT Act requires financial institutions,
including each Fund, to adopt certain policies and programs to prevent money-laundering activities, including procedures to verify
the identity of customers opening new accounts. As requested on the Application, you should supply your full name, date of birth,
social security number and permanent street address. Mailing addresses containing a P.O. Box will not be accepted. This information
will assist each Fund in verifying your identity. Until such verification is made, each Fund may temporarily limit additional share
purchases. In addition, each Fund may limit additional share purchases or close an account if it is unable to verify a shareholder’s
identity. As required by law, each Fund may employ various procedures, such as comparing the information to fraud databases or
requesting additional information or documentation from you, to ensure that the information supplied by you is correct.
Purchase through Brokers: You may invest
in a Fund through brokers or agents who have entered into selling agreements with each Fund’s distributor. The brokers and
agents are authorized to receive purchase and redemption orders on behalf of each Fund. Such brokers are authorized to designate
other intermediaries to receive purchase and redemption orders on each Fund’s behalf. A Fund will be deemed to have received
a purchase or redemption order when an authorized broker or, if applicable, a brokers authorized designee receives the order. The
broker or agent may set their own initial and subsequent investment minimums. You may be charged a fee if you use a broker or agent
to buy or redeem shares of a Fund. Finally, various servicing agents use procedures and impose restrictions that may be in addition
to, or different from those applicable to investors purchasing shares directly from each Fund. You should carefully read the program
materials provided to you by your servicing agent.
Purchase by Wire: If you wish to
wire money to make an investment in a Fund, please call the Funds at [ ] for wiring instructions and to notify the Funds that a
wire transfer is coming. Any commercial bank can transfer same-day funds via wire. A Fund will normally accept wired funds for
investment on the day received if they are received by a Fund’s designated bank before the close of regular trading on the
NYSE. Your bank may charge you a fee for wiring same-day funds.
Automatic Investment Plan: You may
participate in the Funds’ Automatic Investment Plan, an investment plan that automatically moves money from your bank account
and invests it in a Fund through the use of electronic funds transfers or automatic bank drafts. You may elect to make subsequent
investments by transfers of a minimum of $50 on specified days of each month into your established Fund account. Please contact
the Funds at [ ] for more information about the Funds’ Automatic Investment Plan.
Each Fund, however, reserves the right, in
its sole discretion, to reject any application to purchase shares. Applications will not be accepted unless they are accompanied
by a check drawn on a U.S. bank, thrift institutions, or credit union in U.S. funds for the full amount of the shares to be purchased.
After you open an account, you may purchase additional shares by sending a check together with written instructions stating the
name(s) on the account and the account number, to the above address. Make all checks payable to the name of the applicable Fund.
The Funds will not accept payment in cash, cashier’s checks or money orders. Also, to prevent check fraud, the Funds will
not accept third party checks, U.S. Treasury checks, credit card checks or starter checks for the purchase of shares.
Note: Gemini Fund Services, LLC, the
Funds’ transfer agent, will charge a $25 fee against a shareholder’s account, in addition to any loss sustained by
a Fund, for any check returned to the transfer agent for insufficient funds.
When Order is Processed: All shares
will be purchased at the NAV per share (plus applicable sales charges, if any) next determined after a Fund receives your application
or request in good order. All requests received in good order by a Fund before 4:00 p.m. (Eastern Time) will be processed on that
same day. Requests received after 4:00 p.m. will be processed on the next business day.
|
Good Order: When making a purchase
request, make sure your request is in good order. “Good order” means your purchase request includes:
·
the name of each Fund and share class;
·
the dollar amount of shares to be purchased;
·
a completed purchase application or investment stub; and
·
check payable to the name of the applicable Fund.
|
Retirement Plans: You may purchase
shares of a Fund for your individual retirement plans. Please call the Funds at [ ] for the most current listing and appropriate
disclosure documentation on how to open a retirement account.
HOW TO REDEEM SHARES
Redeeming Shares: The Funds typically
expect that it will take up to three business days following receipt of your redemption request to pay out redemption proceeds
by check or electronic transfer. The Funds typically expect to pay redemptions from cash, cash equivalents, proceeds from the sale
of Fund shares, any lines of credit, and then from the sale of portfolio securities. These redemption payment methods will be used
in regular and stressed market conditions. You may redeem all or any portion of the shares credited to your account by submitting
a written request for redemption to:
|
Regular Mail
Newfound Risk Managed Global Sectors Fund
Newfound Multi-Asset Income Fund
Newfound Risk Managed U.S. Sectors Fund
c/o Gemini Fund Services, LLC
PO Box 541150
Omaha, Nebraska 68154
|
Express/Overnight Mail
Newfound Risk Managed Global Sectors Fund
Newfound Multi-Asset Income Fund
Newfound Risk Managed U.S. Sectors Fund
c/o Gemini Fund Services, LLC
4221 North 203rd Street, Suite
100
Elkhorn, Nebraska 68022
|
Redemptions by Telephone: The telephone
redemption privilege is automatically available to all new accounts except retirement accounts. If you do not want the telephone
redemption privilege, you must indicate this in the appropriate area on your account application or write to each Fund and instruct
it to remove this privilege from your account.
The proceeds will be sent by mail to the
address designated on your account or wired directly to your existing account in a bank or brokerage firm in the United States
as designated on your application. To redeem by telephone, call [ ]. IRA accounts are not redeemable by telephone.
Each Fund reserves the right to suspend the
telephone redemption privileges with respect to your account if the name(s) or the address on the account has been changed within
the previous 30 days. Neither the Funds, the transfer agent, nor their respective affiliates will be liable for complying with
telephone instructions they reasonably believe to be genuine or for any loss, damage, cost or expenses in acting on such telephone
instructions and you will be required to bear the risk of any such loss. A Fund or the transfer agent, or both, will employ reasonable
procedures to determine that telephone instructions are genuine. If a Fund and/or the transfer agent do not employ these procedures,
they may be liable to you for losses due to unauthorized or fraudulent instructions. These procedures may include, among others,
requiring forms of personal identification prior to acting upon telephone instructions, providing written confirmation of the transactions
and/or tape recording telephone instructions.
Redemptions through Broker: If shares
of a Fund are held by a broker-dealer, financial institution or other servicing agent, you must contact that servicing agent to
redeem shares of a Fund. The servicing agent may charge a fee for this service.
Redemptions by Wire: You may request
that your redemption proceeds be wired directly to your bank account. The Fund’s transfer agent imposes a $15 fee for each
wire redemption and deducts the fee directly from your account. Your bank may also impose a fee for the incoming wire.
Automatic Withdrawal Plan: If your
individual accounts, IRA or other qualified plan account have a current account value of at least $10,000, you may participate
in the Fund’s Automatic Withdrawal Plan, an investment plan that automatically moves money to your bank account from a Fund
through the use of electronic funds transfers. You may elect to make subsequent withdrawals by transfers of a minimum of $250 on
specified days of each month into your established bank account. Please contact the Funds at [ ] for more information about the
Funds’ Automatic Withdrawal Plans.
Redemptions in Kind: Each Fund reserves
the right to honor requests for redemption or repurchase orders by making payment in whole or in part in readily marketable securities
(“redemption in kind”) if the amount is greater than the lesser of $250,000 or 1% of each Fund’s assets. The
securities will be chosen by a Fund and valued under the Funds’ NAV procedures. A shareholder will be exposed to market risk
until these securities are converted to cash and may incur transaction expenses in converting these securities to cash.
When Redemptions are Sent: Once a Fund
receives your redemption request in “good order” as described below, it will issue a check based on the next determined
NAV following your redemption request. If you purchase shares using a check and soon after request a redemption, your redemption
proceeds will not be sent until the check used for your purchase has cleared your bank.
Good Order: Your redemption request
will be processed if it is in “good order.” To be in good order, the following conditions must be satisfied:
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The request should be in writing, unless redeeming by telephone,
indicating the number of shares or dollar amount to be redeemed;
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The request must identify your account number;
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The request should be signed by you and any other person listed on
the account, exactly as the shares are registered; and
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If you request that the redemption proceeds be sent to a person,
bank or an address other than that of record or paid to someone other than the record owner(s), or if the address was changed within
the last 30 days, or if the proceeds of a requested redemption exceed $50,000, the signature(s) on the request must be medallion
signature guaranteed by an eligible signature guarantor.
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Redemption Fee: Each Fund will deduct
a 1.00% redemption fee on your redemption amount if you sell your shares within 30 days of purchase. Shares held longest will be
treated as being redeemed first and shares held shortest as being redeemed last. Shares held for 30 days or more are not subject
to the 1.00% fee. Redemption fees are paid to a Fund directly and are designed to offset costs associated with fluctuations in
Fund asset levels and cash flow caused by short-term shareholder trading.
Waivers of Redemption Fees: The
Funds have elected not to impose the redemption fee for:
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redemptions and exchanges of Fund shares acquired through the reinvestment
of dividends and distributions;
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certain types of redemptions and exchanges of Fund shares owned through
participant-directed retirement plans;
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redemptions or exchanges in discretionary asset allocation, fee based
or wrap programs ("wrap programs") that are initiated by the sponsor/financial adviser as part of a periodic rebalancing;
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redemptions or exchanges in a fee based or wrap program that are
made as a result of a full withdrawal from the wrap program or as part of a systematic withdrawal plan;
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involuntary redemptions, such as those resulting from a shareholder's
failure to maintain a minimum investment in a Fund, or to pay shareholder fees; or other types of redemptions as the Adviser or
the Trust may determine in special situations and approved by the Trust’s or the Adviser's Chief Compliance Officer.
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When You Need Medallion Signature
Guarantees: If you wish to change the bank or brokerage account that you have designated on your account, you may do so at
any time by writing to a Fund with your signature guaranteed. A medallion signature guarantee assures that a signature is genuine
and protects you from unauthorized account transfers. You will need your signature guaranteed if:
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you request a redemption to be made payable to a person not on record
with each Fund;
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you request that a redemption be mailed to an address other than
that on record with each Fund;
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the proceeds of a requested redemption exceed $50,000;
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any redemption is transmitted by federal wire transfer to a bank
other than the bank of record; or
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your address was changed within 30 days of your redemption request.
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Signatures may be guaranteed by any eligible
guarantor institution (including banks, brokers and dealers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations). Further documentation will be required to change the designated account
if shares are held by a corporation, fiduciary or other organization. A notary public cannot guarantee signatures.
Retirement Plans: If you own an IRA
or other retirement plan, you must indicate on your redemption request whether a Fund should withhold federal income tax. Unless
you elect in your redemption request that you do not want to have federal tax withheld, the redemption will be subject to withholding.
Low Balances: If at any time your account
balance in a Fund falls below $1,000, a Fund may notify you that, unless the account is brought up to at least $1,000 within 30
days of the notice; your account could be closed. After the notice period, a Fund may redeem all of your shares and close your
account by sending you a check to the address of record. Your account will not be closed if the account balance drops below required
minimums due to a decline in NAV. The Funds will not charge any redemption fee on involuntary redemptions.
STATEMENT OF ADDITIONAL INFORMATION
[ ]
This Statement of Additional Information
(“SAI”) is not a prospectus and should be read in conjunction with the Prospectus of the Newfound Risk Managed Global
Sectors Fund, Newfound Multi-Asset Income Fund and Newfound Risk Managed U.S. Sectors Fund (each a “Fund” and, collectively
the “Funds”) dated [ ], which are incorporated by reference into this SAI (i.e., legally made a part of this SAI).
Copies may be obtained without charge by contacting the Funds’ Transfer Agent, Gemini Fund Services, LLC, 4221 North 203rd
Street, Suite 100, Elkhorn, NE 68022 or by calling [ ]. You may also obtain a Prospectus by visiting the Funds’ website at
www.thinknewfoundfunds.com.
TABLE OF CONTENTS
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THE FUNDS
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INVESTMENTS AND RISKS
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PORTFOLIO TURNOVER
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INVESTMENT RESTRICTIONS
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INVESTMENT ADVISER
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PORTFOLIO MANAGERS
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ALLOCATION OF BROKERAGE
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POLICIES AND PROCEDURES FOR DISCLOSURE OF PORTFOLIO HOLDINGS
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OTHER SERVICE PROVIDERS
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INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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LEGAL COUNSEL
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DISTRIBUTOR
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DESCRIPTION OF SHARES
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CODE OF ETHICS
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PROXY VOTING POLICIES
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PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
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TAX STATUS
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ANTI-MONEY LAUNDERING PROGRAM
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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
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MANAGEMENT
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FINANCIAL STATEMENTS
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APPENDIX A – BOND RATINGS
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APPENDIX B – PROXY VOTING POLICIES AND PROCEDURES
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THE FUNDS
The Newfound Risk Managed
Global Sectors Fund, Newfound Multi-Asset Income Fund and Newfound Risk Managed U.S. Sectors Fund are a diversified series of shares
of Northern Lights Fund Trust III, a Delaware statutory trust organized on December 5, 2011 (the "Trust"). The Trust
is registered as an open-end management investment company. The Trust is governed by its Board of Trustees (the "Board,"
or “Board of Trustees”).
Each Fund may issue an unlimited
number of shares of beneficial interest. All shares of the Funds have equal rights and privileges. Each share of a Fund is entitled
to one vote on all matters as to which shares are entitled to vote. In addition, each share of a Fund is entitled to participate
equally with other shares, on a class-specific basis, (i) in dividends and distributions declared by a Fund and (ii) on liquidation
to its proportionate share of the assets remaining after satisfaction of outstanding liabilities. Shares of each Fund are fully
paid, non-assessable and fully transferable and have no pre-emptive, conversion or exchange rights. Fractional shares have proportionately
the same rights, including voting rights, as are provided for a full share.
Newfound Research LLC (the
"Adviser") is the Funds’ investment adviser. The Funds’ investment objectives, restrictions and policies
are more fully described here and in the Prospectus. The Board may start other series and offer shares of a new fund under the
Trust at any time.
Each Fund offers three classes
of shares: Class A shares, Class C shares and Class I shares. Class C shares of the Newfound Risk Managed Global Sectors Fund,
Newfound Multi-Asset Income Fund and Newfound Risk Managed U.S. Sectors Fund are not currently available for sale. Each share class
represents an interest in the same assets of the Funds, has the same rights and is identical in all material respects except that
(i) each class of shares may be subject to different (or no) sales loads; (ii) each class of shares may bear different (or no)
distribution fees; (iii) each class of shares may have different shareholder features, such as minimum investment amounts; (iv)
certain other class-specific expenses will be borne solely by the class to which such expenses are attributable, including transfer
agent fees attributable to a specific class of shares, printing and postage expenses related to preparing and distributing materials
to current shareholders of a specific class, registration fees paid by a specific class of shares, the expenses of administrative
personnel and services required to support the shareholders of a specific class, litigation or other legal expenses relating to
a class of shares, Trustees' fees or expenses paid as a result of issues relating to a specific class of shares and accounting
fees and expenses relating to a specific class of shares and (v) each class has exclusive voting rights with respect to matters
relating to its own distribution arrangements. The Board may classify and reclassify the shares of the Funds into additional classes
of shares at a future date.
Under the Trust's Agreement
and Declaration of Trust, each Trustee will continue in office until the termination of the Trust or his/her earlier death, incapacity,
resignation or removal. Shareholders can remove a Trustee to the extent provided by the Investment Company Act of 1940, as amended
(the "1940 Act") and the rules and regulations promulgated thereunder. Vacancies may be filled by a majority of the remaining
Trustees, except insofar as the 1940 Act may require the election by shareholders. As a result, normally no annual or regular meetings
of shareholders will be held unless matters arise requiring a vote of shareholders under the Agreement and Declaration of Trust
or the 1940 Act.
INVESTMENTS AND RISKS
The investment objective
of each Fund and the descriptions of each Fund's principal investment strategies are set forth under "Principal Investment
Strategies" in the Prospectus. Each Fund's investment objective is not fundamental and may be changed without the approval
of a majority of the outstanding voting securities of the Trust.
The following pages contain
more detailed information about the types of instruments in which the Funds may invest, strategies the Adviser may employ in pursuit
of the Funds' investment objective and a summary of related risks.
Equity Securities
Equity securities in which
a Fund invests include common stocks, preferred stocks and securities convertible into common stocks, such as convertible bonds,
warrants, rights and options. The value of equity securities varies in response to many factors, including the activities and financial
condition of individual companies, the business market in which individual companies compete and general market and economic conditions.
Equity securities fluctuate in value, often based on factors unrelated to the value of the issuer of the securities, and such fluctuations
can be significant.
Common Stock
Common stock represents
an equity (ownership) interest in a company, and usually possesses voting rights and earns dividends. Dividends on common stock
are not fixed but are declared at the discretion of the issuer. Common stock generally represents the riskiest investment in a
company. In addition, common stock generally has the greatest appreciation and depreciation potential because increases and decreases
in earnings are usually reflected in a company's stock price.
Preferred Stock
The Funds may invest in
preferred stock with no minimum credit rating. Preferred stock is a class of stock having a preference over common stock as to
the payment of dividends and the recovery of investment should a company be liquidated, although preferred stock is usually junior
to the debt securities of the issuer. Preferred stock typically does not possess voting rights and its market value may change
based on changes in interest rates.
The fundamental risk of
investing in common and preferred stock is the risk that the value of the stock might decrease. Stock values fluctuate in response
to the activities of an individual company or in response to general market and/or economic conditions. Historically, common stocks
have provided greater long-term returns and have entailed greater short-term risks than preferred stocks, fixed-income securities
and money market investments. The market value of all securities, including common and preferred stocks, is based upon the market's
perception of value and not necessarily the book value of an issuer or other objective measures of a company's worth.
Fixed Income/Debt/Bond
Securities
Yields on fixed income securities
are dependent on a variety of factors, including the general conditions of the money market and other fixed income securities markets,
the size of a particular offering, the maturity of the obligation and the rating of the issue. An investment in the Funds will
be
subjected to risk even if all fixed income
securities in the Funds' portfolio are paid in full at maturity. All fixed income securities, including U.S. Government securities,
can change in value when there is a change in interest rates or the issuer's actual or perceived creditworthiness or ability to
meet its obligations.
There is normally an inverse
relationship between the market value of securities sensitive to prevailing interest rates and actual changes in interest rates.
In other words, an increase in interest rates produces a decrease in market value. The longer the remaining maturity (and duration)
of a security, the greater will be the effect of interest rate changes on the market value of that security. Changes in the ability
of an issuer to make payments of interest and principal and in the market’s perception of an issuer's creditworthiness will
also affect the market value of the debt securities of that issuer. Obligations of issuers of fixed income securities (including
municipal securities) are subject to the provisions of bankruptcy, insolvency, and other laws affecting the rights and remedies
of creditors, such as the Federal Bankruptcy Reform Act of 1978. In addition, the obligations of municipal issuers may become subject
to laws enacted in the future by Congress, state legislatures, or referenda extending the time for payment of principal and/or
interest, or imposing other constraints upon enforcement of such obligations or upon the ability of municipalities to levy taxes.
Changes in the ability of an issuer to make payments of interest and principal and in the market's perception of an issuer's creditworthiness
will also affect the market value of the debt securities of that issuer. The possibility exists, therefore, that, the ability of
any issuer to pay, when due, the principal of and interest on its debt securities may become impaired.
The corporate debt securities
in which the Funds may invest include corporate bonds and notes and short-term investments such as commercial paper and variable
rate demand notes. Commercial paper (short-term promissory notes) is issued by companies to finance their or their affiliate's
current obligations and is frequently unsecured. Variable and floating rate demand notes are unsecured obligations typically redeemable
upon not more than 30 days' notice. These obligations include master demand notes that permit investment of fluctuating amounts
at varying rates of interest pursuant to a direct arrangement with the issuer of the instrument. The issuer of these obligations
often has the right, after a given period, to prepay the outstanding principal amount of the obligations upon a specified number
of days' notice. These obligations generally are not traded, nor generally is there an established secondary market for these obligations.
To the extent a demand note does not have a 7-day or shorter demand feature and there is no readily available market for the obligation,
it is treated as an illiquid security.
The Funds may invest in
sovereign bonds. Sovereign bonds involve special risks not present in corporate bonds. The governmental authority that controls
the repayment of the bonds may be unable or unwilling to make interest payments and/or repay the principal on its bonds. If an
issuer of sovereign bonds defaults on payments of principal and/or interest, the Funds may have limited recourse against the issuer.
In the past, certain governments of emerging market countries have declared themselves unable to meet their financial obligations
on a timely basis, which has resulted in losses to holders of such government’s debt.
A sovereign debtor’s
willingness or ability to repay principal and pay interest in a timely manner may be affected by, among other factors, its cash
flow situation, the extent of its foreign currency reserves, the availability of sufficient foreign exchange, the relative size
of the debt service burden, the sovereign debtor’s policy toward principal international lenders and local political constraints.
Sovereign debtors may also be dependent on expected disbursements from foreign governments,
multilateral agencies and other entities to
reduce principal and interest arrearages on their debt. The failure of a sovereign debtor to implement economic reforms, achieve
specified levels of economic performance or repay principal or interest when due may result in the cancellation of third-party
commitments to lend funds to the sovereign debtor, which may further impair such debtor’s ability or willingness to service
its debts.
The Funds may invest in
debt securities, including non-investment grade debt securities. The following describes some of the risks associated with fixed
income debt securities:
Interest Rate Risk.
Debt securities have varying levels of sensitivity to changes in interest rates. In general, the price of a debt security can fall
when interest rates rise and can rise when interest rates fall. Securities with longer maturities and mortgage securities can be
more sensitive to interest rate changes although they usually offer higher yields to compensate investors for the greater risks.
The longer the maturity of the security, the greater the impact a change in interest rates could have on the security's price.
In addition, short-term and long-term interest rates do not necessarily move in the same amount or the same direction. Short-term
securities tend to react to changes in short-term interest rates and long-term securities tend to react to changes in long-term
interest rates.
Credit Risk. Fixed
income securities have speculative characteristics and changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity of those issuers to make principal or interest payments, as compared to issuers of more highly rated
securities.
Extension Risk. The
Funds are subject to the risk that an issuer will exercise its right to pay principal on an obligation held by the Funds (such
as mortgage-backed securities) later than expected. This may happen when there is a rise in interest rates. These events may lengthen
the duration (i.e., interest rate sensitivity) and potentially reduce the value of these securities.
Prepayment Risk.
Certain types of debt securities, such as mortgage-backed securities, have yield and maturity characteristics corresponding to
underlying assets. Unlike traditional debt securities, which may pay a fixed rate of interest until maturity when the entire principal
amount comes due, payments on certain mortgage-backed securities may include both interest and a partial payment of principal.
Besides the scheduled repayment of principal, payments of principal may result from the voluntary prepayment, refinancing, or foreclosure
of the underlying mortgage loans.
Securities subject to prepayment
are less effective than other types of securities as a means of "locking in" attractive long-term interest rates. One
reason is the need to reinvest prepayments of principal; another is the possibility of significant unscheduled prepayments resulting
from declines in interest rates. These prepayments would have to be reinvested at lower rates. As a result, these securities may
have less potential for capital appreciation during periods of declining interest rates than other securities of comparable maturities,
although they may have a similar risk of decline in market value during periods of rising interest rates. Prepayments may also
significantly shorten the effective maturities of these securities, especially during periods of declining interest rates. Conversely,
during periods of rising interest rates, a reduction in prepayments may increase the effective maturities of these securities,
subjecting them to a greater risk of decline in market value in response to rising interest rates than traditional debt securities,
and, therefore, potentially increasing the volatility of the Funds.
At times, some of the mortgage-backed
securities in which the Funds may invest will have higher than market interest rates and therefore will be purchased at a premium
above their par value.
Prepayments may cause losses in securities
purchased at a premium, as unscheduled prepayments, which are made at par, will cause the Funds to experience a loss equal to any
unamortized premium.
Certificates of Deposit
and Bankers' Acceptances
Certificates of deposit
are receipts issued by a depository institution in exchange for the deposit of funds. The issuer agrees to pay the amount deposited
plus interest to the bearer of the receipt on the date specified on the certificate. The certificate usually can be traded in the
secondary market prior to maturity.
The Funds may invest in
insured bank obligations. The Federal Deposit Insurance Corporation ("FDIC") insures the deposits of federally insured
banks and savings and loan associations (collectively referred to as "banks") up to $250,000. The Funds may purchase
bank obligations that are fully insured as to principal by the FDIC. Currently, to remain fully insured as to principal, these
investments must be limited to $250,000 per bank; if the principal amount and accrued interest together exceed $250,000, the excess
principal and accrued interest will not be insured. Insured bank obligations may have limited marketability.
Bankers' acceptances typically
arise from short-term credit arrangements designed to enable businesses to obtain funds to finance commercial transactions. Generally,
an acceptance is a time draft drawn on a bank by an exporter or an importer to obtain a stated amount of funds to pay for specific
merchandise. The draft is then "accepted" by a bank that, in effect, unconditionally guarantees to pay the face value
of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an earning asset or it may be
sold in the secondary market at the going rate of discount for a specific maturity. Although maturities for acceptances can be
as long as 270 days, most acceptances have maturities of six months or less.
Time Deposits and Variable
Rate Notes
The Funds may invest in
fixed time deposits, whether or not subject to withdrawal penalties. The commercial paper obligations, which the Funds may buy
are unsecured and may include variable rate notes. The nature and terms of a variable rate note (i.e., a "Master Note")
permit the Funds to invest fluctuating amounts at varying rates of interest pursuant to a direct arrangement between a Fund as
lender, and the issuer, as borrower. It permits daily changes in the amounts borrowed. The Funds have the right at any time to
increase, up to the full amount stated in the note agreement, or to decrease the amount outstanding under the note. The issuer
may prepay at any time and without penalty any part of or the full amount of the note. The note may or may not be backed by one
or more bank letters of credit. Because these notes are direct lending arrangements between the Funds and the issuer, it is not
generally contemplated that they will be traded; moreover, there is currently no secondary market for them. Except as specifically
provided in the Prospectus, there is no limitation on the type of issuer from whom these notes may be purchased; however, in connection
with such purchase and on an ongoing basis, the Adviser will consider the earning power, cash flow and other liquidity ratios of
the issuer, and its ability to pay principal and interest on demand, including a situation in which all holders of such notes made
demand simultaneously. Variable rate notes are subject to the Funds' investment restriction on illiquid securities unless such
notes can be put back to the issuer on demand within seven days.
Commercial Paper
The Funds may purchase commercial
paper. Commercial paper consists of short-term (usually from 1 to 270 days) unsecured promissory notes issued by corporations in
order to finance their current operations. It may be secured by letters of credit, a surety bond or other forms of collateral.
Commercial paper is usually repaid at maturity by the issuer from the proceeds of the issuance of new commercial paper. As a result,
investment in commercial paper is subject to the risk the issuer cannot issue enough new commercial paper to satisfy its outstanding
commercial paper, also known as rollover risk. Commercial paper may become illiquid or may suffer from reduced liquidity in certain
circumstances. Like all fixed income securities, commercial paper prices are susceptible to fluctuations in interest rates. If
interest rates rise, commercial paper prices will decline. The short-term nature of a commercial paper investment makes it less
susceptible to interest rate risk than many other fixed income securities because interest rate risk typically increases as maturity
lengths increase. Commercial paper tends to yield smaller returns than longer-term corporate debt because securities with shorter
maturities typically have lower effective yields than those with longer maturities. As with all fixed income securities, there
is a chance that the issuer will default on its commercial paper obligation.
Repurchase Agreements
The Funds may enter into
repurchase agreements. In a repurchase agreement, an investor (such as the Funds) purchases a security (known as the "underlying
security") from a securities dealer or bank. Any such dealer or bank must be deemed creditworthy by the Adviser. At that time,
the bank or securities dealer agrees to repurchase the underlying security at a mutually agreed upon price on a designated future
date. The repurchase price may be higher than the purchase price, the difference being income to the Funds, or the purchase and
repurchase prices may be the same, with interest at an agreed upon rate due to the Funds on repurchase. In either case, the income
to the Funds generally will be unrelated to the interest rate on the underlying securities. Repurchase agreements must be "fully
collateralized," in that the market value of the underlying securities (including accrued interest) must at all times be equal
to or greater than the repurchase price. Therefore, a repurchase agreement can be considered a loan collateralized by the underlying
securities.
Repurchase agreements are
generally for a short period of time, often less than a week, and will generally be used by the Funds to invest excess cash or
as part of a temporary defensive strategy. Repurchase agreements that do not provide for payment within seven days will be treated
as illiquid securities. In the event of a bankruptcy or other default by the seller of a repurchase agreement, the Funds could
experience both delays in liquidating the underlying security and losses. These losses could result from: (a) possible decline
in the value of the underlying security while the Fund is seeking to enforce its rights under the repurchase agreement; (b) possible
reduced levels of income or lack of access to income during this period; and (c) expenses of enforcing its rights.
High Yield Securities
The Funds may invest in
high yield securities. High yield, high risk bonds are securities that are generally rated below investment grade by the primary
rating agencies (BB+ or lower by S&P and Ba1 or lower by Moody's). Other terms used to describe such securities include "lower
rated bonds," "non-investment grade bonds," "below investment grade bonds," and "junk bonds."
These securities are considered to be high-risk investments. The risks include the following:
Greater Risk of Loss.
These securities are regarded as predominately speculative. There is a greater risk that issuers of lower rated securities will
default than issuers of higher rated securities. Issuers of lower rated securities generally are less creditworthy and may be highly
indebted, financially distressed, or bankrupt. These issuers are more vulnerable to real or perceived economic changes, political
changes or adverse industry developments. In addition, high yield securities are frequently subordinated to the prior payment of
senior indebtedness. If an issuer fails to pay principal or interest, the Funds would experience a decrease in income and a decline
in the market value of its investments.
Sensitivity to Interest
Rate and Economic Changes. The income and market value of lower-rated securities may fluctuate more than higher rated securities.
Although non-investment grade securities tend to be less sensitive to interest rate changes than investment grade securities, non-investment
grade securities are more sensitive to short-term corporate, economic and market developments. During periods of economic uncertainty
and change, the market price of the investments in lower-rated securities may be volatile. The default rate for high yield bonds
tends to be cyclical, with defaults rising in periods of economic downturn. For example, in 2000, 2001 and 2002, the default rate
for high yield securities was significantly higher than in the prior or subsequent years.
Valuation Difficulties.
It is often more difficult to value lower rated securities than higher rated securities. If an issuer's financial condition deteriorates,
accurate financial and business information may be limited or unavailable. In addition, the lower rated investments may be thinly
traded and there may be no established secondary market. Because of the lack of market pricing and current information for investments
in lower rated securities, valuation of such investments is much more dependent on judgment than is the case with higher rated
securities.
Liquidity. There
may be no established secondary or public market for investments in lower rated securities. Such securities are frequently traded
in markets that may be relatively less liquid than the market for higher rated securities. In addition, relatively few institutional
purchasers may hold a major portion of an issue of lower-rated securities at times. As a result, the Funds may be required to sell
investments at substantial losses or retain them indefinitely when an issuer's financial condition is deteriorating.
Credit Quality. Credit
quality of non-investment grade securities can change suddenly and unexpectedly, and even recently-issued credit ratings may not
fully reflect the actual risks posed by a particular high-yield security.
New Legislation.
Future legislation may have a possible negative impact on the market for high yield, high risk bonds. As an example, in the late
1980’s, legislation required federally-insured savings and loan associations to divest their investments in high yield, high
risk bonds. New legislation, if enacted, could have a material negative effect on the Funds' investments in lower rated securities.
High yield. High
risk investments may include the following:
Straight fixed-income
debt securities. These include bonds and other debt obligations that bear a fixed or variable rate of interest payable at regular
intervals and have a fixed or resettable maturity date. The particular terms of such securities vary and may include features such
as call provisions and sinking funds.
Zero-coupon debt securities.
These bear no interest obligation but are issued at a discount from their value at maturity. When held to maturity, their entire
return equals the difference between their issue price and their maturity value.
Zero-fixed-coupon debt
securities. These are zero-coupon debt securities that convert on a specified date to interest-bearing debt securities.
Pay-in-kind bonds.
These are bonds which allow the issuer, at its option, to make current interest payments on the bonds either in cash or in additional
bonds. These are bonds sold without registration under the Securities Act of 1933, as amended ("Securities Act"), usually
to a relatively small number of institutional investors.
Convertible Securities.
These are bonds or preferred stock that may be converted to common stock.
Preferred Stock.
These are stocks that generally pay a dividend at a specified rate and have preference over common stock in the payment of dividends
and in liquidation.
Loan Participations and
Assignments. These are participations in, or assignments of all or a portion of loans to corporations or to governments, including
governments of less developed countries.
Securities issued in
connection with Reorganizations and Corporate Restructurings. In connection with reorganizing or restructuring of an issuer,
an issuer may issue common stock or other securities to holders of its debt securities. The Funds may hold such common stock and
other securities even if it does not invest in such securities.
Municipal Government
Obligations
In general, municipal obligations
are debt obligations issued by or on behalf of states, territories and possessions of the United States (including the District
of Columbia) and their political subdivisions, agencies and instrumentalities. Municipal obligations generally include debt obligations
issued to obtain funds for various public purposes. Certain types of municipal obligations are issued in whole or in part to obtain
funding for privately operated facilities or projects. Municipal obligations include general obligation bonds, revenue bonds, industrial
development bonds, notes and municipal lease obligations. Municipal obligations also include additional obligations, the interest
on which is exempt from federal income tax, that may become available in the future as long as the Board determines that an investment
in any such type of obligation is consistent with the Funds' investment objectives. Municipal obligations may be fully or partially
backed by local government, the credit of a private issuer, current or anticipated revenues from a specific project or specific
assets or domestic or foreign entities providing credit support such as letters of credit, guarantees or insurance.
Bonds and Notes.
General obligation bonds are secured by the issuer's pledge of its full faith, credit and taxing power for the payment of interest
and principal. Revenue bonds are payable only from the revenues derived from a project or facility or from the proceeds of a specified
revenue source. Industrial development bonds are generally revenue bonds secured by payments from and the credit of private users.
Municipal notes are issued to meet the short-term funding requirements of state, regional and local governments. Municipal notes
include tax anticipation notes, bond anticipation
notes, revenue anticipation notes, tax and
revenue anticipation notes, construction loan notes, short-term discount notes, tax-exempt commercial paper, demand notes and similar
instruments.
Municipal Lease Obligations.
Municipal lease obligations may take the form of a lease, an installment purchase or a conditional sales contract. They are issued
by state and local governments and authorities to acquire land, equipment and facilities, such as vehicles, telecommunications
and computer equipment and other capital assets. The Funds may invest in underlying funds that purchase these lease obligations
directly, or it may purchase participation interests in such lease obligations (See "Participation Interests" section).
States have different requirements for issuing municipal debt and issuing municipal leases. Municipal leases are generally subject
to greater risks than general obligation or revenue bonds because they usually contain a "non-appropriation" clause,
which provides that the issuer is not obligated to make payments on the obligation in future years unless funds have been appropriated
for this purpose each year. Such non-appropriation clauses are required to avoid the municipal lease obligations from being treated
as debt for state debt restriction purposes. Accordingly, such obligations are subject to "non-appropriation" risk. Municipal
leases may be secured by the underlying capital asset and it may be difficult to dispose of any such asset in the event of non-appropriation
or other default.
Master Limited Partnerships
(“MLPs”)
An MLP is an entity that
is generally taxed as a partnership for federal income tax purposes and that derives each year at least 90% of its gross income
from “Qualifying Income”. Qualifying Income for MLPs includes interest, dividends, real estate rents, gain from the
sale or disposition of real property, income and gain from commodities or commodity futures, and income and gain from mineral or
natural resources activities that generate Qualifying Income. MLP interests (known as units) are traded on securities exchanges
or over-the-counter. An MLP’s organization as a partnership and compliance with the Qualifying Income rules generally eliminates
federal tax at the entity level.
An MLP has one or more general
partners (who may be individuals, corporations, or other partnerships) which manage the partnership, and limited partners, which
provide capital to the partnership but have no role in its management. Typically, the general partner is owned by company management
or another publicly traded sponsoring corporation. When an investor buys units in an MLP, the investor becomes a limited partner.
MLPs are formed in several
ways. A nontraded partnership may decide to go public. Several nontraded partnerships may roll up into a single MLP. A corporation
may spin-off a group of assets or part of its business into an MLP of which it is the general partner, to realize the assets’
full value on the marketplace by selling the assets and using the cash proceeds received from the MLP to address debt obligations
or to invest in higher growth opportunities, while retaining control of the MLP. A corporation may fully convert to an MLP, although
since 1986 the tax consequences have made this an unappealing option for most corporations. Unlike the ways described above, it
is also possible for a newly formed entity to commence operations as an MLP from its inception.
The sponsor or general partner
of an MLP, other energy companies, and utilities may sell assets to MLPs in order to generate cash to fund expansion projects or
repay debt. The MLP structure essentially transfers cash flows generated from these acquired assets directly to MLP limited partner
unitholders.
In the case of an MLP buying
assets from its sponsor or general partner the transaction is intended to be based upon comparable terms in the acquisition market
for similar assets. To help insure that appropriate protections are in place, the general partner of the MLP generally creates
an independent committee to review and approve the terms of the transaction. The committee often obtains a fairness opinion and
can retain counsel or other experts to assist its evaluation. Since both parties normally have a significant equity stake in the
MLP, both parties are aligned to see that the transaction is accretive and fair to the MLP.
As a motivation for the
general partner to successfully manage the MLP and increase cash flows, the terms of MLPs typically provide that the general partner
receives a larger portion of the net income as distributions reach higher target levels. As cash flow grows, the general partner
receives a greater interest in the incremental income compared to the interest of limited partners. Although the percentages vary
among MLPs, the general partner’s marginal interest in distributions generally increases from 2% to 15% at the first designated
distribution target level moving up to 25% and ultimately 50% as pre-established distribution per unit thresholds are met. Nevertheless,
the aggregate amount distributed to limited partners will increase as MLP distributions reach higher target levels. Given this
incentive structure, the general partner has an incentive to streamline operations and undertake acquisitions and growth projects
in order to increase distributions to all partners.
Because the MLP itself generally
does not pay federal income tax, its income or loss is allocated to its investors, irrespective of whether the investors receive
any cash payment or other distributions from the MLP. An MLP typically makes quarterly cash distributions. Although they resemble
corporate dividends, MLP distributions are treated differently for tax purposes. The MLP distribution is treated as a return of
capital to the extent of the investor’s basis in his MLP interest and, to the extent the distribution exceeds the investor’s
basis in the MLP, generally as capital gain. The investor’s original basis is the price paid for the units. The basis is
adjusted downwards with each distribution and allocation of deductions (such as depreciation) and losses, and upwards with each
allocation of taxable income and gain.
The partner will not incur
federal income tax on distributions until: (1) he sells his MLP units and pays tax on his gain, which gain is increased due to
the basis decrease due to prior distributions; or (2) his basis reaches zero. When the units are sold, the difference between the
sales price and the investor’s adjusted basis is gain or loss for federal income tax purposes.
The business of certain
MLPs is affected by supply and demand for energy commodities because such MLPs derive revenue and income based upon the volume
of the underlying commodity produced, transported, processed, distributed, and/or marketed. Pipeline MLPs have indirect commodity
exposure to gas and oil price volatility because although they do not own the underlying energy commodity, the general level of
commodity prices may affect the volume of the commodity that the MLP delivers to its customers and the cost of providing services
such as distributing natural gas liquids. The costs of natural gas pipeline MLPs to perform services may exceed the negotiated
rates under “negotiated rate” contracts. Specifically, processing MLPs may be directly affected by energy commodity
prices. Propane MLPs own the underlying energy commodity, and therefore have direct exposure to energy commodity prices, although
the Adviser intends to target high quality MLPs that seek to mitigate or manage direct margin exposure to commodity prices. However,
the MLP industry in general could be hurt by market perception that an MLP’s performance and valuation are directly tied
to commodity prices.
Real Estate Investment
Trusts (“REITs”)
The Funds may invest in
the equity securities of REITs focused on the energy industry. A REIT is a corporation or business trust that invests in real estate
and derives its income from rents or sales of real property or interest on loans secured by mortgages on real property. The market
value of REITs may be affected by numerous factors, including decreases in the value of real estate, vacancies, decreases in lease
rates, defaults by lessees, changes in the tax laws or by their inability to qualify for the tax-free pass-through of their income.
Energy Trust Securities.
The Funds may invest in
U.S. royalty trusts. U.S. royalty trusts are generally not subject to U.S. federal corporate income taxation at the trust or entity
level. Instead, each unitholder of the U.S. royalty trust is required to take into account its share of all items of the U.S. royalty
trust’s income, gain, loss, deduction and expense. It is possible that the Funds’ share of taxable income from a U.S.
royalty trust may exceed the cash actually distributed to it from the U.S. royalty trust in a given year. In such a case, the Funds
will have less after-tax cash available for distribution to shareholders.
Exchange-Traded Notes
(“ETNs”)
The Funds may invest
in ETNs, which are senior, unsecured, unsubordinated debt securities whose returns are linked to the performance of a particular
market benchmark or strategy, minus applicable fees. ETNs are traded on an exchange (e.g., the New York Stock Exchange (“NYSE”))
during normal trading hours; however, investors also can hold ETNs until they mature. At maturity, the issuer pays to the investor
a cash amount equal to the principal amount, subject to the day’s market benchmark or strategy factor. ETNs do not make periodic
coupon payments or provide principal protection. ETNs are subject to credit risk, including the credit risk of the issuer, and
the value of the ETN may drop due to a downgrade in the issuer’s credit rating, despite the underlying market benchmark or
strategy remaining unchanged. The value of an ETN also may be influenced by time to maturity, level of supply and demand for the
ETN, volatility and lack of liquidity in underlying assets, changes in the applicable interest rates, changes in the issuer’s
credit rating, and economic, legal, political, or geographic events that affect the referenced underlying asset. When the Funds
invest in ETNs, it will bear its proportionate share of any fees and expenses borne by the ETN. A decision by the Funds to sell
ETN holdings may be limited by the availability of a secondary market. In addition, although an ETN may be listed on an exchange,
the issuer may not be required to maintain the listing, and there can be no assurance that a secondary market will exist for an
ETN.
ETNs also are subject to
tax risk. No assurance can be given that the IRS will accept, or a court will uphold, how the Funds characterize and treat ETNs
for tax purposes.
An ETN that is tied to a
specific market benchmark or strategy may not be able to replicate and maintain exactly the composition and relative weighting
of securities, commodities or other components in the applicable market benchmark or strategy. Some ETNs that use leverage can,
at times, be relatively illiquid, and thus they may be difficult to purchase or sell at a fair price. Leveraged ETNs are subject
to the same risk as other instruments that use leverage in any form. The market value of ETNs may differ from their market benchmark
or strategy. This difference in price may be due to the fact that the supply and demand in the market for ETNs at any point in
time is not always identical to the supply and demand in the market for the securities, commodities or other components underlying
the market
benchmark or strategy that the ETN seeks to
track. As a result, there may be times when an ETN trades at a premium or discount to its market benchmark or strategy.
United States Government
Obligations
These consist of various
types of marketable securities issued by the United States Treasury, i.e., bills, notes and bonds. Such securities are direct obligations
of the United States government and differ mainly in the length of their maturity. Treasury bills, the most frequently issued marketable
government security, have a maturity of up to one year and are issued on a discount basis. The Funds may also invest in Treasury
Inflation-Protected Securities (“TIPS”). TIPS are special types of treasury bonds that were created in order to offer
bond investors protection from inflation. The values of the TIPS are automatically adjusted to the inflation rate as measured by
the Consumer Price Index (“CPI”). If the CPI goes up by half a percent, the value of the bond (the TIPS) would also
go up by half a percent. If the CPI falls, the value of the bond does not fall because the government guarantees that the original
investment will stay the same. TIPS decline in value when real interest rates rise. However, in certain interest rate environments,
such as when real interest rates are rising faster than nominal interest rates, TIPS may experience greater losses than other fixed
income securities with similar duration.
United States Government
Agency Obligations
These consist of debt securities
issued by agencies and instrumentalities of the United States government, including the various types of instruments currently
outstanding or which may be offered in the future. Agencies include, among others, the Federal Housing Administration, Government
National Mortgage Association ("GNMA"), Farmer's Home Administration, Export-Import Bank of the United States, Maritime
Administration, and General Services Administration. Instrumentalities include, for example, each of the Federal Home Loan Banks,
the National Bank for Cooperatives, the Federal Home Loan Mortgage Corporation ("FHLMC"), the Farm Credit Banks, the
Federal National Mortgage Association ("FNMA"), and the United States Postal Service. These securities are either: (i)
backed by the full faith and credit of the United States government (e.g., United States Treasury Bills); (ii) guaranteed by the
United States Treasury (e.g., GNMA mortgage-backed securities); (iii) supported by the issuing agency's or instrumentality's right
to borrow from the United States Treasury (e.g., FNMA Discount Notes); or (iv) supported only by the issuing agency's or instrumentality's
own credit (e.g., Tennessee Valley Association). On September 7, 2008, the U.S. Treasury Department and the Federal Housing Finance
Authority (the "FHFA") announced that FNMA and FHLMC had been placed into conservatorship, a statutory process designed
to stabilize a troubled institution with the objective of returning the entity to normal business operations. The U.S. Treasury
Department and the FHFA at the same time established a secured lending facility and a Secured Stock Purchase Agreement with both
FNMA and FHLMC to ensure that each entity had the ability to fulfill its financial obligations. The FHFA announced that it does
not anticipate any disruption in pattern of payments or ongoing business operations of FNMA and FHLMC.
Government-related guarantors
(i.e., not backed by the full faith and credit of the United States Government) include FNMA and FHLMC. FNMA is a government-sponsored
corporation owned entirely by private stockholders. It is subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved
seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks
and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment
of principal and interest by FNMA but are not
backed by the full faith and credit of the United States Government.
FHLMC was created by Congress
in 1970 for the purpose of increasing the availability of mortgage credit for residential housing. It is a government-sponsored
corporation formerly owned by the twelve Federal Home Loan Banks and now owned entirely by private stockholders. FHLMC issues Participation
Certificates ("PCs"), which represent interests in conventional mortgages from FHLMC's national portfolio. FHLMC guarantees
the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the
United States Government. Commercial banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers
and other secondary market issuers also create pass-through pools of conventional residential mortgage loans. Such issuers may,
in addition, be the originators and/or servicers of the underlying mortgage loans as well as the guarantors of the mortgage-related
securities. Pools created by such nongovernmental issuers generally offer a higher rate of interest than government and government-related
pools because there are no direct or indirect government or agency guarantees of payments in the former pools. However, timely
payment of interest and principal of these pools may be supported by various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance and letters of credit. The insurance and guarantees are issued by governmental entities,
private insurers and the mortgage poolers.
Securities of Other Investment
Companies
The Funds' investments in
exchange traded funds ("ETFs"), mutual funds and closed-end funds involve certain additional expenses and certain tax
results, which would not be present in a direct investment in the underlying fund. Generally, the Funds will not purchase securities
of another investment company if, as a result: (i) more than 10% of the Funds’ total assets would be invested in securities
of other investment companies, (ii) such purchase would result in more than 3% of the total outstanding voting securities of any
such investment company being held by the Funds, or (iii) more than 5% of the Funds’ total assets would be invested in any
one such investment company. However, many ETFs have obtained exemptive relief from the Securities and Exchange Commission (“SEC”)
to permit unaffiliated funds to invest in the ETF’s shares beyond the above statutory limitations, subject to certain conditions
and pursuant to a contractual arrangement between the particular ETF and the investing fund. A Fund may rely on these exemptive
orders to invest in unaffiliated ETFs. In the alternative, the Funds intend to rely on Rule 12d1-3, which allows unaffiliated mutual
funds and ETFs to exceed the 5% limitation and the 10% limitation, provided the aggregate sales loads any investor pays (i.e.,
the combined distribution expenses of both the acquiring fund and the acquired fund) does not exceed the limits on sales loads
established by FINRA for funds of funds. In addition to ETFs, the Funds may invest in other investment companies such as open-end
mutual funds or exchange-traded closed-end funds, within the limitations described above.
Closed-End Investment
Companies
The Funds may invest its
assets in "closed-end" investment companies (or "closed-end funds"), subject to the investment restrictions
set forth above. Shares of closed-end funds are typically offered to the public in a one-time initial public offering by a group
of underwriters who retain a spread or underwriting commission of between 4% or 6% of the initial public offering price. Such securities
are then listed for trading on the NYSE, the American Stock Exchange, the National Association of Securities Dealers Automated
Quotation System (commonly known as "NASDAQ") and, in some
cases, may be traded in other over-the-counter
markets. Because the shares of closed-end funds cannot be redeemed upon demand to the issuer like the shares of an open-end investment
company (such as the Funds), investors seek to buy and sell shares of closed-end funds in the secondary market.
The Funds generally will
purchase shares of closed-end funds only in the secondary market. The Funds will incur normal brokerage costs on such purchases
similar to the expenses the Funds would incur for the purchase of securities of any other type of issuer in the secondary market.
The Funds may, however, also purchase securities of a closed-end fund in an initial public offering when, in the opinion of the
Adviser, based on a consideration of the nature of the closed-end fund's proposed investments, the prevailing market conditions
and the level of demand for such securities, they represent an attractive opportunity for growth of capital. The initial offering
price typically will include a dealer spread, which may be higher than the applicable brokerage cost if the Funds purchased such
securities in the secondary market.
The shares of many closed-end
funds, after their initial public offering, frequently trade at a price per share, which is less than the net asset value (“NAV”)
per share, the difference representing the "market discount" of such shares. This market discount may be due in part
to the investment objective of long-term appreciation, which is sought by many closed-end funds, as well as to the fact that the
shares of closed-end funds are not redeemable by the holder upon demand to the issuer at the next determined NAV but rather are
subject to the principles of supply and demand in the secondary market. A relative lack of secondary market purchasers of closed-end
fund shares also may contribute to such shares trading at a discount to their NAV.
The Funds may invest in
shares of closed-end funds that are trading at a discount to NAV or at a premium to NAV. There can be no assurance that the market
discount on shares of any closed-end fund purchased by the Funds will ever decrease. In fact, it is possible that this market discount
may increase and the Funds may suffer realized or unrealized capital losses due to further decline in the market price of the securities
of such closed-end funds, thereby adversely affecting the NAV of the Funds' shares. Similarly, there can be no assurance that any
shares of a closed-end fund purchased by the Funds at a premium will continue to trade at a premium or that the premium will not
decrease subsequent to a purchase of such shares by the Funds.
Closed-end funds may issue
senior securities (including preferred stock and debt obligations) for the purpose of leveraging the closed-end fund's common shares
in an attempt to enhance the current return to such closed-end fund's common shareholders. The Funds' investment in the common
shares of closed-end funds that are financially leveraged may create an opportunity for greater total return on its investment,
but at the same time may be expected to exhibit more volatility in market price and NAV than an investment in shares of investment
companies without a leveraged capital structure.
Open-End Investment Companies
The Funds and any "affiliated
persons," as defined by the 1940 Act, may purchase in the aggregate only up to 3% of the total outstanding securities of any
underlying fund. Accordingly, when affiliated persons hold shares of any of the underlying fund, the Funds' ability to invest
fully in shares of those funds is restricted, and the Adviser must then, in some instances, select alternative investments that
would not have been its first preference. The 1940 Act also provides that an underlying fund whose shares are purchased by
the Funds when relying on certain exemptions to limitations on investments in other investment companies will be obligated to redeem
shares held by the Funds only in an amount up to 1% of the underlying fund's outstanding securities during any period
of less than 30 days. Therefore, shares held
by the Funds when relying on certain exemptions to limitations on investments in other investment companies under the 1940 Act
in excess of 1% of an underlying fund's outstanding securities will be considered not readily marketable securities, which, together
with other such securities, may not exceed 15% of the Funds' total assets.
Under certain circumstances,
an underlying fund may determine to make payment of a redemption by the Funds wholly or partly by a distribution in kind of securities
from its portfolio, in lieu of cash, in conformity with the rules of the SEC. In such cases, the Funds may hold securities distributed
by an underlying fund until the Adviser determines that it is appropriate to dispose of such securities.
Investment decisions by
the investment advisers of the underlying fund(s) are made independently of the Funds and the Adviser. Therefore, the investment
adviser of one underlying fund may be purchasing shares of the same issuer whose shares are being sold by the investment adviser
of another such fund. The result would be an indirect expense to the Funds without accomplishing any investment purpose.
Exchange Traded Funds
ETFs are generally passive
funds that track their related index and have the flexibility of trading like a security. They are managed by professionals and
provide the investor with diversification, cost and tax efficiency, liquidity, marginability, are useful for hedging, have the
ability to go long and short, and some provide quarterly dividends. Additionally, some ETFs are unit investment trusts. ETFs typically
have two markets. The primary market is where institutions swap "creation units" in block-multiples of, for example,
50,000 shares for in-kind securities and cash in the form of dividends. The secondary market is where individual investors can
trade as little as a single share during trading hours on the exchange. This is different from open-ended mutual funds that are
traded after hours once the NAV is calculated. ETFs share many similar risks with open-end and closed-end funds.
Foreign Securities
General. The Funds
may invest in foreign securities and ETFs and other investment companies that hold a portfolio of foreign securities. Investing
in securities of foreign companies and countries involves certain considerations and risks that are not typically associated with
investing in U.S. government securities and securities of domestic companies. There may be less publicly available information
about a foreign issuer than a domestic one, and foreign companies are not generally subject to uniform accounting, auditing and
financial standards and requirements comparable to those applicable to U.S. companies. There may also be less government supervision
and regulation of foreign securities exchanges, brokers and listed companies than exists in the United States. Interest and dividends
paid by foreign issuers may be subject to withholding and other foreign taxes, which may decrease the net return on such investments
as compared to dividends and interest paid to the Funds by domestic companies or the U.S. government. There may be the possibility
of expropriations, seizure or nationalization of foreign deposits, confiscatory taxation, political, economic or social instability
or diplomatic developments that could affect assets of the Funds held in foreign countries. Finally, the establishment of exchange
controls or other foreign governmental laws or restrictions could adversely affect the payment of obligations.
To the extent the Funds'
currency exchange transactions do not fully protect the Funds against adverse changes in currency exchange rates, decreases in
the value of currencies of the foreign countries in which the Funds will invest relative to the U.S. dollar will result in a corresponding
decrease
in the U.S. dollar value of the Funds' assets
denominated in those currencies (and possibly a corresponding increase in the amount of securities required to be liquidated to
meet distribution requirements). Conversely, increases in the value of currencies of the foreign countries in which the Funds invest
relative to the U.S. dollar will result in a corresponding increase in the U.S. dollar value of the Funds' assets (and possibly
a corresponding decrease in the amount of securities to be liquidated).
Securities Options
The Funds may purchase
and write (i.e., sell) put and call options. Such options may relate to particular securities or stock indices, and may or may
not be listed on a domestic or foreign securities exchange and may or may not be issued by the Options Clearing Corporation. Options
trading is a highly specialized activity that entails greater than ordinary investment risk. Options may be more volatile than
the underlying instruments, and therefore, on a percentage basis, an investment in options may be subject to greater fluctuation
than an investment in the underlying instruments themselves.
A call option for
a particular security gives the purchaser of the option the right to buy, and the writer (seller) the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of the option, regardless of the market price of the
security. The premium paid to the writer is in consideration for undertaking the obligation under the option contract. A put option
for a particular security gives the purchaser the right to sell the security at the stated exercise price at any time prior to
the expiration date of the option, regardless of the market price of the security.
Stock index options
are put options and call options on various stock indices. In most respects, they are identical to listed options on common stocks.
The primary difference between stock options and index options occurs when index options are exercised. In the case of stock options,
the underlying security, common stock, is delivered. However, upon the exercise of an index option, settlement does not occur by
delivery of the securities comprising the index. The option holder who exercises the index option receives an amount of cash if
the closing level of the stock index upon which the option is based is greater than, in the case of a call, or less than, in the
case of a put, the exercise price of the option. This amount of cash is equal to the difference between the closing price of the
stock index and the exercise price of the option expressed in dollars times a specified multiple. A stock index fluctuates with
changes in the market value of the stocks included in the index. For example, some stock index options are based on a broad market
index, such as the Standard & Poor's 500® Index or the Value Line Composite Index or a narrower market index, such as the
Standard & Poor's 100®. Indices may also be based on an industry or market segment, such as the AMEX Oil and Gas Index
or the Computer and Business Equipment Index. Options on stock indices are currently traded on the NYSE, the American Stock Exchange
and NASDAQ PHLX.
The Funds' obligation
to sell an instrument subject to a call option written by it, or to purchase an instrument subject to a put option written by it,
may be terminated prior to the expiration date of the option by the Funds' execution of a closing purchase transaction, which is
effected by purchasing on an exchange an option of the same series (i.e., same underlying instrument, exercise price and expiration
date) as the option previously written. A closing purchase transaction will ordinarily be effected to realize a profit on an outstanding
option, to prevent an underlying instrument from being called, to permit the sale of the underlying instrument or to permit the
writing of a new option containing different terms on such underlying instrument. The cost of such a liquidation purchase plus
transactions costs may be greater than the premium received upon the original option, in which event the Funds will have paid a
loss in the transaction. There is no assurance that a liquid secondary market will exist for any particular option. An option writer
unable to effect a closing purchase transaction will not be able
to sell the underlying instrument or
liquidate the assets held in a segregated account, as described below, until the option expires or the optioned instrument is delivered
upon exercise. In such circumstances, the writer will be subject to the risk of market decline or appreciation in the instrument
during such period.
If an option purchased
by the Funds expires unexercised, the Funds realize a loss equal to the premium paid. If the Funds enter into a closing sale transaction
on an option purchased by it, the Funds will realize a gain if the premium received by the Funds on the closing transaction is
more than the premium paid to purchase the option, or a loss if it is less. If an option written by the Funds expire on the stipulated
expiration date or if the Funds enter into a closing purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold). If an option written by the Funds is exercised,
the proceeds of the sale will be increased by the net premium originally received and the Funds will realize a gain or loss.
Certain Risks
Regarding Options.
There are several
risks associated with transactions in options. For example, there are significant differences between the securities and options
markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives.
In addition, a liquid secondary market for particular options, whether traded over-the-counter or on an exchange, may be absent
for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed
by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying securities or currencies; unusual or unforeseen circumstances
may interrupt normal operations on an exchange; the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading value; or one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options
that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable
in accordance with their terms.
Successful use by
the Funds of options on stock indices will be subject to the ability of the Adviser to correctly predict movements in the directions
of the stock market. This requires different skills and techniques than predicting changes in the prices of individual securities.
In addition, a Fund's ability to effectively hedge all or a portion of the securities in its portfolio, in anticipation of or during
a market decline, through transactions in put options on stock indices, depends on the degree to which price movements in the underlying
index correlate with the price movements of the securities held by the Funds. Inasmuch as the Funds' securities will not duplicate
the components of an index, the correlation will not be perfect. Consequently, the Funds bear the risk that the prices of its securities
being hedged will not move in the same amount as the prices of its put options on the stock indices. It is also possible that there
may be a negative correlation between the index and the Funds' securities that would result in a loss on both such securities and
the options on stock indices acquired by the Funds.
The hours of trading
for options may not conform to the hours during which the underlying securities are traded. To the extent that the options markets
close before the markets for the underlying securities, significant price and rate movements can take place in the underlying markets
that cannot be reflected in the options markets. The purchase of options is a highly specialized activity that involves
investment techniques and risks different
from those associated with ordinary portfolio securities transactions. The purchase of stock index options involves the risk that
the premium and transaction costs paid by the Funds in purchasing an option will be lost as a result of unanticipated movements
in prices of the securities comprising the stock index on which the option is based.
There is no assurance
that a liquid secondary market on an options exchange will exist for any particular option, or at any particular time, and for
some options no secondary market on an exchange or elsewhere may exist. If the Funds are unable to close out a call option on securities
that it has written before the option is exercised, the Funds may be required to purchase the optioned securities in order to satisfy
its obligation under the option to deliver such securities. If the Funds are unable to effect a closing sale transaction with respect
to options on securities that it has purchased, it would have to exercise the option in order to realize any profit and would incur
transaction costs upon the purchase and sale of the underlying securities.
Cover for Options
Positions.
Transactions using
options (other than options that the Funds has purchased) expose the Funds to an obligation to another party. The Funds will not
enter into any such transactions unless it owns either (i) an offsetting ("covered") position in securities or other
options or (ii) cash or liquid securities with a value sufficient at all times to cover its potential obligations not covered as
provided in (i) above. The Funds will comply with SEC guidelines regarding cover for these instruments and, if the guidelines so
require, set aside cash or liquid securities in a segregated account with the Funds' custodian in the prescribed amount. Under
current SEC guidelines, the Funds will segregate assets to cover transactions in which the Funds write or sells options.
Assets used as cover
or held in a segregated account cannot be sold while the position in the corresponding option is open, unless they are replaced
with similar assets. As a result, the commitment of a large portion of the Funds' assets to cover or segregated accounts could
impede portfolio management or the Funds' ability to meet redemption requests or other current obligations.
Options on Futures Contracts
The Funds may purchase and
sell options on the same types of futures in which it may invest. Options on futures are similar to options on underlying instruments
except that options on futures give the purchaser the right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the option is a put), rather than to purchase or sell
the futures contract, at a specified exercise price at any time during the period of the option. Upon exercise of the option, the
delivery of the futures position by the writer of the option to the holder of the option will be accompanied by the delivery of
the accumulated balance in the writer's futures margin account which represents the amount by which the market price of the futures
contract, at exercise, 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. Purchasers of options who fail to exercise their options prior to the exercise date suffer a loss of the
premium paid.
Dealer Options
The Funds may engage in
transactions involving dealer options as well as exchange-traded options. Certain additional risks are specific to dealer options.
While the Funds might look to a clearing corporation to exercise exchange-traded options, if the Funds were to purchase a dealer
option it would
need to rely on the dealer from which it purchased
the option to perform if the option were exercised. Failure by the dealer to do so would result in the loss of the premium paid
by the Funds as well as loss of the expected benefit of the transaction.
Exchange-traded options
generally have a continuous liquid market while dealer options may not. Consequently, the Funds may generally be able to realize
the value of a dealer option it has purchased only by exercising or reselling the option to the dealer who issued it. Similarly,
when the Funds write a dealer option, it may generally be able to close out the option prior to its expiration only by entering
into a closing purchase transaction with the dealer to whom the Funds originally wrote the option. While the Funds will seek to
enter into dealer options only with dealers who will agree to and which are expected to be capable of entering into closing transactions
with the Trust on behalf of the Funds, there can be no assurance that the Funds will at any time be able to liquidate a dealer
option at a favorable price at any time prior to expiration. Unless the Funds, as covered dealer call option writers, are able
to effect a closing purchase transaction, they will not be able to liquidate securities (or other assets) used as cover until the
option expires or is exercised. In the event of insolvency of the other party, the Funds may be unable to liquidate a dealer option.
With respect to options written by the Funds, the inability to enter into a closing transaction may result in material losses to
the Funds. For example, because the Funds must maintain a secured position with respect to any call option on a security it writes,
the Funds may not sell the assets, which it has segregated to secure the position while it is obligated under the option. This
requirement may impair the Funds' ability to sell portfolio securities at a time when such sale might be advantageous.
The Staff of the SEC has
taken the position that purchased dealer options are illiquid securities. The Funds may treat the cover used for written dealer
options as liquid if the dealer agrees that the Funds may repurchase the dealer option it has written for a maximum price to be
calculated by a predetermined formula. In such cases, the dealer option would be considered illiquid only to the extent the maximum
purchase price under the formula exceeds the intrinsic value of the option. Accordingly, the Funds will treat dealer options as
subject to the Funds' limitation on illiquid securities. If the SEC changes its position on the liquidity of dealer options, the
Funds will change its treatment of such instruments accordingly.
Futures Contracts
A futures contract provides
for the future sale by one party and purchase by another party of a specified amount of a specific financial instrument (e.g.,
units of a stock index) for a specified price, date, time and place designated at the time the contract is made. Brokerage fees
are paid when a futures contract is bought or sold and margin deposits must be maintained. Entering into a contract to buy is commonly
referred to as buying or purchasing a contract or holding a long position. Entering into a contract to sell is commonly referred
to as selling a contract or holding a short position.
Unlike when the Funds purchase
or sell a security, no price would be paid or received by the Funds upon the purchase or sale of a futures contract. Upon entering
into a futures contract, and to maintain the Funds’ open positions in futures contracts, the Funds would be required to deposit
with its custodian or futures broker in a segregated account in the name of the futures broker an amount of cash, U.S. government
securities, suitable money market instruments, or other liquid securities, known as "initial margin." The margin required
for a particular futures contract is set by the exchange on which the contract is traded, and may be significantly modified from
time to time by the exchange during the term of the contract. Futures contracts are customarily purchased and sold on margins that
may range upward from less than 5% of the value of the contract being traded.
If the price of an open
futures contract changes (by increase in underlying instrument or index in the case of a sale or by decrease in the case of a purchase)
so that the loss on the futures contract reaches a point at which the margin on deposit does not satisfy margin requirements, the
broker will require an increase in the margin. However, if the value of a position increases because of favorable price changes
in the futures contract so that the margin deposit exceeds the required margin, the broker will pay the excess to the Funds.
These subsequent payments,
called "variation margin," to and from the futures broker, are made on a daily basis as the price of the underlying assets
fluctuate making the long and short positions in the futures contract more or less valuable, a process known as "marking to
the market." The Funds expect to earn interest income on its margin deposits.
Although certain futures
contracts, by their terms, require actual future delivery of and payment for the underlying instruments, in practice most futures
contracts are usually closed out before the delivery date. Closing out an open futures contract purchase or sale is effected by
entering into an offsetting futures contract sale or purchase, respectively, for the same aggregate amount of the identical underlying
instrument or index and the same delivery date. If the offsetting purchase price is less than the original sale price, the Funds
realize a gain; if it is more, the Funds realize a loss. Conversely, if the offsetting sale price is more than the original purchase
price, the Funds realize a gain; if it is less, the Funds realize a loss. The transaction costs must also be included in these
calculations. There can be no assurance, however, that the Funds will be able to enter into an offsetting transaction with respect
to a particular futures contract at a particular time. If the Funds are not able to enter into an offsetting transaction, the Funds
will continue to be required to maintain the margin deposits on the futures contract.
For example, one contract
in the Financial Times Stock Exchange 100 Index future is a contract to buy 25 pounds sterling multiplied by the level of the UK
Financial Times 100 Share Index on a given future date. Settlement of a stock index futures contract may or may not be in the underlying
instrument or index. If not in the underlying instrument or index, then settlement will be made in cash, equivalent over time to
the difference between the contract price and the actual price of the underlying asset at the time the stock index futures contract
expires.
Swap Agreements
The Funds may enter into
swap agreements for purposes of attempting to gain exposure to equity, debt, commodities or other asset markets without actually
purchasing those assets, or to hedge a position. Swap agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a day to more than one year. In a standard "swap" transaction, two parties agree to
exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments.
The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount,"
i.e., the return on or increase in value of a particular dollar amount invested in a "basket" of securities representing
a particular index.
Most swap agreements entered
into by the Funds calculate the obligations of the parties to the agreement on a "net basis." Consequently, the Funds'
current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under
the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). Payments
may be made at the conclusion of a swap agreement or periodically during its term.
Swap agreements do not involve
the delivery of securities or other underlying assets. Accordingly, if a swap is entered into on a net basis, if the other party
to a swap agreement defaults, the Funds' risk of loss consists of the net amount of payments that the Funds are contractually entitled
to receive, if any.
The net amount of the excess,
if any, of the Funds' obligations over its entitlements with respect to a swap agreement entered into on a net basis will be accrued
daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued excess will be maintained in
an account with the Custodian. The Funds will also establish and maintain such accounts with respect to its total obligations under
any swaps that are not entered into on a net basis. Obligations under swap agreements so covered will not be construed to be "senior
securities" for purposes of the Funds' investment restriction concerning senior securities.
Because they are two-party
contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid for the
Funds' illiquid investment limitations. The Funds will not enter into any swap agreement unless the Adviser believes that the other
party to the transaction is creditworthy. The Funds bear the risk of loss of the amount expected to be received under a swap agreement
in the event of the default or bankruptcy of a swap agreement counter-party.
The Funds may enter into
a swap agreement in circumstances where the Adviser believes that it may be more cost effective or practical than buying the securities
represented by such index or a futures contract or an option on such index. The counter-party to any swap agreement will typically
be a bank, investment banking firm or broker/dealer. The counter-party will generally agree to pay the Funds the amount, if any,
by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks
represented in the index, plus the dividends that would have been received on those stocks. The Funds will agree to pay to the
counter-party a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional
amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Funds on any swap agreement
should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Funds on the notional
amount.
The swap market has grown
substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets
for other similar instruments that are traded in the over-the-counter market.
Regulation as a Commodity
Pool Operator
The Trust, on behalf
of the Funds, has filed with the National Futures Association, a notice claiming an exclusion from the definition of the term "commodity
pool operator" under the Commodity Exchange Act, as amended, and the rules of the Commodity Futures Trading Commission (“CFTC”)
promulgated thereunder, with respect to the Funds’ operations. Accordingly, the Funds are not currently subject to
registration or regulation as a commodity pool operator.
When-Issued, Forward
Commitments and Delayed Settlements
The Funds may purchase and
sell securities on a when-issued, forward commitment or delayed settlement basis. In this event, the Custodian (as defined under
the section entitled "Custodian") will segregate liquid assets equal to the amount of the commitment in a separate account.
Normally, the
Custodian will set aside portfolio securities
to satisfy a purchase commitment. In such a case, the Funds may be required subsequently to segregate additional assets in order
to assure that the value of the account remains equal to the amount of the Funds' commitment. It may be expected that the Funds'
net assets will fluctuate to a greater degree when it sets aside portfolio securities to cover such purchase commitments than when
it sets aside cash.
The Funds do not intend
to engage in these transactions for speculative purposes but only in furtherance of its investment objectives. Because the Funds
will segregate liquid assets to satisfy its purchase commitments in the manner described, the Funds' liquidity and the ability
of the Adviser to manage them may be affected in the event the Funds' forward commitments, commitments to purchase when-issued
securities and delayed settlements ever exceeded 15% of the value of its net assets.
The Funds will purchase
securities on a when-issued, forward commitment or delayed settlement basis only with the intention of completing the transaction.
If deemed advisable as a matter of investment strategy, however, the Funds may dispose of or renegotiate a commitment after it
is entered into, and may sell securities it has committed to purchase before those securities are delivered to the Funds on the
settlement date. In these cases, the Funds may realize a taxable capital gain or loss. When the Funds engage in when-issued, forward
commitment and delayed settlement transactions, it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Funds incurring a loss or missing an opportunity to obtain a price credited to be advantageous.
The market value of the
securities underlying a when-issued purchase, forward commitment to purchase securities, or a delayed settlement and any subsequent
fluctuations in their market value is taken into account when determining the market value of the Funds starting on the day the
Funds agrees to purchase the securities. The Funds do not earn interest on the securities it has committed to purchase until it
has paid for and delivered on the settlement date.
Illiquid and Restricted
Securities
The Funds may invest up
to 15% of their net assets in illiquid securities. Illiquid securities include securities subject to contractual or legal restrictions
on resale (e.g., because they have not been registered under the Securities Act) and securities that are otherwise not readily
marketable (e.g., because trading in the security is suspended or because market makers do not exist or will not entertain bids
or offers). Securities that have not been registered under the Securities Act are referred to as private placements or restricted
securities and are purchased directly from the issuer or in the secondary market. Foreign securities that are freely tradable in
their principal markets are not considered to be illiquid.
Restricted and other illiquid
securities may be subject to the potential for delays on resale and uncertainty in valuation. The Funds might be unable to dispose
of illiquid securities promptly or at reasonable prices and might thereby experience difficulty in satisfying redemption requests
from shareholders. The Funds might have to register restricted securities in order to dispose of them, resulting in additional
expense and delay. Adverse market conditions could impede such a public offering of securities.
A large institutional
market exists for certain securities that are not registered under the Securities Act, including foreign securities. The fact that
there are contractual or legal restrictions on resale to the general public or to certain institutions may not be indicative of
the liquidity of such
investments. Rule 144A under the Securities
Act allows such a broader institutional trading market for securities otherwise subject to restrictions on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements of the Securities Act for resale of
certain securities to qualified institutional buyers. Rule 144A has produced enhanced liquidity for many restricted securities,
and market liquidity for such securities may continue to expand as a result of this regulation and the consequent existence of
the PORTAL system, which is an automated system for the trading, clearance and settlement of unregistered securities of domestic
and foreign issuers sponsored by the Financial Industry Regulatory Authority, Inc. ("FINRA").
Under guidelines adopted
by the Board, the Adviser may determine that particular Rule 144A securities, and commercial paper issued in reliance on the private
placement exemption from registration afforded by Section 4(a)(2) of the Securities Act, are liquid even though they are not registered.
A determination of whether such a security is liquid or not is a question of fact. In making this determination, the Adviser will
consider, as it deems appropriate under the circumstances and among other factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers willing to purchase or sell the security; (3) the number of other potential purchasers of the
security; (4) dealer undertakings to make a market in the security; (5) the nature of the security (e.g., debt or equity, date
of maturity, terms of dividend or interest payments, and other material terms) and the nature of the marketplace trades (e.g.,
the time needed to dispose of the security, the method of soliciting offers, and the mechanics of transfer); and (6) the rating
of the security and the financial condition and prospects of the issuer. In the case of commercial paper, the Adviser will also
determine that the paper (1) is not traded flat or in default as to principal and interest, and (2) is rated in one of the two
highest rating categories by at least two Nationally Recognized Statistical Rating Organizations ("NRSROs") or, if only
one NRSRO rates the security, by that NRSRO, or, if the security is unrated, the Adviser determines that it is of equivalent quality.
Rule 144A securities and
Section 4(a)(2) commercial paper that have been deemed liquid as described above will continue to be monitored by the Adviser to
determine if the security is no longer liquid as the result of changed conditions. Investing in Rule 144A securities or Section
4(a)(2) commercial paper could have the effect of increasing the amount of the Funds' assets invested in illiquid securities if
institutional buyers are unwilling to purchase such securities.
Lending Portfolio Securities
For the purpose of achieving
income, the Funds may lend its portfolio securities, provided (1) the loan is secured continuously by collateral consisting of
U.S. Government securities or cash or cash equivalents (cash, U.S. Government securities, negotiable certificates of deposit, bankers'
acceptances or letters of credit) maintained on a daily mark-to-market basis in an amount at least equal to the current market
value of the securities loaned, (2) the Funds may at any time call the loan and obtain the return of securities loaned, (3) the
Funds will receive any interest or dividends received on the loaned securities, and (4) the aggregate value of the securities loaned
will not at any time exceed one-third of the total assets of the Funds. The Funds may invest the cash collateral received in connection
with securities lending transactions in the Milestone Treasury Obligations Fund “Milestone”. Milestone is managed by
CLS Investments, LLC. The lending agent may invest the cash collateral received in connection with securities lending transactions
in Milestone. Milestone is registered under the 1940 Act as an open end investment company, is subject to Rule 2a-7 under the 190
Act, which CLS may receive an investment advisory fee of up to 0.10% on an annualized basis of the average daily net assets of
Milestone. The Funds receive compensation relating to the lending of the Funds’ securities.
Short Sales
“Short Sales Against
The Box. A Fund may engage in short sales against the box. In a short sale, a Fund sells a borrowed security and has a corresponding
obligation to the lender to return the identical security. The seller does not immediately deliver the securities sold and is said
to have a short position in those securities until delivery occurs. A Fund may engage in a short sale if at the time of the short
sale a Fund owns or has the right to obtain without additional cost an equal amount of the security being sold short. This investment
technique is known as a short sale “against the box.” It may be entered into by a Fund to, for example, lock in a sale
price for a security the Fund does not wish to sell immediately. If a Fund engages in a short sale, the collateral for the short
position will be segregated in an account with a Fund’s custodian or qualified sub-custodian. No more than 10% of a Fund’s
net assets (taken at current value) may be held as collateral for short sales against the box at any one time.
A Fund may make a short
sale as a hedge, when it believes that the price of a security may decline, causing a decline in the value of a security owned
by the Fund (or a security convertible or exchangeable for such security). In such case, any future losses in the Fund’s
long position should be offset by a gain in the short position and, conversely, any gain in the long position should be reduced
by a loss in the short position. The extent to which such gains or losses are reduced will depend upon the amount of the security
sold short relative to the amount a Fund owns. There are certain additional transaction costs associated with short sales against
the box, but the Funds endeavor to offset these costs with the income from the investment of the cash proceeds of short sales.
If a Fund effects a short
sale of securities at a time when it has an unrealized gain on the securities, it may be required to recognize that gain as if
it had actually sold the securities (as a “constructive sale”) on the date it effects the short sale. However, such
constructive sale treatment may not apply if the Fund closes out the short sale with securities other than the appreciated securities
held at the time of the short sale and if certain other conditions are satisfied. Uncertainty regarding the tax consequences of
effecting short sales may limit the extent to which a Fund may effect short sales.
Short Sales (excluding
Short Sales “Against the Box”). A Fund may sell securities short. A short sale is a transaction in which a Fund
sells securities it does not own in anticipation of a decline in the market price of the securities.
To deliver the securities
to the buyer, a Fund must arrange through a broker to borrow the securities and, in so doing, the Fund becomes obligated to replace
the securities borrowed at their market price at the time of replacement, whatever that price may be. A Fund will make a profit
or incur a loss as a result of a short sale depending on whether the price of the securities decreases or increases between the
date of the short sale and the date on which the Fund purchases the security to replace the borrowed securities that have been
sold. The amount of any loss would be increased (and any gain decreased) by any premium or interest a Fund is required to pay in
connection with a short sale.
A Fund’s obligation
to replace the securities borrowed in connection with a short sale will be secured by cash or liquid securities deposited as collateral
with the broker. In addition, each Fund places in a segregated account with its custodian or a qualified sub-custodian an amount
of cash or liquid securities equal to the difference, if any, between (i) the market value of the securities sold at the time they
were sold short and (ii) any cash or liquid securities deposited as collateral with the broker in connection with the short sale
(not including the proceeds of the short sale). Until it replaces the borrowed securities, a Fund will maintain the segregated
account daily at a level so that (a) the amount deposited in the account plus the amount deposited with the broker (not including
the proceeds from
the short sale) will equal the current market
value of the securities sold short and (b) the amount deposited in the account plus the amount deposited with the broker (not including
the proceeds from the short sale) will not be less than the market value of the securities at the time they were sold short.”
PORTFOLIO TURNOVER
Each Fund may engage in
a high level of trading in seeking to achieve its investment objectives. The portfolio turnover rate for each Fund is calculated
by dividing the lesser of the purchases or sales of portfolio investments for the reporting period by the monthly average value
of the portfolio investments owned during the reporting period. A 100% portfolio turnover rate results, for example, if the equivalents
of all the securities in each Fund’s portfolio are replaced in a one-year period. The calculation excludes all securities,
including options, whose maturities or expiration dates at the time of acquisition are one year or less. Portfolio turnover may
vary greatly from year to year as well as within a particular year, and may be affected by cash requirements for redemption or
shares. Each Fund is not restricted by policy with regard to portfolio turnover and will make changes in its investment portfolio
from time to time as business and economic conditions as well as market prices may dictate. Portfolio turnover for the Funds increased
during the last fiscal year because the models that the Adviser employs identified significant changes in market trends which led
to a greater number of trades being executed.
The following table
displays the portfolio turnover rates for the Funds for the fiscal years ended [ ]:
|
FUND
|
Portfolio Turnover Rates
|
|
2020
|
2019
|
|
Newfound Risk Managed Global Sectors Fund
|
[ ]%
|
318%
|
|
Newfound Multi-Asset Income Fund
|
[ ]%
|
347%
|
|
Newfound Risk Managed U.S. Sectors Fund
|
[ ]%
|
360%
|
INVESTMENT RESTRICTIONS
The Funds have adopted the
following investment restrictions that may not be changed without approval by a "majority of the outstanding shares"
of the Funds which, as used in this SAI, means the vote of the lesser of (a) 67% or more of the shares of the Funds represented
at a meeting, if the holders of more than 50% of the outstanding shares of the Funds are present or represented by proxy, or (b)
more than 50% of the outstanding shares of the Funds. The Funds may not:
|
|
1.
|
Issue senior securities. This limitation is not applicable to activities that may be deemed to
involve the issuance or sale of a senior security by the Funds, provided that the Funds' engagement in such activities is consistent
with or permitted by the 1940 Act the rules and regulations promulgated thereunder or interpretations of the SEC or its staff;
|
|
|
2.
|
Borrow money, except (a) from a bank, provided that immediately after such borrowing there is an
asset coverage of 300% for all borrowings of each Fund; or (b) from a bank or other persons for temporary purposes only, provided
that such temporary borrowings are in an amount not exceeding 5% of the Funds' total assets at the time when the borrowing is made.
This limitation does not preclude the Funds from entering into reverse repurchase transactions, provided that the Funds has
|
an asset coverage of 300% for all
borrowings and repurchase commitments of the Funds pursuant to reverse repurchase transactions;
|
|
3.
|
Purchase securities on margin, participate on a joint or joint and several basis in any securities
trading account, or underwrite securities. (This does not preclude the Funds from obtaining such short-term credit as may be necessary
for the clearance of purchases and sales of its portfolio securities, and except to the extent that the Funds may be deemed an
underwriter under the Securities Act, by virtue of disposing of portfolio securities);
|
|
|
4.
|
Purchase or sell real estate or interests in real estate. This limitation is not applicable to
investments in marketable securities that are secured by or represent interests in real estate. This limitation does not preclude
the Funds from investing in mortgage-related securities or investing in companies engaged in the real estate business or that have
a significant portion of their assets in real estate (including real estate investment trusts);
|
|
|
5.
|
Invest 25% or more of the market value of its assets in the securities of companies engaged in
any one industry. (This does not apply to investment in the securities of the U.S. Government, its agencies or instrumentalities);
|
|
|
6.
|
Purchase or sell commodities (unless acquired as a result of ownership of securities or other investments
or through commodity forward contracts, futures contracts or options), except that the Funds may purchase and sell forward and
futures contracts and options to the full extent permitted under the 1940 Act, sell foreign currency contracts in accordance with
any rules of the CFTC, invest in securities or other instruments backed by commodities, and invest in companies that are engaged
in a commodities business or have a significant portion of their assets in commodities; or
|
|
|
7.
|
Make loans to others, except (a) through the purchase of debt securities in accordance with its
investment objectives and policies, (b) to the extent the entry into a repurchase agreement is deemed to be a loan, and (c) by
loaning portfolio securities.
|
With respect to interpretations
of the SEC or its staff described in paragraph number 1 and 6 above, the SEC and its staff have identified various securities trading
practices and derivative instruments used by mutual funds that give rise to potential senior security issues under Section 18(f)
of the 1940 Act. However, rather than rigidly deeming all such practices as impermissible forms of issuing a "senior security"
under Section 18(f), the SEC and its staff through interpretive releases, including Investment Company Act Release No. 10666 (April
18, 1979), and no-action letters has developed an evolving series of methods by which a fund may address senior security issues.
In particular, the common theme in this line of guidance has been to use methods of "covering" fund obligations that
might otherwise create a senior security-type obligation by holding sufficient liquid assets that permit a fund to meet potential
trading and derivative-related obligations. Thus, a potential Section 18(f) senior security limitation is not applicable to activities
that might be deemed to involve a form of the issuance or sale of a senior security by each Fund, provided that each Fund's engagement
in such activities is consistent with or permitted by Section 18 of the 1940 Act, the rules and regulations promulgated thereunder
or interpretations of the SEC or its staff.
Each Fund observes the
following policies, which are not deemed fundamental and which may be changed without shareholder vote. The Funds may not:
|
|
1.
|
Invest in any issuer for purposes of exercising control or management;
|
|
|
2.
|
Invest in securities of other investment companies except as permitted under the 1940 Act;
|
|
|
3.
|
Invest, in the aggregate, more than 15% of its net assets, measured at time of purchase, in securities
with legal or contractual restrictions on resale, securities, which are not readily marketable and repurchase agreements with more
than seven days to maturity; or
|
|
|
4.
|
Mortgage, pledge, hypothecate or in any manner transfer, as security for indebtedness, any assets
of the Funds except as may be necessary in connection with borrowings described in limitation (2) above. Margin deposits, security
interests, liens and collateral arrangements with respect to transactions involving options, futures contracts, short sales and
other permitted investments and techniques are not deemed to be a mortgage, pledge or hypothecation of assets for purposes of this
limitation.
|
If a restriction on the
Funds' investments is adhered to at the time an investment is made, a subsequent change in the percentage of Fund assets invested
in certain securities or other instruments, or change in average duration of the Funds' investment portfolio, resulting from changes
in the value of the Funds' total assets, will not be considered a violation of the restriction; provided, however, that the asset
coverage requirement applicable to borrowings shall be maintained in the manner contemplated by applicable law.
INVESTMENT ADVISER
The Adviser. Newfound
Research LLC, PO Box 81256, Wellesley Hills, Massachusetts 02481, serves as investment adviser to the Funds. Subject to the oversight
of the Board, the Adviser is responsible for management of the Funds' investment portfolios. The Adviser is responsible for selecting
the Funds' investments according to the Funds' investment objectives, policies and restrictions. The Adviser was established in
2008 for the purpose of developing quantitative investment models and licensing data from these models to institutions. As of [
], the Adviser had approximately $[ ] million under management (inclusive of model licensing arrangements and assets invested in
the Adviser’s strategies through UMA platforms and separate account type arrangements).
The Advisory Agreement
for the Funds was renewed by the Board of Trustees at a meeting held on February 19-20, 2020.
Pursuant to an investment
advisory agreement (the “Advisory Agreement”), the Funds pay the Adviser, on a monthly basis, an advisory fee. The
following table sets forth the annual management fee rate payable by the Funds to the Adviser pursuant to the Advisory Agreement,
expressed as a percentage of the relevant Fund’s average daily net assets:
|
Fund
|
Advisory Fee
|
|
Newfound Risk Managed Global Sectors Fund
|
0.79%
|
|
Newfound Multi-Asset Income Fund
|
0.69%
|
|
Newfound Risk Managed U.S. Sectors Fund
|
0.79%
|
The Adviser has contractually
agreed to waive its fees and reimburse expenses of the Funds, at least until [ ] to the extent necessary to ensure that Total Annual
Fund Operating Expenses After Fee Waiver and Reimbursement (exclusive of front-end or contingent deferred loads; brokerage fees
and commissions, acquired fund fees and expenses; borrowing costs (such as interest and dividend expense on securities sold short);
taxes; and extraordinary expenses, such as litigation expenses (which may include indemnification of Fund officers and Trustees,
and contractual indemnification of Fund service providers (other than the Adviser))) will not exceed the percentages, shown in
the table below, of average daily net assets of each class share of the Funds (the “Expense Limitation Agreement”).
These fee waivers and expense reimbursements are subject to possible recoupment
from the Funds within the three years after
the fees have been waived or reimbursed) if such recoupment can be achieved within the foregoing expense limits
or within the expense limits in place at the time of recoupment, whichever is lower. This waiver may be terminated only by the
Board, on 60 days’ written notice to the Adviser. Fee waiver and reimbursement arrangements can decrease a Fund's expenses
and each Fund’s expense limitation is shown below:
Fund
|
Expense Limitation
|
|
Newfound Risk Managed Global Sectors Fund
|
Class A
|
1.75%
|
|
Class I
|
1.50%
|
|
Newfound Multi-Asset Income Fund
|
Class A
|
1.60%
|
|
Class I
|
1.35%
|
|
Newfound Risk Managed U.S. Sectors Fund
|
Class A
|
1.50%
|
|
Class I
|
1.25%
|
The following table displays
the advisory fees that were incurred by the Funds during the fiscal year ended [ ]:
|
Fund
|
Fees Earned by the Adviser
|
Advisory Fees Waived
|
Net Fees Earned by the Adviser
|
Fund Expenses Reimbursed by the Adviser
|
|
Newfound Risk Managed Global Sectors Fund
|
$[ ]
|
$[ ]
|
$[ ]
|
$[ ]
|
|
Newfound Multi-Asset Income Fund
|
$[ ]
|
$[ ]
|
$[ ]
|
$[ ]
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$[ ]
|
$[ ]
|
$[ ]
|
$[ ]
|
The following table displays
the advisory fees that were incurred by the Funds during the fiscal year ended March 31, 2019:
|
Fund
|
Fees Earned by the Adviser
|
Advisory Fees Waived
|
Net Fees Earned by the Adviser
|
Fund Expenses Reimbursed by the Adviser
|
|
Newfound Risk Managed Global Sectors Fund
|
$583,182
|
$116,887
|
$466,295
|
$0
|
|
Newfound Multi-Asset Income Fund
|
$536,051
|
$30,214
|
$505,837
|
$0
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$462,961
|
$147,404
|
$315,557
|
$0
|
The following table displays
the advisory fees that were incurred by the Funds during the fiscal year ended March 31, 2018:
|
Fund
|
Fees Earned by the Adviser
|
Advisory Fees Waived
|
Net Fees Earned by the Adviser
|
Fund Expenses Reimbursed by the Adviser
|
|
Newfound Risk Managed Global Sectors Fund
|
$598,780
|
$109,271
|
$489,509
|
$0
|
|
Newfound Multi-Asset Income Fund
|
$757,861
|
$32,177
|
$725,684
|
$0
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$342,264
|
$121,599
|
$220,665
|
$0
|
PORTFOLIO MANAGERS
Portfolio Managers.
As described in the Prospectus, the portfolio managers (the “Portfolio Managers”) listed below are responsible for
the management of the Funds and, as of [ ], other accounts are set forth in the following tables.
|
Portfolio Manager
|
|
Other Registered Investment Companies
|
|
Other Pooled Investment Vehicles
|
|
Other Accounts
|
|
Number
|
|
Total Assets
|
Number
|
|
Total Assets
|
Number
|
|
Total Assets
|
|
Corey Hoffstein
|
|
[ ]
|
|
$[ ]
|
|
[ ]
|
|
$[ ]
|
|
[ ]
|
|
$[ ]
|
|
Nathan Faber
|
|
[ ]
|
|
$[ ]
|
|
[ ]
|
|
$[ ]
|
|
[ ]
|
|
$[ ]
|
Of the accounts above, the following are subject to performance-based
fees.
|
Portfolio Manager
|
|
Other Registered Investment Companies
|
|
Other Pooled Investment Vehicles
|
|
Other Accounts
|
|
|
Number
|
|
Total Assets
|
|
Number
|
|
Total Assets
|
|
Number
|
|
Total Assets
|
|
Corey Hoffstein
|
|
[ ]
|
|
$[ ]
|
|
[ ]
|
|
$[ ]
|
|
[ ]
|
|
$[ ]
|
|
Nathan Faber
|
|
[ ]
|
|
$[ ]
|
|
[ ]
|
|
$[ ]
|
|
[ ]
|
|
$[ ]
|
Conflicts of Interest.
As indicated in the table
above, the Portfolio Managers may manage numerous accounts for multiple clients. These accounts may include registered investment
companies, other types of pooled accounts (e.g., collective investment funds), and separate accounts (i.e., accounts managed on
behalf of individuals or public or private institutions). The Portfolio Managers make investment decisions for each account based
on the investment objectives and policies and other relevant investment
considerations applicable to that portfolio.
When a Portfolio Manager
has responsibility for managing more than one account, potential conflicts of interest may arise. Those conflicts could include
preferential treatment of one account over others in terms of allocation of resources or of investment opportunities. For instance,
the Adviser may receive fees from certain accounts that are higher than the fee it receives from the Funds. In this instance, a
Portfolio Manager may have an incentive to favor the higher account over such Fund. The Adviser has adopted policies and procedures
designed to address these potential material conflicts. For instance, the Portfolio Managers are normally responsible for all accounts
within a certain investment discipline, and do not, absent special circumstances, differentiate among the various accounts when
allocating resources. Additionally, the Adviser utilizes a system for allocating investment opportunities among portfolios that
is designed to provide a fair and equitable allocation.
Compensation.
Mr. Faber’s compensation
from the Adviser consists of a fixed salary, variable bonus, retirement plans and other arrangements. Mr. Hoffstein shares in the
profits of the Adviser through his 50% indirect ownership of the Adviser.
Ownership of Securities.
As of [ ], the Portfolio Managers owned the
following securities in the Funds:
|
|
Dollar Range of Shares Beneficially Owned of the:
|
|
Name of Portfolio Manager
|
Newfound Risk Managed Global Sectors Fund
|
Newfound Multi-Asset Income Fund
|
Newfound Risk Managed U.S. Sectors Fund
|
|
Corey Hoffstein
|
$[ ]
|
$[ ]
|
$[ ]
|
|
Nathan Faber
|
$[ ]
|
$[ ]
|
$[ ]
|
ALLOCATION OF BROKERAGE
Specific decisions to purchase
or sell securities for the Funds are made by the Portfolio Managers who are employees of the Adviser. The Adviser is also responsible
for the implementation of those decisions, including the selection of broker-dealers to effect portfolio transactions, the negotiation
of commissions, and the allocation of principal business and portfolio brokerage.
In purchasing and selling
the Funds’ portfolio securities, it is the Adviser’s policy to obtain quality execution at the most favorable prices
through responsible broker-dealers and, in the case of agency transactions, at competitive commission rates where such rates are
negotiable. However, under certain conditions, the Funds may pay higher brokerage commissions in return for brokerage and research
services. In selecting broker-dealers to execute the Funds’ portfolio transactions, consideration is given to such factors
as the price of the security, the rate of the commission, the size and difficulty of the order, the reliability, integrity, financial
condition, general execution and operational capabilities of competing brokers and dealers, their expertise in particular markets
and the brokerage and research
services they provide to the Adviser or the
Funds. It is not the policy of the Adviser to seek the lowest available commission rate where it is believed that a broker or dealer
charging a higher commission rate would offer greater reliability or provide better price or execution.
Transactions on stock exchanges
involve the payment of brokerage commissions. In transactions on stock exchanges in the United States, these commissions are negotiated.
Traditionally, commission rates have generally not been negotiated on stock markets outside the United States. In recent years,
however, an increasing number of overseas stock markets have adopted a system of negotiated rates, although a number of markets
continue to be subject to an established schedule of minimum commission rates. It is expected that equity securities will ordinarily
be purchased in the primary markets, whether over-the-counter or listed, and that listed securities may be purchased in the over-the-counter
market if such market is deemed the primary market. In the case of securities traded on the over-the-counter markets, there is
generally no stated commission, but the price usually includes an undisclosed commission or markup. In underwritten offerings,
the price includes a disclosed, fixed commission or discount.
For fixed income securities,
it is expected that purchases and sales will ordinarily be transacted with the issuer, the issuer’s underwriter, or with
a primary market maker acting as principal on a net basis, with no brokerage commission being paid by the Funds. However, the price
of the securities generally includes compensation, which is not disclosed separately. Transactions placed through dealers who are
serving as primary market makers reflect the spread between the bid and asked prices.
With respect to equity and
fixed income securities, the Adviser may effect principal transactions on behalf of the Funds with a broker or dealer who furnishes
brokerage and/or research services, designate any such broker or dealer to receive selling concessions, discounts or other allowances
or otherwise deal with any such broker or dealer in connection with the acquisition of securities in underwritings. The prices
the Funds pay to underwriters of newly-issued securities usually include a concession paid by the issuer to the underwriter. The
Adviser may receive research services in connection with brokerage transactions, including designations in fixed price offerings.
The Adviser receives a wide
range of research services from brokers and dealers covering investment opportunities throughout the world, including information
on the economies, industries, groups of securities, individual companies, statistics, political developments, technical market
action, pricing and appraisal services, and performance analyses of all the countries in which the Funds’ portfolio is likely
to be invested. The Adviser cannot readily determine the extent to which commissions charged by brokers reflect the value of their
research services, but brokers occasionally suggest a level of business they would like to receive in return for the brokerage
and research services they provide. To the extent that research services of value are provided by brokers, the Adviser may be relieved
of expenses, which it might otherwise bear. In some cases, research services are generated by third parties but are provided to
the Adviser by or through brokers.
Certain broker-dealers,
which provide quality execution services, also furnish research services to the Adviser. The Adviser has adopted brokerage allocation
policies embodying the concepts of Section 28(e) of the Securities Exchange Act of 1934, which permits an investment adviser to
cause its clients to pay a broker which furnishes brokerage or research services a higher commission than that which might be charged
by another broker which does not furnish brokerage or research services, or which furnishes brokerage or research services deemed
to be of lesser value, if such commission is deemed reasonable in relation to the brokerage and research services provided by the
broker, viewed in terms of either that particular transaction or the overall responsibilities of the Adviser with respect to
the accounts as to which it exercises investment
discretion. Accordingly, the Adviser may assess the reasonableness of commissions in light of the total brokerage and research
services provided by each particular broker.
Portfolio securities
will not be purchased from or sold to the Adviser, or the distributor, or any affiliated person of any of them acting as principal,
except to the extent permitted by rule or order of the SEC. The table below provides information about the brokerage fees incurred
by the Funds for the fiscal year ended [ ]:
|
Fund
|
Brokerage Commissions
|
|
Newfound Risk Managed Global Sectors Fund
|
$[ ]
|
|
|
Newfound Multi-Asset Income Fund
|
$[ ]
|
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$[ ]
|
|
The table below provides
information about the brokerage fees incurred by the Funds for the fiscal year ended March 31, 2019:
|
Fund
|
Brokerage Commissions
|
|
Newfound Risk Managed Global Sectors Fund
|
$48,513
|
|
|
Newfound Multi-Asset Income Fund
|
$123,554
|
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$62,065
|
|
The table below provides
information about the brokerage fees incurred by the Funds for the fiscal year ended March 31, 2018:
|
Fund
|
Brokerage Commissions
|
|
Newfound Risk Managed Global Sectors Fund
|
$14,295
|
|
|
Newfound Multi-Asset Income Fund
|
$78,389
|
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$29,389
|
|
POLICIES AND PROCEDURES FOR DISCLOSURE OF
PORTFOLIO HOLDINGS
The Trust has adopted policies
and procedures that govern the disclosure of the Funds' portfolio holdings. These policies and procedures are designed to ensure
that such disclosure is in the best interests of Fund shareholders.
It is the Trust's policy
to: (1) ensure that any disclosure of portfolio holdings information is in the best interest of Trust shareholders; (2) protect
the confidentiality of portfolio holdings information; (3) have procedures in place to guard against personal trading based on
the information; and (4) ensure that the disclosure of portfolio holdings information does not create conflicts between the interests
of the Trust's shareholders and those of the Trust's affiliates.
The Funds disclose their
portfolio holdings by mailing the annual and semi-annual reports to shareholders approximately two months after the end of the
fiscal year and semi-annual period. In addition, the Funds disclose their portfolio holdings reports on Form N-CSR two months after
the end of each semi-annual period and on and Form N-PORT two months after the end of each calendar quarter.
The Funds’ portfolio
holdings as of the end of each calendar month are posted on the Funds’ website, http://www.thinknewfoundfunds.com no later
than thirty days after the end of each month. This posted information generally remains accessible until the Funds post the information
for the next calendar month to the Funds’ website. The Funds may choose to post their portfolio holdings on a more frequent
basis, especially during periods of high market volatility. These off-cycle disclosures will be replaced with the normal monthly
release when available.
Under limited circumstances,
as described below, the Funds' portfolio holdings may be disclosed to, or known by, certain third parties in advance of their filing
with the SEC on Form N-CSR or Form PORT. In each case, a determination has been made by the Trust’s Chief Compliance Officer
that such advance disclosure is supported by a legitimate business purpose of the Funds and that the recipient is subject to a
duty to keep the information confidential, including a duty not to trade on material, non-public information.
Newfound Research LLC. Personnel of the
Adviser, including personnel responsible for managing the Funds' portfolio, may have full daily access to Fund portfolio holdings
since that information is necessary in order for them to provide management, administrative, and investment services to the Funds.
As required for purposes of analyzing the impact of existing and future market changes on the prices, availability, demand and
liquidity of such securities, as well as for the assistance of the Portfolio Managers in the trading of such securities, Adviser
personnel may also release and discuss certain portfolio holdings with various broker-dealers.
Gemini Fund Services, LLC. Gemini Fund
Services, LLC is the transfer agent, fund accountant, administrator and custody administrator for the Funds; therefore, its personnel
have full daily access to the Funds' portfolio holdings since that information is necessary in order for them to provide the agreed-upon
services for the Trust.
MUFG Union Bank, National Association.
MUFG Union Bank, National Association is custodian for the Funds; therefore, its personnel have full daily access to the Funds'
portfolio holdings since that information is necessary in order for them to provide the agreed-upon services for the Trust.
[ ]. [ ] is
the Funds' independent registered public accounting firm; therefore, its personnel have access to the Funds' portfolio holdings
in connection with auditing of the Funds' annual financial statements and providing other audit, tax and related services for the
Funds.
Counsel to the Trust and Counsel to the Independent
Trustees. Counsel to the Trust, Counsel to the Independent Trustees and their respective personnel have access to the Funds’
portfolio holdings in connection with the review of the Funds’ annual and semi-annual shareholder reports and SEC filings.
Additions to List of Approved Recipients
The Trust’s Chief
Compliance Officer is the person responsible, and whose prior approval is required, for any disclosure of the Funds' portfolio
securities at any time or to any persons other than those described above. In such cases, the recipient must have a legitimate
business need for the information in connection with the operation or administration of the Funds, as determined by the Trust’s
Chief Compliance Officer, and must be subject to a duty to keep the information confidential and not trade on any material, non-public
information. There are no ongoing arrangements in place with respect to the disclosure of portfolio holdings. In no event shall
a Fund, the Adviser, or any other party receive any direct or indirect compensation in connection with the disclosure of information
about a Fund's portfolio holdings.
Compliance With Portfolio Holdings Disclosure
Procedures
The Trust’s Chief
Compliance Officer will report periodically to the Board with respect to compliance with the Funds' portfolio holdings disclosure
procedures, and from time to time will provide the Board any updates to the portfolio holdings disclosure policies and procedures.
There is no assurance that
the Trust's policies on disclosure of portfolio holdings will protect the Funds from the potential misuse of holdings information
by individuals or firms in possession of that information.
OTHER SERVICE PROVIDERS
Fund Administration,
Fund Accounting and Transfer Agent Services
Gemini Fund Services,
LLC (the “Administrator” or “GFS”), which has its principal office at 4221 North 203rd Street,
Suite 100, Elkhorn, NE 68022, serves as administrator, fund accountant and transfer agent for Fund pursuant to a Fund Services
Agreement (the “Agreement”) with the Trust and subject to the supervision of the Board. GFS is primarily in the business
of providing administrative, fund accounting and transfer agent services to retail and institutional mutual funds. GFS is an affiliate
of the distributor. GFS may also provide persons to serve as officers of the Funds. Such officers may be directors, officers or
employees of GFS or its affiliates.
The Agreement became effective
on February 23, 2012 and remained in effect for two years from the applicable effective date for the Funds, and will continue in
effect for successive twelve-month periods provided that such continuance is specifically approved at least annually by a majority
of the Board. The Agreement is terminable by the Board or GFS on 90 days’ written notice and may be assigned by either
party, provided that the Trust may not assign this agreement without the prior written
consent of GFS. The Agreement provides that
GFS shall be without liability for any action reasonably taken or omitted pursuant to the Agreement.
Under the Agreement,
GFS performs administrative services, including: (1) monitoring the performance of administrative and professional services
rendered to the Trust by others service providers; (2) monitoring Fund holdings and operations for post-trade compliance with the
Funds’ registration statement and applicable laws and rules; (3) preparing and coordinating the printing of semi-annual and
annual financial statements; (4) preparing selected management reports for performance and compliance analyses; (5) preparing and
disseminating materials for and attending and participating in meetings of the Board; (6) determining income and capital gains
available for distribution and calculating distributions required to meet regulatory, income, and excise tax requirements; (7)
reviewing the Trust's federal, state, and local tax returns as prepared and signed by the Trust's independent public accountants;
(8) preparing and maintaining the Trust's operating expense budget to determine proper expense accruals to be charged to the Funds
to calculate its daily NAV; (9) assisting in and monitoring the preparation, filing, printing and where applicable, dissemination
to shareholders of amendments to the Trust’s Registration Statement on Form N-1A, periodic reports to the Trustees, shareholders
and the SEC, notices pursuant to Rule 24f-2, proxy materials and reports to the SEC on Forms N-CEN, N-CSR, N-PORT and N-PX; (10)
coordinating the Trust's audits and examinations by assisting the Funds’ independent public accountants; (11) determining,
in consultation with others, the jurisdictions in which shares of the Trust shall be registered or qualified for sale and facilitate
such registration or qualification; (12) monitoring sales of shares and ensure that the shares are properly and duly registered
with the SEC; (13) monitoring the calculation of performance data for the Funds; (14) preparing, or causing to be prepared,
expense and financial reports; (15) preparing authorization for the payment of Trust expenses and pay, from Trust assets, all bills
of the Trust; (16) providing information typically supplied in the Investment Company industry to companies that track or report
price, performance or other information with respect to investment companies; (17) upon request, assisting the Funds in the evaluation
and selection of other service providers, such as independent public accountants, printers, EDGAR providers and proxy solicitors
(such parties may be affiliates of GFS); and (18) performing other services, recordkeeping and assistance relating to the affairs
of the Trust as the Trust may, from time to time, reasonably request.
GFS also provides the Funds
with accounting services, including: (i) daily computing of NAV; (ii) maintaining security ledgers and books and records as required
by the 1940 Act; (iii) producing the Funds’ listing of portfolio securities and general ledger reports; (iv) reconciling
of accounting records; (v) calculating yield and total return for the Funds; (vi) maintaining certain books and records described
in Rule 31a-1 under the 1940 Act, and reconciling account information and balances among the Funds’ custodian and Adviser;
and (vii) monitoring and evaluating daily income and expense accruals, and sales and redemptions of shares of the Funds.
GFS also acts as transfer,
dividend disbursing, and shareholder servicing agent for the Funds pursuant to the Agreement. Under the Agreement, GFS is responsible
for administering and performing transfer agent functions, dividend distribution, shareholder administration, and maintaining necessary
records in accordance with applicable rules and regulations.
For the services rendered
to the Funds by GFS, the Funds pays GFS the greater of an annual minimum fee or an asset based fee, which scales downward based
upon net assets for fund administration, fund accounting and transfer agency services. The Funds also pay GFS for any out-of-pocket
expenses.
For the fiscal
year ended [ ], the Funds incurred the following fees:
|
Fund
|
For Administration Services
|
For Fund Accounting Services
|
For Transfer Agency Services
|
|
Newfound Risk Managed Global Sectors Fund
|
$[ ]
|
$[ ]
|
$[ ]
|
|
Newfound Multi-Asset Income Fund
|
$[ ]
|
$[ ]
|
$[ ]
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$[ ]
|
$[ ]
|
$[ ]
|
For the fiscal year
ended March 31, 2019, the Funds incurred the following fees:
|
Fund
|
For Administration Services
|
For Fund Accounting Services
|
For Transfer Agency Services
|
|
Newfound Risk Managed Global Sectors Fund
|
$48,711
|
$35,369
|
$46,665
|
|
Newfound Multi-Asset Income Fund
|
$59,939
|
$43,206
|
$26,675
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$47,516
|
$34,925
|
$34,410
|
For the fiscal year ended
March 31, 2018, the Funds incurred the following fees:
|
Fund
|
For Administration Services
|
For Fund Accounting Services
|
For Transfer Agency Services
|
|
Newfound Risk Managed Global Sectors Fund
|
$51,219
|
$35,346
|
$48,060
|
|
Newfound Multi-Asset Income Fund
|
$71,157
|
$43,115
|
$11,980
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$37,601
|
$33,236
|
$17,259
|
Custodian
MUFG Union Bank, National
Association, (the “Custodian”) located at 350 California Street, Suite 2, San Francisco, California 94104, serves as
the custodian of the Funds’ assets pursuant to a custody agreement (the "Custody Agreement") by and between the
Custodian and the Trust on behalf of the Funds. The Custodian's responsibilities include safeguarding and controlling the Funds’
cash and securities, handling the receipt and delivery of securities, and collecting interest and dividends on the Funds’
investments. Pursuant to the Custody Agreement, the Custodian also maintains original entry documents and books of record and general
ledgers; posts cash receipts and disbursements; and records purchases and sales based upon communications from the Adviser. The
Funds may employ foreign sub-custodians that are approved by the Board to hold foreign assets.
Securities
Lending Activities
The
Funds have entered into a Securities Lending Authorization Agreement between the Trust, on behalf of each Fund, and Securities
Finance Trust Company (“SFTC”), under which SFTC serves as each Fund’s securities lending agent. The dollar amounts
of income and fees and compensation paid to the Funds’ and Custodian related to the Funds’ respective securities lending
activities during fiscal year ended [ ] were as follows:
|
|
|
|
|
|
|
Newfound Risk Managed Global Sectors Fund
|
Newfound Multi-Asset Income Fund
|
Newfound Risk Managed U.S. Sectors Fund
|
|
Gross income from securities lending activities (including income from cash collateral reinvestment)
|
[ ]
|
[ ]
|
[ ]
|
|
Fees and/or compensation for securities lending activities and related services
|
-
|
-
|
-
|
|
Fees paid to securities lending agent from a revenue split
|
[ ]
|
[ ]
|
[ ]
|
|
Fees paid for any cash collateral management service (including fees deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split*
|
-
|
-
|
-
|
|
Administrative fees not included in revenue split
|
-
|
-
|
-
|
|
Indemnification fees not included in revenue split
|
-
|
-
|
-
|
|
(Rebate) (paid to borrower)/Premium (paid to lender)
|
[ ]
|
[ ]
|
[ ]
|
|
Other fees not included in revenue split
|
-
|
-
|
-
|
|
Aggregate fees/compensation for securities lending activities
|
[ ]
|
[ ]
|
[ ]
|
|
Net income from securities lending activities
|
[ ]
|
[ ]
|
[ ]
|
*
The Fund’s cash collateral was invested in the Fidelity Government Money Market Portfolio and Morgan Stanley Prime Portfolio
during the fiscal year ended [ ]. The Milestone Treasury Obligations Fund is managed by CLS Investments, LLC.
The
services provided by SFTC as securities lending agent are as follows: provide notification to custodian and to act with regard
to the lending of available securities; market available securities for securities lending purposes and to solicit competitive
bids; provide upon request, credit information about approved borrowers and other institutions that may become approved borrowers
and shall assist in analyzing the creditworthiness of such institutions; create a specific section on its auction website that
is accessible only by approved borrowers and other such entities as may be agreed upon form time to time; prepare financial analysis
of bids received in the auction process and make recommendations; prepare or cause to be prepared transactional confirmation in
respect of each loan effected; notify custodian whenever an available security loan has been agreed upon.
The
services provided by SFTC as securities lending agent are as follows: provide notification to custodian and to act with regard
to the lending of available securities; market available securities for securities lending purposes and to solicit competitive
bids; provide upon request, credit information about approved borrowers and other institutions that may become approved borrowers
and shall assist in analyzing the creditworthiness of such institutions; create a specific section on its auction website that
is accessible only by approved borrowers and other such entities as may be agreed upon form time to time; prepare financial analysis
of bids received in the auction process and make recommendations; prepare or cause to be prepared transactional confirmation in
respect of each loan effected; notify custodian whenever an available security loan has been agreed upon.
Compliance Services
Northern Lights Compliance
Services, LLC ("NLCS"), located at 4221 North 203rd Street, Suite 100, Elkhorn, NE 68022, an affiliate of
GFS and the distributor, provides a chief compliance officer to the Trust as well as related compliance services pursuant to a
consulting agreement between NLCS and the Trust. NLCS’s compliance services consist primarily of reviewing and assessing
the policies and procedures of the Trust and its service providers pertaining to compliance with applicable federal
securities laws, including Rule 38a-1 under
the 1940 Act. For the services rendered to the Funds by the NLCS, the Funds
pay NLCS an annual fixed fee and an asset based fee, which scales downward based upon each Fund’s net assets. The table below
provides information about compliance service fees incurred by the Funds for the fiscal year ended [ ]:
|
Fund
|
Compliance Service Fees
|
|
Newfound Risk Managed Global Sectors Fund
|
$[ ]
|
|
Newfound Multi-Asset Income Fund
|
$[ ]
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$[ ]
|
For the fiscal year ended
March 31, 2019, the Funds incurred the following fees::
|
Fund
|
Compliance Service Fees
|
|
Newfound Risk Managed Global Sectors Fund
|
$[ ]
|
|
Newfound Multi-Asset Income Fund
|
$[ ]
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$[ ]
|
For the fiscal year ended March 31, 2018, the
Funds incurred the following fees:
|
Fund
|
Compliance Service Fees
|
|
Newfound Risk Managed Global Sectors Fund
|
$10,207
|
|
Newfound Multi-Asset Income Fund
|
$10,350
|
|
Newfound Risk Managed U.S. Sectors Fund
|
$10,556
|
Effective February 1, 2019, NorthStar Financial
Services Group, LLC, the parent company of GFS, Northern Lights Distributors, LLC, and Northern Lights Compliance Services, LLC
(collectively, the “Gemini Companies”), sold its interest in the Gemini Companies to a third party private equity firm
that contemporaneously acquired Ultimus Fund Solutions, LLC (an independent mutual fund administration firm) and its affiliates
(collectively, the “Ultimus Companies”). As a result of these separate transactions, the Gemini Companies and the Ultimus
Companies are now indirectly owned through a common parent entity, The Ultimus Group, LLC.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The
Funds have selected [ ], located at 555 Seventeenth Street, Suite 1000, Denver, Colorado 80202, as its independent registered public
accounting firm for the current fiscal year. [ ] performs annual audits of the Funds’ financial statements and provides other
audit, tax and related services for the Funds.
LEGAL COUNSEL
Thompson Hine LLP, 41 South
High Street, Suite 1700, Columbus, Ohio 43215 serves as the Trust’s legal counsel.
DISTRIBUTOR
Northern Lights Distributors,
LLC, located at 4221 North 203rd Street, Suite 100, Elkhorn, Nebraska 68130 (the “Distributor”) serves as
the principal underwriter and national distributor for the shares of the Funds pursuant to an underwriting agreement with the Trust
(the “Underwriting Agreement”). The Distributor is registered as a broker-dealer under the Securities Exchange Act
of 1934 and each state’s securities laws and is a member of FINRA. The offering of the Funds’ shares are continuous.
The Underwriting Agreement provides that the Distributor, as agent in connection with the distribution of Fund shares, will use
reasonable efforts to facilitate the sale of the Funds’ shares.
The Underwriting Agreement
provides that, unless sooner terminated, it will continue in effect for two years initially and thereafter shall continue from
year to year, subject to annual approval by (a) the Board or a vote of a majority of the outstanding shares, and (b) by a majority
of the Trustees who are not interested persons of the Trust or of the Distributor by vote cast in person at a meeting called for
the purpose of voting on such approval.
The Underwriting Agreement
may be terminated by the Funds at any time, without the payment of any penalty, by vote of a majority of the Trust’s entire
Board or by vote of a majority of the outstanding shares of the Funds on 60 days written notice to the Distributor, or by the Distributor
at any time, without the payment of any penalty, on 60 days written notice to the Funds. The Underwriting Agreement will automatically
terminate in the event of its assignment.
The following table sets forth the total compensation
received by the Distributor from the Funds during the fiscal year ended [ ]:
|
Fund
|
Net Underwriting Discounts and Commissions
|
Compensation on Redemptions and Repurchases
|
Brokerage Commissions
|
Other Compensation
|
|
Newfound Risk Managed Global Sectors Fund -Class A
|
$[ ]
|
$[ ]
|
$[ ]
|
*
|
|
Newfound Risk Managed Global Sectors Fund -Class C
|
$[ ]
|
$[ ]
|
$[ ]
|
*
|
|
Newfound Multi Asset Income Fund Class A
|
$[ ]
|
$[ ]
|
$[ ]
|
*
|
|
Newfound Multi Asset Income Fund Class C
|
$[ ]
|
$[ ]
|
$[ ]
|
*
|
|
Newfound Risk Managed US Sectors Fund Class A
|
$[ ]
|
$[ ]
|
$[ ]
|
*
|
|
Newfound Risk Managed US Sectors Fund Class C
|
$[ ]
|
$[ ]
|
$[ ]
|
*
|
|
* The Distributor received $[ ] from the Adviser as compensation for its distribution services to the Funds.
|
|
The Distributor also receives 12b-1 fees from the Funds as described under the following section entitled “Rule 12b-1 Plan”.
|
Rule 12b-1 Plan
The Trust, on behalf of
the Funds, has adopted the Trust’s Master Distribution and Shareholder Servicing Plan for Class A and Class C shares, pursuant
to Rule 12b-1 under the 1940 Act (each a “Plan”, and collectively the "Plans") pursuant to which the Funds
are authorized to pay the Distributor, as compensation for Distributor's account maintenance services under the Plans, a distribution
and shareholder servicing fee at the rate of up to 0.25% of each Fund’s average daily net assets attributable
to the Class A shares and 1.00% of each Fund’s
average daily net assets attributable to the Class C shares. Such fees are to be paid by the Funds monthly, or at such other intervals
as the Board shall determine. Such fees shall be based upon the Funds’ average daily net assets during the preceding month,
and shall be calculated and accrued daily. The Funds may pay fees to the Distributor at a lesser rate, as agreed upon by the Board
of Trustees and the Distributor. The Plans authorize payments to the Distributor as compensation for providing account maintenance
services to Fund shareholders, including arranging for certain securities dealers or brokers, administrators and others ("Recipients")
to provide these services and paying compensation for these services.
The services to be provided
by Recipients may include, but are not limited to, the following: assistance in the offering and sale of Fund shares and in other
aspects of the marketing of the shares to clients or prospective clients of the respective recipients; answering routine inquiries
concerning the Funds; assisting in the establishment and maintenance of accounts or sub-accounts in the Funds and in processing
purchase and redemption transactions; making the Funds’ investment plan and shareholder services available; and providing
such other information and services to investors in shares of the Funds as the Distributor or the Trust, on behalf of the Funds,
may reasonably request. The distribution services shall also include any advertising and marketing services provided by or arranged
by the Distributor with respect to the Funds.
The Distributor is required
to provide a written report, at least quarterly to the Board, specifying in reasonable detail the amounts expended pursuant to
the Plans and the purposes for which such expenditures were made. Further, the Distributor will inform the Board of any Rule 12b-1
fees to be paid by the Distributor to Recipients.
The Plans may not be amended
to increase materially the amount of the Distributor's compensation to be paid by the Funds, unless such amendment is approved
by the vote of a majority of the outstanding voting securities of the affected class of the Funds (as defined in the 1940 Act).
All material amendments must be approved by a majority of the Board and a majority of the Trustees by votes cast in person at a
meeting called for the purpose of voting on a Plan. During the term of the Plans, the selection and nomination of non-interested
Trustees of the Trust will be committed to the discretion of current non-interested Trustees. The Distributor will preserve copies
of the Plans, any related agreements, and all reports, for a period of not less than six years from the date of such document and
for at least the first two years in an easily accessible place.
Any agreement related to
the Plans will be in writing and provide that: (a) it may be terminated by the Trust or the applicable Fund at any time upon sixty
days' written notice, without the payment of any penalty, by vote of a majority of the Trustees, or by vote of a majority of the
outstanding voting securities of the Trust or the Funds; (b) it will automatically terminate in the event of its assignment (as
defined in the 1940 Act); and (c) it will continue in effect for a period of more than one year from the date of its execution
or adoption only so long as such continuance is specifically approved at least annually by a majority of the Board and a majority
of the Trustees by votes cast in person at a meeting called for the purpose of voting on such agreement.
For the fiscal year or
period ended [ ], the Funds incurred the following allocated distribution fees:
|
Actual 12b-1 Expenditures Paid by
|
|
Newfound Fund Shares
|
|
During the Fiscal Year Ended [ ]
|
|
|
Newfound Risk Managed Global Sectors Fund -Class A
|
Newfound Multi Asset Income Fund Class A
|
|
Newfound Risk Managed US Sectors Fund Class A
|
|
|
Advertising/Marketing
|
$[ ]
|
$[ ]
|
|
$[ ]
|
|
|
Printing/Postage
|
$[ ]
|
$[ ]
|
|
$[ ]
|
|
|
Payment to distributor
|
$[ ]
|
$[ ]
|
|
$[ ]
|
|
|
Payment to dealers
|
$[ ]
|
$[ ]
|
|
$[ ]
|
|
|
Compensation to sales personnel
|
$[ ]
|
$[ ]
|
|
$[ ]
|
|
|
Other
|
$[ ]
|
$[ ]
|
|
$[ ]
|
|
|
Total
|
$[ ]
|
$[ ]
|
|
$[ ]
|
|
DESCRIPTION OF SHARES
Each share of beneficial
interest of the Trust has one vote in the election of Trustees. Cumulative voting is not authorized for the Trust. This means that
the holders of more than 50% of the shares voting for the election of Trustees can elect 100% of the Trustees if they choose to
do so, and, in that event, the holders of the remaining shares will be unable to elect any Trustees.
Shareholders of the Trust
and any other future series of the Trust will vote in the aggregate and not by series except as otherwise required by law or when
the Board determines that the matter to be voted upon affects only the interest of the shareholders of a particular series or classes.
Matters such as election of Trustees are not subject to separate voting requirements and may be acted upon by shareholders of the
Trust voting without regard to series.
The Trust is authorized
to issue an unlimited number of shares of beneficial interest. Each share has equal dividend, distribution and liquidation rights.
There are no conversion or preemptive rights applicable to any shares of the Funds. All shares issued are fully paid and non-assessable.
CODE OF ETHICS
The Trust, the Adviser and
the Distributor have each adopted codes of ethics under Rule 17j-1 under the 1940 Act that governs the personal securities transactions
of their board members, officers and employees who may have access to current trading information of the Trust. Under the code
of ethics adopted by the Trust, the Trustees are permitted to invest in securities that may also be purchased by the Funds.
In addition, the Trust has
adopted a code of ethics, which applies only to the Trust's executive officers (the “Code”) to ensure that these officers
promote professional conduct in the practice of corporate governance and management. The purpose behind these guidelines is to
promote (i) honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal
and professional relationships; (ii) full, fair, accurate, timely, and understandable disclosure in reports and documents that
a registrant files with, or submits to, the SEC and in other public communications made by the Funds; (iii) compliance with applicable
governmental laws, rule and
regulations; (iv) the prompt internal reporting
of violations of the Code to an appropriate person or persons identified in the Code; and (v) accountability for adherence to the
Code.
PROXY VOTING POLICIES
The Board has adopted Proxy
Voting Policies and Procedures ("Policies") on behalf of the Trust, which delegate the responsibility for voting proxies
to the Adviser or its designee, subject to the Board's continuing oversight. The Policies require that the Adviser or its designee
vote proxies received in a manner consistent with the best interests of the Funds and shareholders. The Policies also require the
Adviser or its designee to present to the Board, at least annually, the Adviser's proxy voting policies, or the proxy voting policies
of the Adviser's designee, and a record of each proxy voted by the Adviser or its designee on behalf of the Funds, including a
report on the resolution of all proxies identified by the Adviser as involving a conflict of interest.
Where a proxy proposal raises
a material conflict between the Adviser's interests and the Funds’ interests, the Adviser will resolve the conflict by voting
in accordance with the policy guidelines or at the client's directive using the recommendation of an independent third party. If
the third party's recommendations are not received in a timely fashion, the Adviser will abstain from voting the securities held
by that client's account. A copy of the Adviser's proxy voting policies is attached hereto as Appendix B.
Information regarding
how the Funds voted proxies during the most recent 12-month period ended [ ] is available without charge, upon request, by calling
toll free, [ ] and by accessing the information on proxy voting filed by the Funds on Form N-PX on the SEC's website at www.sec.gov.
In addition, a copy of the Funds’ proxy voting policies and procedures are also available by calling [ ] and will be sent
within three business days of receipt of a request.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Calculation of Share Price
As indicated in the Prospectus
under the heading "How Shares Are Priced" the NAV of each Fund’s shares, by class, is determined by dividing the
total value of that Fund's portfolio investments and other assets, less any liabilities, by the total number of shares outstanding
of the Fund, by class.
Generally, the Funds’
domestic securities (including underlying ETFs which hold portfolio securities primarily listed on foreign (non-U.S.) exchanges)
are valued each day at the last quoted sales price on each security’s primary exchange. Securities traded or dealt in upon
one or more securities exchanges for which market quotations are readily available and not subject to restrictions against resale
shall be valued at the last quoted sales price on the primary exchange or, in the absence of a sale on the primary exchange, at
the mean between the current bid and ask prices on such exchange. Securities primarily traded in the NASDAQ National Market System
for which market quotations are readily available shall be valued using the NASDAQ Official Closing Price. If market quotations
are not readily available, securities will be valued at their fair market value as determined in good faith by the Funds’
fair value committee in accordance with procedures approved by the Board and as further described below. Securities that are not
traded or dealt in any securities exchange (whether domestic or foreign) and for which over-the-counter market quotations are readily
available generally shall be
valued at the last sale price or, in the absence
of a sale, at the mean between the current bid and ask price on such over-the- counter market.
Certain securities or investments
for which daily market quotes are not readily available may be valued, pursuant to guidelines established by the Board, with reference
to other securities or indices. Debt securities not traded on an exchange may be valued at prices supplied by a pricing agent(s)
based on broker or dealer supplied valuations or matrix pricing, a method of valuing securities by reference to the value of other
securities with similar characteristics, such as rating, interest rate and maturity. Short-term investments having a maturity of
60 days or less may be generally valued at amortized cost when it approximated fair value.
Exchange traded options
are valued at the last quoted sales price or, in the absence of a sale, at the mean between the current bid and ask prices on the
exchange on which such options are traded. Futures and options on futures are valued at the settlement price determined by the
exchange. Other securities for which market quotes are not readily available are valued at fair value as determined in good faith
by the Board or persons acting at its direction. Swap agreements and other derivatives are generally valued daily based upon quotations
from market makers or by a pricing service in accordance with the valuation procedures approved by the Board.
Under certain circumstances,
each Fund may use an independent pricing service to calculate the fair market value of foreign equity securities on a daily basis
by applying valuation factors to the last sale price or the mean price as noted above. The fair market values supplied by the independent
pricing service will generally reflect market trading that occurs after the close of the applicable foreign markets of comparable
securities or the value of other instruments that have a strong correlation to the fair-valued securities. The independent pricing
service will also take into account the current relevant currency exchange rate. A security that is fair valued may be valued at
a price higher or lower than actual market quotations or the value determined by other funds using their own fair valuation procedures.
Because foreign securities may trade on days when Fund shares are not priced, the value of securities held by the Funds can change
on days when Fund shares cannot be redeemed or purchased. In the event that a foreign security’s market quotations are not
readily available or are deemed unreliable (for reasons other than because the foreign exchange on which it trades closed before
each Funds’ calculation of NAV), the security will be valued at its fair market value as determined in good faith by the
Funds’ fair value committee in accordance with procedures approved by the Board as discussed below. Without fair valuation,
it is possible that short-term traders could take advantage of the arbitrage opportunity and dilute the NAV of long-term investors.
Fair valuation of the Funds’ portfolio securities can serve to reduce arbitrage opportunities available to short-term traders,
but there is no assurance that it will prevent dilution of each Fund’s NAV by short-term traders. In addition, because the
Funds may invest in underlying ETFs which hold portfolio securities primarily listed on foreign (non-U.S.) exchanges, and these
exchanges may trade on weekends or other days when the underlying ETFs do not price their shares, the value of these portfolio
securities may change on days when you may not be able to buy or sell Fund shares.
Investments initially valued
in currencies other than the U.S. dollar are converted to U.S. dollars using exchange rates obtained from pricing services. As
a result, the NAV of each Fund's shares may be affected by changes in the value of currencies in relation to the U.S. dollar. The
value of securities traded in markets outside the United States or denominated in currencies other than the U.S. dollar may be
affected significantly on a day that the NYSE is closed and an investor is not able to purchase, redeem or exchange shares.
Each Fund’s shares
are valued at the close of regular trading on the NYSE (normally 4:00 p.m., Eastern time) (the "NYSE Close") on each
day that the NYSE is open. For purposes of calculating the NAV, the Funds normally use pricing data for domestic equity securities
received shortly after the NYSE Close and does not normally take into account trading, clearances or settlements that take place
after the NYSE Close. Domestic fixed income and foreign securities are normally priced using data reflecting the earlier closing
of the principal markets for those securities. Information that becomes known to the Funds or their agents after the NAV has been
calculated on a particular day will not generally be used to retroactively adjust the price of the security or the NAV determined
earlier that day.
When market quotations are
insufficient or not readily available, the Funds may value securities at fair value or estimate their value as determined in good
faith by the Board or its designees, pursuant to procedures approved by the Board. Fair valuation may also be used by the Board
if extraordinary events occur after the close of the relevant market but prior to the NYSE Close.
The Funds may hold securities,
such as private placements, interests in commodity pools, other non-traded securities or temporarily illiquid securities, for which
market quotations are not readily available or are determined to be unreliable. These securities will be valued at their fair market
value as determined using the “fair value” procedures approved by the Board. The Board has delegated execution of these
procedures to a fair value committee composed of one of more officers from each of the (i) Trust, (ii) administrator, and (iii)
Adviser. The committee may also enlist third party consultants such as an audit firm or financial officer of a security issuer
on an as-needed basis to assist in determining a security-specific fair value. The Board reviews and ratifies the execution of
this process and the resultant fair value prices at least quarterly to assure the process produces reliable results.
Fair Value Committee
and Valuation Process. The fair value committee is composed of one of more officers from each of the (i) Trust, (ii) administrator,
and (iii) Adviser. The applicable investments are valued collectively via inputs from each of these groups. For example, fair value
determinations are required for the following securities: (i) securities for which market quotations are insufficient or not readily
available on a particular business day (including securities for which there is a short and temporary lapse in the provision of
a price by the regular pricing source), (ii) securities for which, in the judgment of the Adviser, the prices or values available
do not represent the fair value of the instrument. Factors which may cause the Adviser to make such a judgment include, but are
not limited to, the following: only a bid price or an asked price is available; the spread between bid and asked prices is substantial;
the frequency of sales; the thinness of the market; the size of reported trades; and actions of the securities markets, such as
the suspension or limitation of trading; (iii) securities determined to be illiquid; (iv) securities with respect to which an event
that will affect the value thereof has occurred (a “significant event”) since the closing prices were established on
the principal exchange on which they are traded, but prior to each Fund’s calculation of its net asset value. Specifically,
interests in commodity pools or managed futures pools are valued on a daily basis by reference to the closing market prices of
each futures contract or other asset held by a pool, as adjusted for pool expenses. Restricted or illiquid securities, such as
private placements or non-traded securities are valued via inputs from the Adviser valuation based upon the current bid for the
security from two or more independent dealers or other parties reasonably familiar with the facts and circumstances of the security
(who should take into consideration all relevant factors as may be appropriate under the circumstances). If the Adviser is unable
to obtain a current bid from such independent dealers or other independent parties, the fair value committee shall determine the
fair value of such security using the following factors: (i) the type of security; (ii) the cost at date of purchase; (iii) the
size and nature of the Fund's holdings; (iv) the discount from market value of unrestricted securities of the same class at the
time of purchase and subsequent thereto; (v) information as to any transactions or offers with respect
to the security; (vi) the nature and duration
of restrictions on disposition of the security and the existence of any registration rights; (vii) how the yield of the security
compares to similar securities of companies of similar or equal creditworthiness; (viii) the level of recent trades of similar
or comparable securities; (ix) the liquidity characteristics of the security; (x) current market conditions; and (xi) the market
value of any securities into which the security is convertible or exchangeable.
Standards For Fair
Value Determinations. As a general principle, the fair value of a security is the amount that the Fund might reasonably
expect to realize upon its current sale. The Trust has adopted Financial Accounting Standards Board Statement of Financial Accounting
Standards Codification Topic 820, Fair Value Measurements and Disclosures ("ASC 820"). In accordance with ASC 820, fair
value is defined as the price that the Fund would receive upon selling an investment in a timely transaction to an independent
buyer in the principal or most advantageous market of the investment. ASC 820 establishes a three-tier hierarchy to maximize the
use of observable market data and minimize the use of unobservable inputs and to establish classification of fair value measurements
for disclosure purposes. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value
including such a pricing model and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable.
Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed
based on market data obtained from sources independent of the reporting entity. Unobservable inputs are inputs that reflect the
reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability, developed
based on the best information available under the circumstances.
Various inputs are used
in determining the value of each Fund's investments relating to ASC 820. These inputs are summarized in the three broad levels
listed below.
Level 1 – quoted prices in active markets
for identical securities.
Level 2 – other significant observable
inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 – significant unobservable inputs
(including a Fund’s own assumptions in determining the fair value of investments).
The fair value committee
takes into account the relevant factors and surrounding circumstances, which may include: (i) the nature and pricing history (if
any) of the security; (ii) whether any dealer quotations for the security are available; (iii) possible valuation methodologies
that could be used to determine the fair value of the security; (iv) the recommendation of a Portfolio Manager of the Fund with
respect to the valuation of the security; (v) whether the same or similar securities are held by other funds managed by the Adviser
or other funds and the method used to price the security in those funds; (vi) the extent to which the fair value to be determined
for the security will result from the use of data or formulae produced by independent third parties and (vii) the liquidity or
illiquidity of the market for the security.
Board of Trustees’
Determination. The Board meets at least quarterly to consider the valuations provided by the fair value committee and to
ratify the valuations made for the applicable securities. The Board considers the reports provided by the fair value committee,
including follow up studies of
subsequent market-provided prices when available,
in reviewing and determining in good faith the fair value of the applicable portfolio securities.
The Trust expects that the NYSE will be closed
on the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day.
Purchase of Shares
Orders for shares received
by the Funds in good order prior to the close of business on the NYSE on each day during such periods that the NYSE is open for
trading are priced at the public offering price, which is NAV plus any sales charge, or at NAV per share (if no sales charges apply)
computed as of the close of the regular session of trading on the NYSE. Orders received in good order after the close of the NYSE,
or on a day it is not open for trading, are priced at the close of such NYSE on the next day on which it is open for trading at
the next determined NAV per share plus sales charges, if any. Whether a sales charge waiver is available for your retirement plan
or charitable account depends upon the policies and procedures of your intermediary. Please consult your financial adviser for
further information.
Redemption of Shares
The Funds will redeem all
or any portion of a shareholder's shares of the Funds when requested in accordance with the procedures set forth in the "Redemptions"
section of the Prospectus. Under the 1940 Act, a shareholder's right to redeem shares and to receive payment therefore may be suspended
at times:
(a) when the NYSE is closed, other than customary
weekend and holiday closings; (b) when trading on that exchange is restricted for any reason; (c) when an emergency exists as a
result of which disposal by the Funds of securities owned is not reasonably practicable or it is not reasonably practicable for
the Funds to fairly determine the value of net assets, provided that applicable rules and regulations of the SEC (or any succeeding
governmental authority) will govern as to whether the conditions prescribed in (b) or (c) exist; or (d) when the SEC by order permits
a suspension of the right to redemption or a postponement of the date of payment on redemption.
In case of suspension of
the right of redemption, payment of a redemption request will be made based on the NAV next determined after the termination of
the suspension.
Supporting documents in
addition to those listed under "Redemptions" in the Prospectus will be required from executors, administrators, trustees,
or if redemption is requested by someone other than the shareholder of record. Such documents include, but are not restricted to,
stock powers, trust instruments, certificates of death, appointments as executor, certificates of corporate authority and waiver
of tax required in some states when settling estates.
Redemption Fees
A redemption fee of 1.00% of the amount redeemed
is assessed on shares that have been redeemed within 30 days of purchase.
Waivers of Redemption Fees: the Funds
have elected not to impose the redemption fee for:
-
redemptions and exchanges of Fund shares
acquired through the reinvestment of dividends and distributions;
-
certain types of redemptions and exchanges
of Fund shares owned through participant-directed retirement plans;
-
redemptions or exchanges in discretionary
asset allocation, fee based or wrap programs ("wrap programs") that are initiated by the sponsor/financial adviser as
part of a periodic rebalancing;
-
redemptions or exchanges in a fee based or
wrap program that are made as a result of a full withdrawal from the wrap program or as part of a systematic withdrawal plan including
the Funds’ systematic withdrawal plan;
-
involuntary redemptions, such as those resulting
from a shareholder's failure to maintain a minimum investment in a Fund, or to pay shareholder fees; or
-
other types of redemptions as the Adviser
or the Trust may determine in special situations and approved by the Funds’ or the Adviser's Chief Compliance Officer.
Notice to Texas Shareholders
Under section 72.1021(a)
of the Texas Property Code, initial investors in a Fund who are Texas residents may designate a representative to receive notices
of abandoned property in connection with Fund shares. Texas shareholders who wish to appoint a representative should notify the
Trust’s Transfer Agent by writing to the address below to obtain a form for providing written notice to the Trust:
Newfound Risk Managed Global Sectors Fund
Newfound Multi-Asset Income Fund
Newfound Risk Managed U.S. Sectors Fund
c/o Gemini Fund Services, LLC
4221 North 203rd Street, Suite
100
Elkhorn, NE 68022
TAX STATUS
The following discussion
is general in nature and should not be regarded as an exhaustive presentation of all possible tax ramifications. All shareholders
should consult a qualified tax adviser regarding their investment in the Funds.
The Funds intend to qualify
as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "IRS Code"),
which requires compliance with certain requirements concerning the sources of its income, diversification of its assets, and the
amount and timing of its distributions to shareholders. Such qualification does not involve supervision of management or investment
practices or policies by any government agency or bureau. By so qualifying, the Funds should not be subject to federal income or
excise tax on its net investment income or net capital gain, which are distributed to shareholders in accordance with the applicable
timing requirements. Net investment income and net capital gain of the Funds will be computed in accordance with Section 852 of
the IRS Code.
The Funds intend to distribute
all of its net investment income, any excess of net short-term capital gains over net long-term capital losses, and any excess
of net long-term capital gains over net
short-term capital losses in accordance with
the timing requirements imposed by the IRS Code and therefore should not be required to pay any federal income or excise taxes.
Distributions of net investment income and net capital gain will be made after the end of each fiscal year. Both types of distributions
will be in shares of the Funds unless a shareholder elects to receive cash.
At [ ], the Funds had capital loss carry
forwards for federal income tax purposes available to offset future capital gains as follows:
|
Fund
|
|
Short-Term
|
|
|
Long-Term
|
|
|
Total
|
|
|
Expiration
|
|
Newfound Risk Managed Global Sectors Fund
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
Non-expiring
|
|
Newfound Multi-Asset Income Fund
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
Non-expiring
|
|
Newfound Risk Managed U.S. Sectors Fund
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
$
|
[ ]
|
|
|
|
To
be treated as a regulated investment company under Subchapter M of the IRS Code, the Funds must also (a) derive at least 90% of
its gross income from dividends, interest, payments with respect to securities loans, net income from certain publicly traded partnerships
and gains from the sale or other disposition of securities or foreign currencies, or other income (including, but not limited to,
gains from options, futures or forward contracts) derived with respect to the business of investing in such securities or currencies,
and (b) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the market value of a Fund's assets
is represented by cash, U.S. government securities and securities of other regulated investment companies, and other securities
(for purposes of this calculation, generally limited in respect of any one issuer, to an amount not greater than 5% of the market
value of a Fund's assets and 10% of the outstanding voting securities of such issuer) and (ii) not more than 25% of the value of
its assets is invested in the securities of (other than U.S. government securities or the securities of other regulated investment
companies) any one issuer, two or more issuers which a Fund controls and which are determined to be engaged in the same or similar
trades or businesses, or the securities of certain publicly traded partnerships.
If a Fund fails to qualify
as a regulated investment company under Subchapter M in any fiscal year, it will be treated as a corporation for federal income
tax purposes. As such, a Fund would be required to pay income taxes on its net investment income and net realized capital gains,
if any, at the rates generally applicable to corporations. Shareholders of a Fund generally would not be liable for income tax
on each Fund's net investment income or net realized capital gains in their individual capacities. Distributions to shareholders,
whether from a Fund's net investment income or net realized capital gains, would be treated as taxable dividends to the extent
of current or accumulated earnings and profits of a Fund.
The Funds are subject to
a 4% nondeductible excise tax on certain undistributed amounts of ordinary income and capital gain under a prescribed formula contained
in Section 4982 of the IRS Code. The formula requires payment to shareholders during a calendar year of distributions representing
at least 98% of the Funds’ ordinary income for the calendar year and at least 98.2% of its capital gain net income (i.e.,
the excess of its capital gains over capital losses) realized during the one-year period ending October 31 during such year plus
100% of any income that was neither distributed nor taxed to the Funds during the preceding calendar year. Under ordinary circumstances,
the Funds expect to time its distributions so as to avoid liability for this tax.
The following discussion
of tax consequences is for the general information of shareholders that are subject to tax. Shareholders that are IRAs or other
qualified retirement plans are exempt from income taxation under the IRS Code.
Distributions of taxable
net investment income and the excess of net short-term capital gain over net long-term capital loss are generally taxable to shareholders
as ordinary income, unless such distributions are attributable to “qualified dividend income” eligible for the reduced
federal income tax rates applicable to long-term capital gains, provided certain holding period and other requirements are satisfied.
Distributions of net capital
gain ("capital gain dividends") generally are taxable to shareholders as long-term capital gain, regardless of the length
of time the shares of the Funds have been held by such shareholders.
Certain
U.S. shareholders, including individuals and estates and trusts, are subject to an additional 3.8% Medicare tax on all or a portion
of their “net investment income,” which should include dividends from the Funds and net gains from the disposition
of shares of the Funds. U.S. shareholders are urged to consult their own tax advisers regarding the implications of the additional
Medicare tax resulting from an investment in the Funds.
A
redemption of Fund shares by a shareholder results in the recognition of taxable gain or loss in an amount equal to the difference
between the amount realized and the shareholder's tax basis in his or her Fund shares. Such gain or loss is treated as a capital
gain or loss if the shares are held as capital assets. The gain or loss is generally be treated as long-term capital gain or loss
if the shares were held for more than one year and if not held for such period, as short-term capital gain or loss. However, any
loss realized upon the redemption of shares within six months from the date of their purchase is treated as a long-term capital
loss to the extent of any amounts treated as capital gain dividends during such six-month period. All or a portion of any loss
realized upon the redemption of shares may be disallowed to the extent shares are purchased (including shares acquired by means
of reinvested dividends) within 30 days before or after such redemption.
Distributions of taxable
net investment income and net capital gain are taxable as described above, whether received in additional shares or cash. Shareholders
electing to receive distributions in the form of additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share on the reinvestment date.
All distributions of taxable
net investment income and net capital gain, whether received in shares or in cash, must be reported by each taxable shareholder
on his or her federal income tax return. Dividends or distributions declared in October, November or December as of a record date
in such a month, if any, is deemed to have been received by shareholders on December 31, if paid during January of the following
year. Redemptions of shares may result in tax consequences (gain or loss) to the shareholder and is subject to these reporting
requirements.
Under the IRS Code, the
Funds are required to report to the Internal Revenue Service all distributions of income and capital gains as well as gross proceeds
from the redemption or exchange of Fund shares, except in the case of certain exempt shareholders. Under the backup withholding
provisions of Section 3406 of the IRS Code, distributions of net investment income and net capital gain and proceeds from the redemption
or exchange of the shares of a regulated investment company may be subject to withholding of federal income tax in the case of
non-exempt shareholders who fail to furnish the investment company with their taxpayer identification numbers and with required
certifications regarding their status under
the federal income tax law, or if a Fund is notified by the IRS or a broker that withholding is required due to an incorrect TIN
or a previous failure to report taxable interest or dividends. If the withholding provisions are applicable, any such distributions
and proceeds, whether taken in cash or reinvested in additional shares, will be reduced by the amounts required to be withheld.
Payments to a shareholder
that is either a foreign financial institution (“FFI”) or a non-financial foreign entity (“NFFE”) within
the meaning of the Foreign Account Tax Compliance Act (“FATCA”) may be subject to a generally nonrefundable 30% withholding
tax on: (a) income dividends paid by a Fund after June 30, 2014 and (b) certain capital gain distributions and the proceeds arising
from the sale of Fund shares paid by the Fund after December 31, 2016. FATCA withholding tax generally can be avoided: (a) by an
FFI, subject to any applicable intergovernmental agreement or other exemption, if it enters into a valid agreement with the IRS
to, among other requirements, report required information about certain direct and indirect ownership of foreign financial accounts
held by U.S. persons with the FFI and (b) by an NFFE, if it: (i) certifies that it has no substantial U.S. persons as owners or
(ii) if it does have such owners, reports information relating to them. A Fund may disclose the information that it receives from
its shareholders to the IRS, non-U.S. taxing authorities or other parties as necessary to comply with FATCA. Withholding also may
be required if a foreign entity that is a shareholder of a Fund fails to provide the Fund with appropriate certifications or other
documentation concerning its status under FATCA.
Options, Futures, Forward
Contracts and Swap Agreements
To the extent such investments
are permissible for a Fund, a Fund's transactions in options, futures contracts, hedging transactions, forward contracts, straddles
and foreign currencies are subject to special tax rules (including mark-to-market, constructive sale, straddle, wash sale and short
sale rules), the effect of which may be to accelerate income to the Fund, defer losses to the Fund, cause adjustments in the holding
periods of the Fund's securities, convert long-term capital gains into short-term capital gains and convert short-term capital
losses into long-term capital losses. These rules could therefore affect the amount, timing and character of distributions to shareholders.
To the extent such investments
are permissible, certain of each Fund's hedging activities (including its transactions, if any, in foreign currencies or foreign
currency-denominated instruments) are likely to produce a difference between its book income and its taxable income. If each Fund’s
book income exceeds its taxable income, the distribution (if any) of such excess book income is be treated as (i) a dividend to
the extent of the Funds’ remaining earnings and profits (including earnings and profits arising from tax-exempt income),
(ii) thereafter, as a return of capital to the extent of the recipient's basis in the shares, and (iii) thereafter, as gain from
the sale or exchange of a capital asset. If the Funds’ book income is less than taxable income, the Funds could be required
to make distributions exceeding book income to qualify as a regular investment company that is accorded special tax treatment.
Passive Foreign Investment
Companies
Investment by a Fund in
certain "passive foreign investment companies" ("PFICs") could subject a Fund to a U.S. federal income tax
(including interest charges) on distributions received from the company or on proceeds received from the disposition of shares
in the company, which tax cannot be eliminated by making distributions to Fund shareholders. However, a Fund may elect to treat
a PFIC as a "qualified electing fund" ("QEF"), in which case a Fund will be required to include its share of
the
company's income and net capital gains annually,
regardless of whether they receives any distribution from the company.
Each Fund also may make
an election to mark the gains (and to a limited extent losses) in such holdings "to the market" as though it had sold
and repurchased its holdings in those PFICs on the last day of the Fund's taxable year. Such gains and losses are treated as ordinary
income and loss. The QEF and mark-to-market elections may accelerate the recognition of income (without the receipt of cash) and
increase the amount required to be distributed for a Fund to avoid taxation. Making either of these elections therefore may require
a Fund to liquidate other investments (including when it is not advantageous to do so) to meet its distribution requirement, which
also may accelerate the recognition of gain and affect a Fund's total return.
Foreign Currency Transactions
The Funds’ transactions in foreign currencies,
foreign currency-denominated debt securities and certain foreign currency options, futures contracts and forward contracts (and
similar instruments) may give rise to ordinary income or loss to the extent such income or loss results from fluctuations in the
value of the foreign currency concerned.
Other Regulated Investment Companies
Generally, the character of the income or capital
gains that the Funds receive from another investment company passes through to the Funds’ shareholders as long as the Funds
and the other investment company each qualify as a regulated investment company. However, to the extent that another investment
company that qualifies as a regulated investment company realizes net losses on its investments for a given taxable year, the Funds
are not able to recognize its share of those losses until it disposes of shares of such investment company. Moreover, even when
the Funds do make such a disposition, a portion of its loss may be recognized as a long-term capital loss, which are not treated
as favorably for federal income tax purposes as an ordinary deduction. In particular, the Funds are not able to offset any capital
losses from its dispositions of shares of other investment companies against its ordinary income. As a result of the foregoing
rules, and certain other special rules, it is possible that the amounts of net investment income and net capital gains that the
Funds are required to distribute to shareholders are greater than such amounts would have been had the Funds invested directly
in the securities held by the investment companies in which it invests, rather than investing in shares of the investment companies.
For similar reasons, the character of distributions from the Funds (e.g., long-term capital gain, qualified dividend income, etc.)
will not necessarily be the same as it would have been had the Funds invested directly in the securities held by the investment
companies in which it invests.
Foreign Taxation
Income received by the Funds
from sources within foreign countries may be subject to withholding and other taxes imposed by such countries. Tax treaties and
conventions between certain countries and the U.S. may reduce or eliminate such taxes. If more than 50% of the value of the Funds’
total assets at the close of its taxable year consists of securities of foreign corporations, the Funds may be able to elect to
"pass through" to the Funds’ shareholders the amount of eligible foreign income and similar taxes paid by the Funds.
If this election is made, a shareholder generally subject to tax is required to include in gross income (in addition to taxable
dividends actually received) his or her pro rata share of the foreign taxes paid by the Funds, and may be entitled either to deduct
(as an itemized
deduction) his or her pro rata share of foreign
taxes in computing his or her taxable income or to use it as a foreign tax credit against his or her U.S. federal income tax liability,
subject to certain limitations. In particular, a shareholder must hold his or her shares (without protection from risk of loss)
on the ex-dividend date and for at least 15 more days during the 30-day period surrounding the ex-dividend date to be eligible
to claim a foreign tax credit with respect to a gain dividend. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Each shareholder is notified within 60 days after the close of the Funds’ taxable year whether
the foreign taxes paid by the Funds "pass through" for that year.
Generally, a credit for
foreign taxes is subject to the limitation that it may not exceed the shareholder's U.S. tax attributable to his or her total foreign
source taxable income. For this purpose, if the pass-through election is made, the source of the Funds’ income flows through
to shareholders of the Funds. With respect to the Funds, gains from the sale of securities will be treated as derived from U.S.
sources and certain currency fluctuation gains, including fluctuation gains from foreign currency-denominated debt securities,
receivables and payables are treated as ordinary income derived from U.S. sources. The limitation on the foreign tax credit is
applied separately to foreign source passive income, and to certain other types of income. A shareholder may be unable to claim
a credit for the full amount of his or her proportionate share of the foreign taxes paid by the Funds. The foreign tax credit can
be used to offset only 90% of the revised alternative minimum tax imposed on corporations and individuals and foreign taxes generally
are not deductible in computing alternative minimum taxable income.
Original Issue Discount
and Pay-In-Kind Securities
Current federal tax law
requires the holder of a U.S. Treasury or other fixed income zero coupon security to accrue as income each year a portion of the
discount at which the security was purchased, even though the holder receives no interest payment in cash on the security during
the year. In addition, pay-in-kind securities gives rise to income which is required to be distributed and is taxable even though
the Funds holding the security receives no interest payment in cash on the security during the year.
Some of the debt securities
(with a fixed maturity date of more than one year from the date of issuance) that may be acquired by the Funds may be treated as
debt securities that are issued originally at a discount. Generally, the amount of the original issue discount ("OID")
is treated as interest income and is included in income over the term of the debt security, even though payment of that amount
is not received until a later time, usually when the debt security matures. A portion of the OID includable in income with respect
to certain high-yield corporate debt securities (including certain pay-in-kind securities) may be treated as a dividend for U.S.
federal income tax purposes.
Some of the debt securities
(with a fixed maturity date of more than one year from the date of issuance) that may be acquired by the Funds in the secondary
market may be treated as having market discount. Generally, any gain recognized on the disposition of, and any partial payment
of principal on, a debt security having market discount is treated as ordinary income to the extent the gain, or principal payment,
does not exceed the "accrued market discount" on such debt security. Market discount generally accrues in equal daily
installments. The Funds may make one or more of the elections applicable to debt securities having market discount, which could
affect the character and timing of recognition of income.
Some debt securities (with
a fixed maturity date of one year or less from the date of issuance) that may be acquired by the Funds may be treated as having
acquisition discount, or OID in the case
of certain types of debt securities. Generally,
the Funds are required to include the acquisition discount, or OID, in income over the term of the debt security, even though payment
of that amount is not received until a later time, usually when the debt security matures. The Funds may make one or more of the
elections applicable to debt securities having acquisition discount, or OID, which could affect the character and timing of recognition
of income.
If the Funds hold the foregoing
kinds of securities, they may be required to pay out as an income distribution each year an amount, which is greater than the total
amount of cash interest the Funds actually received. Such distributions may be made from the cash assets of the Funds or by liquidation
of portfolio securities, if necessary (including when it is not advantageous to do so). The Funds may realize gains or losses from
such liquidations. In the event the Funds realize net capital gains from such transactions, its shareholders may receive a larger
capital gain distribution, if any, than they would in the absence of such transactions.
Shareholders of the Funds
may be subject to state and local taxes on distributions received from the Funds and on redemptions of the Funds’ shares.
A brief explanation of the
form and character of the distribution accompany each distribution. After the end of each year the Funds issue to each shareholder
a statement of the federal income tax status of all distributions.
Shareholders should consult
their tax advisers about the application of federal, state and local and foreign tax law in light of their particular situation.
ANTI-MONEY LAUNDERING PROGRAM
The Trust has established
an Anti-Money Laundering Compliance Program (the "Program") as required by the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA PATRIOT Act"). To ensure compliance
with this law, the Trust's Program provides for the development of internal practices, procedures and controls, designation of
anti-money laundering compliance officers, an ongoing training program and an independent audit function to determine the effectiveness
of the Program. The Trust's secretary serves as its Anti-Money Laundering Compliance Officer.
Procedures to implement
the Program include, but are not limited to, determining that the Funds’ Distributor and Transfer Agent have established
proper anti-money laundering procedures, reporting suspicious and/or fraudulent activity and providing a complete and thorough
review of all new opening account applications. The Trust will not transact business with any person or entity whose identity cannot
be adequately verified under the provisions of the USA PATRIOT Act.
As
a result of the Program, the Trust may be required to "freeze" the account of a shareholder if the shareholder appears
to be involved in suspicious activity or if certain account information matches information on government lists of known terrorists
or other suspicious persons, or the Trust may be required to transfer the account or proceeds of the account to a governmental
agency.
CONTROL PERSONS AND
PRINCIPAL HOLDERS OF SECURITIES
A principal shareholder
is any person who owns of record or beneficially 5% or more of the outstanding shares of a Fund. A control person is one who owns
beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence
of control. Persons controlling the Funds can determine the outcome of any proposal submitted to the shareholders for approval,
including changes to the Funds’ fundamental policies or the terms of the Advisory Agreement. As of [ ], the following shareholders
of record owned 5% or more of the outstanding shares of the Funds:
[ ]
SP Investment Associates is a limited
liability company formed in Delaware whose primary offices are based in Massachusetts and may be deemed to control the Newfound
Risk Managed Global Sectors Fund. The Adviser has an agreement with SP Investment Associates ("Investor") whereby the
Investor agreed to invest at least $25,000,000 in the Newfound Risk Managed Global Sectors Fund. The Investor agreed that its shares
of the Newfound Risk Managed Global Sectors Fund would not be redeemed prior to June 30, 2017 unless certain conditions were met
(which did not occur). As such, the Investor, who currently owns greater than 50% of the shares of the Newfound Risk Managed Global
Sectors Fund, may redeem some or all of its shares in the Newfound Risk Managed Global Sectors Fund at any time. The Investor agreed
to provide consulting services to the Adviser and assistance in gaining platform access with certain firms for the Adviser’s
advised mutual funds and other investment products. In consideration for the mutual covenants of the parties, the Adviser agreed
to pay the Investor 10 basis points per year (in monthly installments) based on the amount of the assets invested in the Newfound
Risk Managed Global Sectors Fund. Such payments are made by the Adviser out of the Adviser's legitimate profits.
[ ]
Management Ownership Information.
As of [ ], the Trustees and officers of the
Trust, as a group, beneficially owned less than 1% of the outstanding shares of each Fund.
MANAGEMENT
The business of the Trust
is managed under the direction of the Board in accordance with the Agreement and Declaration of Trust and the Trust's By-laws (the
"Governing Documents"), which have been filed with the SEC and are available upon request. The Board consists of five
individuals, all of whom are not "interested persons" (as defined under the 1940 Act) of the Trust and the Adviser ("Independent
Trustees"). Pursuant to the Governing Documents, the Trustees shall elect officers including a President, a Secretary, a Treasurer,
a Principal Executive Officer and a Principal Accounting Officer. The Board retains the power to conduct, operate and carry on
the business of the Trust and has the power to incur and pay any expenses, which, in the opinion of the Board, are necessary or
incidental to carry out any of the Trust's purposes. The Trustees, officers, employees and agents of the Trust, when acting in
such capacities, shall not be subject to any personal liability except for his or her own bad faith, willful misfeasance, gross
negligence or reckless disregard of his or her duties.
Board Leadership Structure.
The Board is led by John V. Palancia, who has served as the Chairman of the Board since May 2014. The Board has not appointed a
Lead Independent Trustee because all Trustees are Independent Trustees. Under the Trust's Agreement and Declaration of Trust
and By-Laws, the Chairman of the Board is responsible
for (a) presiding at Board meetings, (b) calling special meetings on an as-needed basis, and (c) executing and administering Trust
policies, including (i) setting the agendas for Board meetings and (ii) providing information to Board members in advance of each
Board meeting and between Board meetings. Generally, the Trust believes it best to have a non-executive Chairman of the Board,
who together with the President (principal executive officer), are seen by shareholders, business partners and other stakeholders
as providing strong leadership. The Trust believes that its Chairman, the independent chair of the Audit Committee, and, as an
entity, the full Board of Trustees, provide effective leadership that is in the best interests of the Trust, its funds and each
shareholder.
Board Risk Oversight.
The Board is comprised entirely of Independent Trustees with an Audit Committee with a separate chair. The Board is responsible
for overseeing risk management, and the full Board regularly engages in discussions of risk management and receives compliance
reports that inform its oversight of risk management from its Chief Compliance Officer at quarterly meetings and on an ad hoc basis,
when and if necessary. The Audit Committee considers financial and reporting the risk within its area of responsibilities. Generally,
the Board believes that its oversight of material risks is adequately maintained through the compliance-reporting chain where the
Chief Compliance Officer is the primary recipient and communicator of such risk-related information.
Trustee Qualifications.
Generally, the Funds believe
that each Trustee is competent to serve because of his or her individual overall merits including: (i) experience, (ii) qualifications,
(iii) attributes and (iv) skills.
James Jensen has over 40
years of business experience in a wide range of industries including the financial services industry. His experience includes over
25 years of mutual fund board experience with service as chairman of the Audit Committee, chairman of the Nominating and Governance
Committee and, for the past eight years, as Chairman of the Board of Wasatch Funds. Since April 2008, Mr. Jensen has served as
the Chief Executive Officer of Clearwater Law & Governance Group, where he devotes himself full time to corporate law practice,
board governance consulting for operating companies and private investing. In May 2014, Mr. Jensen and his firm conducted the 11th
Green River Conference on Corporate Governance for lawyers, accountants, directors and service providers. In 2001, Mr. Jensen co-founded
Intelisum, Inc., a company pursuing computer and measurement technology and products, and was Chairman of the Board from 2001 to
2008. From 1986 to 2004, Mr. Jensen held key positions with NPS Pharmaceuticals, Inc., including Vice President, Corporate Development,
Legal Affairs and General Counsel and Secretary. In addition to his business experience, Mr. Jensen was Chairman of the Board of
Agricon Global Corporation, formerly BayHill Capital Corporation from 2008 to 2014 and was a Director of the University of Utah
Research Foundation from 2000 to 2018. Mr. Jensen was the founder and first President of the MountainWest Venture Group (now "MountainWest
Capital Network") in 1983. Mr. Jensen is a member of the National Association of Corporate Directors. Mr. Jensen graduated
with a Bachelor of Arts degree from the University of Utah in 1967 and received degrees of Juris Doctor and Master of Business
Administration from Columbia University in 1971.
Patricia Luscombe,
CFA, has more than 25 years in financial advisory and valuation services. She has delivered a broad range of corporate finance
advice including fairness opinions and valuations. Ms. Luscombe joined Lincoln International in 2007 as a Managing Director and
co-head of Lincoln's Valuations & Opinions Group. In this position, she assists regulated investment funds,
business development companies,
private equity funds and hedge funds in the valuation of illiquid securities for fair value accounting purposes. Ms. Luscombe's
clients range from closely-held businesses to large, publicly-traded companies. Previously, Ms. Luscombe spent 16 years with Duff
& Phelps Corporation, as a Managing Director in the firm's valuation and financial advisory business. Prior to joining Duff
& Phelps Corporation, Ms. Luscombe was an Associate at Smith Barney, a division of Citigroup Capital Markets, Inc., where she
managed a variety of financial transactions, including mergers and acquisitions, leveraged buyouts, and equity and debt financings.
Ms. Luscombe is a member of the Chicago Chapter of the Association for Corporate Growth, the Chartered Financial Analyst Society
of Chicago and former president of the Chicago Finance Exchange. Ms. Luscombe holds a Bachelor of Arts degree in economics from
Stanford University, a Master's degree in economics from the University of Chicago and a Master of Business Administration degree
from the University of Chicago Booth School of Business. In addition, Ms. Luscombe is licensed under the Series 24, 79 and 63 of
FINRA.
John V. Palancia has over
40 years of business experience in the financial services industry including serving as the Director of Global Futures Operations
for Merrill Lynch, Pierce, Fenner & Smith, Inc. (“Merrill Lynch”) Mr. Palancia possesses an in depth understanding
of broker-dealer operations from having served in various management capacities and has held industry registrations in both securities
and futures. Based on his service at Merrill Lynch, he also possesses a strong understanding of risk management, balance sheet
analysis, compliance and the regulatory framework under which regulated financial entities must operate. Additionally, he is well
versed in the regulatory framework under which investment companies must operate based on his service as a member of three other
mutual fund boards. This practical and extensive experience in the securities industry provides valuable insight into fund operations
and enhances his ability to effectively serve as chairman of the Board. Mr. Palancia holds a Bachelor of Science degree in Economics.
Mark H. Taylor has over
30 years of academic and professional experience in the accounting and auditing fields which makes him particularly qualified to
serve as the Trust’s Audit Committee chair. He holds PhD, Master’s and Bachelor’s degrees in Accounting and is
a licensed Certified Public Accountant. Dr. Taylor chairs the Department of Accountancy in the Weatherhead School of Management
at Case Western Reserve University and is the Andrew D. Braden Professor of Accounting and Auditing. Since August 2017, Dr. Taylor
has been serving a three-year term as Vice President-Finance on the Board of Directors of the American Accounting Association (AAA).
From 2012 to 2015, he served a 3-year term as President of the Auditing Section of the AAA (Vice-President 2012-2013, President
2013-2014, and Past President (2014-2015). Dr. Taylor serves as a member of two other mutual fund boards within the Northern Lights
Fund Complex, and completed a fellowship in the Professional Practice Group of the Office of the Chief Accountant at the headquarters
of the United States Securities Exchange Commission. He also served a three-year term on the AICPA’s Auditing Standards Board
(2010-2012). Dr. Taylor is a member of two research teams that recently received grants from the Center for Audit Quality to study
how auditors manage the process of auditing fair value measurements in financial statements and how accounting firms’ tone-at-the
top messaging impacts audit performance. Dr. Taylor teaches corporate governance and accounting policy as well as auditing and
assurance services and possesses a strong understanding of the regulatory framework under which investment companies operate.
Jeffery D. Young has 40
years of business management experience, including in the transportation industry and operations and information technologies.
He is currently Co-owner and Vice President of the Latin America Agriculture Development Corporation, an agribusiness exporting
fruit to the United States and other Central American countries. He has served as Assistant Vice President of
Transportation Systems at Union Pacific Railroad
Company, where he was responsible for the development and implementation of large scale command and control systems that support
railroad operations and safety. In this position, Mr. Young was heavily involved in the regulatory compliance of safety and mission
critical systems. Mr. Young also served as Chairman of the Association of American Railroads Policy Committee and represented both
Union Pacific Railroad and the railroad industry in safety and regulatory hearings with the National Transportation Safety Board
and the Federal Railroad Administration in Washington, DC. Mr. Young was a member of the Board of Directors of PS Technologies,
a Union Pacific affiliate serving as a technology supplier to the railroad industry. His practical business experience and understanding
of regulatory compliance provides a different perspective that will bring diversity to Board deliberations.
Trustees and Officers.
The Trustees and officers of the Trust, together with information as to their principal business occupations during the past five
years and other information, are shown below. Unless otherwise noted, the address of each Trustee and officer is 4221 North 203rd
Street, Suite 100, Elkhorn, Nebraska 68022.
|
Independent Trustees
|
|
Name, Address, Year of Birth
|
Position(s) Held with Registrant
|
Length of Service and Term
|
Principal Occupation(s) During Past 5 Years
|
Number of Funds Overseen In The Fund Complex*
|
Other Directorships Held During Past 5 Years**
|
|
James U.
Jensen
1944
|
Trustee
|
Since February 2012, Indefinite
|
Chief Executive Officer, ClearWater Law & Governance Group, LLC (an operating board governance consulting company) (since 2004).
|
3
|
Northern Lights Fund Trust III (for series not affiliated with the Funds since 2012); Wasatch Funds Trust, (since 1986); University of Utah Research Foundation (April 2000 to May 2018);
|
|
Patricia
Luscombe
1961
|
Trustee
|
Since January 2015, Indefinite
|
Managing Director of the Valuations & Opinions Group, Lincoln International LLC (since August 2007).
|
3
|
Northern Lights Fund Trust III (for series not affiliated with the Funds since 2015); Monetta Mutual Funds (since November 2015).
|
|
John V.
Palancia
1954
|
Trustee, Chairman
|
Trustee, since February 2012, Indefinite; Chairman of the Board since May 2014
|
Retired (since 2011).
|
3
|
Northern Lights Fund Trust III (for series not affiliated with the Funds since 2012); Northern Lights Fund Trust (since 2011); Northern Lights Variable Trust (since 2011); Alternative Strategies Fund (since 2012).
|
|
Mark H.
Taylor
1964
|
Trustee, Chairman of the Audit Committee
|
Since February 2012, Indefinite
|
Chair, Department of Accountancy and Andrew D. Braden Professor of Accounting and Auditing, Weatherhead School of Management, Case Western Reserve University (since 2009); Vice President-Finance, American Accounting Association (2017-2020); President, Auditing Section of the American Accounting Association (2012-15).
|
3
|
Northern Lights Fund Trust III (for series not affiliated with the Funds since 2012); Northern Lights Fund Trust (since 2007); Northern Lights Variable Trust (since 2007); Alternative Strategies Fund (since June 2010).
|
|
Jeffery D. Young
1956
|
Trustee
|
Since January 2015, Indefinite
|
Co-owner and Vice President, Latin America Agriculture Development Corp. (since May 2015); President, Celeritas Rail Consulting (since June 2014).
|
3
|
Northern Lights Fund Trust III (for series not affiliated with the Funds since 2015).
|
* As of [ ], the Trust was comprised of [
] active portfolios managed by [ ] unaffiliated investment advisers. The term “Fund Complex” applies only to the Funds.
The Funds do not hold themselves out as related to any other series within the Trust for investment purposes, nor do they share
the same investment adviser with any other series.
** Only includes directorships held within the
past 5 years in a company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or
subject to the requirements of Section 15(d) of the Securities Exchange Act of 1934, or any company registered as an investment
company under the 1940 Act.
Officers of the Trust
|
Name, Address, Year of Birth
|
Position(s) Held with Registrant
|
Length of Service and Term
|
Principal Occupation(s) During Past 5 Years
|
|
Richard Malinowski
80 Arkay Drive,
Hauppauge, NY 11788
1983
|
President
|
Since
August 2017, indefinite
|
Senior Vice President (since 2017), Vice President and Counsel (2015-2016) and Assistant Vice President (2012–2015), Gemini Fund Services, LLC.
|
|
Brian Curley
80 Arkay Drive,
Hauppauge, NY 11788
1970
|
Treasurer
|
Since
February 2013, indefinite
|
Vice President, Gemini Fund Services, LLC (since 2015), Assistant Vice President, Gemini Fund Services, LLC (2012-2014).
|
|
Eric Kane
80 Arkay Drive,
Hauppauge, NY 11788
1981
|
Secretary
|
Since
November 2013, indefinite
|
Vice President and Counsel, Gemini Fund Services, LLC (since 2017), Assistant Vice President, Gemini Fund Services, LLC (2014- 2017), Staff Attorney, Gemini Fund Services, LLC (2013-2014).
|
|
William Kimme
1962
|
Chief Compliance Officer
|
Since
February 2012, indefinite
|
Senior Compliance Officer of Northern Lights Compliance Services, LLC (since 2011).
|
Audit Committee.
The Board has an Audit Committee that consists solely of Trustees who are not "interested persons" of the Trust within
the meaning of the 1940 Act. The Audit Committee's responsibilities include: (i) recommending to the Board the selection, retention
or termination of the Trust's independent auditors; (ii) reviewing with the independent auditors the scope, performance and anticipated
cost of their audit; (iii) discussing with the independent auditors certain matters relating to the Trust's financial statements,
including any adjustment to such financial statements recommended by such independent auditors, or any other results of any audit;
(iv) reviewing on a periodic basis a formal written statement from the independent auditors with respect to their independence,
discussing with the independent auditors any relationships or services disclosed in the statement that may impact the objectivity
and independence of the Trust's independent auditors and recommending that the Board take appropriate action in response thereto
to satisfy itself of the auditor's independence; and (v) considering the comments of the independent auditors and management's
responses thereto with respect to the quality and adequacy of the Trust's accounting and financial reporting policies and practices
and internal controls. The Audit Committee operates pursuant to an Audit Committee Charter. Dr. Taylor is Chairman of the Audit
Committee. During the past fiscal year, the Audit Committee held four meetings.
Compensation of Directors.
Effective April 1, 2019, each Trustee who is not affiliated with the Trust or an investment adviser to any series of the Trust
will receive a quarterly fee of $21,500, allocated among each of the various portfolios comprising the Trust, for his or her attendance
at the regularly scheduled meetings of the Board of Trustees, to be paid in advance of each calendar quarter, as well as reimbursement
for any reasonable expenses incurred. Effective January 1, 2017, in addition to the quarterly fees and reimbursements, the Chairman
of the Board receives a quarterly fee of $5,000, and the Audit Committee Chairman receives a quarterly fee of $3,750.
Additionally, in the event
an in-person meeting of the Board of Trustees other than its regularly scheduled meetings (a “Special Meeting”) is
required, each Independent Trustee will receive a fee of $2,500 per Special Meeting, as well as reimbursement for any reasonable
expenses incurred, to be paid by the relevant series of the Trust or its investment adviser depending on the circumstances necessitating
the Special Meeting. None of the executive officers receive compensation from the Trust.
The table below details the amount of compensation
the Trustees received from the Funds during the fiscal year ended [ ]. The Trust does not have a bonus, profit sharing, pension
or retirement plan.
|
Name and Position
|
Newfound Risk Managed Global Sectors Fund
|
Newfound Multi- Asset Income Fund
|
Newfound Risk Managed U.S. Sectors Fund
|
Pension or Retirement Benefits Accrued as Part of Fund Expenses
|
Estimated Annual Benefits Upon Retirement
|
Total Compensation From Fund Complex* Paid to Trustees
|
|
James U. Jensen
|
$[ ]
|
$[ ]
|
$[ ]
|
None
|
None
|
$[ ]
|
|
Patricia Luscombe
|
$[ ]
|
$[ ]
|
$[ ]
|
None
|
None
|
$[ ]
|
|
John V. Palancia
|
$[ ]
|
$[ ]
|
$[ ]
|
None
|
None
|
$[ ]
|
|
Mark H. Taylor
|
$[ ]
|
$[ ]
|
$[ ]
|
None
|
None
|
$[ ]
|
|
Jeffery D. Young
|
$[ ]
|
$[ ]
|
$[ ]
|
None
|
None
|
$[ ]
|
* There are currently numerous series comprising
the Trust. The term “Fund Complex” refers only to the Funds, and not to any other series of the Trust. For the fiscal
year ended [ ], the aggregate independent Trustees’ fees paid by the entire Trust were $[ ].
Trustees' Ownership of Shares in the Funds.
As of [ ], the Trustees beneficially owned the following amounts in the Funds:
|
Name of Trustee
|
Dollar Range of Equity Securities in the Funds
|
Aggregate Dollar Range of Equity Securities in All Registered Investment Companies Overseen by Trustee in Family of Investment Companies*
|
|
James U. Jensen
|
None
|
$[ ]
|
|
Patricia Luscombe
|
None
|
$[ ]
|
|
John V. Palancia
|
None
|
$[ ]
|
|
Mark H. Taylor
|
None
|
$[ ]
|
|
Jeffery D. Young
|
None
|
$[ ]
|
FINANCIAL STATEMENTS
The financial
statements and report of the independent registered public accounting firm required to be included in this SAI are hereby incorporated
by reference to the Annual Report for the Funds for the period ended [ ], are incorporated by reference. You can obtain the Semi-Annual
Report and the Annual Report without charge by calling the Funds at [ ].
BOND RATINGS
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS
Aaa.
Bonds rated Aaa are judged to be the best quality. They carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally
strong position of these issues.
Aa.
Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa securities.
A.
Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility
to impairment sometime in the future.
Baa.
Bonds which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may
be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba.
Bonds which are rated Ba are judged to have speculative elements; their future payments cannot be considered as well assured. Often
the protection of interest and principal may be very moderate and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this class.
B.
Bonds which are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments
or of maintenance of other terms of the contract over any long period of time may be small.
Moody's
applies the numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through B. The modifier 1 indicates that
the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating category.
DESCRIPTION OF COMMERCIAL PAPER RATINGS
Commercial
paper rated Prime-l by Moody's are judged by Moody's to be of the best quality. Their short-term debt obligations carry the smallest
degree of investment risk. Margins of support for current indebtedness are large or stable with cash flow and asset protection
well insured. Current liquidity provides ample coverage of near-term liabilities and unused alternative financing arrangements
are
generally available. While protective elements
may change over the intermediate or longer term, such changes are most unlikely to impair the fundamentally strong position of
short-term obligations.
Issuers
(or related supporting institutions) rated Prime-2 have a strong capacity for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Commercial
paper rated A by S&P have the following characteristics. Liquidity ratios are better than industry average. Long-term debt
rating is A or better. The issuer has access to at least two additional channels of borrowing. Basic earnings and cash flow are
in an upward trend. Typically, the issuer is a strong company in a well-established industry and has superior management. Issuers
rated A are further refined by use of numbers 1, 2, and 3 to denote relative strength within this highest classification. Those
issuers rated A-1 that are determined by S&P to possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
Fitch's
commercial paper ratings represent Fitch's assessment of the issuer's ability to meet its obligations in a timely manner. The assessment
places emphasis on the existence of liquidity. Ratings range from F-1+ which represents exceptionally strong credit quality to
F-4 which represents weak credit quality.
Duff
& Phelps' short-term ratings apply to all obligations with maturities of under one year, including commercial paper, the uninsured
portion of certificates of deposit, unsecured bank loans, master notes, bankers acceptances, irrevocable letters of credit and
current maturities of long-term debt. Emphasis is placed on liquidity. Ratings range from Duff 1+ for the highest quality to Duff
5 for the lowest, issuers in default. Issues rated Duff 1+ are regarded as having the highest certainty of timely payment. Issues
rated Duff 1 are regarded as having very high certainty of timely payment.
PROXY VOTING POLICIES AND PROCEDURES
NEWFOUND RESEARCH LLC
Voting client proxies
Policy
Newfound, as a matter of policy and as a fiduciary,
has responsibility for voting proxies for portfolio securities consistent with the best economic interests of the funds, portfolios
and clients it advises. Our firm maintains written policies and procedures as to the handling, research, voting and reporting of
proxy voting and makes appropriate disclosures about our firm’s proxy policies and practices. Our policy and practice includes
the responsibility to monitor corporate actions, receive and vote client proxies and disclose any potential conflicts of interest
as well as making information available to clients about the voting of proxies for their portfolio securities and maintaining relevant
and required records.
Background
Proxy voting is an important right of shareholders
and reasonable care and diligence must be undertaken to ensure that such rights are properly and timely exercised.
Investment advisers registered with the SEC,
and which exercise voting authority with respect to client securities, are required by Rule 206(4)-6 of the Advisers Act to (a)
adopt and implement written policies and procedures that are reasonably designed to ensure that client securities are voted in
the best interests of clients, which must include how an adviser addresses material conflicts that may arise between an adviser's
interests and those of its funds, portfolios and clients; (b) to disclose to funds, portfolios and clients how they may obtain
information from the adviser with respect to the voting of proxies for their securities; (c) to describe to clients a summary of
its proxy voting policies and procedures and, upon request, furnish a copy to its clients; and (d) maintain certain records relating
to the adviser's proxy voting activities when the adviser does have proxy voting authority.
Responsibility
Newfound’s Chief Compliance Officer has
the responsibility for the implementation and monitoring of our proxy voting policy, practices, disclosures and record keeping,
including outlining our voting guidelines in our procedures.
Procedure
Newfound has adopted procedures to implement
the firm’s policy and reviews to monitor and insure the firm’s policy is observed, implemented properly and amended
or updated, as appropriate, which include the following:
Voting Procedures
I.
INTRODUCTION
Newfound has adopted proxy voting policies and
procedures as required by Rule 206(4)-6 of the Investment Advisers Act of 1940.
II.
GLOSSARY OF TERMS
Non-Routine Proxy Proposals shall mean:
|
|
·
|
Proxy proposals that are to be considered
on a case-by-case basis,
|
|
|
·
|
Proxy proposals that Advisor generally
abstains from voting on, and
|
|
|
·
|
Proxy proposals that are not addressed
by the Principles and Guidelines section of the Proxy Voting Policy and Procedures.
|
The Proxy Manager shall be our Chief Executive
Officer.
The Proxy Committee shall be comprised of the
following person(s):
|
|
1)
|
Our Chief Executive Officer
|
|
|
2)
|
Our Chief Investment Officer
|
|
|
3)
|
Our Managing Director (portfolio manager)
|
A quorum of the Proxy Committee shall be comprised
of a majority of the members of the Proxy Committee.
Routine Proxy Proposals shall mean proxy proposals
that the Proxy Manager shall cast either yes or no votes in accordance with the Principles and Guidelines noted below.
III.
PRINCIPLES AND GUIDELINES
|
|
A.
|
Principles. Newfound’s primary purpose
and fiduciary responsibility is to maximize shareholder value, which is defined as share price and dividend appreciation.
|
Newfound will vote proxies in the best
interests of our funds, portfolios and clients and will generally vote for, against, consider on a case-by-case basis, or abstain
from voting as indicated below. Because of the extenuating circumstances associated with specific proxy issues, Newfound’s
votes may differ from time to time from the indications noted. In addition, the list may not include all proxies on which Newfound
votes. Newfound will also act, in our best judgment, on behalf of our funds, portfolios and clients on certain corporate actions
that impact shareholder value, such as tender offers and bankruptcy proceedings.
With respect to clients invested in
Newfound’s investment strategies through separately managed accounts; Newfound’s agreements with such clients state
that decisions on voting of proxies will be made by the clients unless a client directs Newfound in writing to vote such proxies.
If a client so requests Newfound to exercise voting rights on the client’s behalf, then Newfound shall be permitted, but
not required to take any action with respect to the voting of the proxies. In such cases, Newfound has agreed not to render any
advice or take any action with respect to securities or other investments presently or formerly held in the client’s accounts,
or the issuers thereof, which become the subject of any proceeding, including class actions and bankruptcies.
|
|
1.
|
Routine Business Decisions and Director
Related Proposals
|
Newfound votes for:
a)
Name changes
b)
Directors in uncontested elections
c)
Elimination/limitation of directors’ liability
d)
Indemnification of directors
e)
Reincorporation that is not a takeover defense
Newfound considers on a case-by-case
basis:
f)
Directors in contested elections
g)
Approval of auditors.
Newfound votes for:
|
|
a)
|
Majority independent board
|
|
|
b)
|
Audit, compensation & nominating committees
that are comprised exclusively of
|
independent directors
|
|
c)
|
Minimum director share ownership
|
|
|
d)
|
Separate offices of chairperson and CEO
|
|
|
e)
|
Limitation on number of other board seats
|
|
|
g)
|
Shareholders’ ability to remove directors
|
|
|
h)
|
Shareholder right to call special meetings
|
Newfound votes against:
|
|
a)
|
Supermajority vote requirements
|
|
|
b)
|
Limiting directors’ tenure
|
|
|
c)
|
Restrictions on shareholders to act by
written consent
|
|
|
3.
|
Newfound considers on a case-by-case
basis:
|
|
|
b)
|
Dissident proxy battle
|
|
|
4.
|
Director and Executive Compensation
|
Newfound votes for:
a)
Disclosure of executive compensation
Newfound votes against:
|
|
a)
|
Golden and tin parachutes
|
Newfound considers on a case-by-case
basis:
|
|
a)
|
Restricting executive compensation
|
|
|
b)
|
Executive compensation plans
|
|
|
c)
|
Establish/Increase share option plans for
directors and executives
|
Newfound votes against:
a)
Reincorporation to prevent takeover
b)
Issue new class of common stock with unequal voting rights
c)
Adoption of fair price amendments
d)
Establish a classified (or “staggered”) board of directors
e)
Eliminating cumulative voting
f)
Poison pills
g)
Blank check preferred stock
Newfound votes for:
|
|
a)
|
Increase authorized common stock (unless
additional stock is a takeover defense, i.e., poison pill).
|
|
|
b)
|
Share repurchase programs (when all shareholders
may participate on equal terms)
|
Newfound votes against:
|
|
a)
|
Unequal voting rights, such as dual class
of stock
|
Newfound considers on a case-by-case
basis:
|
|
a)
|
Increase preferred stock
|
|
|
b)
|
Blank check preferred stock (not for takeover
defense)
|
|
|
7.
|
Other Shareholder Value Issues
|
Newfound votes for:
a)
Employee stock ownership plans (ESOPs)
b)
Employee stock purchase plans
c)
401(k) plans
Newfound votes against:
Newfound considers on a case-by-case
basis:
|
|
a)
|
Mergers and acquisitions
|
|
|
b)
|
Spin-offs and asset sales
|
|
|
8.
|
Corporate, Social and Environmental
Policy Proposals. As noted above, Newfound’s fiduciary responsibility is the maintenance and growth of our clients’
assets. Accordingly, Newfound will typically vote in accordance with management’s recommendations or abstain from voting
on proposals concerning corporate policy and social and environmental issues. When such proposals impact shareholder value, Newfound
may vote on a case-by-case basis.
|
|
|
9.
|
Proposals Specific to Mutual Funds.
Newfound serves as investment adviser or sub-adviser to certain investment companies registered with the Securities and Exchange
Commission. These funds may invest in other investment companies that are not affiliated with the funds (“Underlying Funds”)
and are required by the Investment Company Act of 1940, as amended (the “1940 Act”) to handle proxies received from
Underlying Funds in a certain manner. Notwithstanding the guidelines provided in these procedures, it is the policy of Newfound
to vote all proxies received from the Underlying Funds in the same proportion that all shares of the Underlying Funds are voted,
or in accordance with instructions received from fund shareholders, pursuant to Section 12(d)(1)(F) of the 1940 Act. After properly
voted, the proxy materials are placed in a file maintained by the Chief Compliance Officer for future reference.
|
IV.
Conflicts of Interest
On occasion, a conflict of interest may exist
between Newfound and funds, portfolios and clients regarding the outcome of certain proxy votes. In such cases, Newfound is committed
to resolving the conflict in the best interest of our funds, portfolios and clients before we vote the proxy in question.
If the proxy proposal is a Routine Proxy Proposal,
Newfound will typically adhere to the standard procedure of referring to the principles and guidelines described herein in deciding
how to vote.
Alternatively, Newfound may disclose the conflict
to our clients and obtain their consent before voting or seek the recommendation of an independent third-party in deciding how
to vote.
If the proxy proposal is a Non-Routine Proxy
Proposal, Newfound will take any of the following courses of action to resolve the conflict:
|
|
1)
|
Disclose the conflict to our funds, portfolios
and clients and obtain consent before voting;
|
|
|
2)
|
Suggest that our funds, portfolios and
clients engage another party to determine how the proxy should be voted; or
|
|
|
3)
|
Vote according to the recommendation of
an independent third-party, such as a:
|
-
proxy consultant;
-
research analyst;
-
proxy voting department of a mutual fund
or pension fund; or
-
compliance consultant.
V.
Obtaining More Information
Funds, portfolios and clients may obtain
a record of Newfound’s proxy voting, free of charge, by calling [ ].
These policies and procedures may also be
found in Newfound’s Form ADV, Part 2A and supporting schedules.
VI.
Procedures
When the mail arrives, the person responsible
for separating the mail gives any proxy materials to the person who handles compliance issues. The proxy materials are then opened
by the Compliance person. If the proxy is received electronically, the proxy materials are forwarded to the Compliance person.
The ticker symbol for the security noted on the proxy is located. A Security Cross Reference report is run in Axys or similar portfolio
management software as of the record date, as stated on the proxy. This report tells how many shares were owned by funds, portfolios
and clients as of the record date, and can be printed in detail so that the exact clients who held the security on the record date
are listed. An email or Schwab Compliance Technologies case is sent to the designated administrative employee about the arrival
of the proxy. In the email (or SCT case) is listed the name of the security, ticker symbol, arrival date, custodian and number
of shares.
Once the Security Cross Reference report has
been run, the number of shares on the report is compared to the number of shares to be voted on the proxy.
If the number of shares between the two reports
matches, then the Security Cross Reference report is attached to the proxy materials and forwarded to the Portfolio Manager to
be voted according to Newfound’s proxy voting policies.
If the number of shares does not match, then
reasonable efforts will be made to resolve the difference, such as:
|
|
·
|
Rerunning the Security Cross Reference
report for other dates around the record date of the proxy to see if the security transferred into Newfound after the record date,
even though the client owned it as of the record date.
|
|
|
·
|
Calling the custodian to confirm the clients
per their records that are included in the proxy count, and then verifying that information to the Security Cross Reference report.
There may be differences due to clients having made the decision to vote their proxies, in which case, the proxies would go directly
to the clients.
|
If the difference still cannot be resolved,
the matter is reviewed with the Portfolio Manager as to the next action to be taken. If the difference is determined to be immaterial
and is approved by the Portfolio Manager, then the proxy will stand as is.
Once the shares have been reconciled, then the
proxy materials and the Security Cross Reference report are then given to the Portfolio Manager to vote.
The Portfolio Manager will generally vote the
routine proxies in accordance with the principles and guidelines described in Newfound’s Proxy Voting Policy and sign the
proxy. For Non-Routine Proxy Proposals, the Portfolio Manager will vote them on a case-by-case basis. The vote and the rationale
will be noted as documentation for the vote.
Once the Portfolio Manager has voted the proxies,
they will be given to the designated administrative employee for processing. If the proxy is to be mailed, then a copy of the proxy
is made, attached to the proxy materials that support the vote and Security Cross Reference report and filed in chronological order.
This file is maintained by year.
If the proxy was voted electronically, the original
proxy with the notes on it is as to how the proxy was voted, are maintained and attached to the proxy materials that support the
vote and Security Cross Reference report, and filed in chronological order, just like proxies that are mailed.
The designated retail employee then enters the
necessary information in the Schwab Compliance Technologies. The following information is entered:
-
Name of Company
-
Proxy Proposal
-
Management’s recommendation
-
Newfound’s Action
-
Rationale for the vote
-
List of clients to whom the proxy vote applies.
Should Newfound receive any requests from clients
regarding proxy voting, the designated administrative employee will maintain a record of the requests from the specific clients,
which will include:
-
Name of the Client
-
Date that the request was received
-
Whether the request was for a complete or
partial record of proxy votes
-
The documents provided
-
Date that the information was sent to the
client
A copy of the information sent to the client
will be retained in a chronological file, maintained by year.
VII.
Disclosure
Newfound will provide conspicuously displayed
information in its Form ADV Part 2A in the Supporting Schedules, summarizing this proxy voting policy and procedures, including
a statement that clients may request information regarding how Newfound voted a client’s proxies, and that clients may request
a copy of these policies and procedures.
Violations of the firm's policies may result
in disciplinary actions by the firm up to and including termination of employment.