Part I:
Appendix I-I—Additional
Information
Fund
and its Fiscal Year End |
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Xtrackers
S&P 500 Carbon Budget ETF |
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Statement of Additional Information
(SAI)—Part
II
Part
II of this SAI includes policies, investment techniques and
information that apply to the Xtrackers funds. Unless otherwise
noted, the use of the term “fund”
applies to each of the Xtrackers funds of the Trust.
The use of the term “Underlying
Index”
applies only in the context of index-based ETFs.
As of the date of this SAI, all series of the
Trust are index-based ETFs except Xtrackers
RREEF Global Natural Resources ETF. The use of
the term “portfolio”
applies to the Xtrackers RREEF Global Natural
Resources ETF, which is an actively-managed ETF, as described
in its prospectus.
Investment Advisor. DBX
Advisors LLC, located at 875 Third Avenue, New
York, New York 10022, serves as investment advisor
to each fund pursuant to an Investment Advisory
Agreement between the Trust and the Advisor. The
Advisor is a Delaware limited liability company and was
registered as an investment advisor under the Investment
Advisers Act of 1940, as amended, in August 2010.
DBX Advisors LLC was formed in June 2010 and is
an indirect, wholly-owned subsidiary of DWS Group GmbH &
Co. KGaA (“DWS
Group”).
DBX Advisors LLC and
its advisory affiliates (“DWS
Service Providers”)
have sought and obtained a permanent order from
the Securities and Exchange Commission providing
exemptive relief under Section 9 of the Investment
Company Act of 1940, as amended, on which the
DWS Service Providers rely in connection with
the continued provision of investment advisory services
to the funds and other registered investment companies.
For Xtrackers California
Municipal Bond ETF, Xtrackers High Beta High
Yield Bond ETF, Xtrackers Low Beta High Yield
Bond ETF, Xtrackers Municipal Infrastructure Revenue Bond
ETF, Xtrackers Risk Managed USD High Yield Strategy
ETF, Xtrackers Short Duration High Yield Bond ETF,
Xtrackers US 0-1 Year Treasury ETF, Xtrackers USD High
Yield BB-B ex Financials ETF and Xtrackers USD High
Yield Corporate Bond ETF only: In rendering investment
advisory services, the Advisor may use the resources
of one or more foreign (non-US) affiliates that are
not registered under the Investment Advisers Act of 1940,
as amended (the Advisers Act), to provide portfolio management
and research services to a fund. Under a Participating
Affiliates Agreement, an affiliate may be considered
a Participating Affiliate of the Advisor as that
term
is used in relief granted by the staff of the SEC allowing
US-registered advisers to use investment advisory
and trading resources of unregistered advisory affiliates
subject to the regulatory supervision of the registered
adviser. A Participating Affiliate and any of their respective
employees who provide services to a fund are
considered under a Participating Affiliate Agreement to
be an “associated
person”
of the Advisor as that term is defined in the
Advisers Act for purposes of the Advisor's required supervision.
Terms of the Investment Advisory Agreement.
Under the Investment Advisory Agreement, the
Advisor, subject to the supervision of the Board
and in conformity with the stated investment
policies of each fund, manages and administers
the Trust and manages the duties of the investment and reinvestment
of each fund’s assets.
Under the Investment
Advisory Agreement, the Advisor is responsible
for substantially all expenses of the funds (including
the payments to a Subadvisor, if any, the cost of
transfer agency, custody, fund administration, compensation
paid to the Independent Board Members in respect of
the Independent Board Members’ service to the fund, legal,
audit and other services) except for the fee payments under
the Investment Advisory Agreement, interest expense,
taxes, brokerage expenses, future distribution fees
or expenses, litigation expenses and other extraordinary expenses.
The Investment Advisory
Agreement with respect to each fund continues
in effect for two years from its effective date,
and thereafter is subject to annual approval by (i) the
Board or (ii) the vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the applicable
fund, provided that in either event such continuance also
is approved by a majority of the Board who are not interested
persons (as defined in the 1940 Act) of the applicable
fund, by a vote cast in person at a meeting called for the purpose
of voting on such approval.
The Investment Advisory
Agreement with respect to each fund is terminable
without penalty, on 60 days’ notice, by
the Board or by a vote of the holders of a majority of the
applicable fund’s outstanding voting securities (as defined
in the 1940 Act). The Investment Advisory Agreement
is also terminable upon 60 days’ notice by the
Advisor and will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
The
annual Unitary Advisory Fee rate for each fund is set forth in
Part II – Appendix II-C.
Subadvisor (applicable only to those
funds that have a Subadvisory arrangement as described in
Part I). Each
Subadvisor serves as Subadvisor to a fund pursuant to
the terms of an Investment Sub-Advisory Agreement between it
and DBX (Subadvisory Agreement).
Harvest Global Investments
Limited (HGI), located at Level
32,
Lee Garden One,
33 Hysan Ave,
Causeway Bay,
Hong Kong, serves as the investment Subadvisor
to all the assets of two funds. HGI is an investment
advisor registered with the SEC. In addition,
HGI is an affiliate of DWS Group.
RREEF America L.L.C.
(RREEF), 222 South Riverside Plaza, Chicago,
Illinois 60606, serves as Subadvisor to all
of the assets of one fund. RREEF is an investment advisor
registered with the SEC. RREEF is an affiliate of DBX
and an indirect, wholly-owned subsidiary of DWS Group.
RREEF has provided real estate investment management
services to institutional investors since 1975 and
has been an investment advisor of real estate securities since
1993.
Terms of the Subadvisory Agreement
with HGI. Pursuant
to the terms of the Subadvisory Agreement, the
Subadvisor makes the investment decisions, buys and
sells securities, and conducts the research that leads to
these purchase and sale decisions for a fund. The
Subadvisor is also responsible for selecting
brokers and dealers to execute portfolio transactions
and for negotiating brokerage commissions and
dealer charges on behalf of a fund. Under the
terms of the Subadvisory Agreement, the
Subadvisor manages the investment and reinvestment of
a fund's assets and provides such investment advice, research
and assistance as DBX may, from time to time, reasonably request.
The
Subadvisory Agreement provides that the Subadvisor will
not be liable for any error of judgment or mistake of law
or for any loss suffered by a fund in connection with matters
to which the Subadvisory Agreement relates, except
a loss resulting from (a) the Subadvisor causing a
fund to be in violation of any applicable federal or state law,
rule or regulation or any investment policy or restriction
set forth in a fund's prospectus or as may be provided
in writing by the Board or DBX, or (b) willful misconduct,
bad faith or gross negligence on the part of
the Subadvisor in the performance of its duties or from reckless
disregard by the Subadvisor of its obligations and duties under
the Subadvisory Agreement.
The
Subadvisory Agreement continues from year to year only
as long as such continuance is specifically approved at
least annually (a) by a majority of the Board Members who
are not parties to such agreement or interested persons
of any such party, and (b) by the shareholders or
the Board of the Registrant. The
Subadvisory Agreement may be terminated at any
time upon 60 days’ written notice by DBX
or by the Board of the Registrant or by majority
vote of the outstanding shares of a fund, and will
terminate automatically upon assignment or upon termination
of a fund’s Investment Advisory Agreement.
Under the
Subadvisory Agreement between DBX and the
Subadvisor, DBX, not a fund, pays the Subadvisor a Subadvisory
fee based on the percentage of the assets overseen
by the Subadvisor or based on a percentage of
the fee received by DBX from a fund. The Subadvisor fee
is paid directly by DBX at specific rates negotiated between
DBX and the Subadvisor. No fund is responsible for paying the
Subadvisor.
Terms of the Subadvisory Agreement
with RREEF. Pursuant
to the terms of the Subadvisory Agreement, the
Subadvisor provides DBX with a target allocation which represents
the Subadvisor's recommendations as to the purchase,
retention and disposition of the securities for the
fund. The Subadvisor also provides such investment advice,
research and assistance as DBX may, from time to time, reasonably
request.
The Subadvisory Agreement
provides that the Subadvisor will not be liable
for any error of judgment or mistake of law
or for any loss suffered by the fund in connection with
matters to which the Subadvisory Agreement relates, except
a loss resulting from (a) the subadvisor causing the
fund to be in violation of any applicable federal or state
law, rule or regulation or any investment policy or restriction
set forth in the fund's prospectus or as may be
provided in writing by the Board or DBX, or (b) willful misconduct,
bad faith or gross negligence on the part of
the Subadvisor in the performance of its duties or from reckless
disregard by the Subadvisor of its obligations and duties under
the Subadvisory Agreement.
Following its initial
term, the Subadvisory Agreement continues from
year to year only as long as such continuance
is specifically approved at least annually (a) by
a majority of the Board Members who are not parties to
such agreement or interested persons of any such party,
and (b) by the shareholders or the Board of the Registrant.
The Subadvisory Agreement may be terminated
at any time upon 60 days’ written notice by DBX or
by the Board of the Registrant or by majority vote of
the
outstanding shares of the fund, and will terminate automatically
upon assignment or upon termination of the fund’s Investment
Advisory Agreement.
Under the Subadvisory
Agreement between DBX and a Subadvisor, DBX,
not the fund, pays the Subadvisor a subadvisory
fee based on the percentage of the assets overseen
by the Subadvisor or based on a percentage of
the fee received by DBX from the fund. The Subadvisor fee
is paid directly by DBX at specific rates negotiated between
DBX and the Subadvisor. No fund is responsible for paying the
Subadvisor.
Codes of Ethics.
Each fund, the Advisor, the Distributor, and,
if applicable, each fund’s subadvisor(s) have adopted codes
of ethics under Rule 17j-1 under the 1940 Act. Board
Members, officers of the Trust and employees of the
Advisor and the Distributor are permitted to make personal
securities transactions, including transactions in
securities that may be purchased or held by a fund, subject
to requirements and restrictions set forth in the applicable
Code of Ethics. The Advisor’s Code of Ethics contains
provisions and requirements designed to identify and
address certain conflicts of interest between personal investment
activities and the interests of a fund. Among other
things, the Advisor’s Code of Ethics prohibits certain types
of transactions absent prior approval, imposes time periods
during which personal transactions may not be made
in certain securities, and requires the submission of
duplicate broker confirmations and quarterly reporting of
securities transactions. Additional restrictions apply to
portfolio managers, traders, research analysts and others
involved in the investment advisory process. Exceptions
to these and other provisions of the Advisor’s or Subadvisor’s
Codes of Ethics may be granted in particular circumstances after
review by appropriate personnel.
Board Members and Officers’ Identification
and Background. The
identification and background of the Board Members
and Officers of the Registrant are set forth in Part
II—Appendix
II-A.
Board Committees and Compensation.
Information regarding
the Committees of the Board, as well as compensation
paid to the Independent Board Members and to
Board Members who are not officers of the Registrant,
for certain specified periods, is set forth in Part I—Appendix
I-B and Part I—Appendix
I-C, respectively.
Administrator.
BNY
serves as administrator for each fund. Pursuant
to a Fund Administration and Accounting Agreement
and a Corporate Services Agreement with the
Trust, BNY
provides necessary administrative, tax and accounting
and financial reporting services for the maintenance
and operations of the Trust and each fund. In addition,
BNY
makes available the office space, equipment,
personnel and facilities required to provide such
services. As compensation for these services, BNY
receives certain out-of-pocket costs, transaction
fees and asset-based fees which are accrued
daily and paid monthly by the Advisor from its management fee.
Custodian.
BNY
serves as custodian for each fund. Pursuant
to a Custody Agreement with the Trust, BNY
maintains in separate accounts cash, securities
and other assets of the Trust and each fund,
keeps all necessary accounts and records and
provides other services. BNY
is required, upon the order of the Trust, to
deliver securities held by BNY
and to make payments for securities purchased
by the Trust for each fund. Also, pursuant to the
Custody Agreement, BNY
is authorized to appoint certain foreign custodians
or foreign custody managers for fund investments
outside the US. As compensation for these services,
BNY
receives certain out-of-pocket costs, transaction
fees and asset-based fees which are accrued
daily and paid monthly by the Advisor from its management fee.
Transfer Agent.
BNY
serves as transfer agent for each fund. Pursuant
to a Transfer Agency and Service Agreement with
the Trust, BNY
acts as a transfer agent for each fund’s
authorized and issued Shares and as the dividend
disbursing agent of the Trust. As compensation for
these services, BNY
receives certain out-of-pocket costs, transaction
fees and asset-based fees which are accrued
daily and paid monthly by the Advisor from its management fee.
Fund Legal Counsel.
Provides legal services to the funds.
Independent Trustee Legal Counsel.
Serves as legal counsel to the Independent Board Members.
Distributor.
ALPS serves as the Distributor for each fund. The
Distributor has entered into a Distribution Agreement with
the Trust pursuant to which it distributes Shares of each
fund. The Distribution Agreement continues for two years
from its effective date and is renewable annually. Shares
are continuously offered for sale by the fund through
the Distributor only in Creation Units, as described in
the applicable Prospectus and below in the “Creation
and Redemption of Creation Units”
section of this SAI.
Shares
in less than Creation Units are not distributed by the
Distributor. The Distributor will deliver the applicable Prospectus
and, upon request, the SAI to Authorized Participants
purchasing Creation Units and will maintain records
of both orders placed with it and confirmations of
acceptance furnished by it. The Distributor is a broker-dealer
registered under the 1934 Act, and a member of the Financial
Industry Regulatory Authority.
The Distribution Agreement
for each fund provides that it may be terminated
at any time, without the payment of any penalty,
on at least 60 days’ prior written notice to
the other party following (i) the vote of a majority of the
Independent Board Members, or (ii) the vote of a majority
of the outstanding voting securities (as defined in
the 1940 Act) of the relevant fund. The Distribution Agreement
will terminate automatically in the event of its assignment (as
defined in the 1940 Act).
Shares.
The Trust currently is comprised of separate investment
series or portfolios called funds. The Trust issues
Shares of beneficial interest in each fund with no par value.
The Board may designate additional funds.
Each Share issued by
a fund has a pro rata interest in the assets
of that fund. Shares have no preemptive, exchange,
subscription or conversion rights and are freely transferable.
Each Share is entitled to participate equally in
dividends and distributions declared by the Board with respect
to the relevant fund, and in the net distributable assets
of such fund on liquidation. Each Share has one vote
with respect to matters upon which the shareholder
is entitled to vote. In any matter submitted to shareholders
for a vote, each fund shall hold a separate vote, provided
that shareholders of all affected funds will vote together
when: (1) required by the 1940 Act or (2) the Trustees
determine that the matter affects the interests of
more than one fund. Under Delaware law, the Trust is not
required to hold an annual meeting of shareholders unless
required to do so under the 1940 Act. The policy of
the Trust is not to hold an annual meeting of shareholders
unless required to do so under the 1940 Act. All Shares
(regardless of the fund) have noncumulative voting rights
in the election of Board Members. Under Delaware law,
Trustees of the Trust may be removed by vote of the shareholders.
Following the creation
of the initial Creation Unit(s) of Shares of
a fund and immediately prior to the commencement
of trading in the fund’s Shares, a holder of
Shares may be a “control
person”
of the fund, as
defined
in the 1940 Act. The fund cannot predict the length of
time for which one or more shareholders may remain a control
person of the fund.
Shareholders may make
inquiries by writing to DBX ETF Trust, c/o the
Distributor, ALPS Distributors, Inc., 1290 Broadway,
Suite 1000, Denver, Colorado 80203, by email by
writing to dbxquestions@list.db.com or by telephone by calling
1-844-851-4255 (toll free).
Termination of the Trust or a Fund.
The Trust or a fund may be terminated by a majority
vote of the Board or the affirmative vote of
a supermajority of the holders of the Trust
or such fund entitled to vote on termination. Although
the Shares are not automatically redeemable upon
the occurrence of any specific event, the Trust’s organizational
documents provide that the Board will have the
unrestricted power to alter the number of Shares in a
Creation Unit. In the event of a termination of the Trust or
a fund, the Board, in its sole discretion, could determine to
permit the Shares to be redeemable in aggregations smaller
than Creation Units or to be individually redeemable.
In such circumstance, the Trust may make redemptions
in kind, for cash or for a combination of cash or securities.
Purchase and Redemption of
Shares
Exchange Listing and Trading
A discussion of exchange
listing and trading matters associated with
an investment in each fund is contained in the
“Investing
in the Funds”
section of the fund’s Prospectus. The
discussion below supplements, and should be
read in conjunction with, that section of the Prospectus.
Shares of each fund are
listed for trading and will trade throughout
the day on the Exchange. There can be no assurance
that the requirements of the Exchange necessary
to maintain the listing of Shares of any fund will
continue to be met. The Exchange may, but is not required
to, remove the Shares of a fund from listing if (i)
following the initial 12-month period beginning upon the
commencement of trading of fund Shares, there are fewer
than 50 beneficial owners of Shares of the fund for
30 or more consecutive trading days, (ii) the value of the
Underlying Index on which a fund is based is no longer calculated
or available, (iii) the IOPV of a fund is no longer calculated
or available or (iv) any other event shall occur or
condition shall exist that, in the opinion of the Exchange,
makes
further dealings on the Exchange inadvisable. The Exchange
will also remove Shares of a fund from listing and trading upon
termination of the fund.
In order to provide additional
information regarding the indicative value of
Shares of the fund, the Exchange or a market
data vendor disseminates every 15 seconds through
the facilities of the Consolidated Tape Association or
other widely disseminated means an updated IOPV for
the fund as calculated by an information provider or market
data vendor. The Trust is not involved in or responsible
for any aspect of the calculation or dissemination of
the IOPVs and makes no representation or warranty as to the accuracy
of the IOPVs.
An IOPV has a securities
component and a cash component. The securities
values included in an IOPV are the values of
the Deposit Securities for a fund. While the
IOPV reflects the current market value of the Deposit Securities
required to be deposited in connection with the
purchase of a Creation Unit, it does not necessarily reflect
the precise composition of the current portfolio of
securities held by a fund at a particular point in time because
the current portfolio of the fund may include securities
that are not a part of the current Deposit Securities.
Therefore, a fund’s IOPV disseminated during the
Exchange trading hours should not be viewed as a real-time
update of the fund’s NAV, which is calculated only once
a day.
The cash component included
in an IOPV consists of estimated accrued interest,
dividends and other income, less expenses. If
applicable, each IOPV also reflects changes
in currency exchange rates between the US dollar and the applicable
currency.
The Trust reserves the
right to adjust the Share prices of funds in
the future to maintain convenient trading ranges for
investors. Any adjustments would be accomplished through
stock splits or reverse stock splits, which would have no effect
on the net assets of the fund.
DTC as Securities Depository for Shares
of the funds. Shares
of each fund are represented by securities registered
in the name of DTC or its nominee and deposited with,
or on behalf of, DTC. DTC, a limited-purpose trust company,
was created to hold securities of its participants
(“DTC
Participants”)
and to facilitate the clearance and settlement
of securities transactions among the DTC Participants
in such securities through electronic book-entry
changes in accounts of the DTC Participants,
thereby eliminating the need for physical movement of
securities’ certificates. DTC Participants include securities
brokers and dealers, banks, trust companies,
clearing
corporations and certain other organizations, some
of whom (and/or their representatives) own DTC. More
specifically, DTC is owned by a number of its DTC Participants
and by the NYSE, NYSE Amex Equities and the
Financial Industry Regulatory Authority. Access to the
DTC system is also available to others such as banks, brokers,
dealers and trust companies that clear through or
maintain a custodial relationship with a DTC Participant, either
directly or indirectly (“Indirect
Participants”).
Beneficial ownership
of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through
DTC Participants and Indirect Participants. Ownership
of beneficial interests in Shares (owners of such
beneficial interests are referred to herein as “Beneficial
Owners”)
is shown on, and the transfer of ownership is
effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records
of DTC Participants (with respect to Indirect Participants
and Beneficial Owners that are not DTC Participants).
Beneficial Owners will receive from or through the
DTC Participant a written confirmation relating to their purchase
of Shares. The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery
of such securities in definitive form. Such laws may
impair the ability of certain investors to acquire beneficial
interests in Shares.
Conveyance of all notices,
statements and other communications to Beneficial
Owners is effected as follows. Pursuant to the
Depositary Agreement between the Trust and DTC,
DTC is required to make available to the Trust upon
request and for a fee to be charged to the Trust a listing
of the Shares of each fund held by each DTC Participant.
The Trust shall inquire of each such DTC Participant
as to the number of Beneficial Owners holding Shares,
directly or indirectly, through such DTC Participant. The
Trust shall provide each such DTC Participant with copies
of such notice, statement or other communication,
in such form, number and at such place as such DTC
Participant may reasonably request, in order that such
notice, statement or communication may be transmitted
by such DTC Participant, directly or indirectly, to such
Beneficial Owners. In addition, the Trust shall pay to
each such DTC Participant a fair and reasonable amount as
reimbursement for the expenses attendant to such transmittal,
all subject to applicable statutory and regulatory requirements.
The Trust understands
that under existing industry practice, in the
event the Trust requests any action of holders of Shares,
or a Beneficial Owner desires to take any action that
DTC, as the record owner of all outstanding Shares,
is
entitled to take, DTC would authorize the DTC Participants
to take such action and that the DTC Participants would
authorize the Indirect Participants and Beneficial Owners
acting through such DTC Participants to take such
action and would otherwise act upon the instructions of Beneficial
Owners owning through them.
Share distributions shall
be made to DTC or its nominee, Cede & Co.,
as the registered holder of all Shares of the Trust.
DTC or its nominee, upon receipt of any such distributions,
shall credit immediately DTC Participants’ accounts
with payments in amounts proportionate to their respective
beneficial interests in Shares of each fund as shown
on the records of DTC or its nominee. Payments by
DTC Participants to Indirect Participants and Beneficial Owners
of Shares held through such DTC Participants will
be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts
of customers in bearer form or registered in a “street
name,”
and will be the responsibility of such DTC Participants.
The Trust has no responsibility
or liability for any aspect of the records relating
to or notices to Beneficial Owners, or payments
made on account of beneficial ownership interests
in such Shares, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership
interests, or for any other aspect of the relationship
between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect
Participants and Beneficial Owners owning through
such DTC Participants. DTC may decide to discontinue
providing its service with respect to Shares of the Trust
at any time by giving reasonable notice to the Trust and
discharging its responsibilities with respect thereto under
applicable law. Under such circumstances, the Trust shall
take action to find a replacement for DTC to perform its functions
at a comparable cost.
Creation and Redemption of Creation Units
General.
The Trust issues and sells Shares of each fund only
in Creation Units on a continuous basis through the Distributor,
without a sales load, at the fund’s NAV next determined
after receipt, on any Business Day, of an order in
proper form. Information on a fund’s Creation Units can
be found in the Prospectus.
The Board reserves the
right to declare a split or a consolidation
in the number of Shares outstanding of any fund of
the Trust, and to make a corresponding change in the number
of Shares constituting a Creation Unit, in the
event
that the per Share price in the secondary market rises
(or declines) to an amount that falls outside the range deemed
desirable by the Board.
As of the date of this
SAI, each Exchange observes the following holidays,
as observed: New Year’s Day, Dr. Martin Luther
King, Jr. Day, Presidents’ Day, Good Friday, Memorial
Day, Juneteenth National Independence Day, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Fund Deposit. The
consideration for purchase of Creation Units
of a fund generally consists of the in-kind (except for
Xtrackers Harvest CSI 300 China A-Shares ETF
and Xtrackers Harvest CSI 500 China A-Shares
Small Cap ETF, which are effected principally
in cash) deposit of a designated portfolio of
securities (i.e., the “Deposit
Securities”),
which constitutes an optimized representation
of the securities of the relevant fund’s
Underlying Index or portfolio, as applicable,
and the Cash Component computed as described
below. Together, the Deposit Securities and
the Cash Component constitute the “Fund
Deposit,”
which represents the minimum initial and subsequent
investment amount for a Creation Unit of any fund.
The Cash Component is
an amount equal to the difference between the
NAV of the Shares (per Creation Unit) and the
“Deposit
Amount,”
which is an amount equal to the market value
of the Deposit Securities, and serves to compensate
for any difference between the NAV per Creation
Unit and the Deposit Amount. Payment of any stamp
duty or other similar fees and expenses payable upon
transfer of beneficial ownership of the Deposit Securities
shall be the sole responsibility of the AP purchasing a Creation
Unit.
The Advisor makes available
through the National Securities Clearing Corporation
(“NSCC”)
on each Business Day, prior to the opening of
business on the Exchange, the list of names
and the required number of Shares of each Deposit
Security to be included in the current Fund
Deposit (based on information at the end of
the previous Business Day) for each fund. Such Fund Deposit
is applicable, subject to any adjustments as described
below, in order to effect purchases of Creation Units
of Shares of a given fund until such time as the next-announced
Fund Deposit is made available.
The identity and number
of Shares of the Deposit Securities pursuant
to changes in composition of a fund’s portfolio
and changes as rebalancing adjustments and corporate
action events are reflected from time to time by
the Advisor with a view to the investment objective
of
the fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting
or composition of the component securities constituting the relevant
Underlying Index.
The Trust reserves the
right to permit or require the substitution
of a “cash
in lieu”
amount to be added to the Cash Component to
replace any Deposit Security that may not be
available in sufficient quantity for delivery or that may
not be eligible for transfer through the systems of DTC
of the Clearing Process (discussed below). The Trust also
reserves the right to permit or require a “cash
in lieu”
amount where the delivery of the Deposit Security by
the AP (as described below) would be restricted under applicable
securities laws or where the delivery of the Deposit
Security to the AP would result in the disposition
of the Deposit Security by the AP becoming restricted
under applicable securities laws, or in certain other
situations. The adjustments described above will reflect
changes, known to the Advisor on the date of announcement
to be in effect by the time of delivery of the
Fund Deposit, in the composition of the subject index being
tracked by the relevant fund, or resulting from stock splits
and other corporate actions. For Xtrackers Harvest CSI
300 China A-Shares ETF and Xtrackers Harvest CSI 500
China A-Shares Small Cap ETF, Creation Units are purchased principally
for cash.
Role of the Authorized Participant.
Creation Units may be purchased only by or through
a DTC Participant that has entered into an Authorized
Participant Agreement with the Distributor (an
authorized participant, or an “AP”),
which agreement has also been accepted by the
Transfer Agent. Such AP will agree, pursuant
to the terms of such Authorized Participant
Agreement and on behalf of itself or any investor
on whose behalf it will act, to certain conditions,
including that such AP will make available in advance
of each purchase of Shares an amount of cash sufficient
to pay the Cash Component, once the NAV of a
Creation Unit is next determined after receipt of the purchase
order in proper form, together with the transaction
fee described below. The AP may require the investor
to enter into an agreement with such AP with respect
to certain matters, including payment of the Cash Component.
Investors who are not APs must make appropriate
arrangements with an AP. Investors should be aware that
their particular broker may not be a DTC Participant or
may not have executed an Authorized Participant Agreement
and that orders to purchase Creation Units may
have to be placed by the investor’s broker through an
AP. As a result, purchase orders placed through an AP may result
in additional charges to such investor.
The
Trust does not expect the Distributor to enter into an
Authorized Participant Agreement with more than a small
number of DTC Participants. A list of current APs may be obtained
from the Distributor.
Purchase Order.
To initiate an order for a Creation Unit, an
AP must submit an irrevocable order to purchase Shares
of a fund in accordance with the Authorized Participant
Agreement. If accepted by the Distributor, the Transfer
Agent will notify the Advisor and the Custodian of
such order. If applicable, the Custodian will then provide such
information to the appropriate sub-custodian. For each
applicable fund, the Custodian shall cause the applicable
sub-custodian to maintain an account into which the
AP shall deliver, on behalf of itself or the party on whose
behalf it is acting, the applicable securities included in
the designated Fund Deposit (or the cash value of all or
a part of such securities, in the case of a permitted or required
cash purchase or “cash
in lieu”
amount), with any appropriate adjustments as
advised by the Trust. Deposit Securities located
outside the United States must be delivered
to an account maintained at the applicable local
sub-custodian. Those placing orders to purchase Creation
Units through an AP should allow sufficient time to
permit proper submission of the purchase order to the
Distributor by the cut-off time on such Business Day.
The AP must also make
available on or before the contractual settlement
date, by means satisfactory to the Trust, immediately
available or same day funds estimated by the
Trust to be sufficient to pay the Cash Component
next determined after acceptance of the purchase
order, together with the applicable purchase transaction
fee. Any excess funds will be returned following
settlement of the issue of the Creation Unit. Those
placing orders should ascertain the applicable deadline
for cash transfers by contacting the operations department
of the broker or depositary institution effectuating
the transfer of the Cash Component. This deadline is
likely to be significantly earlier than the closing time of the
regular trading session on the Exchange.
Investors should be aware
that an AP may require orders for purchases
of Shares placed with it to be in the particular form required
by the individual AP.
Timing of Submission of Purchase Orders.
An AP must submit an irrevocable purchase order
before 4:00 p.m., Eastern time on any Business
Day in order to receive that day’s NAV.
In the case of custom orders, the order must
be received by the Distributor no later than 3:00 p.m.,
Eastern time on the trade date. With respect to in-kind
creations, a custom order may be placed by an
AP
where cash replaces any Deposit Security which may not
be available in sufficient quantity for delivery or which may
not be eligible for trading by such AP or the investor for
which it is acting or other relevant reason. Notwithstanding
the foregoing, the Trust may, but is not required to,
permit custom orders (consisting of a basket of securities
or cash that differs from a published or transacted
Fund Deposit) until 4:00 p.m., Eastern time, or until the
market close (in the event the Exchange closes early). Orders
to create Shares of a fund that are submitted on the
Business Day immediately preceding a holiday or day
(other than a weekend) when the markets in the relevant
foreign market are closed may not be accepted. The
Distributor in its discretion may permit the submission of
such orders and requests by or through an AP at any time
(including on days on which the Exchange is not open
for business) via communication through the facilities of
the Transfer Agent’s proprietary website maintained for
this purpose, provided such submission is permissible
pursuant to the terms of the applicable Authorized Participant
Agreement. Purchase orders and redemption requests,
if accepted by the Trust, will be processed based on
the NAV next determined after such acceptance in accordance
with the Trust’s standard cut-off times as provided
in the Authorized Participant Agreement and disclosed in this
SAI.
Acceptance of Orders for Creation Unit.
Subject to the
conditions that (i) an irrevocable purchase order has been
submitted by the AP (either on its own or another investor’s
behalf) and (ii) arrangements satisfactory to the
Trust are in place for payment of the Cash Component and
any other cash amounts which may be due, the Trust will
accept the order, subject to its right (and the right of the
Distributor and the Advisor) to reject any order until acceptance.
Once the Trust has accepted
an order, upon next determination of the NAV
of the Shares, the Trust will confirm the issuance
of a Creation Unit, against receipt of payment, at
such NAV. The Distributor will then transmit a confirmation of
acceptance to the AP that placed the order.
The SEC has stated its
position that an ETF generally may suspend the
issuance of Creation Units only for a limited
time and only due to extraordinary circumstances, such
as when the markets on which the ETF’s portfolio holdings
are traded are closed for a limited period of time. The
SEC has also stated that an ETF could not set transaction
fees so high as to effectively suspend the issuance of
Creation Units. The Trust reserves the right to reject or
revoke a creation order transmitted to it by the Distributor
in respect of any fund in compliance with Rule 6c-11
under the 1940 Act under circumstances which
include,
but are not limited to, if (i) the order is not in proper
form; (ii) the investor(s) upon obtaining the Shares ordered,
would own 80% or more of the currently outstanding
Shares of any fund; (iii) the Deposit Securities delivered
do not conform to the identity and number of Shares
specified by the Advisor, as described above; (iv) acceptance
of the Fund Deposit would, in the opinion of
counsel, be unlawful; or (vi) circumstances outside the
control of the Trust, the Distributor and the Advisor make
it impracticable to process purchase orders. The Trust
shall notify a prospective purchaser of a Creation Unit
and/or the AP acting on behalf of such purchaser of its
rejection of such order. The Trust, the Custodian, the sub-custodian
and the Distributor are under no duty, however,
to give notification of any defects or irregularities
in the delivery of Portfolio Deposits nor shall any of
them incur any liability for failure to give such notification.
Issuance of a Creation Unit.
Except as provided herein, a Creation Unit will
not be issued until the transfer of good title
to the Trust of the Deposit Securities and the payment
of the Cash Component and any other cash amounts
which may be due have been completed. When (if
applicable) the sub-custodian has confirmed to the Custodian
that the securities included in the Fund Deposit (or
the cash value thereof) have been delivered to the account
of the relevant sub-custodian or sub-custodians, the
Distributor and the Advisor shall be notified of such delivery
and the Trust will issue and cause the delivery of
the Creation Unit. Creation Units typically are issued on
a “T+1
basis”
(i.e., one Business Day
after trade date). However,
the Trust reserves the right to settle Creation Unit
transactions on a basis other than T+1, including in order
to accommodate non-U.S. market holiday schedules, closures
and settlement cycles, to account for different treatment
among non-U.S. and U.S. markets of dividend record
dates and ex-dividend dates, or under such other circumstances
as the Trust may agree, in its sole discretion.
To the extent contemplated
by an AP’s agreement with the Distributor,
the Trust will issue Creation Units to such AP
notwithstanding the fact that the corresponding Portfolio
Deposits have not been received in part or in whole,
in reliance on the undertaking of the AP to deliver the
missing Deposit Securities as soon as possible, which undertaking
shall be secured by such AP’s delivery and maintenance
of collateral having a value at least equal to
115%, which the Advisor may change from time to time,
of the value of the missing Deposit Securities in accordance
with the Trust’s then-effective procedures. The
only collateral that is acceptable to the Trust is cash in
US dollars or an irrevocable letter of credit in form,
and
drawn on a bank, that is satisfactory to the Trust. The
cash collateral posted by the AP may be invested at the
risk of the AP, and income, if any, on invested cash collateral
will be paid to that AP. Information concerning the
Trust’s current procedures for collateralization of missing
Deposit Securities is available from the Transfer Agent.
The Authorized Participant Agreement will permit the
Trust to buy the missing Deposit Securities at any time
and will subject the AP to liability for any shortfall between
the cost to the Trust of purchasing such securities and
the cash collateral or the amount that may be drawn under any
letter of credit.
In certain cases, APs
may create and redeem Creation Units on the
same trade date and in these instances, the
Trust reserves the right to settle these transactions on
a net basis or require a representation from the APs that
the creation and redemption transactions are for separate
Beneficial Owners. All questions as to the number
of shares of each security in the Deposit Securities and
the validity, form, eligibility and acceptance for deposit of
any securities to be delivered shall be determined by the
Trust, and the Trust’s determination shall be final and binding.
Cash Purchase Method. In
the case of a cash purchase, the investor must
pay the cash equivalent of the Deposit Securities
it would otherwise be required to provide through
an in-kind purchase, plus the same Cash Component
required to be paid by an in-kind purchaser. In
addition, to offset the Trust’s brokerage and other transaction
costs associated with using the cash to purchase the
requisite Deposit Securities, the investor will be required
to pay a fixed purchase transaction fee, plus an additional
variable charge for cash purchases, which is expressed
as a percentage of the value of the Deposit Securities.
Creation Transaction Fee. A
standard creation transaction fee is imposed
to offset the transfer and other transaction
costs associated with the issuance of Creation Units.
The standard creation transaction fee will be the same
regardless of the number of Creation Units purchased
by a purchaser on the same day. The AP may also
be required to cover certain brokerage, tax, foreign exchange,
execution, price movement and other costs and
expenses related to the execution of trades resulting from
such transaction (including when the Trust permits an
AP to substitute cash for some or all of the Deposit Securities).
APs will also bear the costs of transferring the
Deposit Securities to the Trust. Investors who use the
services of a broker or other such intermediary may be
charged a fee for such services. Certain fees or costs
associated
with creation transactions may be waived in certain
circumstances. Each fund’s standard creation transaction
fee is set forth in the Prospectus.
Redemption of Creation Units. Shares
of a fund may be redeemed only in Creation Units
at their NAV next determined after receipt of
a redemption request in proper form and only
on a Business Day. The Trust will not redeem Shares
in amounts less than Creation Units. Beneficial Owners
also may sell Shares in the secondary market but
must accumulate enough Shares to constitute a Creation
Unit in order to have such Shares redeemed by the
Trust. There can be no assurance, however, that there will
be sufficient liquidity in the public trading market at any
time to permit assembly of a Creation Unit. Investors should
expect to incur brokerage and other costs in connection
with assembling a sufficient number of Shares to constitute a
redeemable Creation Unit.
Redemptions are effected
primarily in-kind, except for Xtrackers Harvest
CSI 300 China A-Shares ETF and Xtrackers
Harvest CSI 500 China A-Shares Small Cap ETF, which
are effected principally in cash. In the case of in-kind redemptions,
the Advisor makes available through the NSCC,
prior to the opening of business on the Exchange on
each Business Day, the identity and number of Shares that
will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form
(as defined below) on that day (“Fund
Securities”).
Fund Securities received on redemption may not
be identical to Deposit Securities that are
applicable to creations of Creation Units. Each
fund reserves the right to honor a redemption
request by delivering a basket of securities
or cash that differs from the Fund Securities.
Unless cash redemptions
are available or specified for a fund, the redemption
proceeds for a Creation Unit generally consist
of Fund Securities plus cash in an amount equal
to the difference between the NAV of the Shares being
redeemed, as next determined after a receipt of a
request in proper form, and the value of the Fund Securities,
less the redemption transaction fee described below.
Redemption Transaction Fee. A
standard redemption transaction fee is imposed
to offset transfer and other transaction costs
that may be incurred by the relevant fund. The
standard redemption transaction fees are set forth
in the Prospectus. The standard redemption transaction
fee will be the same regardless of the number of Creation
Units redeemed by an investor on the same day.
The AP may also be required to cover certain brokerage,
tax, foreign exchange, execution, price
movement
and other costs and expenses related to the execution
of trades resulting from such transaction (including
when the Trust substitutes cash for some or all
of the Fund Securities), up to a maximum of 2% of the
amount redeemed (including the standard redemption fee
set forth in the Prospectus). APs will also bear the costs
of transferring the Fund Securities from the Trust to
their account or on their order. Investors who use the services
of a broker or other such intermediary may be charged
a fee for such services. Certain fees or costs associated
with redemption transactions may be waived in certain circumstances.
The maximum redemption
fee, as a percentage of the amount redeemed,
is 2%. Redemption requests for Creation Units
of any fund must be submitted by or through
an AP. An AP must submit an irrevocable redemption
request before 4:00 p.m., Eastern time on any
Business Day in order to receive that day’s NAV. In the
case of custom redemptions, the order must be received
no later than 3:00 p.m., Eastern time. Investors other
than through APs are responsible for making arrangements
for a redemption request to be made through
an AP. The Distributor will provide a list of current APs upon
request.
Cash transactions may
have to be carried out over several days if
the securities market is relatively illiquid and may involve
considerable brokerage fees and taxes. These brokerage
fees and taxes, which will be higher than if a fund
sold and redeemed its shares principally in-kind, will
generally be passed on to purchasers and redeemers of
Creation Units in the form of creation and redemption transaction
fees. However, the funds cap the total fees that
may be charged in connection with the redemption of
Creation Units at 2% of the value of the Creation Units redeemed.
To the extent transaction and other costs associated
with a redemption exceed that cap those transaction
costs will be borne by a fund’s remaining shareholders.
The AP must transmit
the request for redemption in the form required
by the Trust or the Transfer Agent in accordance
with procedures set forth in the Authorized Participant
Agreement. Investors should be aware that their
particular broker may not have executed an Authorized
Participant Agreement and that, therefore, requests to
redeem Creation Units may have to be placed by the investor’s
broker through an AP who has executed an Authorized
Participant Agreement in effect. At any time, there
may be only a limited number of broker-dealers that
have an Authorized Participant Agreement. Investors making
a redemption request should be aware that such request
must be in the form specified by such AP. Investors
making
a request to redeem Creation Units should allow sufficient
time to permit proper submission of the request by
an AP and transfer of the Shares to the Trust’s Transfer Agent;
such investors should allow for the additional time that
may be required to effect redemptions through their banks,
brokers or other financial intermediaries if such intermediaries
are not APs.
A redemption request
is considered to be in “proper
form”
if (i) an AP has transferred or caused to be
transferred to the Trust’s Transfer Agent
the Creation Unit being redeemed through the
book-entry system of DTC so as to be effective
by the Exchange closing time on any Business
Day, (ii) a request in form satisfactory to the Trust
is received from the AP on behalf of itself or another redeeming
investor within the time periods specified above
and (iii) all other procedures set forth in the Participant
Agreement are properly followed. If the Transfer Agent
does not receive the investor’s Shares through DTC’s
facilities by 10:00 a.m., Eastern time, on the Business
Day next following the day that the redemption request
is received, the redemption request shall be rejected.
Investors should be aware that the deadline for
such transfers of Shares through the DTC system may
be significantly earlier than the close of business on
the Exchange. Those making redemption requests should
ascertain the deadline applicable to transfers of Shares
through the DTC system by contacting the operations
department of the broker or depositary institution effecting
the transfer of the Shares.
Upon receiving a redemption
request, the Transfer Agent shall notify the
Trust of such redemption request. The tender
of an investor’s Shares for redemption and the distribution
of the cash redemption payment in respect of
Creation Units redeemed will be made through DTC and
the relevant AP to the Beneficial Owner thereof as recorded
on the book-entry system of DTC or the DTC Participant
through which such investor holds, as the case may
be, or by such other means specified by the AP submitting the
redemption request.
A redeeming Beneficial
Owner or AP acting on behalf of such Beneficial
Owner must maintain appropriate security arrangements
with a qualified broker-dealer, bank or other
custody providers in each jurisdiction in which any
of the portfolio securities are customarily traded, to which
account such portfolio securities will be delivered.
If neither the redeeming
Beneficial Owner nor the AP acting on behalf
of such redeeming Beneficial Owner has appropriate
arrangements to take delivery of Fund Securities
in the applicable non-US jurisdiction and it is
not
possible to make other such arrangements, or if it is not
possible to effect deliveries of Fund Securities in such jurisdiction,
the Trust may in its discretion exercise its option
to redeem such Shares in cash, and the redeeming Beneficial
Owner will be required to receive its redemption proceeds
in cash. In such case, the investor will receive a
cash payment equal to the NAV of its Shares based on
the NAV of Shares of the relevant fund next determined
after the redemption request is received in proper form
(minus a redemption transaction fee and additional variable
charge for cash redemptions specified above, to
offset the Trust’s brokerage and other transaction costs associated
with the disposition of portfolio securities of the
fund). Redemptions of Shares for Fund Securities will
be subject to compliance with applicable US federal and
state securities laws and each fund (whether or not it
otherwise permits cash redemptions) reserves the right to
redeem Creation Units for cash to the extent that the fund
could not lawfully deliver specific Fund Securities upon
redemptions or could not do so without first registering the
Fund Securities under such laws.
In the case of cash redemptions,
proceeds will be paid to the AP redeeming Shares
on behalf of the redeeming investor as soon
as practicable after the date of redemption (within seven calendar
days thereafter).
The right of redemption
may be suspended or the date of payment postponed
with respect to any fund (i) for any period
during which the NYSE is closed (other than customary
weekend and holiday closings), (ii) for any period
during which trading on the NYSE is suspended or
restricted, (iii) for any period during which an emergency exists
as a result of which disposal of the Shares of the fund’s
portfolio securities or determination of its NAV is not
reasonably practicable or (iv) in such other circumstance as
is permitted by the SEC.
An AP submitting a redemption
request is deemed to represent to the Trust
that it is in compliance with the requirements
set forth in the Authorized Participant Agreement.
The Trust reserves the right to verify these representations
at its discretion, but will typically require verification
with respect to a redemption request from a
fund in connection with higher levels of redemption activity
and/or short interest in the fund. If the AP, upon receipt
of a verification request, does not provide sufficient
verification of its representations as determined by
the Trust, the redemption request will not be considered to
have been received in proper form and may be rejected by the
Trust.
Redemptions
of Creation Units are generally settled within one
Business Day (i.e., “T+1”).
The Trust reserves the right to settle redemption
transactions on a basis other than T+1, if necessary
or appropriate under the circumstances and compliant
with applicable law. Delayed settlement may
occur due to a number of different reasons,
including, without limitation, settlement cycles for
the underlying securities, unscheduled market closings, an
effort to link distribution to dividend record dates and ex-dates
and newly announced holidays.
Taxation on Creation and Redemptions
of Creation Units. An
AP generally will recognize either gain or loss upon
the exchange of Deposit Securities for Creation Units.
This gain or loss is calculated by taking the market value
of the Creation Units purchased over the AP’s aggregate
basis in the Deposit Securities exchanged therefor.
However, the Internal Revenue Service (the “IRS”)
may apply the wash sales rules to determine that any
loss recognized
upon the exchange of Deposit Securities for
Creation Units is not currently deductible. APs should consult
their own tax advisors.
Current federal tax laws
dictate that capital gain or loss realized from
the redemption of Creation Units will generally
create long-term capital gain or loss if the AP holds
the Creation Units for more than one year, or short-term
capital gain or loss if the Creation Units were held
for one year or less, if the Creation Units are held as capital
assets.
Compensation of Financial Intermediaries
The Distributor may also
enter into agreements with securities dealers
(“Soliciting
Dealers”)
who will solicit purchases of Creation Units
of fund Shares. Such Soliciting Dealers must also be APs.
The Advisor may, from
time to time and from its own resources, pay,
defray or absorb costs relating to distribution,
including payments out of its own resources to the
Distributor, or to otherwise promote the sale of Shares. The
Advisor currently pays the Distributor, from the Advisor’s
own resources, for such purposes.
The Advisor and/or its
subsidiaries or affiliates (“Xtrackers
Entities”)
may pay certain broker-dealers and other financial
intermediaries or solicitors (“Intermediaries”)
for certain marketing or referral activities
related to the fund or other funds advised by
the Advisor or its affiliates. Any payments
made by Xtrackers Entities will be made from
their own assets and not from the assets of the fund.
Although a portion of Xtrackers Entities’ revenue comes
directly or indirectly in part from fees paid by the
fund
and other Xtrackers funds, payments do not increase the
price paid by investors for the purchase of shares of, or
the cost of owning, shares of the fund or other Xtrackers funds.
Xtrackers Entities may make payments for Intermediaries’
participating in activities that are designed to make
registered representatives, other professionals and individual
investors more knowledgeable about the fund or
for other activities, such as participation in marketing activities
and presentations, educational training programs, the
support of technology platforms and/or reporting systems
(“Education
Costs”)
or the referral or introduction of investors
to Xtrackers Entities. Xtrackers Entities may
also make payments to Intermediaries for certain printing,
publishing and mailing costs associated with the
fund or materials relating to other Xtrackers funds or
exchange-traded funds in general (“Publishing
Costs”).
In addition, Xtrackers Entities may make payments
to Intermediaries that make shares of the fund
and certain other Xtrackers funds available
to their clients or for otherwise promoting
the fund and other Xtrackers funds. Payments
of this type are sometimes referred to as revenue-sharing
payments. Payments to an Intermediary may be
significant to the Intermediary, and amounts that
Intermediaries pay to your salesperson or other investment
professional may also be significant for your salesperson
or other investment professional. Because an
Intermediary may make decisions about which investment
options or investment advisor it will recommend
or make available to its clients or contacts or
what services to provide for various products based on
payments it receives or is eligible to receive, payments create
conflicts of interest between the Intermediary and its
clients or contacts and these financial incentives may cause
the Intermediary to recommend the fund and other Xtrackers
funds or their investment advisor over other investments
or to refer a contact to the Xtrackers Entities. The
same conflict of interest exists with respect to your salesperson
or other investment professional if he or she receives
similar payments from his or her Intermediary firm.
Ask your salesperson or visit your Intermediary’s website
for more information.
Xtrackers Entities may
determine to make payments based on any number
of metrics. For example, Xtrackers Entities
may make payments at year end or other intervals in
a fixed amount, based upon an Intermediary’s services at
defined levels or an amount based on the Intermediary’s
net sales of one or more Xtrackers funds in a year or
other period, any of which arrangements may include an
agreed upon minimum or maximum payment, or any combination
of the foregoing. Any payments made by the Xtrackers
Entities to an Intermediary may create the incentive
for an Intermediary to encourage customers to buy shares of the
fund or other Xtrackers funds.
Certain
Xtrackers Entities have established revenue sharing
arrangements to make Payments to Intermediaries
that make fund shares available to their clients or otherwise
promote certain funds. Pursuant to these arrangements,
Intermediaries have agreed to promote certain
funds to their customers and to not charge certain of
their customers any commissions on the purchase or sale
of fund shares. Payments made pursuant to these arrangements
may vary in any year and may be different for
different Intermediaries. In certain cases, the Payments described
in the preceding sentence may be subject to certain minimum payment
levels.
The Advisor may also
enter into agreements with financial intermediaries
relating to the use of Xtrackers
funds in third-party model portfolios.
Each fund has been advised
that the Advisor, the Distributor and their
affiliates expect that the firms listed in Part
II—Appendix
II-D will receive revenue sharing payments
at different points during the coming year as described above.
Other Payments to Financial Intermediaries
and Other Third Parties.
In addition to the above-described payments,
the Advisor or an affiliate may, from its own resources,
pay fees to financial intermediaries who sell shares
of Xtrackers
funds for other products or services offered
by the intermediaries. Such payments may be in the
form of licensing fees for access to various kinds of analytical
data.
From time to time, the
Advisor or an affiliate may enter into arrangements
with a third party pursuant to which the third
party agrees to invest a substantial amount of assets
into a fund and the Advisor or an affiliate makes payments
(from the Advisor’s or affiliate’s own resources) to
the third party. Any such payments would be based on
a percentage of such fund’s assets under management representing
assets from investors other than those invested by the third
party.
Anti-Money Laundering Requirements.
The funds are subject
to the USA PATRIOT Act (the “Patriot
Act”).
The Patriot Act is intended to prevent the use
of the US financial system in furtherance of
money laundering, terrorism or other illicit
activities. Pursuant to requirements under the
Patriot Act, a fund may request information
from APs to enable it to form a reasonable belief that
it knows the true identity of its APs. This information
will be used to verify the identity of APs or, in some
cases, the status of financial professionals; it will be
used only for compliance with the requirements of
the
Patriot Act. The funds reserve the right to reject purchase
orders from persons who have not submitted information
sufficient to allow a fund to verify their identity. Each
fund also reserves the right to redeem any amounts in
a fund from persons whose identity it is unable to verify
on a timely basis. It is the funds’ policy to cooperate fully
with appropriate regulators in any investigations conducted
with respect to potential money laundering, terrorism or other
illicit activities.
Investments, Practices and Techniques, and Risks
Part II - Appendix II-E includes
a description of the investment practices and
techniques which a fund may employ in pursuing
its investment objective, as well as the associated
risks. Descriptions in this SAI of a particular investment
practice or technique in which a fund may engage
(or a risk that a fund may be subject to) are meant to
describe the spectrum of investments that the Advisor (and/or
subadvisor, if applicable) in its discretion might, but
is not required to, use in managing a fund. The Advisor (and/or
subadvisor, if applicable) may in its discretion at any
time employ such practice and technique for one or more
funds but not for all funds advised by it. Furthermore, it
is possible that certain types of investment practices or
techniques described herein may not be available, permissible,
economically feasible or effective for their intended
purposes in all markets. Certain practices, techniques
or investments may not be principal activities of
the fund, but, to the extent employed, could from time to
time have a material impact on a fund’s performance.
It is possible that certain investment
practices and/or techniques may not be permissible for a fund
based on its investment restrictions, as described herein
(also see Part I: Investments, Practices and Techniques, and
Risks) and in the fund’s prospectus.
The Advisor and/or subadvisor
assume general supervision over placing orders
on behalf of the funds for the purchase and
sale of portfolio securities. In selecting brokers
or dealers for any transaction in portfolio securities, the
Advisor’s and/or subadvisor’s policy is to make such selection
based on factors deemed relevant, including but
not limited to, the breadth of the market in the security, the
price of the security, the reasonableness of the commission
or mark-up or mark-down, if any, execution capability,
settlement capability, back office efficiency and
the
financial condition of the broker or dealer, both for the
specific transaction and on a continuing basis. The overall
reasonableness of brokerage commissions paid is
evaluated by the Advisor and/or subadvisor based upon their
knowledge of available information as to the general level
of commissions paid by other institutional investors for
comparable services. Brokers may also be selected because
of their ability to handle special or difficult executions,
such as may be involved in large block trades, less liquid
securities, broad distributions, or other circumstances.
The Trust has adopted policies and procedures that
prohibit the consideration of sales of the funds’ Shares as
a factor in the selection of a broker or a dealer to execute
its portfolio transactions.
Purchases and sales of
fixed-income securities and certain over-the-counter
securities are effected on a net basis, without
the payment of brokerage commissions. Transactions
in fixed income and certain over-the-counter securities
are generally placed by the Advisor with the principal
market makers for these securities unless the Advisor
reasonably believes more favorable results are available
elsewhere. Transactions with dealers serving as
market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues will include
an underwriting fee paid to the underwriter. Money market
instruments are normally purchased in principal transactions
directly from the issuer or from an underwriter or market maker.
To the extent applicable
and consistent with Section 28(e) of the 1934
Act, as amended, and interpretations thereunder,
the Advisor and/or subadvisor may cause a fund to
pay a higher commission than otherwise obtainable from
other brokers or dealers in return for brokerage or research
services and products if the Advisor and/or subadvisor
determines in good faith that the commission is
reasonable in relation to the services and products utilized.
In addition to agency transactions, the Advisor and/or
subadvisor may receive brokerage or research services
and products in connection with certain riskless principal
transactions, in accordance with applicable SEC and
other regulatory guidelines. In both instances, these services
and products may include but are not limited to:
economic, industry, or company research reports or investment
recommendations; subscriptions to certain financial
publications; market data such as stock quotes, last
sale prices, trading volumes and similar data; databases
and software, including, but not limited to, quantitative
analytical software; and products and services that
assist in effecting transactions and functions incidental thereto,
including services of third-party computer systems
directly related to brokerage activities and routing
settlement
instructions. The Advisor and/or subadvisor may
use brokerage or research services and products furnished
by brokers, dealers or service providers in servicing
all client accounts, and not all services and products
may necessarily be used in connection with the
account that paid the commissions or spreads to the broker or
dealer.
The funds’ purchase
and sale orders for securities may be combined
with those of other investment companies, clients
or accounts that the Advisor and/or subadvisor manage
or advise and for which they have brokerage placement
authority. If purchases or sales of portfolio securities
of the funds and one or more other accounts managed
or advised by the Advisor and/or subadvisor are
considered at or about the same time, transactions in
such securities are allocated among the funds and the other
accounts in a manner deemed equitable to all by the
Advisor and/or subadvisor. In some cases, this procedure
could have a detrimental effect on the price or
volume of the security as far as the funds are concerned.
However, in other cases, it is possible that the
ability to participate in volume transactions and to negotiate
lower transaction costs will be beneficial to the
funds. The Advisor and/or subadvisor from time to time
deals, trades and invests for their own account in the
types of securities in which the funds may invest. The
Advisor and/or subadvisor may effect trades on behalf of
and for the account of the funds with brokers or dealers that
are affiliated with the Advisor and/or subadvisor, in conformity
with the 1940 Act and SEC rules and regulations.
Under these provisions, any commissions paid to affiliated
brokers or dealers must be reasonable and fair compared
to the commissions charged by other brokers or
dealers in comparable transactions. The funds will not deal
with affiliates in principal transactions unless permitted
by applicable SEC rule or regulation or by SEC exemptive order.
Portfolio Turnover. Portfolio
turnover rate is defined by the SEC as the ratio
of the lesser of sales or purchases to the monthly
average value of such securities owned during
the year, excluding all securities whose remaining maturities
at the time of acquisition were one year or less.
Portfolio turnover may
vary from year to year as well as within a year.
High turnover rates may result in comparatively
greater brokerage expenses and higher taxes (if you
are investing in a taxable account). The overall reasonableness
of brokerage commissions is evaluated by the Advisor
and/or subadvisor, if applicable, based upon their
knowledge
of available information as to the general level of
commissions paid by the other institutional investors for comparable
services.
Portfolio Holdings Information
The Trust has adopted
a policy regarding the disclosure of information
about the Trust’s portfolio holdings. The Board
must approve all material amendments to this policy.
Each fund’s portfolio
holdings are publicly disseminated each day
the funds are open for business through financial reporting
and news services, including publicly accessible
Internet web sites. In addition, a basket composition
file, which includes the security names and share quantities
to deliver in exchange for fund shares, together with
estimates and actual cash components, is publicly disseminated
daily prior to the opening of the Exchanges via
the NSCC. The basket represents one Creation Unit of
each fund. The Trust, the Advisor and the Administrator
will not disseminate non-public information concerning the Trust.
Each fund offers and issues
Shares at their net asset value (“NAV”)
per Share only in aggregations of a specified number
of Shares (“Creation
Units”),
generally in exchange for a basket of securities
and other instruments included in its Underlying
Index or portfolio, as applicable, (the “Deposit
Securities”),
together with the Cash Component. For Xtrackers
Harvest CSI 300 China A-Shares ETF
and Xtrackers Harvest CSI 500 China A-Shares
Small Cap ETF, each fund offers and issues Shares
at their NAV per Share only in Creation Units, generally
in exchange for a specified amount of cash totaling
the NAV of the Creation Units. Shares trade in the
secondary market at market prices that may be at, above
or below NAV. Information on the Exchange on which
each fund trades is set forth in Part I – Appendix I-I.
The Trust’s Board
has designated the Advisor as the valuation
designee for a fund pursuant to Rule 2a-5 under the
1940 Act. The Advisor’s Pricing Committee values securities
and other assets using the methodologies described below.
In determining NAV, expenses
are accrued and applied daily and securities
and other assets for which market quotations
are available are valued at market value. Equity
investments
are valued at market value, which is generally determined
using the last reported official closing price on
the exchange or market on which the security is primarily
traded at the time of valuation. Debt securities’ values
are based on price quotations or other equivalent indications
of value provided by a third-party pricing service.
Any such third-party service may use a variety of
methodologies to value some or all of the fund’s debt securities
to determine the market price. For example, the
prices of securities with characteristics similar to those held
by the fund may be proprietary pricing models. In certain
cases, some of the fund’s debt securities may be
valued at the mean between the last available bid and
ask prices for such securities or, if such prices are not
available, at prices for securities of comparable maturity,
quality, and type. Money market instruments will be valued at
amortized cost.
Each fund has delegated
proxy voting responsibilities to the Advisor,
subject to the Board’s general oversight. Each fund
has delegated proxy voting to the Advisor with the direction
that proxies should be voted consistent with each
fund’s best economic interests. The Advisor has adopted
its own Proxy Voting Policies and Procedures (Policies),
and Proxy Voting Guidelines (Guidelines) for this
purpose. The Policies address, among other things, conflicts
of interest that may arise between the interests of
a fund, and the interests of the Advisor and its affiliates. The
Policies and Guidelines are included in Part II—
Appendix II-G.
You may obtain information
about how each fund voted proxies related to
its portfolio securities during the 12-month
period ended June 30 (1) without charge, upon request,
by calling 844-851-4255;
(2)
on
our Web site
at dws.com/en-us/resources/proxy-voting;
and (3) by visiting the SEC’s Web site at www.sec.gov.
A fund’s prospectus(es)
and this SAI omit certain information contained
in the Registration Statement which a fund has
filed with the SEC under the 1933 Act and reference
is hereby made to the Registration Statement for
further information with respect to a fund and the securities
offered hereby.
Ratings
Of Investments
Bonds and Commercial Paper Ratings
Set forth below are descriptions
of ratings (as of the date of each rating agency’s
annual ratings publication or other current
ratings publication, as applicable) which represent opinions
as to the quality of the securities. It should be emphasized,
however, that ratings are relative and subjective and are not
absolute standards of quality.
If a fixed income security
is rated differently among the three major ratings
agencies (i.e., Moody’s Investor Services,
Inc., Fitch Investors Services, Inc., and S&P Global
Ratings), portfolio management would rely on the highest
credit rating for purposes of the fund’s investment policies.
Moody’s Investors Service, Inc. Global Long-Term
Rating Scale
Moody’s long-term
ratings are assigned to issuers or
obligations with an original maturity of eleven
months or more and reflect both on the likelihood
of a default or impairment on contractual financial
obligations and the expected
financial loss suffered in the event of default or impairment.
Aaa
Obligations rated Aaa are judged to be of the highest quality,
subject to the lowest level of credit risk.
Aa
Obligations rated Aa are judged to be of high quality and are
subject to very low credit risk.
A
Obligations rated A are judged to be upper-medium grade and are
subject to low credit risk.
Baa
Obligations rated Baa are judged to be medium-grade
and subject to moderate credit risk and as such may possess certain
speculative characteristics.
Ba
Obligations rated Ba are judged to be speculative and are subject
to substantial credit risk.
B
Obligations rated B are considered speculative and are subject
to high credit risk.
Caa
Obligations rated Caa are judged to be speculative of
poor standing and are subject to very high credit risk.
Ca
Obligations rated Ca are highly speculative and are likely
in, or very near, default, with some prospect of recovery of
principal and interest.
C
Obligations rated C are the lowest rated class of bonds and
are typically in default, with little prospect for recovery of
principal or
interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to
each generic rating classification from Aa through Caa. The
modifier 1 indicates that the obligation ranks in the higher
end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a
ranking in the lower end of that generic rating category. Additionally,
a “(hyb)”
indicator is appended to all ratings of hybrid
securities issued by banks, insurers, finance companies, and
securities firms.
By their terms, hybrid
securities allow for the omission of scheduled
dividends, interest, or principal payments, which
can potentially result in impairment if such an omission
occurs. Hybrid securities may also be subject to
contractually allowable write-downs of principal that could
result in impairment. Together with the hybrid indicator,
the long-term obligation rating assigned to a hybrid
security is an expression of the relative credit risk associated
with that security.
Moody’s Investors Service, Inc. Global Short-Term
Rating Scale
Moody’s short-term
ratings are assigned to obligations with an
original maturity of thirteen months or less and reflect
both on the likelihood of a default or impairment on
contractual financial obligations and the expected financial
loss suffered in the event of default or impairment.
P-1
Ratings of Prime-1 reflect a superior ability to repay short-term
obligations.
P-2
Ratings of Prime-2 reflect a strong ability to repay short-term
obligations.
P-3
Ratings of Prime-3 reflect an acceptable ability to repay short-term
obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall
within any of the Prime rating categories.
Moody’s Investors Service, Inc. US Municipal Short-Term
Debt and Demand Obligation Ratings
Short-Term Obligation Ratings
The Municipal Investment
Grade (MIG) scale is used to rate US municipal
cash flow notes, bond anticipation notes and
certain other short-term obligations, which typically mature
in three years or less.
MIG 1
This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly
reliable liquidity support, or demonstrated broad-based access
to the market for refinancing.
MIG 2
This designation denotes strong credit quality. Margins
of protection are ample, although not as large as in the preceding
group.
MIG 3
This designation denotes acceptable credit quality. Liquidity
and cash-flow protection may be narrow, and market
access for refinancing is likely to be less well-established.
SG
This designation denotes speculative-grade credit quality.
Debt instruments in this category may lack sufficient margins
of protection.
Demand Obligation Ratings
For
variable rate demand obligations (VRDOs), Moody’s
assigns
both a long-term rating and a short-term payment obligation
rating. The long-term rating addresses the issuer’s
ability to meet scheduled principal and interest payments.
The short-term payment obligation rating addresses
the ability of the issuer or the liquidity provider to
meet any purchase price payment obligation resulting from
optional tenders (“on
demand”)
and/or mandatory tenders
of the VRDO. The short-term payment
obligation rating uses the Variable Municipal
Investment Grade (VMIG) scale.
Transitions of VMIG ratings with conditional
liquidity support differ from transitions of Prime ratings
reflecting the risk that external liquidity support will
terminate if the issuer’s long-term rating drops below investment
grade.
For VRDOs,
Moody's
typically assigns a VMIG rating if the frequency
of the payment obligation is less than every three
years. If
the frequency of the payment obligation is
less than three years, but the obligation is payable only with
remarketing proceeds, the VMIG short-term rating is
not assigned and it is denoted as “NR”.
VMIG 1
This designation denotes superior credit quality. Excellent
protection is afforded by the superior short-term credit
strength of the liquidity provider and structural and legal protections.
VMIG 2
This designation denotes strong credit quality. Good
protection is afforded by the strong short-term credit strength
of the liquidity provider and structural and legal protections.
VMIG 3
This designation denotes acceptable credit quality. Adequate
protection is afforded by the satisfactory short-term
credit strength of the liquidity provider and structural and
legal protections.
SG
This designation denotes speculative-grade credit quality.
Demand features rated in this category may be supported
by a liquidity provider that does not have a sufficiently
strong short-term rating or may lack the structural or legal
protections.
S&P Global Ratings Long-Term Issue Credit Ratings
AAA An
obligation rated 'AAA' has the highest rating assigned
by S&P Global Ratings. The obligor's capacity to
meet its financial commitments on the obligation is extremely
strong.
AA An
obligation rated 'AA' differs from the highest-rated
obligations only to a small degree. The obligor's capacity
to meet its financial commitments on the obligation is very strong.
A An
obligation rated 'A' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories.
However, the obligor's capacity to meet its financial commitments
on the obligation is still strong.
BBB An
obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions
or changing circumstances are more likely to weaken the
obligor’s capacity to meet its financial commitments on
the obligation.
Obligations rated 'BB',
'B', 'CCC', 'CC', and 'C' are regarded as having
significant speculative characteristics. 'BB'
indicates the least degree of speculation and 'C'
the highest. While such obligations will likely have some
quality and protective characteristics, these may be
outweighed by large uncertainties or major exposure to adverse
conditions.
BB An
obligation rated 'BB' is less vulnerable to nonpayment
than other speculative issues. However, it faces
major ongoing uncertainties or exposure to adverse business,
financial, or economic conditions that could lead
to the obligor's inadequate capacity to meet its financial commitments
on the obligation.
B
An obligation rated 'B' is more vulnerable to nonpayment than
obligations rated 'BB', but the obligor currently has the
capacity to meet its financial commitments on the obligation.
Adverse business, financial, or economic conditions
will likely impair the obligor's capacity or willingness to meet
its financial commitments on the obligation.
CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its
financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the
obligor is not likely to have the capacity to meet its financial
commitments on the obligation.
CC
An obligation rated 'CC' is currently highly vulnerable to
nonpayment. The 'CC' rating is used when a default has
not yet occurred but S&P Global Ratings expects default
to be a virtual certainty, regardless of the anticipated time
to default.
C
An obligation rated 'C' is currently highly vulnerable to nonpayment,
and the obligation is expected to have lower relative
seniority or lower ultimate recovery compared with obligations
that are rated higher.
D
An obligation rated 'D' is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the 'D'
rating category is used when payments on an obligation
are not made on the date due, unless S&P Global
Ratings believes that such payments will be made within
the next five business days in the absence of a stated
grace period or within the earlier of the stated grace
period or the next 30 calendar days. The 'D' rating also
will be used upon the filing of a bankruptcy petition or
the taking of similar action and where default on an obligation
is a virtual certainty, for example due to automatic
stay provisions. A rating on an obligation is lowered
to 'D' if it is subject to a distressed debt restructuring.
Plus (+) or Minus (-) Ratings
from 'AA' to 'CCC' may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within
the rating categories.
S&P Global Ratings Short-Term Issue Credit Ratings
A-1
A short-term obligation rated 'A-1' is rated in the highest
category by S&P Global Ratings. The obligor's capacity
to meet its financial commitments on the
obligation
is strong. Within this category, certain obligations
are designated with a plus sign (+). This indicates that
the obligor's capacity to meet its financial commitments on these
obligations is extremely strong.
A-2
A short-term obligation rated 'A-2' is somewhat more susceptible
to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its
financial commitments on the obligation is satisfactory.
A-3
A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions
or changing circumstances are more likely to weaken an
obligor’s capacity to meet its financial commitments on
the obligation.
B
A short-term obligation rated 'B' is regarded as vulnerable
and has significant speculative characteristics.
The obligor currently has the capacity to meet its financial
commitments; however, it faces major ongoing uncertainties
that could lead to the obligor's inadequate capacity to meet
its financial commitments.
C
A short-term obligation rated 'C' is currently vulnerable to
nonpayment and is dependent upon favorable business, financial,
and economic conditions for the obligor to meet its financial
commitments on the obligation.
D
A short-term obligation rated 'D' is in default or in breach of
an imputed promise. For non-hybrid capital instruments,
the 'D' rating category is used when payments on
an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made
within any stated grace period. However, any stated grace
period longer than five business days will be treated as
five business days. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a
similar action and where default on an obligation is a virtual
certainty, for example due to automatic stay provisions.
A rating on an obligation is lowered to 'D' if it is subject
to a distressed debt restructuring.
SPUR (S&P Underlying Rating)
A SPUR is an opinion about the stand-alone capacity
of an obligor to pay debt service on a credit-enhanced
debt issue, without giving effect to the enhancement
that applies to it. These ratings are published
only at the request of the debt issuer or obligor
with the designation SPUR to distinguish them from
the credit-enhanced rating that applies to the debt issue.
S&P Global Ratings maintains surveillance of an issue with
a published SPUR.
S&P Global Ratings Municipal
Short-Term Note Ratings
An S&P Global Ratings
US municipal note rating reflects S&P Global
Ratings’ opinion about the liquidity factors and
market access risks unique to the notes. Notes due in
three years or less will likely receive a note rating. Notes
with an original maturity of more than three years will
most likely receive a long-term debt rating. In determining
which type of rating, if any, to assign, S&P Global Ratings’
analysis will review the following considerations:
•
Amortization
schedule—the
larger the final maturity relative to other maturities, the more
likely it will be treated as a note; and
•
Source
of payment—the
more dependent the issue is on the market for its refinancing,
the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue
determined to possess a very strong capacity to pay debt service
is given a plus (+) designation.
SP-2
Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes
over the term of the notes.
SP-3
Speculative capacity to pay principal and interest.
D ‘D’
is assigned upon failure to pay the note when due, completion
of a distressed debt restructuring, or the filing of
a bankruptcy petition or the taking of similar action and
where default on an obligation is a virtual certainty, for example
due to automatic stay provisions.
S&P Global Ratings Dual Ratings
Dual ratings may be assigned
to debt issues that have a put option or demand
feature. The first component of the rating addresses
the likelihood of repayment of principal and
interest as due, and the second component of
the rating addresses only the demand feature. The first
component of the rating can relate to either a short-term
or long-term transaction and accordingly use either
short-term or long-term rating symbols. The second component
of the rating relates to the put option and is assigned
a short-term rating symbol (for example, 'AAA/A-1+'
or 'A-1+/A-1'). With US municipal short-term
demand
debt, the US municipal short-term note rating symbols
are used for the first component of the rating (for example,
'SP-1+/A-1+').
S&P Global Market Intelligence Earnings and Dividend
Rankings for Common Stocks
S&P Global Market
Intelligence, an affiliate of S&P Global Ratings,
has provided Earnings and Dividend Rankings, commonly
referred to as Quality Rankings, on common stocks
since 1956. Quality Rankings reflect the long-term growth
and stability of a company’s earnings and dividends.
The Quality Rankings
System attempts to capture the long-term growth
and stability of earnings and dividends record
in a single system. In assessing Quality Rankings, S&P
Global Market Intelligence recognizes that earnings and
dividend performance is the end result of the interplay of
various factors such as products and industry position, corporate
resources and financial policy. Over the long run,
the record of earnings and dividend performance has
a considerable bearing on the relative quality of stocks.
The rankings, however,
do not profess to reflect all of the factors,
tangible or intangible, that bear on stock quality.
The rankings are generated
by a computerized system and are based on per-share
earnings and dividend records of the most recent
10 years – a period long enough to measure
significant secular (long-term) growth, capture indications
of changes in trend as they develop, encompass
the full peak-to-peak range of the business cycle,
and include a bull and a bear market. Basic scores are
computed for earnings and dividends, and then adjusted
as indicated by a set of predetermined modifiers for
change in the rate of growth, stability within long-term trend,
and cyclicality. Adjusted scores for earnings and dividends are
then combined to yield a final ranking.
The ranking system makes
allowance for the fact that corporate size generally
imparts certain advantages from an investment
standpoint. Conversely, minimum size limits (in
sales volume) are set for the various rankings. However, the
system provides for making exceptions where the score
reflects an outstanding earnings and dividend record.
The following table shows the letter classifications and brief
descriptions of Quality Rankings.
The
ranking system grants some exceptions to the pure quantitative
rank. Thus, if a company has not paid any dividend
over the past 10 years, it is very unlikely that it will
rank higher than A-. In addition, companies may receive a
bonus score based on their sales volume (higher sales are
viewed as better for stability). If a company omits a dividend
on preferred stock, it will receive a rank of no better
than C that year. If a company pays a dividend on the
common stock, it is highly unlikely that the rank will be
below B-, even if it has incurred losses. In addition, if
a company files for bankruptcy, the model’s rank is automatically
changed to D.
Fitch Ratings Long-Term Ratings
AAA:
Highest Credit Quality.
‘AAA’ ratings denote the lowest expectation
of default risk. They are assigned only in cases of
exceptionally strong capacity for payment of financial commitments.
This capacity is highly unlikely to be adversely affected by
foreseeable events.
AA:
Very High Credit Quality.
‘AA’ ratings denote expectations of
very low default risk. They indicate very strong capacity for
payment of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A:
High Credit Quality.
‘A’ ratings denote expectations of low
default risk. The capacity for payment of financial commitments
is considered strong. This capacity may, nevertheless,
be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.
BBB:
Good Credit Quality.
‘BBB’ ratings indicate that expectations
of default risk are currently low. The capacity for
payment of financial commitments is considered adequate,
but adverse business or economic conditions are more likely to
impair this capacity.
BB:
Speculative. ‘BB’ ratings indicate an elevated vulnerability
to default risk, particularly in the event of adverse changes
in business or economic conditions over time; however,
business or financial flexibility exists that supports the servicing
of financial commitments.
B:
Highly Speculative.
‘B’ ratings indicate that material default
risk is present, but a limited margin of safety remains. Financial
commitments are currently being met; however, capacity
for continued payment is vulnerable to deterioration in the business
and economic environment.
CCC:
Substantial Credit Risk.
Very low margin for safety. Default is a real possibility.
CC:
Very High Levels of Credit Risk.
Default of some kind appears probable.
C:
Near Default.
A default or default-like process has begun, or
for a closed funding vehicle, payment capacity is irrevocably
impaired. Conditions that are indicative of a ‘C’
category rating for an issuer include:
a. The
issuer has entered into a grace or cure period following non-payment
of a material financial obligation;
b.
The
formal announcement by the issuer or their agent of a distressed
debt exchange; and
c.
A
closed financing vehicle where payment capacity is irrevocably
impaired such that it is not expected to pay interest
and/or principal in full during the life of the transaction,
but where no payment default is imminent.
RD:
Restricted Default.
‘RD’ ratings indicate an issuer that in Fitch’s
opinion has experienced:
a. An
uncured payment default or distressed debt exchange on
a bond, loan or other material financial obligation, but
b. Has
not entered into bankruptcy filings, administration, receivership,
liquidation, or other formal winding-up procedure, and
c. Has
not otherwise ceased operating.
a.
The
selective payment default on a specific class or currency of
debt;
b.
The
uncured expiry of any applicable original grace
period, cure period or default forbearance period
following a payment default on a bank loan,
capital markets security or other material financial obligation.
D:
Default. ‘D’ ratings indicate an issuer that in Fitch’s opinion
has entered into bankruptcy filings, administration, receivership,
liquidation or other formal winding-up procedure
or that has otherwise ceased business and debt
is still outstanding.
Default ratings are not
assigned prospectively to entities or their
obligations; within this context, non-payment on an
instrument that contains a deferral feature or grace period
will generally not be considered a default until after
the
expiration of the deferral or grace period, unless a default
is otherwise driven by bankruptcy or other similar circumstance,
or by a distressed debt exchange.
In all cases, the assignment
of a default rating reflects the agency’s
opinion as to the most appropriate rating category
consistent with the rest of its universe of ratings
and may differ from the definition of default
under the terms of an issuer’s financial
obligations or local commercial practice.
Within rating categories,
Fitch may use modifiers. The modifiers “+”
or “-”
may be appended to a rating to denote relative
status within major rating categories. For example, the
rating category ‘AA’ has three notch-specific rating levels
(‘AA+’; ‘AA’; ‘AA–‘; each a rating level). Such suffixes are
not added to ‘AAA’ ratings and ratings below the ‘CCC’ category.
For the short-term rating category of ‘F1’, a ‘+’ may
be appended.
Fitch Ratings Short-Term Ratings
F1:
Highest Short-Term Credit Quality. Indicates the strongest
intrinsic capacity for timely payment of financial commitments;
may have an added “+”
to denote any exceptionally strong credit feature.
F2:
Good Short-Term Credit Quality. Good intrinsic capacity for timely
payment of financial commitments.
F3:
Fair Short-Term Credit Quality. The intrinsic capacity for
timely payment of financial commitments is adequate.
B:
Speculative Short-Term Credit Quality. Minimal capacity for
timely payment of financial commitments, plus heightened
vulnerability to near term adverse changes in financial and economic
conditions.
C:
High Short-Term Default risk. Default is a real possibility.
RD:
Restricted Default. Indicates an entity that has defaulted on
one or more of its financial commitments, although it
continues to meet other financial obligations. Typically applicable
to entity ratings only.
D:
Default. Indicates a broad-based default event for an entity,
or the default of a short-term obligation.
Part II:
Appendix II-A—Board
Members and Officers
Identification and Background
The Board has responsibility
for the overall management and operations of the funds, including general supervision of
the duties performed by the Advisor and other service providers. Each Board Member serves until his or her successor is
duly elected or appointed and qualified. Each officer serves until he or she resigns, is removed, dies, retires or becomes
disqualified.
The Trust currently has
three Board Members. The three Independent Board Members have no affiliation or business connection
with the Advisor or any of its affiliated persons and do not own any stock or other securities issued by the
Advisor.
The Independent Board
Members of the Trust, their term of office and length of time served, their principal business occupations
during the past five years, the number of portfolios in the fund complex (defined below) overseen by each
Independent Board Member, and other directorships, if any, held by the Board Members are shown below. The fund
complex includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and
any registered funds that have an investment advisor that is an affiliated person of the Advisor. As of the date of this
SAI, the fund complex consists of the funds in the Trust, as well as the registered funds advised by affiliates of the
Advisor.
Shareholder Communications to the Board.
Shareholders may send communications to the Trust’s Board
by addressing the communications directly to
the Board (or individual Board Members) and/or otherwise clearly indicating in the salutation
that the communication is for the Board (or individual Board Members). The shareholder may send the communication
to either the Trust’s office or directly to such Board members c/o 875 Third Avenue, New York, NY 10022.
Other shareholder communications received by the Trust not directly addressed and sent to the Board will be reviewed
and generally responded to by management. Such communications will be forwarded to the Board at management’s discretion
based on the matters contained therein.
Independent Board Members
Name,
Year of Birth,
Position
with
the Trust and Length
|
Business
Experience and
Directorships
During the Past 5 Years |
Number
of
Portfolios
in
Fund
Complex
Overseen
|
Other
Directorships
Held
by
Board
Member |
Stephen
R. Byers (1953)
Chairperson
since 2016,
and
Board Member since
2011
(formerly, Lead
Independent
Board
Member,
2015-2016) |
Independent
Director (2011- present);
Independent
Consultant (2014-present);
Director
of Investment Management, the
Dreyfus
Corporation (2000-2006) and Vice
Chairman
and Chief Investment Officer, the
Dreyfus
Corporation (2002-2006). Former
Directorship:
Sierra Income Corporation. |
|
The
Arbitrage Funds, Mutual
Fund
Directors Forum,
Barings
BDC (BBDC) |
George
O. Elston (1964)
Board
Member since 2011,
Chairperson
of the Audit
Committee
since 2015 |
Chief
Financial Officer, EyePoint
Pharmaceuticals,
Inc. (2019-present); Chief
Financial
Officer, Enzyvant (2018-2019);
Chief
Executive Officer, 2X Oncology, Inc.
(2017-2018);
Senior Vice President and Chief
Financial
Officer, Juniper Pharmaceuticals,
Inc.
(2014-2016); Senior Vice President and
Chief
Financial Officer, KBI BioPharma Inc.
(2013-2014);
Managing Partner, Chatham
Street
Partners (2010-2013). |
|
|
J.
David Officer (1948)
Board
Member since 2011,
Chairperson
of the
Nominating
Committee
since
2015 |
Independent
Director (2010-present); Vice
Chairman,
the Dreyfus Corporation (2006-
2009);
President, The Dreyfus Family of
Funds,
Inc. (2006-2009). Former
Directorships:
Old Westbury Funds. |
|
Chairman
of Ilex
Management
Ltd; |
Officers(2)
Name,
Year of Birth, Position
with
the Trust and Length of
|
Business
Experience and
Directorships
During the Past 5 Years |
Arne
Noack(4)
(1983)
President
and Chief Executive
Officer
2024-present |
Managing
Direcor, DWS; Regional Head of Systematic Investment Solutions, Americas
of
DWS Investment Management Americas, Inc.(since 2021); Formerly: Co-Head
Product
Americas DWS Investment Management Americas, Inc. (2019-2020); Head of
Exchange
Traded Product Development USA, Xtrackers, DWS (2015-2019); and Head of
Exchange
Traded Product Development EMEA, Xtrackers (2012-2015). |
Freddi
Klassen(4)
(1975)
Chief
Operating Officer, 2024-
present
|
Director,
DWS; Chief Administrative Officer Investment Division Americas, of DWS
Investment
Management Americas, Inc. and Manager (since 2023) and Chief
Operating
Officer of the Advisor (2016–present). Formerly: President and Chief
Executive
Officer, DBX ETF Trust (2016-2024); Programmes (Head 2021-2023), of DWS
Investment
Management Americas, Inc.; Chief Operating Officer in the Americas for
the
Traditional Asset Classes Department (2014–2020); Global Chief Operating Officer
for
Equities Technology in the Investment Bank Division at Deutsche Bank AG (2013-
2014);
Chief Operating Officer for Exchange Traded Funds and Systematic Funds in
Europe
(2008-2013). |
Diane
Kenneally(5)
(1966)
Treasurer,
Chief Financial
Officer
and Controller, 2019-
present
|
Director,
DWS; Fund Administration Treasurer’s Office (Head since 2024), of DWS
Investment
Management Americas, Inc.; Chief Financial Officer and Treasurer for DWS
US
registered investment companies advised by DWS Investment Management
Americas,
Inc. (2018-present); Treasurer and Chief Financial Officer, The European
Equity
Fund, Inc., The New Germany Fund, Inc. and The Central and Eastern Europe
Fund,
Inc. (2018-present); formerly: Assistant Treasurer for the DWS funds (2007-2018);
and
Co-Head of DWS Treasurer’s Office (2018-2024).. |
Frank
Gecsedi(4)
(1967)
Chief
Compliance Officer,
2010-present
|
Director,
DWS; AFC Compliance US (Senior Team Lead), of DWS Investment
Management
Americas, Inc.; Compliance Department (2016-present), Vice President in
the
Deutsche Asset Management Compliance Department at Deutsche Bank AG
(2013-2016)
and Chief Compliance Officer of the Advisor (2010-present); Chief
Compliance
Officer of DWS Distributors, Inc. (2019-2022); Vice President in Deutsche
Bank’s
Global Markets Legal, Risk and Capital Division (2010-2012). |
John
Millette(5)
(1962)
Secretary,
2020-present |
Director,
DWS; Legal (Associate General Counsel), DWS US Retail Legal (2003-
present),
of DWS Investment Management Americas, Inc.; Vice President and
Secretary
of DWS US registered investment companies advised by DWS Investment
Management
Americas, Inc. (1999-present); Chief Legal Officer, DWS Investment
Management
Americas, Inc. (2015-present); Director and Vice President of DWS Trust
Company
(2016-present); Vice President, DBX Advisors LLC (2021-present); Secretary,
The
European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and
Eastern
Europe Fund, Inc. (2011-present); formerly: Secretary of Deutsche Investment
Management
Americas Inc. (2015-2017); and Assistant Secretary of DBX ETF Trust
(2019-2020).
|
Caroline
Pearson (5)
(1962)
Assistant
Secretary, 2020-
present
|
Managing
Director, DWS; Legal (Regional Head of Legal, Americas), DWS US Retail
Legal,
of DWS Investment Management Americas, Inc.(since 2024); Chief Legal
Officer
of DWS US registered investment companies advised by DWS Investment
Management
Americas, Inc. (2010-present); Chief Legal Officer, DBX Advisors LLC
(2019-present);
Chief Legal Officer, The European Equity Fund, Inc., The New Germany
Fund,
Inc. and The Central and Eastern Europe Fund, Inc. (2012-present); formerly:
Secretary,
Deutsche AM Distributors, Inc. (2002-2017); Secretary, Deutsche AM
Service
Company (2010-2017); Chief Legal Officer, DBX Strategic Advisors LLC (2020-
2021);
and Legal (Senior Team Lead) DWS (2020-2024). |
Yvonne
Wong(5)
(1960)
Assistant
Treasurer, since
November
14, 2023 |
Vice
President, DWS; Fund Administration (Senior Analyst), of DWS Investment
Management
Americas, Inc.; Assistant Treasurer for DWS US registered investment
companies
advised by DWS Investment Management Americas, Inc. (since December
1,
2023). |
Jeffrey
Berry(5)
(1959)
Assistant
Treasurer, 2019-
present
|
Director,
DWS; Fund Administration (Senior Specialist), of DWS Investment
Management
Americas, Inc. |
Name,
Year of Birth, Position
with
the Trust and Length of
Time
Served(3)
|
Business
Experience and
Directorships
During the Past 5 Years |
Sheila
Cadogan(5)
(1966)
Assistant
Treasurer, 2019-
present
|
Director,
DWS; Fund Administration Treasurer’s Office, Head of Accounting and Vendor
Oversight
(since 2024), of DWS Investment Management Americas, Inc.; Assistant
Treasurer
for DWS US registered investment companies advised by DWS Investment
Management
Americas, Inc. (2017-present); Director and Vice President, DWS Trust
Company
(2018-present); Assistant Treasurer, The European Equity Fund, Inc., The New
Germany
Fund, Inc. and The Central and Eastern Europe Fund, Inc. (2018-present).
Formerly:
Co-Head of DWS Treasurer’s Office (2018-2024). |
Christina
A. Morse(6)
(1964)
Assistant
Secretary, 2017-
present
|
Senior
Vice President, Director Regulatory Administration at BNY Mellon Asset
Servicing
(2023-present); Vice President at BNY Mellon Asset Servicing (2014-2023);
Vice
President and Counsel at Lord Abbett & Co. LLC (2013-2014). |
Christian
Rijs(4)(1980)
Anti-Money
Laundering
Compliance
Officer, 2021 -
present
|
Director,
DWS; Senior Team Lead Anti-Financial Crime and Compliance, of DWS
Investment
Management Americas, Inc.; AML Officer, DWS Trust Company (since
November
2, 2021); AML Officer, DWS US registered investment companies advised
by
DWS Investment Management Americas, Inc. (since October 6, 2021); AML Officer,
The
European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and
Eastern
Europe Fund, Inc. (since November 12, 2021); formerly: DWS UK & Ireland
Head
of Anti-Financial Crime and MLRO. |
Rich
Kircher(5)(1962)
Deputy
Anti-Money Laundering
Compliance
Officer, since
August
13, 2024 |
Director,
DWS; Senior Team Lead Anti-Financial Crime and Compliance, of DWS
Investment
Management Americas, Inc.; Deputy AML Officer, The European Equity
Fund,
Inc., The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc.
(since
July 26, 2024); Deputy AML Officer, DWS US registered investment companies
advised
by DWS Investment Management Americas, Inc. (since September 20, 2024);
Deputy
AML Officer, DWS Distributors, Inc. (since November 13, 2024); formerly: BSA
&
Sanctions Compliance Officer for Putnam Investments. |
(1)
The
length of time served is represented by the year in which the Board Member joined the Board.
(2)
As
a result of their respective positions held with the Advisor and its affiliates, these individuals are considered “interested
persons”
of the Advisor within the meaning of the 1940 Act. Interested
persons receive no compensation from the fund.
(3)
The
length of time served is represented by the year in which the officer was first elected to the Trust in such capacity.
(4)
Address:
875 Third Avenue, New York, New York 10022.
(5)
Address:
100 Summer Street, Boston, MA 02110.
(6)
Address:
BNY Mellon Asset Servicing, 240 Greenwich Street, New York, NY 10286.
Certain officers hold
similar positions for other investment companies for which DBX or an affiliate serves as the Advisor.
Board Member Qualifications
The Board has concluded
that, based on each Board Member’s experience, qualifications and attributes, each Board Member
should serve as a Board Member. Following is a brief summary of the information that led to this conclusion:
Mr. Byers gained extensive
experience with a variety of financial, accounting, management, regulatory and operational issues
facing registered investment companies through his more than 30 years of experience on the boards and/or in
senior management of such companies as The Arbitrage Funds, Sierra Income Corporation, Barings BDC (BBDC), Mutual
Fund Directors Forum, College of William and Mary - Graduate School of Business, Lighthouse Growth Advisors LLC,
Founders Asset Management, LLC, The Dreyfus Corporation, Gruntal & Co., LLC, Painewebber, Citibank/Citicorp and
American Airlines. Mr. Byers possesses a strong understanding of the regulatory framework under which registered investment
companies must operate and can provide management input and investment guidance to the Board.
Through Mr. Elston’s
prior positions on the boards and in senior management of such companies as Eye Point Pharmaceuticals, Juniper
Pharmaceuticals, Inc., and Celldex Therapeutics, Inc., Mr. Elston has experience with a variety of financial, management,
regulatory and operational issues as well as experience with marketing and distribution. Mr. Elston also has
experience as a managing partner of Chatham Partners LLC, as the Senior Vice President and Chief Financial Officer
at Juniper Pharmaceuticals, Inc. and as the Chief Executive Officer at 2X Oncology, Inc. and Chief Financial Officer
of Enzyvant.
Mr.
Officer has over 30 years of experience in the financial services industry and related fields, including his positions on
the boards and/or in senior management of such companies as Ilex Partners (Asia), LLC, Old Westbury Funds, MAN
Long/Short Fund, GLG Investment Series Trust, The Bank of New York Mellon, The Dreyfus Corporation, Laurel Capital
Advisors and Bank of New England. In addition to his experience with financial, investment and regulatory matters,
Mr. Officer has extensive accounting knowledge through his education and experience as a principal financial officer,
principal accounting officer, controller, public accountant or auditor at his previous positions.
Part II:
Appendix II-B—Portfolio
Management Compensation
For funds advised by RREEF
Each fund is managed by
a team of investment professionals who each play an important role in a fund’s management process.
Team members work together to develop investment strategies and select securities for a fund. This team works
for RREEF or its affiliates and is supported by a large staff of economists, research analysts, traders and other investment
specialists. The Advisor or its affiliates believe(s) its team approach benefits investors by bringing together many
disciplines and leveraging its extensive resources. Team members with primary responsibility for management of
a fund, as well as team members who have other ongoing management responsibilities for a fund, are identified in
each fund’s prospectus, as of the date of a fund’s prospectus. Composition of the team may change over time, and
shareholders and investors will be notified of changes affecting individuals with primary fund management responsibility.
Compensation of Portfolio Managers
RREEF and its affiliates
are part of DWS. The brand DWS represents DWS Group GmbH & Co. KGaA (“DWS
Group”)
and any of its subsidiaries such as DBX Advisors
LLC, and DWS Investment Management Americas, Inc. which offer advisory
services. DWS seeks to offer its investment professionals competitive short-term and long-term compensation based
on continuous, above average, fund performance relative to the market. This includes measurement of short and
long-term performance against industry and portfolio benchmarks. As employees of DWS, portfolio managers are
paid on a total compensation basis, which includes Fixed Pay (base salary) and Variable Compensation, as follows:
•
Fixed
Pay (FP) is the key and primary element of compensation for the majority of DWS employees and reflects the
value of the individual’s role and function within the organization. It rewards factors that an employee brings to
the organization such as skills and experience, while reflecting regional and divisional (i.e. DWS) specifics. FP levels
play a significant role in ensuring competitiveness of RREEF and its affiliates in the labor market, thus benchmarking
provides a valuable input when determining FP levels.
•
Variable
Compensation (VC) is a discretionary compensation element that enables DWS Group to provide additional reward
to employees for their performance and behaviors, while reflecting DWS Group’s affordability and the financial
situation. VC aims to:
Recognize that every employee
contributes to DWS’s success through the franchise component of Variable Compensation (Franchise
Component), and
Reflect individual performance,
investment performance, behaviors and culture through discretionary individual VC
(Individual Component).
Employee seniority as
well as divisional and regional specifics determine which VC elements are applicable for a given employee
and the conditions under which they apply. Both Franchise and Individual Components may be awarded in shares
or other share-based instruments and other deferral arrangements.
•
VC
can be delivered via cash, restricted equity awards, and/or restricted incentive awards or restricted compensation. Restricted
compensation may include:
notional fund investments,
restricted equity, notional equity,
such other form as DWS may decide in its
sole discretion.
•
VC
comprises a greater proportion of total compensation as an employee’s seniority and total compensation level increase.
Proportion of VC delivered via a long-term incentive award, which is subject to performance conditions and
forfeiture provisions, will increase significantly as the amount of the VC increases.
•
Additional
forfeiture and claw back provisions, including complete forfeiture and claw back of VC may apply in certain
events if an employee is designated a Material Risk Taker.
•
For
key investment professionals, in particular, a portion of any long-term incentives will be in the form of notional investments
aligned, where possible, to the funds they manage.
In general, each of RREEF
and its advisory affiliates seek to offer their investment professionals competitive short-term and
long-term compensation based on continuous, above average, fund performance relative to the market. This includes measurement
of short and long-term performance against industry and portfolio benchmarks. To evaluate their investment professionals
in light of and consistent with the compensation principles set forth above, RREEF reviews investment performance
for all accounts managed in relation to the appropriate Morningstar peer group universe with respect to
a fund, iMoneyNet peer group with respect to a money market fund or relevant benchmark index(es) set forth in the
governing documents with respect to each other account type. The ultimate goal of this process is to evaluate the
degree to which investment professionals deliver investment performance that meets or exceeds their clients’ risk
and return objectives. When determining total compensation, RREEF considers a number of quantitative, qualitative and
other factors:
•
Quantitative
measures (e.g. one-, three- and five-year pre-tax returns versus the appropriate Morningstar peer group
universe for a fund, or versus the appropriate iMoneyNet peer group for a money market fund or relevant benchmark
index(es) set forth in the governing documents with respect to each other account type, taking risk targets
into account) are utilized to measure performance.
•
Qualitative
measures (e.g. adherence to, as well as contributions to, the enhancement of the investment process) are
included in the performance review.
•
Other
factors (e.g. non-investment related performance, teamwork, adherence to compliance rules, risk management and
“living
the values”
of RREEF and its affiliates) are included as part of a discretionary component of the review process,
giving management the ability to consider additional markers of performance on a subjective basis.
•
Furthermore,
it is important to note that DWS Group functions within a controlled environment based upon the risk
limits established by DWS Group's Risk division, in conjunction with DWS Group management. Because risk
consideration is inherent in all business activities, performance assessment factors in an employee’s ability to
assess and manage risk.
Real, potential or apparent
conflicts of interest may arise when a portfolio manager has day-to-day portfolio management responsibilities
with respect to more than one fund or account, including the following:
•
Certain
investments may be appropriate for a fund and also for other clients advised by RREEF and its affiliates, including
other client accounts managed by a fund’s portfolio management team. Investment decisions for a fund and
other clients are made with a view to achieving their respective investment objectives and after consideration of
such factors as their current holdings, availability of cash for investment and the size of their investments generally. A
particular security may be bought or sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, because clients of RREEF and its affiliates may have differing investment
strategies, a particular security may be bought for one or more clients when one or more other clients are
selling the security. The investment results achieved for a fund may differ from the results achieved for other clients
of RREEF and its affiliates. In addition, purchases or sales of the same security may be made for two or more
clients on the same day. In such event, such transactions will be allocated among the clients in a manner believed
by RREEF and its affiliates to be most equitable to each client, generally utilizing a pro rata allocation methodology.
In some cases, the allocation procedure could potentially have an adverse effect or positive effect on
the price or amount of the securities purchased or sold by a fund. Purchase and sale orders for a fund may be
combined with those of other clients of RREEF and its affiliates in the interest of achieving the most favorable net
results to a fund and the other clients.
•
To
the extent that a portfolio manager has responsibilities for managing multiple client accounts, a portfolio manager will
need to divide time and attention among relevant accounts. RREEF and its affiliates attempt to minimize these
conflicts by aligning its portfolio management teams by investment strategy and by employing similar investment models
across multiple client accounts.
•
In
some cases, an apparent conflict may arise where RREEF has an incentive, such as a performance-based fee, in
managing one account and not with respect to other accounts it manages. RREEF and its affiliates will not determine
allocations based on whether it receives a performance-based fee from the client. Additionally, RREEF has
in place supervisory oversight processes to periodically monitor performance deviations for accounts with like
strategies.
•
RREEF
and its affiliates and the investment team of a fund may manage other mutual funds and separate accounts on
a long only or a long-short basis. The simultaneous management of long and short portfolios creates potential conflicts
of interest including the risk that short sale activity could adversely affect the market value of the long positions
(and vice versa), the risk arising from sequential orders in long and short positions, and the risks associated with
receiving opposing orders at the same time. RREEF has adopted procedures that it believes are reasonably designed
to mitigate these and other potential conflicts of interest. Included in these procedures are specific guidelines
developed to provide fair and equitable treatment for all clients whose accounts are managed by each fund’s
portfolio management team. RREEF and the portfolio management team have established monitoring procedures,
a protocol for supervisory reviews, as well as compliance oversight to ensure that potential conflicts of
interest relating to this type of activity are properly addressed.
RREEF is owned by DWS
Group, a multinational global financial services firm that is a majority owned subsidiary of Deutsche
Bank AG. Therefore, RREEF is affiliated with a variety of entities that provide, and/or engage in commercial banking,
insurance, brokerage, investment banking, financial advisory, broker-dealer activities (including sales and trading), hedge
funds, real estate and private equity investing, in addition to the provision of investment management services to
institutional and individual investors. Since Deutsche Bank AG, its affiliates, directors, officers and employees (the “Firm”)
are engaged in businesses and have interests in addition to managing asset management accounts, such wide
ranging activities involve real, potential or apparent conflicts of interest. These interests and activities include potential
advisory, transactional and financial activities and other interests in securities and companies that may be directly
or indirectly purchased or sold by the Firm for its clients’ advisory accounts. RREEF may take investment positions
in securities in which other clients or related persons within the Firm have different investment positions. There
may be instances in which RREEF and its affiliates are purchasing or selling for their client accounts, or pursuing an
outcome in the context of a workout or restructuring with respect to, securities in which the Firm is undertaking the
same or differing strategy in other businesses or other client accounts. These are considerations of which advisory clients
should be aware and which will cause conflicts that could be to the disadvantage of RREEF, and its affiliate’s advisory
clients, including the Fund. RREEF has instituted business and compliance policies, procedures and disclosures that
are designed to identify, monitor and mitigate conflicts of interest and, as appropriate, to report them to a fund’s Board.
Each Portfolio Manager
is responsible for various functions related to portfolio management, including, but not limited to,
investing cash inflows, coordinating with members of his or her team to focus on certain asset classes, implementing investment
strategy, researching and reviewing investment strategy and overseeing members of his or her portfolio management
team with more limited responsibilities.
Compensation of Portfolio Managers
The Advisor and its affiliates
are part of DWS. The brand DWS represents DWS Group GmbH & Co. KGaA (“DWS
Group”)
and any of its subsidiaries such as DBX Advisors LLC,
DWS Investment Management Americas, Inc. and RREEF
America L.L.C. which offer advisory services. As employees of DWS, portfolio managers are paid on a total compensation
basis, which includes Fixed Pay (base salary) and Variable Compensation, as follows:
•
Fixed
Pay (FP) is the key and primary element of compensation for the majority of DWS employees and reflects the
value of the individual’s role and function within the organization. It rewards factors that an employee brings to
the organization such as skills and experience, while reflecting regional and divisional (i.e., DWS) specifics. FP levels
play a significant role in ensuring competitiveness of the Advisor and its affiliates in the labor market, thus benchmarking
provides a valuable input when determining FP levels.
•
Variable
Compensation (VC) is a discretionary compensation element that enables DWS Group to provide additional reward
to employees for their performance and behaviors, while reflecting DWS Group’s affordability and financial situation.
VC aims to:
Recognize that every employee
contributes to DWS’s success through the franchise component of Variable Compensation (Franchise
Component); and
Reflect individual performance,
investment performance, behaviors and culture through discretionary individual VC
(Individual Component).
Employee seniority as
well as divisional and regional specifics determine which VC elements are applicable for a given employee
and the conditions under which they apply. Both Franchise and Individual Components may be awarded in shares
or other share-based instruments and other deferral arrangements.
•
VC
can be delivered via cash, restricted equity awards, and/or restricted incentive awards or restricted compensation. Restricted
compensation may include:
Notional fund investments;
Restricted equity, notional equity;
Such other form as DWS may decide in its
sole discretion.
•
VC
comprises a greater proportion of total compensation as an employee’s seniority and total compensation level increase.
Proportion of VC delivered via a long-term incentive award, which is subject to performance conditions and
forfeiture provisions, will increase significantly as the amount of the VC increases.
•
Additional
forfeiture and claw back provisions, including complete forfeiture and claw back of VC may apply in certain
events if an employee is designated a Material Risk Taker.
•
For
key investment professionals, in particular, a portion of any long-term incentives will be in the form of notional investments
aligned, where possible, to a suite of flagship funds managed by the DWS ETF platform.
To evaluate their investment
professionals in light of and consistent with the compensation principles set forth above, the
Advisor considers a number
of quantitative, qualitative and other factors:
•
Quantitative
measures (e.g. tracking error and tracking difference relative
to an index or active target allocation, where applicable)
are utilized to measure performance.
•
Qualitative
measures (e.g., adherence to, as well as contributions to, the enhancement of the investment process) are
included in the performance review.
•
Other
factors (e.g., non-investment related performance, teamwork, adherence to compliance rules, risk management and
“living
the values”
of the Advisor and its affiliates) are included as part of a discretionary component of the review
process, giving management the ability to consider additional markers of performance on a subjective basis.
•
Furthermore,
it is important to note that DWS Group functions within a controlled environment based upon the risk
limits established by DWS Group's Risk division, in conjunction with DWS Group management. Because risk
consideration is inherent in all business activities, performance assessment factors in an employee’s ability to
assess and manage risk.
Real, potential or apparent
conflicts of interest may arise when a portfolio manager has day-to-day portfolio management responsibilities
with respect to more than one fund or account, including the following:
•
Certain
investments may be appropriate for a fund and also for other clients advised by the Advisor and their affiliates,
including other client accounts managed by a fund’s portfolio management team. Investment decisions for
a fund and other clients are made with a view to achieving their respective investment objectives and after consideration
of such factors as their current holdings, availability of cash for investment and the size of their investments
generally. A particular security may be bought or sold for only one client or in different amounts and at
different times for more than one but less than all clients. Likewise, because clients of the Advisor and their affiliates
may have differing investment strategies, a particular security may be bought for one or more clients when
one or more other clients are selling the security. The investment results achieved for a fund may differ from
the results achieved for other clients of the Advisor and their affiliates. In addition, purchases or sales of the
same security may be made for two or more clients on the same day. In such event, such transactions will be
allocated among the clients in a manner believed by the Advisor and their affiliates to be most equitable to each
client, generally utilizing a pro rata allocation methodology. In some cases, the allocation procedure could potentially
have an adverse effect or positive effect on the price or amount of the securities purchased or sold by
a fund. Purchase and sale orders for a fund may be combined with those of other clients of the Advisor and their
affiliates in the interest of achieving the most favorable net results to a fund and the other clients.
•
To
the extent that a portfolio manager has responsibilities for managing multiple client accounts, a portfolio manager will
need to divide time and attention among relevant accounts. The Advisor and their affiliates attempt to minimize these
conflicts by aligning its portfolio management teams by investment strategy and by employing similar investment models
across multiple client accounts.
•
In
some cases, an apparent conflict may arise where the Advisor has an incentive, such as a performance-based fee,
in managing one account and not with respect to other accounts it manages. The Advisor and their affiliates will
not determine allocations based on whether it receives a performance-based fee from the client. Additionally, the
Advisor has in place supervisory oversight processes to periodically monitor performance deviations for accounts with
like strategies.
•
The
Advisor and its affiliates and the investment team of a fund may manage other mutual funds and separate accounts
on a long only or a long-short basis. The simultaneous management of long and short portfolios creates potential
conflicts of interest including the risk that short sale activity could adversely affect the market value of the
long positions (and vice versa), the risk arising from sequential orders in long and short positions, and the risks
associated with receiving opposing orders at the same time. The Advisor has adopted procedures that it believes
are reasonably designed to mitigate these and other potential conflicts of interest. Included in these procedures
are specific guidelines developed to provide fair and equitable treatment for all clients whose accounts are
managed by each fund’s portfolio management team. The Advisor and the portfolio management team have established
monitoring procedures, a protocol for supervisory reviews, as well as compliance oversight to ensure that
potential conflicts of interest relating to this type of activity are properly addressed.
The Advisor is owned
by the DWS Group, a multinational global financial services firm that is a majority-owned subsidiary of
Deutsche Bank AG. Therefore, the Advisor is affiliated with a variety of entities that provide, and/or engage in commercial banking,
insurance, brokerage, investment banking, financial advisory, broker-dealer activities (including sales and trading), hedge
funds, real estate and private equity investing, in addition to the provision of investment management services to
institutional and individual investors. Since Deutsche Bank AG, its affiliates, directors, officers and employees (the “Firm”)
are engaged in businesses and have interests in addition to managing asset management accounts, such
wide
ranging activities involve real, potential or apparent conflicts of interest. These interests and activities include potential
advisory, transactional and financial activities and other interests in securities and companies that may be directly
or indirectly purchased or sold by the Firm for its clients’ advisory accounts. The Advisor may take investment positions
in securities in which other clients or related persons within the Firm have different investment positions. There
may be instances in which the Advisor and their affiliates are purchasing or selling for their client accounts, or pursuing
an outcome in the context of a workout or restructuring with respect to, securities in which the Firm is undertaking
the same or differing strategy in other businesses or other client accounts. These are considerations of which
advisory clients should be aware and which will cause conflicts that could be to the disadvantage of the Advisor, and
their affiliate’s advisory clients, including the fund. The Advisor has instituted business and compliance policies, procedures
and disclosures that are designed to identify, monitor and mitigate conflicts of interest and, as appropriate, to
report them to a fund’s Board.
HGI compensates the funds’
portfolio managers for their management of the funds. HGI pays portfolio managers (i) fixed
base salaries, which are linked to job function, responsibilities and financial services industry peer comparison, and
(ii) variable compensation, which is linked to investment performance, individual contributions to the team, and the
overall financial results of the firm. Variable compensation may include a cash bonus, as well as potential participation in
a variety of long-term incentive programs. There is no material difference in the method used to calculate the portfolio manager’s
compensation with respect to the funds and other accounts managed by the portfolio manager. HGI maintains competitive
salaries for all employees, based on independent research of the investment management industry.
Real, potential or apparent
conflicts of interest may arise when a portfolio manager has day-to-day portfolio management responsibilities
with respect to more than one fund or account, including the following:
•
Certain
investments may be appropriate for a fund and also for other clients advised by the Advisor, including other
client accounts managed by a fund’s portfolio management team. Investment decisions for a fund and other
clients are made with a view to achieving their respective investment objectives and after consideration of
such factors as their current holdings, availability of cash for investment and the size of their investments generally. A
particular security may be bought or sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, because clients of the Advisor may have differing investment strategies,
a particular security may be bought for one or more clients when one or more other clients are selling the
security. The investment results achieved for a fund may differ from the results achieved for other clients of the
Advisor. In addition, purchases or sales of the same security may be made for two or more clients on the same
day. In such event, such transactions will be allocated among the clients in a manner believed by the Advisor to
be most equitable to each client, generally utilizing a pro rata allocation methodology. In some cases, the allocation procedure
could potentially have an adverse effect or positive effect on the price or amount of the securities purchased
or sold by a fund. Purchase and sale orders for a fund may be combined with those of other clients of
the Advisor in the interest of achieving the most favorable net results to a fund and the other clients.
•
To
the extent that a portfolio manager has responsibilities for managing multiple client accounts, a portfolio manager will
need to divide time and attention among relevant accounts. The Advisor attempts to minimize these conflicts by
aligning its portfolio management teams by investment strategy and by employing similar investment models across
multiple client accounts.
•
In
some cases, an apparent conflict may arise where the Advisor has an incentive, such as a performance-based fee,
in managing one account and not with respect to other accounts it manages. The Advisor will not determine allocations
based on whether it receives a performance-based fee from the client. Additionally, the Advisor has in
place supervisory oversight processes to periodically monitor performance deviations for accounts with like strategies.
•
The
Advisor and its affiliates and the investment team of a fund may manage other mutual funds and separate accounts
on a long only or a long-short basis. The simultaneous management of long and short portfolios creates potential
conflicts of interest including the risk that short sale activity could adversely affect the market value of the
long positions (and vice versa), the risk arising from sequential orders in long and short positions, and the risks
associated with receiving opposing orders at the same time. The Advisor has adopted procedures that it believes
are reasonably designed to mitigate these and other potential conflicts of interest. Included in these procedures
are specific guidelines developed to provide fair and equitable treatment for all clients whose accounts are
managed by each fund’s portfolio management team. The Advisor and the portfolio management team have established
monitoring procedures, a protocol for supervisory reviews, as well as compliance oversight to ensure that
potential conflicts of interest relating to this type of activity are properly addressed.
HGI is affiliated with
DWS Group, a multinational global financial services firm that is a majority-owned subsidiary of Deutsche
Bank AG. Therefore, the Advisor is affiliated with a variety of entities that provide, and/or engage in commercial banking,
insurance, brokerage, investment banking, financial advisory, broker-dealer activities (including sales and trading), hedge
funds, real estate and private equity investing, in addition to the provision of investment management services to
institutional and individual investors. Since Deutsche Bank AG, its affiliates, directors, officers and employees (the “Firm”)
are engaged in businesses and have interests in addition to managing asset management accounts, such wide
ranging activities involve real, potential or apparent conflicts of interest. These interests and activities include potential
advisory, transactional and financial activities and other interests in securities and companies that may be directly
or indirectly purchased or sold by the Firm for its clients’ advisory accounts. The Advisor may take investment positions
in securities in which other clients or related persons within the Firm have different investment positions. There
may be instances in which the Advisor is purchasing or selling for its client accounts, or pursuing an outcome in
the context of a workout or restructuring with respect to, securities in which the Firm is undertaking the same or differing
strategy in other businesses or other client accounts. These are considerations of which advisory clients should
be aware and which will cause conflicts that could be to the disadvantage of the Advisor’s advisory clients, including
the fund. The Advisor has instituted business and compliance policies, procedures and disclosures that are designed
to identify, monitor and mitigate conflicts of interest and, as appropriate, to report them to a fund’s Board.
Part II:
Appendix II-C—Contractual
Fee Rates of Service Providers
Fees payable to DBX for investment advisory services
The Unitary Advisory Fee for each fund,
at the annual percentage rate of daily net assets, is indicated below:
|
|
Unitary
Advisory Fee Rate |
MSCI
Currency Hedged Funds |
|
Xtrackers
MSCI All World ex US Hedged Equity ETF |
|
Xtrackers
MSCI EAFE Hedged Equity ETF |
|
Xtrackers
MSCI Emerging Markets Hedged Equity
ETF
|
|
Xtrackers
MSCI Europe Hedged Equity ETF |
|
Xtrackers
MSCI Eurozone Hedged Equity ETF |
|
Xtrackers
MSCI Japan Hedged Equity ETF |
|
|
|
|
Xtrackers
International Real Estate ETF |
|
|
|
|
Xtrackers
Artificial Intelligence and Big Data ETF |
|
Xtrackers
Cybersecurity Select Equity ETF |
|
Xtrackers
Emerging Markets Carbon Reduction and
Climate
Improvers ETF |
|
Xtrackers
FTSE Developed Ex US Multifactor ETF |
|
Xtrackers
MSCI EAFE ESG Leaders Equity ETF |
|
Xtrackers
MSCI EAFE High Dividend Yield Equity ETF |
|
Xtrackers
MSCI Emerging Markets Climate Selection
ETF
|
|
Xtrackers
MSCI Kokusai Equity ETF |
|
Xtrackers
MSCI USA Climate Action Equity ETF |
|
Xtrackers
MSCI USA ESG Leaders Equity ETF |
|
Xtrackers
Net Zero Pathway Paris Aligned US Equity
ETF
|
|
Xtrackers
Russell 1000 US Quality at a Reasonable
Price
ETF |
|
Xtrackers
Russell US Multifactor ETF |
|
Xtrackers
S&P 500 Carbon Budget ETF |
|
Xtrackers
S&P 500 ESG ETF |
|
Xtrackers
S&P 500 Growth ESG ETF |
|
Xtrackers
S&P 500 Value ESG ETF |
|
Xtrackers
S&P ESG Dividend Aristocrats ETF |
|
Xtrackers
S&P MidCap 400 ESG ETF |
|
Xtrackers
Semiconductor Select Equity ETF |
|
Xtrackers
US Green Infrastructure Select Equity ETF |
|
Xtrackers
US National Critical Technologies ETF |
|
|
|
|
Xtrackers
Harvest CSI 300 China A-Shares ETF |
|
|
|
Unitary
Advisory Fee Rate |
Xtrackers
Harvest CSI 500 China A-Shares Small Cap
ETF
|
|
|
|
|
Xtrackers
California Municipal Bond ETF |
|
Xtrackers
High Beta High Yield Bond ETF |
|
Xtrackers
Low Beta High Yield Bond ETF |
|
Xtrackers
Municipal Infrastructure Revenue Bond
ETF
|
|
Xtrackers
Risk Managed USD High Yield Strategy
|
|
Xtrackers
Short Duration High Yield Bond ETF |
|
Xtrackers
US 0-1 Year Treasury ETF |
|
Xtrackers
USD High Yield BB-B ex Financials ETF |
|
Xtrackers
USD High Yield Corporate Bond ETF |
|
|
|
|
Xtrackers
RREEF Global Natural Resources ETF |
|
(1)
Shareholders
of a fund also indirectly bear their pro rata share of the operating expenses, including the Unitary Advisory
Fee or management fee paid to DBX or other investment advisor (which may include affiliates of DBX), of
the underlying funds in which a fund invests.
Part II:
Appendix II-D—Firms
With Which DBX Has Revenue Sharing Arrangements
The list of financial
representatives below is as of the date of this SAI. Any additions, modifications or deletions to the
list of financial representatives identified below that have occurred since the date of this SAI are not reflected. You
can ask your financial representative if it receives revenue sharing payments from the Advisor, the Distributor and/or
their affiliates.
Dorsey, Wright & Associates, LLC
Fidelity Brokerage Services, Inc.
National Financial Services, LLC
Northwestern Mutual Investment Services,
LLC
Raymond James & Associates, Inc.
Raymond James Financial Services, Inc.
Part II:
Appendix II-E—Investments,
Practices and Techniques, and Risks
To the extent that a fund
invests in an Underlying Fund, or one or more affiliated ETFs, certain of these risks would also
apply to that fund. To the extent that a fund invests in an affiliated money market fund, see “INVESTMENTS,
PRACTICES AND TECHNIQUES, AND RISKS OF THE UNDERLYING MONEY MARKET
FUNDS”
below.
Adjustable Rate Securities.
The interest rates paid on the adjustable rate securities in which a fund invests generally are
readjusted at periodic intervals, usually by reference to a predetermined interest rate index. Adjustable rate securities include
US Government securities and securities of other issuers. Some adjustable rate securities are backed by pools of
mortgage loans. There are three main categories of interest rate indices: those based on US Treasury securities, those
derived from a calculated measure such as a cost of funds index and those based on a moving average of mortgage
rates. Commonly used indices include the one-year, three-year and five-year constant maturity Treasury rates,
the three-month Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month, three-month, six-month
or one-year Secured Overnight Financing Rate (SOFR), the prime rate of a specific bank or commercial paper
rates. As with fixed-rates securities, changes in market interest rates and changes in the issuer’s creditworthiness may
affect the value of adjustable rate securities.
Some indices, such as
the one-year constant maturity Treasury rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of Funds index (Cost of Funds Index), tend to lag behind changes
in market rate levels and tend to be somewhat less volatile. To the extent that the Cost of Funds index may reflect
interest changes on a more delayed basis than other indices, in a period of rising interest rates, any increase may
produce a higher yield later than would be produced by such other indices, and in a period of declining interest rates,
the Cost of Funds index may remain higher for a longer period of time than other market interest rates, which may
result in a higher level of principal prepayments on adjustable rate securities which adjust in accordance with the
Cost of Funds index than adjustable rate securities which adjust in accordance with other indices. In addition, dislocations
in the member institutions of the 11th District Federal Home Loan Bank in recent years have caused and may
continue to cause the Cost of Funds index to change for reasons unrelated to changes in general interest rate levels.
Furthermore, any movement in the Cost of Funds index as compared to other indices based upon specific interest
rates may be affected by changes in the method used to calculate the Cost of Funds index.
If prepayments of principal
are made on the securities during periods of rising interest rates, a fund generally will be able
to reinvest such amounts in securities with a higher current rate of return. However, a fund will not benefit from increases
in interest rates to the extent that interest rates rise to the point where they cause the current coupon of adjustable
rate securities held as investments by a fund to exceed the maximum allowable annual or lifetime reset limits
(cap rates) for a particular adjustable rate security. Also, a fund’s net asset value could vary to the extent that current
yields on adjustable rate securities are different than market yields during interim periods between coupon reset
dates.
During periods of declining
interest rates, the coupon rates may readjust downward, resulting in lower yields to a fund.
Further, because of this feature, the value of adjustable rate securities is unlikely to rise during periods of declining interest
rates to the same extent as fixed-rate instruments. Interest rate declines may result in accelerated prepayment of
adjustable rate securities, and the proceeds from such prepayments must be reinvested at lower prevailing interest rates.
London Interbank Offered
Rate (LIBOR), a common benchmark rate previously used for certain floating rate securities, has
been phased out as of the end of 2021 for most maturities and currencies. As of the end of June 2023, certain remaining
widely used US Dollar LIBOR rates that were published for an additional period of time to assist with the transition
were also phased out. In addition, to aid in the transition, the Financial Conduct Authority in the United Kingdom,
LIBOR's regulator, has required the continued publishing of certain “synthetic”
US Dollar LIBOR rates for a period of 15 months
after June 30, 2023 for use in certain cases. The transition process from LIBOR to SOFR for US
Dollar LIBOR rates has become increasingly well defined, especially following the signing of the federal Adjustable Interest
Rate (LIBOR) Act in March 2022 (discussed below). There is no assurance that the composition or characteristics
of
any such alternative reference rate will be similar to or produce the same value or economic equivalence as LIBOR or
that it will have the same volume or liquidity as did LIBOR prior to its discontinuance or unavailability, which may affect
the value or liquidity of, or return on, certain of a fund’s investments.
On March 15, 2022, the
federal Adjustable Interest Rate (LIBOR) Act was signed into law, which provided a statutory alternative
rate-setting methodology on a nationwide basis for certain LIBOR-based instruments that contained no, or
insufficient, alternative rate-setting provisions. On December 16, 2022, the Board of Governors of the Federal Reserve System
adopted a final rule to implement the LIBOR Act, which, among other things, established alternative benchmark rates
based on SOFR to replace LIBOR by operation of law following the cessation date in such instruments that referenced
the following US Dollar LIBOR rates: the overnight rate and the one-, three-, six- and 12-month rates. The transition
of LIBOR-based instruments from LIBOR to a replacement rate as a result of amendment, application of existing
alternative rate-setting provisions, statutory requirements or otherwise may result in a reduction in the value of
certain instruments held by a fund or a reduction in the effectiveness of related fund transactions such as hedges. An
instrument’s transition to a replacement rate could also result in variations in the reported yields of a fund that holds
such instrument. In addition, a liquid market for newly-issued instruments that use alternative reference rates still
may be developing. There may also be challenges for a fund to enter into hedging transactions against such newly-issued instruments
until a market for such hedging transactions develops. All of the aforementioned may adversely affect a fund’s
performance or net asset value.
Asset-Backed Securities.
A fund may invest in securities generally referred to as asset-backed securities. Asset-backed securities
are securities that directly or indirectly represent interests in, or are secured by and payable from, an underlying pool
of assets such as (but not limited to) first lien mortgages, motor vehicle installment sale contracts, other installment sale
contracts, home equity loans, leases of various types of real and personal property, and receivables from revolving credit
(i.e., credit card) agreements and trade receivables. Such assets are securitized through the use of trusts and special
purpose corporations. Asset-backed securities may provide periodic payments that consist of interest and/or principal
payments. Consequently, the life of an asset-backed security varies with the prepayment and loss experience of
the underlying assets. Payments of principal and interest may be dependent upon the cash flow generated by the underlying
assets backing the securities and, in certain cases, may be supported by some form of credit enhancement (for
more information, see Credit Enhancement). The degree of credit enhancement provided for each issue is generally based
on historical information respecting the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated or failure of the credit enhancement could adversely affect the return on an investment in
such a security. The value of the securities also may change because of changes in interest rates or changes in the market’s
perception of the creditworthiness of the servicing agent for the loan pool, the originator of the loans or the financial
institution providing the credit enhancement. Additionally, since the deterioration of worldwide economic and
liquidity conditions that became acute in 2008, asset-backed securities have been subject to greater liquidity risk. Asset-backed
securities are ultimately dependent upon payment of loans and receivables by individuals, businesses and
other borrowers, and a fund generally has no recourse against the entity that originated the loans.
Because asset-backed
securities may not have the benefit of a security interest in the underlying assets, asset-backed securities
present certain additional risks that are not present with mortgage-backed securities. For example, credit card
receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and federal
consumer credit laws, many of which give such debtors the right to avoid payment of certain amounts owed on
the credit cards, thereby reducing the balance due. Furthermore, most issuers of automobile receivables permit the
servicer to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party,
there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables.
In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under
state laws, the trustee for the holders of the automobile receivables may not have a proper security interest in
all of the obligations backing such receivables. Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
The yield characteristics
of the asset-backed securities in which a fund may invest differ from those of traditional debt securities.
Among the major differences are that interest and principal payments are made more frequently on asset-backed securities
(usually monthly) and that principal may be prepaid at any time because the underlying assets generally may
be prepaid at any time. As a result, if a fund purchases these securities at a premium, a prepayment rate that is
faster
than expected will reduce their yield, while a prepayment rate that is slower than expected will have the opposite effect
of increasing yield. Conversely, if a fund purchases these securities at a discount, faster than expected prepayments will
increase, while slower than expected prepayments will reduce, the yield on these securities. Because prepayment of
principal generally occurs during a period of declining interest rates, a fund may generally have to reinvest the proceeds
of such prepayments at lower interest rates. Therefore, asset-backed securities may have less potential for capital
appreciation in periods of falling interest rates than other income-bearing securities of comparable maturity. Conversely,
during periods of rising interest rates, prepayment rates tend to decline, thus lengthening the duration of
asset-backed securities, which may increase the price volatility of these securities.
Other Asset-Backed Securities.
The securitization techniques used to develop mortgage-backed securities are now being
applied to a broad range of assets. Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables, are being securitized in pass-through structures
similar to mortgage pass-through structures or in a structure similar to the CMO structure. In general, the collateral
supporting these securities is of shorter maturity than mortgage loans and is less likely to experience substantial prepayments
with interest rate fluctuations.
Several types of asset-backed
securities have already been offered to investors, including Certificates of Automobile Receivables
(CARS) and Collateralized Loan Obligations (CLOs). CARS
represent undivided fractional interests in a trust
whose assets consist of a pool of motor vehicle retail installment sales contracts and security interests in the vehicles
securing the contracts. Payments of principal and interest on CARS
are passed through monthly to certificate holders,
and are guaranteed up to certain amounts and for a certain time period by a letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the trust. An investor’s return on CARS
may be affected by early prepayment of principal
on the underlying vehicle sales contracts. If the letter of credit is exhausted, the trust may
be prevented from realizing the full amount due on a sales contract because of state law requirements and restrictions relating
to foreclosure sales of vehicles and the obtaining of deficiency judgments following such sales or because of
depreciation, damage or loss of a vehicle, the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or losses if the letter of credit is exhausted.
CLOs represent interests in a trust whose underlying assets consist of a pool of loans. Such loans may include
domestic and foreign senior secured loans, senior unsecured loans and subordinate corporate loans, some of
which may be below investment grade or equivalent unrated loans. CLOs issue classes or “tranches”
that vary in risk and yield. A CLO may experience
substantial losses attributable to defaults on underlying assets. Such losses will
be borne first by the holders of subordinate tranches. A fund’s investment in a CLO may decrease in market value because
of (i) loan defaults or credit impairment, (ii) the disappearance of subordinate tranches (i.e.,
the complete erosion of subordinate tranches
due to collateral defaults), (iii) market anticipation of defaults,
and (iv) investor aversion to CLO securities
as a class. These risks may be magnified depending on the tranche of CLO securities in which a fund
invests. For example, investments in a junior tranche of CLO securities will likely be more sensitive to loan defaults or
credit impairment than investments in more senior tranches.
A fund may also invest
in residual interests in asset-backed securities. In the case of asset-backed securities issued in
a pass-through structure, the cash flow generated by the underlying assets is applied to make required payments on
the securities and to pay related administrative expenses. The residual in an asset-backed security pass-through structure
represents the interest in any excess cash flow remaining after making the foregoing payments. The amount of
residual cash flow resulting from a particular issue of asset-backed securities will depend on, among other things, the
characteristics of the underlying assets, the coupon rates on the securities, prevailing interest rates, the amount of
administrative expenses and the actual prepayment experience on the underlying assets. Asset-backed security residuals
not registered under the 1933 Act may be subject to certain restrictions on transferability. In addition, there may
be no liquid market for such securities.
The availability of asset-backed
securities may be affected by legislative or regulatory developments. It is possible that
such developments may require a fund to dispose of any then-existing holdings of such securities.
Asset-Indexed Securities.
A fund may purchase asset-indexed securities which are debt securities usually issued by
companies in precious metals related businesses such as mining, the principal amount, redemption terms, or interest rates
of which are related to the market price of a specified precious metal. Market prices of asset-indexed securities
will
relate primarily to changes in the market prices of the precious metals to which the securities are indexed rather than
to changes in market rates of interest. However, there may not be a perfect correlation between the price movements of
the asset-indexed securities and the underlying precious metals. Asset-indexed securities typically bear interest or
pay dividends at below market rates (and in certain cases at nominal rates). The purchase of asset-indexed securities also
exposes a fund to the credit risk of the issuer of the asset-indexed securities.
Borrowing.
Under the 1940 Act, a fund is required to maintain continuous asset coverage of 300% with respect to permitted
borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline
to less than 300% due to market fluctuations or otherwise, even if such liquidation of a fund's holdings may be
disadvantageous from an investment standpoint.
Credit Facility.
To the extent that a fund and other affiliated funds (“Participants”)
participate, a fund may share in a revolving
credit facility provided by a syndication of banks. A fund may borrow money under a credit facility for temporary or
emergency purposes, including the funding of shareholder redemption requests, that otherwise might require the untimely
disposition of securities. A fund’s ability to borrow is subject to the terms and conditions of its credit arrangements, which
in some cases may limit the fund’s ability to borrow under the credit facility. Participants are charged an annual commitment
fee as well as other fees associated with the credit facility, paid by the Advisor out of a fund’s unitary advisory
fee, which is allocated based on net assets, among each of the Participants. Interest is charged to a fund on
its borrowings at current commercial rates. A fund can prepay loans at any time and may at any time terminate, or
from time to time reduce, without the payment of a premium or penalty, its commitment under the credit facility subject
to compliance with certain conditions.
Borrowing may exaggerate
changes in the net asset value of fund shares and in the return on a fund’s portfolio. Borrowing will
cost a fund interest expense and other fees, which may reduce a fund’s return. A fund is required to maintain continuous
asset coverage with respect to its borrowings and may be required to sell some of its holdings to reduce debt
and restore coverage at times when it is not advantageous to do so. There is no assurance that a borrowing strategy
will be successful. Upon the expiration of the term of a fund’s existing credit arrangement, the lender may not
be willing to extend further credit to a fund or may only be willing to do so at an increased cost to a fund. If a fund is
not able to extend its credit arrangement, it may be required to liquidate holdings to repay amounts borrowed from the
lender. When a fund and other affiliated funds are joint participants in a credit facility, any given fund may be unable to
borrow some or all of its requested amount at any particular time. This may be true particularly during times of market
stress. In addition, if a fund’s assets increase, there is no assurance that the lender will be willing to make additional
loans to a fund in order to allow it to borrow the amounts desired by a fund to facilitate redemptions.
Chinese Securities.
A-Shares are issued by companies incorporated in mainland China and are traded in RMB on the
stock exchanges in mainland China, including the Shanghai Stock Exchange (“SSE”),
the Shenzhen Stock Exchange (“SZSE”)
and the Beijing Stock Exchange (“BSE”).
Under current regulations in the PRC, foreign investors can invest in
the domestic PRC securities markets through certain market access programs. These programs include the Qualified Foreign
Investor (“QFI”,
including Qualified Foreign Institutional Investor (“QFII”)
and Renminbi Qualified Foreign Institutional Investor
(“RQFII”))
program, where investors will be required to obtain a license from the CSRC. QFIs have also registered to
remit foreign currencies which can be traded on the China Foreign Exchange Trade System (in the case of a QFII) and
RMB (in the case of an RQFII) in the PRC for the purpose of investing in the PRC’s domestic securities markets.
Currently, there are
three stock exchanges in mainland China, the SSE, the SZSE and the BSE. The stock exchanges in
mainland China are supervised by the CSRC and are highly automated with trading and settlement executed electronically. The
stock exchanges in mainland China are smaller, periodically less liquid, and substantially more volatile than the major
securities markets in the United States.
The SSE commenced trading
on December 19, 1990, the SZSE commenced trading on July 3, 1991, and the BSE commenced
trading on November 15, 2021. A-Shares may be listed on the SSE, the SZSE and the BSE; while currently B-Shares
can be listed on the SSE and the SZSE. Companies whose shares are traded on the SSE and SZSE that are incorporated
in mainland China may issue both A-Shares and B-Shares. In China, the A-Shares and B-Shares of an
issuer
may only trade on one exchange. Both classes represent an ownership interest comparable to a share of common stock
and all shares are entitled to substantially the same rights and benefits associated with ownership. A-Shares are
traded in RMB.
A fund may invest in
B-Shares, which are equity securities issued by companies incorporated in China and are denominated and
traded in U.S. dollars and Hong Kong dollars (“HKD”)
on the SSE and SZSE, respectively. B-Shares are available to
foreign investors. H-Shares are equity securities issued by companies incorporated in mainland China and are denominated and
traded in HKD on the Hong Kong Stock Exchange and other foreign exchanges.
A fund may also invest
in red chips and P chips, which are equity securities issued by companies incorporated outside of
mainland China and listed on the Hong Kong Stock Exchange. Companies that issue Red chips generally base their businesses
in mainland China and are controlled, either directly or indirectly, by the state, provincial or municipal governments of
the PRC. Companies that issue P chips generally are non-state-owned Chinese companies incorporated outside of
mainland China but that derive a majority of their revenue from, or allocate a majority of their assets in mainland China.
Securities listed in the United States and Singapore are considered to be Chinese companies if they satisfy two
out of three of the following criteria: (i) the company is based in the PRC, (ii) the company derives more than 50%
of its revenue from activities conducted in the PRC and (iii) the company has more than 50% of its assets in the
PRC.
A fund may be exposed
to securities listed on the Science and Technology Innovation Board (“STAR
Board”)
of the SSE and the ChiNext market of the SZSE.
Such investments will be subject to the following risks and may result in significant
losses for the fund and its investors. Listed companies on ChiNext market and/or STAR Board are usually of
emerging nature with smaller operating scale. Listed companies on ChiNext market and STAR Board are subject to
wider price fluctuation limits, and due to higher entry thresholds for investors may have limited liquidity, compared to
other boards. Hence, companies listed on these boards are subject to higher fluctuation in stock prices and liquidity risks
and have higher risks and turnover ratios than companies listed on the main boards. Stocks listed on ChiNext market
and/or STAR Board may be overvalued and such exceptionally high valuation may not be sustainable. Stock price
may be more susceptible to manipulation due to fewer circulating shares. The rules and regulations regarding companies
listed on the ChiNext market and STAR Board are less stringent in terms of profitability and share capital than
those in the main boards. It may be more common and faster for companies listed on ChiNext market and/or STAR
Board to delist. ChiNext market and STAR Board have stricter criteria for delisting compared to the main boards. This
may have an adverse impact on the fund if the companies that it invests in are delisted. STAR Board is a newly established
board and may have a limited number of listed companies during the initial stage. Investments in STAR Board
may be concentrated in a small number of stocks and subject the fund to higher concentration risk.
A-Share Market Suspension Risk.
A-Shares may only be purchased from, or sold to, certain funds from time to time where
the relevant A-Shares may be sold or purchased on the relevant stock exchange, as appropriate. Given that the
A-Share market is considered volatile and unstable (with the risk of suspension of a particular stock or government intervention),
the creation and redemption of Creation Units may also be disrupted. Such suspensions may be widespread and,
on some occasions, have affected a majority of listed issuers in China. A participating dealer may not be able to create
Creation Units of a fund if A-Shares are not available or not available in sufficient amounts.
A-Share Tax Risk.
Uncertainties in the Chinese tax rules governing taxation of income and gains from investments in A-Shares
could result in unexpected tax liabilities for a fund. China generally imposes withholding tax at a rate of 10% on
dividends and interest derived by nonresident enterprises (including QFIs) from issuers resident in China. China also
imposes withholding tax at a rate of 10% on capital gains derived by nonresident enterprises from investments in
an issuer resident in China, subject to an exemption or reduction pursuant to domestic law or a double taxation agreement
or arrangement.
Since
the respective inception of Shanghai Connect and Shenzhen Connect, foreign investors (including the funds) investing
in A-Shares listed on the SSE through Shanghai Connect and those listed on the SZSE through Shenzhen Connect
would be temporarily exempted from the PRC corporate income tax and value-added tax on the gains on disposal
of such A-Shares. Dividends would be subject to PRC corporate income tax on a withholding basis at 10%, unless
reduced under a double tax treaty with China upon application to and obtaining approval from the competent tax
authority.
Since November 17, 2014,
the corporate income tax for QFIs, with respect to capital gains, has been temporarily lifted.
The withholding tax relating to the realized gains from shares in land-rich companies prior to November 17, 2014 has
been paid by the Xtrackers Harvest ETFs, while realized gains from shares in non-land-rich companies prior to November
17, 2014 were granted by treaty relief pursuant to the PRC-US Double Taxation Agreement. During 2015, revenue
authorities in the PRC made arrangements for the collection of capital gains taxes for investments realized between
November 17, 2009 and November 16, 2014. A fund could be subject to tax liability for any tax payments for
which reserves have not been made or that were not previously withheld. The impact of any such tax liability on a
fund’s return could be substantial. A fund may also be liable to the Advisor or Subadvisor for any tax that is imposed on
the Advisor or Subadvisor by the PRC with respect to the fund’s investments. If a fund’s direct investments in A-Shares
through the Advisor’s or Subadvisor’s Stock Connect investments and/or Subadvisor’s QFI status become subject
to repatriation restrictions, the fund may be unable to satisfy distribution requirements applicable to regulated investment
companies under the Internal Revenue Code of 1986, as amended
(“RIC”),
and be subject to tax at the fund level. In
the event such restrictions are imposed, a fund may borrow funds to the extent necessary to distribute to
shareholders income sufficient to maintain the fund’s status as a RIC.
The current PRC tax laws
and regulations and interpretations thereof may be revised or amended in the future, including with
respect to the possible liability of a fund for the taxation of income and gains from investments in A-Shares through
Stock Connect or obligations of a QFI. The withholding taxes on dividends, interest and capital gains may in principle
be subject to a reduced rate under an applicable tax treaty, but the application of such treaties in the case of
a QFI acting for a foreign investor such as the funds is also uncertain. Finally, it is also unclear whether an RQFII would
also be eligible for PRC Business Tax (BT) exemption, which has been granted to QFIIs, with respect to gains derived
prior to May 1, 2016. In practice, the BT has not been collected. However, the imposition of such taxes on a fund
could have a material adverse effect on a fund’s returns. Under the value-added tax regime, BT exemption granted to
QFIIs with respect to gains realized from the trading of PRC marketable securities has been grandfathered (i.e. QFIIs
continue to enjoy exemption on gains under the value-added tax regime). Since May 1, 2016, RQFIIs are exempt from
PRC value-added tax, which replaced the PRC Business Tax with respect to gains realized from the disposal of securities,
including A-Shares.
The PRC rules for taxation
of QFIs are evolving and certain tax regulations to be issued by the PRC State Administration of
Taxation and/or PRC Ministry of Finance to clarify the subject matter may apply retrospectively, even if such rules are
adverse to a fund and their shareholders. The applicability of reduced treaty rates of withholding in the case of a QFI
acting for a foreign investor such as the fund is also uncertain.
The PRC tax authorities
are not currently enforcing the collection of withholding tax on capital gains, and at present such
taxes likely will not be collected through withholding. If the PRC begins applying tax rules regarding the taxation of
income from A-Shares investments to QFIs and/or begins collecting capital gains taxes on such investments (whether made
through Stock Connect or a QFI), a fund could be subject to withholding tax liability in excess of the amount reserved
(if any). The impact of any such tax liability on a fund’s return could be substantial. A fund will be liable to the
Advisor and/or Subadvisor for any Chinese tax that is imposed on the Advisor and/or the Subadvisor with respect to
the fund’s investments.
As described below under
“Taxes,”
each fund may elect, for US federal income tax purposes, to treat PRC taxes (including
withholding taxes) paid by a fund as paid by its shareholders. Even if a fund is qualified to make that election and
does so, however, your ability to claim a credit for certain PRC taxes may be limited under general US tax principles.
In
addition, to the extent a fund invests in swaps and other derivative instruments, such investments may be less tax-efficient
from a US tax perspective than direct investment in A-Shares and may be subject to special US federal income
tax rules that could adversely affect a fund. Each fund may also may be required to periodically adjust its positions
in those instruments to comply with certain regulatory requirements which may further cause these investments to
be less efficient than a direct investment in A-Shares.
The PRC government has
implemented a number of tax reform policies in recent years. The current tax laws and regulations
may be revised or amended in the future. Any revision or amendment in tax laws and regulations may affect
the after-taxation profit of PRC companies and foreign investors in such companies, such as each fund.
Disclosure of Interests and Short
Swing Profit Rule. A fund may be subject to shareholder disclosure
of interest regulations promulgated by the CSRC.
To the extent they are applicable, these regulations currently would require a fund to make certain
public disclosures when the fund and parties acting in concert with the fund acquire 5% or more of the issued voting
securities of a listed company (which include A-Shares of the listed company). If the reporting requirement is triggered,
a fund would be required to report information which includes, but is not limited to: (a) information about a
fund (and parties acting in concert with the fund) and the type and extent of its holdings in the company; (b) a statement
of a fund’s purposes for the investment and whether the Fund intends to increase its holdings over the following
12-month period; (c) a statement of a fund’s historical investments in the company over the previous six months;
(d) the time of, and other information relating to, the transaction that triggered a fund’s holding in the listed company
reaching the 5% reporting threshold; and (e) other information that may be required by the CSRC or the stock
exchange. Additional information may be required if a fund and its concerted parties constitute the largest shareholder or
actual controlling shareholder of the listed company. The report must be made to the CSRC, the stock exchange, the
invested company, and the CSRC local representative office where the listed company is located. Each fund would also
be required to make a public announcement through a media outlet designated by the CSRC. The public announcement must
contain the same content as the official report. The public announcement may require a fund to disclose its holdings
to the public, which could have an adverse effect on the performance of the fund.
The relevant PRC regulations
presumptively treat all affiliated investors and investors under common control as parties acting
in concert. As such, under a conservative interpretation of these regulations, a fund may be deemed as a “concerted
party”
of other funds managed by the Advisor, Subadvisor or their affiliates and therefore may be subject to the risk that
the fund’s holdings may be required to be reported in the aggregate with the holdings of such other funds should the
aggregate holdings trigger the reporting threshold under the PRC law.
If the 5% shareholding
threshold is triggered by a fund and parties acting in concert with the fund, the fund would be
required to file its report within three days of the date the threshold is reached. During the time limit for filing the report,
a trading freeze applies and a fund would not be permitted to make subsequent trades in the invested company’s securities.
Any such trading freeze may undermine the fund’s performance, if the fund would otherwise make trades during
that period but is prevented from doing so by the regulations.
Once a fund and parties
acting in concert reach the 5% trading threshold as to any listed company, any subsequent incremental
increase or decrease of 5% or more will trigger a further reporting requirement and an additional trading freeze
from the date the threshold is reached to the end of three days after the report and announcement is made. These
trading freezes may undermine a fund’s performance as described above. According to the securities laws of China,
whoever purchases the voting securities of a listed company in violation of the requirements in this paragraph shall
not exercise the voting right of the securities that exceed the threshold within 36 months after purchasing them. Further,
once the fund and parties acting in concert reach the 5% trading threshold as to any listed company, for any subsequent
incremental increase or decrease of 1%, the fund would be required to notify the listed company and make
an announcement thereon on the day immediately after the date the threshold is reached. Also, CSRC requirements currently
require a fund and parties acting in concert, once they have reached the 5% threshold, to disclose whenever their
shareholding drops below this threshold (even as a result of trading which is less than the 5% incremental change that
would trigger a reporting requirement under the relevant CSRC regulation). Under interim measures adopted in July
2015, 5% holders of the securities of listed companies may be temporarily prohibited from selling such securities for
a period of six months.
CSRC
regulations also contain additional disclosure (and tender offer) requirements that apply when an investor and parties
acting in concert reach thresholds of 20% and greater than 30% shareholding in a company.
Subject to the interpretation
of PRC courts and PRC regulators, the operation of the PRC short swing profit rule may be
applicable to the trading of a fund with the result that where the holdings of the fund (possibly with the holdings of
other investors deemed as concert parties of the fund) exceed 5% of the total issued voting shares of a listed company,
the fund may not reduce its holdings in the company within six months of the last purchase of shares of the
company. If a fund violates the rule, it may be required by the listed company to return any profits realized from such
trading to the listed company. In addition, the rule limits the ability of the fund to repurchase securities of the listed
company within six months of such sale. Moreover, under PRC civil procedures, a fund’s assets may be frozen to
the extent of the claims made by the company in question. These risks may greatly impair the performance of the fund.
The CSRC issued a consultation paper on improving the regulation of covered short-swing transactions in July 2023,
which includes a proposal to allow qualified foreign public funds to calculate securities holdings on a product basis
with approval from the CSRC for the purpose of determining short-swing transactions, which would change the current
practice under which a foreign fund manager aggregates all its funds’ holdings in a listed company. However, as
of the date of this SAI, such provisions have not been officially issued and it is uncertain how the final provisions if
issued may impact the fund’s investment in A-Shares.
Economic, political and social risks
of the PRC. The economy of China, which has been in a state of
transition from a planned economy to a more
market oriented economy, differs from the economies of most developed countries in many
respects, including the level of government involvement, its state of development, its growth rate, control of foreign
exchange, and allocation of resources.
Although the majority
of productive assets in China are still owned by the PRC government at various levels, in recent years,
the PRC government has implemented economic reform measures emphasizing utilization of market forces in
the development of the economy of China and a high level of management autonomy. The economy of China has experienced
significant growth in recent decades, but growth has been uneven both geographically and among various sectors
of the economy. Economic growth has also been accompanied by periods of high inflation. The PRC government has
implemented various measures from time to time to control inflation and restrain the rate of economic growth.
For several decades,
the PRC government has carried out economic reforms to achieve decentralization and utilization of
market forces to develop the economy of the PRC. These reforms have resulted in significant economic growth and
social progress. There can, however, be no assurance that the PRC government will continue to pursue such economic
policies or, if it does, that those policies will continue to be successful. Any such adjustment and modification of
those economic policies may have an adverse impact on the securities markets in the PRC as well as the portfolio securities
of a fund. Further, the PRC government may from time to time adopt corrective measures to control the growth
of the PRC economy which may also have an adverse impact on the capital growth and performance of a fund.
Political changes, social instability and adverse diplomatic developments in the PRC could result in the imposition of
additional government restrictions including expropriation of assets, confiscatory taxes or nationalization of some or
all of the property held by the underlying issuers of a fund’s portfolio securities.
Recently, the Chinese
government has become more aggressive about regulating the operations of particular companies or
sectors, including large companies which are indirectly listed in the US. These regulations may substantially limit or
prohibit the operations of such companies and cause investors to lose some or all of the value of their investment.
Government Intervention and Restriction
Risk. Governments and regulators may intervene in the financial
markets, such as by the imposition of trading
restrictions, a ban on “naked”
short selling or the suspension of short selling for certain
stocks. This may affect the operation and market making activities of each fund, and may have an unpredictable impact
on a fund. Furthermore, such market interventions may have a negative impact on the market sentiment which may
in turn affect the performance of a fund.
Investing through Stock Connect.
A fund may also invest in A-Shares listed and traded through
Stock Connect. Stock Connect is a securities
trading and clearing program between either the Shanghai Stock Exchange (“SSE”)
or Shenzhen Stock Exchange (“SZSE”),
and any of the Stock Exchange of Hong Kong Limited (“SEHK”),
China Securities Depository
and
Clearing Corporation Limited (“CSDCC”)
and Hong Kong Securities Clearing Company Limited designed to permit mutual
stock market access between mainland China and Hong Kong by allowing investors to trade and settle eligible securities
(including A-shares and ETFs) on each market via their local exchanges. Trading through Stock Connect is subject
to a daily quota (“Daily
Quota”),
which limits the maximum daily net purchases on any particular day by Hong Kong
investors (and foreign investors trading through Hong Kong) People’s Republic of China (“PRC”)
listed securities (“Northbound”)
and PRC investors trading Hong Kong listed securities (“Southbound”)
through the relevant Stock Connect. Accordingly,
each fund’s direct investments in A-Shares will be limited by the Daily Quotas that limit total purchases
through Stock Connect.
A fund may invest in
A-Shares listed and traded on the SSE and SZSE through Stock Connect, or on such other stock exchanges
in China which participate in Stock Connect from time to time. Trading through Stock Connect is subject to
a number of restrictions that may affect a fund’s investments and returns. Although no individual investment quotas or
licensing requirements apply to investors in Stock Connect, trading through Stock Connect is subject to the Daily Quota.
The Daily Quota does not belong to a fund and is utilized by all investors on a first-come-first-serve basis. As such,
buy orders for securities would be rejected once the Daily Quota is exceeded (although a fund will be permitted to
sell the securities regardless of the Daily Quota balance). The Daily Quota may restrict a fund’s ability to invest in A-Shares
through Stock Connect on a timely basis, which could affect a fund’s ability to effectively pursue its investment strategy.
The Daily Quota is also subject to change.
In addition, investments
made through Stock Connect are subject to trading, clearance and settlement procedures that
are untested in the PRC, which could pose risks to a fund. Moreover, eligible securities invested through Stock Connect
(“Stock
Connect Securities”)
generally may not be sold, purchased or otherwise transferred other than through Stock
Connect in accordance with applicable rules. A primary feature of Stock Connect is the application of the home market’s
laws and rules applicable to investors in securities (i.e. the PRC). Therefore, a fund’s investments in Stock Connect
Securities are subject to PRC securities regulations and listing rules, among other restrictions.
While securities must
be designated as eligible to be traded under Stock Connect (such eligible securities listed on the
SSE, the “SSE
Securities,”
and such eligible securities listed on the SZSE, the “SZSE
Securities”),
those securities may also lose such designation,
and if this occurs, such securities may be sold but could no longer be purchased through
Stock Connect. With respect to sell orders under Stock Connect, the Stock Exchange of Hong Kong (“SEHK”)
carries out pre-trade checks to ensure an investor
has sufficient securities in its account before the market opens on the
trading day. Accordingly, if there are insufficient securities in an investor’s account before the market opens on the
trading day, the sell order will be rejected, which may adversely impact a fund’s performance. However, a fund may
request a custodian to open a special segregated account (“SPSA”)
in CCASS (the Central Clearing and Settlement System
operated by HKSCC for the clearing securities listed or traded on SEHK) to maintain its holdings in securities under
the enhanced pre-trade checking model. Each SPSA will be assigned a unique “Investor
ID”
by CCASS for the purpose of facilitating Stock
Connect order routing system to verify the holdings of an investor such as a fund. Provided that
there is sufficient holding in the SPSA when a broker inputs a fund’s sell order, a fund will be able to dispose of its
holdings of securities (as opposed to the practice of transferring securities to the broker’s account under the current pre-trade
checking model for non-SPSA accounts). Opening of the SPSA accounts for a fund will enable it to dispose of
its holdings of securities in a timely manner.
In addition, Stock Connect
will only operate on days when both the mainland Chinese and Hong Kong markets are open
for trading. Therefore, an investment in securities through Stock Connect may subject a fund to the risk of price fluctuations
on days when one of the mainland Chinese or Hong Kong markets are open, but Stock Connect is not trading.
Each of the SEHK, SSE and SZSE reserves the right to suspend trading under Stock Connect under certain circumstances.
Where such a suspension of trading is effected, a fund’s ability to access securities through Stock Connect
will be adversely affected. In addition, if one or both of the Chinese and Hong Kong markets are closed on a
US trading day, a fund may not be able to acquire or dispose of securities through Stock Connect in a timely manner, which
could adversely affect a fund’s performance.
A fund’s investments
in securities though Stock Connect are held by its custodian in accounts in CCASS maintained by
the Hong Kong Securities Clearing Company Limited (“HKSCC”),
which in turn holds the securities, as the nominee holder,
through an omnibus securities account in its name registered with the CSDCC. The precise nature and rights
of
a fund as the Beneficial Owner of the SSE Securities or SZSE Securities through HKSCC as nominee is not well defined
under PRC law. There is a lack of a clear definition of, and distinction between, legal ownership and beneficial ownership
under PRC law and there have been few cases involving a nominee account structure in the PRC courts. The
exact nature and methods of enforcement of the rights and interests of a fund under PRC law is also uncertain. In
the unlikely event that HKSCC becomes subject to winding up proceedings in Hong Kong, there is a risk that the SSE
Securities or SZSE Securities may not be regarded as held for the beneficial ownership of a fund or as part of the
general assets of HKSCC available for general distribution to its creditors.
Notwithstanding the fact
that HKSCC does not claim proprietary interests in the SSE Securities or SZSE Securities held
in its omnibus stock account in the CSDCC, the CSDCC as the share registrar for SSE- or SZSE-listed companies will
still treat HKSCC as one of the shareholders when it handles corporate actions in respect of such SSE Securities or
SZSE Securities. HKSCC monitors the corporate actions affecting SSE Securities and SZSE Securities and keeps participants
of CCASS informed of all such corporate actions that require CCASS participants to take steps in order to
participate in them. A fund will therefore depend on HKSCC for both settlement and notification and implementation of
corporate actions.
The HKSCC is responsible
for the clearing, settlement and the provisions of depositary, nominee and other related services
of the trades executed by Hong Kong market participants and investors. Accordingly, investors do not hold SSE
Securities or SZSE Securities directly – they are held through their brokers’ or custodians’ accounts with CCASS. The
HKSCC and the CSDCC establish clearing links and each has become a participant of the other to facilitate clearing and
settlement of cross-border trades. Should CSDCC default and the CSDCC be declared as a defaulter, HKSCC’s liabilities
in Stock Connect under its market contracts with clearing participants will be limited to assisting clearing participants
in pursuing their claims against the CSDCC. In that event, a fund may suffer delays in the recovery process or
may not be able to fully recover its losses from the CSDCC.
Market participants are
able to participate in Stock Connect subject to meeting certain information technology capability, risk
management and other requirements as may be specified by the relevant exchange and/or clearing house. Further, the
“connectivity”
in Stock Connect requires the routing of orders across the borders of Hong Kong and the PRC. This
requires the development of new information technology systems on the part of the SEHK and exchange participants. There
is no assurance that these systems will function properly or will continue to be adapted to changes and developments in
both markets. In the event that the relevant systems fail to function properly, trading in securities through Stock Connect
could be disrupted, and a fund’s ability to achieve its investment objective may be adversely affected.
Finally, according to
Caishui [2014] 81 (“Circular
81”)
and Caishui [2016] 127 (“Circular
127”),
while foreign investors currently are exempt
from paying capital gains or business taxes (later, value-added tax) on income and gains from investments
in A-Shares through Stock Connect, these PRC tax rules could be changed, which could result in unexpected tax
liabilities for a fund. Dividends derived from A-Shares are subject to a 10% PRC withholding income tax generally. PRC
stamp duty is also payable for transactions in A-Shares through Stock Connect. Currently, PRC stamp duty on A-Shares
transactions is only imposed on the seller, but not on the purchaser, at the tax rate of 0.05% of the total sales
value. Circular 81 and Circular 127 stipulate that PRC business tax (and, subsequently, PRC value-added tax) is temporarily
exempted on capital gains derived by Hong Kong market participants (including a fund) from the trading of
A-Shares through Stock Connect. According to Caishui [2016] No. 36, the PRC value-added tax reform in the PRC will
be expanded to all industries, including financial services, starting May 1, 2016. The PRC business tax exemption prescribed
in Circular 81 is grandfathered under the value-added tax regime. The Stock Connect program is a relatively new
program. Further developments are likely and there can be no assurance as to the program’s continued existence or
whether future developments regarding the program may restrict or adversely affect a fund’s investments or returns. In
addition, the application and interpretation of the laws and regulations of Hong Kong and the PRC, and the rules, policies
or guidelines published or applied by relevant regulators and exchanges in respect of the Stock Connect program are
uncertain, and they may have a detrimental effect on a fund’s investments and returns.
PRC Broker and PRC Custodian Risk.
The Subadvisor is responsible for selecting PRC Brokers to execute transactions for
Xtrackers Harvest CSI 300 China A-Shares ETF and Xtrackers Harvest CSI 500 China A-Shares ETF in
the PRC markets. As a matter of practice, only
one PRC Broker can be appointed in respect of each stock exchange in the PRC.
Thus, each fund will rely on only one PRC Broker for each stock exchange in the PRC, which may be the same
PRC
Broker. As such a fund will rely on a limited number of PRC Brokers to execute transactions on behalf of each fund.
If a single PRC Broker is appointed, each fund may not necessarily pay the lowest commission available in the market.
However, in their selection of a PRC Broker(s), the Subadvisor
will consider factors such as the competitiveness of
commission rates, size of the relevant orders and execution standards. Should, for any reason, a fund’s ability to use
one or more of the relevant PRC Brokers be affected, this could disrupt the operations of the fund and, for index-based ETFs,
affect the ability of the fund to track its Underlying Index, causing a premium or a discount to the trading price of
the fund’s Shares.
With respect to the funds
which invest in A-Shares through the Subadvisor’s QFI status, the Subadvisor is responsible for
selecting a custodian in the PRC to custody its assets pursuant to local Chinese laws and regulations (the “PRC
Custodian”).
According to the QFI regulations and market practice, the securities and cash accounts for a fund in the PRC
are to be maintained by the PRC Custodian in the joint names of the Subadvisor as the QFI holder and each fund.
Each fund’s PRC Custodian is the Bank of China Limited. The PRC Custodian maintains a fund’s deposit accounts and
oversees each fund’s investments in A-Shares in the PRC to ensure their compliance with the rules and regulations of
the CSRC and the People’s Bank of China (“PBOC”).
A-Shares that are traded on the SSE or SZSE are dealt and held
in book-entry form through the China Securities Depository and Clearing Corporation Limited (“CSDCC”).
A-Shares purchased by the Subadvisor, in its
capacity as a QFI, on behalf of a fund, may be received by the CSDCC and credited to
a securities trading account maintained by the PRC Custodian in the names of the fund and the Subadvisor as the QFI.
The assets held or credited
in a fund’s securities trading account(s) maintained by the PRC Custodian are segregated and
independent from the proprietary assets of the PRC Custodian. However, under PRC law, cash deposited in a fund’s
cash account(s) maintained with the PRC Custodian will not be segregated but will be a debt owing from the PRC
Custodian to the fund as a depositor. Such cash will be co-mingled with cash that belongs to other clients or creditors
of the PRC Custodian. In the event of bankruptcy or liquidation of the PRC Custodian, a fund will not have any
proprietary rights to the cash deposited in such cash account(s), and the fund will become an unsecured creditor, ranking
pari passu with all other unsecured creditors, of the PRC Custodian.
There is a risk that
each fund may suffer losses from the default, bankruptcy or disqualification of the PRC Broker(s) or
PRC Custodian. In such event, a fund may be adversely affected in the execution of any transaction or face difficulty and/or
encounter delays in recovering its assets, or may not be able to recover it in full or at all. Each fund may also incur
losses due to the acts or omissions of the PRC Brokers and/or the PRC Custodian in the execution or settlement of
any transaction or in the transfer of any funds or securities. Subject to the applicable laws and regulations in the PRC,
the Subadvisor will make arrangements to ensure that the PRC
Brokers and PRC Custodian have appropriate procedures to properly
safe-keep a fund’s assets.
PRC Laws and Regulations Risk.
The regulatory and legal framework for capital markets and joint stock companies in
the PRC may not be as well developed as those of developed countries. PRC laws and regulations affecting securities markets
are relatively new and evolving, and because of the limited volume of published cases and judicial interpretation and
their non-binding nature, interpretation and enforcement of these regulations involve significant uncertainties. In addition,
as the PRC legal system develops, no assurance can be given that changes in such laws and regulations, their
interpretation or their enforcement will not have a material adverse effect on their business operations.
Renminbi (RMB).
RMB is the official currency in the People’s Republic of
China.
Future Movements in RMB Exchange
Rates Risk. The exchange rate of RMB ceased to be pegged to US
dollars on July 21, 2005, resulting in a more
flexible RMB exchange rate system. China Foreign Exchange Trading System, authorized by
the PBOC, promulgates the central parity rate of RMB against US dollars, Euro, Yen, pound sterling and Hong Kong dollar
at 9:15 a.m. on each business day, which will be the daily central parity rate for transactions on the Inter-bank Spot
Foreign Exchange Market and OTC transactions of banks. The exchange rate of RMB against the above-mentioned currencies
fluctuates within a range above or below such central parity rate. As the exchange rates are based primarily on
market forces, the exchange rates for RMB against other currencies, including US dollars and Hong Kong dollars, are
susceptible to movements based on external factors. There can be no assurance that such exchange rates will not
fluctuate widely against US dollars, Hong Kong dollars or any other foreign currency in the future. From 1994 to
July
2005, the exchange rate for RMB against US dollar and the Hong Kong dollar was relatively stable. Following July 2005,
the appreciation of RMB accelerated until being subject to alternating periods of devaluation, appreciation and stability
beginning in 2015. Although the PRC government has constantly reiterated its intention to maintain the stability of
RMB, it may introduce measures (such as a reduction in the rate of export tax refund) to address the concerns of the
PRC’s trading partners. Therefore, the possibility that the appreciation of RMB will be further accelerated cannot be
excluded. On the other hand, there can be no assurance that RMB will not be subject to devaluation.
Offshore RMB (“CNH”)
Market Risk. The onshore RMB (“CNY”)
is the only official currency of the PRC and is used in
all financial transactions between individuals, state and corporations in the PRC. Hong Kong is the first jurisdiction to
allow accumulation of RMB deposits outside the PRC. Since June 2010, the offshore RMB (“CNH”)
is traded officially, regulated jointly by the
Hong Kong Monetary Authority and the PBOC. While both CNY and CNH represent RMB, they
are traded in different and separated markets. The two RMB markets operate independently where the flow between
them is highly restricted. Though the CNH is a proxy of the CNY, they do not necessarily have the same exchange
rate and their movement may not be in the same direction. This is because these currencies act in separate jurisdictions,
which leads to separate supply and demand conditions for each, and therefore separate but related currency markets.
The current size of RMB-denominated
financial assets outside the PRC is limited. In addition, participating authorized institutions
are also required by the Hong Kong Monetary Authority to maintain a total amount of RMB (in the form of
cash and its settlement account balance with a Renminbi clearing bank) of no less than 25% of their RMB deposits, which
further limits the availability of RMB that participating authorized institutions can utilize for conversion services for
their customers. RMB business participating banks do not have direct RMB liquidity support from PBOC. Only the
Renminbi clearing bank has access to onshore liquidity support from PBOC (subject to annual and quarterly quotas imposed
by PBOC) to square open positions of participating banks for limited types of transactions, including open positions
resulting from conversion services for corporations relating to cross-border trade settlement. The Renminbi clearing
bank is not obliged to square for participating banks any open positions resulting from other foreign exchange transactions
or conversion services and the participating banks will need to source RMB from the offshore market to
square such open positions. Although it is expected that the offshore RMB market will continue to grow in depth and
size, its growth is subject to many constraints as a result of PRC laws and regulations on foreign exchange. There is
no assurance that new PRC regulations will not be promulgated or the Settlement Agreement will not be terminated or
amended in the future which will have the effect of restricting availability of RMB offshore.
RMB Exchange Controls and Restrictions
Risk. It should be noted that the RMB is currently not a freely
convertible currency as it is subject to foreign
exchange control policies and repatriation restrictions imposed by the PRC government. There
is no assurance that there will always be RMB available in sufficient amounts for a fund to remain fully invested. Since
1994, the conversion of RMB into US dollars has been based on rates set by the PBOC, which are set daily based
on the previous day’s PRC interbank foreign exchange market rate. On July 21, 2005, the PRC government introduced
a managed floating exchange rate system to allow the value of RMB to fluctuate within a regulated band based
on market supply and demand and by reference to a basket of currencies. In addition, a market maker system was
introduced to the interbank spot foreign exchange market. In July 2008, China announced that its exchange rate regime
was further transformed into a managed floating mechanism based on market supply and demand. Given the domestic
and overseas economic developments, the PBOC decided to further improve the RMB exchange rate regime in
June 2010 to enhance the flexibility of the RMB exchange rate. In April 2012, the PBOC decided to take a further step
to increase the flexibility of the RMB exchange rate by expanding the daily trading band from +/– 0.5% to +/– 1%.
Effective from March 17, 2014, the floating band of RMB against USD on the inter-bank spot foreign exchange market
was enlarged from 1% to 2%, i.e., on every trading day on the inter-bank spot market, the trading prices of RMB
against USD would fluctuate within a band of +/– 2 below and above the central parity as released by the China Foreign
Exchange Trade System on that day. On each business day, the spread between the RMB/USD buying and selling
prices offered by the designated foreign exchange banks to their clients was within 3% of the published central parity
of USD on that day, instead of 2%. Effective from August 11, 2015, the RMB central parity is fixed against the USD
by reference to the closing rate of the interbank foreign exchange market on the previous day (rather than the previous
morning’s official setting). The RMB has now moved to a
managed floating exchange rate mechanism based on market supply
and demand with reference to a basket of foreign currencies.
However,
it should be noted that the PRC government’s policies on exchange control and repatriation restrictions are subject
to change, and any such change may adversely impact each fund. There can be no assurance that the RMB exchange
rate will not fluctuate widely against the US dollar or any other foreign currency in the future. Foreign exchange transactions
under the capital account, including principal payments in respect of foreign currency-denominated obligations, currently
continue to be subject to significant foreign exchange controls and require the approval of the SAFE. On the
other hand, the existing PRC foreign exchange regulations have significantly reduced government foreign exchange controls
for transactions under the current account, including trade and service related foreign exchange transactions and
payment of dividends. Nevertheless, neither the Advisor nor the Subadvisor can predict whether the PRC government will
continue its existing foreign exchange policy or when the PRC government will allow free conversion of the RMB to
foreign currencies.
RMB Trading and Settlement Risk.
The trading and settlement of RMB-denominated securities are recent developments in
Hong Kong and there is no assurance that problems will not be encountered with the systems or that other logistical problems
will not arise.
Repatriation Risk.
PBOC and SAFE regulate and monitor the repatriation of funds
out of the PRC by QFIs. Repatriations by QFIs
in respect of Xtrackers Harvest CSI 300 China A-Shares ETF
and Xtrackers
Harvest CSI 500 China A-Shares Small Cap ETF
are currently not subject to repatriation restrictions or prior
approval from SAFE, although authenticity and
compliance reviews will be conducted by the PRC Custodian, and
monthly reports on remittances and repatriations will
be submitted to SAFE by the PRC Custodian. There is no assurance, however, that PRC and QFI rules and regulations will
not change or that repatriation restrictions will not be imposed in the future. Further, such changes to the PRC and
QFI rules and regulations may take effect retroactively. Any restrictions on repatriation of the invested capital and net
profits may impact a fund’s ability to meet redemption requests. Furthermore, as the Custodian’s or the PRC Custodian’s
review on authenticity and compliance is conducted on each repatriation, the repatriation may be delayed or
even rejected by the Custodian or the PRC Custodian in case of non-compliance with the QFI regulations. In such case,
it is expected that redemption proceeds will be paid as soon as practicable and after the completion of the repatriation
of the funds concerned. It should be noted that the actual time required for the completion of the relevant repatriation
will be beyond the Subadvisor’s control.
Restricted Markets Risk.
A fund’s investments in A-Shares may be subject to limitations or restrictions on foreign ownership
or holdings imposed by the PRC. Such legal and regulatory restrictions or limitations may have adverse effects
on the liquidity and performance of each fund’s portfolio holdings. For index-based ETFs, this may increase the
risk of tracking error.
QFI Late Settlement Risk.
Each of the funds will be required to remit foreign currencies
which can be traded on the China Foreign Exchange
Trade System (in the case of a QFII) and RMB (in the case of an RQFII) to the PRC to settle the
purchase of A-Shares by a fund from time to time through the QFI program. In the event such remittance is disrupted, a
fund's performance may be adversely affected. With respect to index-based ETFs, a fund will not be able to fully replicate
its Underlying Index by investing in the relevant A-Shares, which may lead to increased tracking error.
QFI Program Risk.
(Xtrackers Harvest CSI 300 China A-Shares ETF and Xtrackers Harvest CSI 500 China A-Shares Small
Cap ETF) Each fund is not a QFI, but will
utilize the Subadvisor’s QFI license granted under QFI regulations.
Under current regulations
in the PRC, foreign investors can invest in the domestic PRC securities markets through certain
market-access programs. These programs include the QFI (including QFII and RQFII) program, where investors will
be required to obtain a license from the CSRC. QFIs have also registered to remit foreign currencies which can be
traded on the China Foreign Exchange Trade System (in the case of a QFII) and RMB (in the case of an RQFII) in the
PRC for the purpose of investing in the PRC’s domestic securities markets.
In addition, the Subadvisor’s
QFI status could be suspended or revoked. There can be no assurance
that the Subadvisor will continue to maintain its QFI status.
Because each fund will not be able to invest directly in A-Shares beyond the limits
that may be imposed by Stock Connect, the size of a fund’s direct investments in A-Shares may be limited. In the
event the Subadvisor is unable to maintain its QFI status unless
the Subadvisor is able to obtain sufficient exposure to
A-Shares, it may be necessary for a fund to limit or suspend creations of Creation Units. In such event it is possible
that
the trading price of a fund’s Shares on the Exchange will be at a significant premium to the NAV (which, for index-based
ETFs, may also increase tracking error of the fund). In extreme circumstances, a fund may incur significant loss
due to limited investment capabilities, or may not be able fully to implement or pursue its investment objectives or
strategies, due to QFI investment restrictions, illiquidity of the PRC’s securities markets, and delay or disruption in
execution of trades or in settlement of trades.
Pursuant to PRC and QFI
regulations, each of CSRC and SAFE is vested with the power to impose regulatory sanctions if
the Subadvisor, in its capacity as QFI, or the PRC Custodian
(as that term is defined below) violates any provision of
the QFI regulations. Any such violations could result in the revocation of the Subadvisor’s license
or other regulatory sanctions and may adversely impact a fund’s
ability to access A-Shares.
The current QFI regulations
also include rules on investment restrictions applicable to a fund, which may adversely affect
the fund’s liquidity and performance. In addition, because transaction sizes for QFIs are relatively large, the corresponding
heightened risk of exposure to decreased market liquidity and significant price volatility could lead to possible
adverse effects on the timing and pricing of acquisition or disposal of securities.
The regulations which
regulate investments by QFIs in the PRC and the repatriation of capital from QFI investments are
relatively new. The application and interpretation of such investment regulations are therefore relatively untested and
there is no certainty as to how they will be applied as the PRC authorities and regulators have been given wide discretion
in such investment regulations and there is no precedent or certainty as to how such discretion may be exercised
now or in the future.
On May 7, 2020, the PBOC
and SAFE jointly issued the Regulations on Funds of Securities and Futures Investment by
Foreign Institutional Investors (PBOC & SAFE Announcement [2020] No. 2) (“2020
Regulations”)
which came into effect on June 6, 2020. The
2020 Regulations
supersede certain post-registration rules applicable to QFII and RQFII regimes.
One of the key changes of the 2020 Regulations
was
the removal of quota restrictions on investment. However, there
is no guarantee that the quotas will continue to be relaxed. On September 25, 2020, the CSRC, the PBOC, and SAFE
jointly issued the Measures for the Administration of Domestic Securities and Futures Investment by Qualified Foreign
Institutional Investors and RMB Qualified Foreign Institutional Investors (CSRC Decree No. 176) and the CSRC issued
the Provisions on Issues Concerning the Implementation of the Measures for the Administration of Domestic Securities
and Futures Investment by Qualified Foreign Institutional Investors and RMB Qualified Foreign Institutional Investors
(CSRC Announcement [2020] No.63), which came into effect on 1 November 2020. The major revisions to the
previous rules included
merger of the QFII regime and RQFII regime, relaxation of qualification requirements and facilitating
investment and operations of QFIIs and RQFIIs, expansion of investment scope and enhancing ongoing supervision.
On July 26, 2024, the PBOC and SAFE jointly issued the revised
Regulations on Funds of Securities and Futures
Investment by Foreign Institutional Investors (PBOC & SAFE Announcement [2024] No. 7)
(the “2024
Regulations”),
which came into effect on August 26, 2024, and
the 2020 Regulations were simultaneously repealed. The 2024 Regulations simplify
business registration, optimize account management, and facilitate QFIs’ management of foreign exchange currency
risks through entering into foreign exchange derivative transactions.
As of the date of this SAI, the 2024 Regulations
are a relatively new development, and their application may depend
on the interpretation given by the relevant
PRC authorities. The current QFI laws, rules and regulations are subject to change, which may take retrospective effect.
In addition, there can be no assurance that the QFI laws, rules and regulations will not be abolished. A fund, which
invests in the PRC markets through a QFI, may be adversely affected as a result of such changes.
Commodity Pool Operator Exclusion.
Pursuant to a claim for exclusion filed with the National Futures Association (“NFA”)
on behalf of each fund, the Trust is not deemed to be a “commodity
pool operator”
(“CPO”),
under the CEA, and it is not subject to registration
or regulation as such under the CEA. The Advisor is not deemed to be a “commodity
trading advisor”
with respect to its services as an investment advisor to each fund. Under CFTC Regulations, the Advisor
would need to register with the CFTC as a CPO if a fund is unable to comply with certain trading and marketing limitations
on its investments in futures and certain other instruments. With respect to investments in swap transactions, commodity
futures, commodity options or certain other derivatives used for purposes other than bona fide hedging purposes,
the Trust, on behalf of the fund must meet one of the following tests under the amended regulations in order
to claim an exclusion from the definition of a CPO. First, the aggregate initial margin and premiums required to establish
a fund’s positions in such investments may not exceed five percent of the liquidation value of the fund’s
portfolio
(after accounting for unrealized profits and unrealized losses on any such investments). Alternatively, the aggregate
net notional value of such instruments, determined at the time of the most recent position established, may
not exceed one hundred percent (100%) of the liquidation value of the fund’s portfolio (after accounting for unrealized profits
and unrealized losses on any such positions). In addition to meeting one of the foregoing trading limitations, a
fund may not market itself as a commodity pool or otherwise as a vehicle for trading in the commodity futures, commodity
options or swaps and derivatives markets. In the event that the Advisor is required to register as a CPO with
respect to a fund, the disclosure and operations of the fund would need to comply with all applicable CFTC regulations.
Compliance with these additional registration and regulatory requirements could increase operational expenses.
Other potentially adverse regulatory initiatives could also develop.
Convertible Securities.
A fund may invest in convertible securities; that is, bonds, notes, debentures, preferred stocks and
other securities that are convertible (by the holder or by the issuer) into common stock. Investments in convertible securities
can provide an opportunity for capital appreciation and/or income through interest and dividend payments by
virtue of their conversion or exchange features.
The convertible securities
in which a fund may invest include fixed-income or zero coupon debt securities, which may be
converted or exchanged at a stated or determinable exchange ratio into underlying shares of common stock. The exchange
ratio for any particular convertible security may be adjusted from time to time due to stock splits, dividends, spin-offs,
other corporate distributions or scheduled changes in the exchange ratio. A convertible security may be called
for redemption or conversion by the issuer after a particular date and under certain circumstances (including a specified
price) established upon issue. If a convertible security held by a fund is called for redemption or conversion, a
fund could be required to tender it for redemption, convert it into the underlying common stock, or sell it to a third party,
which may have an adverse effect on a fund’s ability to achieve its investment objectives. Convertible securities and
convertible preferred stocks, until converted, have general characteristics similar to both debt and equity securities. Although
to a lesser extent than with debt securities generally, the market values of convertible securities tend to decline
as interest rates increase and, conversely, tend to increase as interest rates decline. In addition, because of the
conversion or exchange feature, the market values of convertible securities typically change as the market values of
the underlying common stocks change, and, therefore, also tend to follow movements in the general market for equity
securities. A unique feature of convertible securities is that, as the market price of the underlying common stock
declines, convertible securities tend to trade increasingly on a yield basis, and so may not experience market value
declines to the same extent as the underlying common stock. When the market price of the underlying common stock
increases, the prices of the convertible securities tend to rise as a reflection of the value of the underlying common
stock, although typically not as much as the underlying common stock. While no securities investments are without
risk, investments in convertible securities generally entail less risk than investments in common stock of the same
issuer.
As debt securities, convertible
securities are investments that provide for a stream of income (or in the case of zero coupon
securities, accretion of income) with generally higher yields than common stocks. Convertible securities generally offer
lower yields than non-convertible securities of similar quality because of their conversion or exchange features.
Of course, like all debt
securities, there can be no assurance of income or principal payments because the issuers of
the convertible securities may default on their obligations.
Convertible securities
are generally subordinated to other similar but non-convertible securities of the same issuer, although
convertible bonds, as corporate debt obligations, enjoy seniority in right of payment to all equity securities, and
convertible preferred stock is senior to common stock, of the same issuer. However, because of the subordination feature,
convertible bonds and convertible preferred stock typically have lower ratings than similar non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay current income or as zero coupon notes
and bonds, including Liquid Yield Option Notes (LYONs).
Contingent convertible securities
(CoCos). A contingent convertible security, or CoCo, is a type
of convertible security typically issued by
a non-U.S. bank that, upon the occurrence of a specified trigger event, may be (i) convertible into equity
securities of the issuer at a predetermined share price; or (ii) written down in liquidation value. Trigger events are
identified in the documents that govern the CoCo and may include a decline in the issuer’s capital below a specified
threshold
level, an increase in the issuer’s risk weighted assets, the share price of the issuer falling to a particular level
for a certain period of time and certain regulatory events, such as a change in regulatory capital requirements. CoCos
are designed to behave like bonds in times of economic health yet absorb losses when the trigger event occurs. CoCos
are generally considered speculative and the prices of CoCos may be volatile.
With respect to CoCos
that provide for conversion of the CoCo into common shares of the issuer in the event of a trigger
event, the conversion would deepen the subordination of the investor, creating a greater risk of loss in the event
of bankruptcy. In addition, because the common stock of the issuer may not pay a dividend, investors in such instruments
could experience reduced yields (or no yields at all). With respect to CoCos that provide for the write down
in liquidation value of the CoCo in the event of a trigger event, it is possible that the liquidation value of the CoCo
may be adjusted downward to below the original par value or written off entirely under certain circumstances. For
instance, if losses have eroded the issuer’s capital levels below a specified threshold, the liquidation value of the CoCo
may be reduced in whole or in part. The write-down of the CoCo’s par value may occur automatically and would not
entitle holders to institute bankruptcy proceedings against the issuer. In addition, an automatic write-down could result
in a reduced income rate if the dividend or interest payment associated with the CoCo is based on par value. Coupon
payments on CoCos may be discretionary and may be cancelled by the issuer for any reason or may be subject to
approval by the issuer’s regulator and may be suspended in the event there are insufficient distributable reserves.
Costs of Buying or Selling Fund Shares.
Buying or selling fund shares involves two types of costs that apply to all securities
transactions. When buying or selling shares of a fund through a broker, you will incur a brokerage commission or
other charges imposed by brokers as determined by that broker. In addition, you will also incur the cost of the “spread”
– that is, the difference between what professional investors are willing to pay for fund shares (the “bid”
price) and the price at which they are willing
to sell fund shares (the “ask”
price). Because of the costs inherent in buying
or selling fund shares, frequent trading may detract significantly from investment results and an investment in
fund shares may not be advisable for investors who anticipate regularly making small investments.
Depositary Receipts.
A fund may invest in sponsored or unsponsored American Depositary Receipts (ADRs), European Depositary
Receipts (EDRs), Global Depositary Receipts (GDRs), International Depositary Receipts (IDRs) and other types
of Depositary Receipts (which, together with ADRs, EDRs, GDRs and IDRs are hereinafter referred to as Depositary Receipts).
Depositary Receipts provide indirect investment in securities of foreign issuers. Prices of unsponsored Depositary
Receipts may be more volatile than if they were sponsored by the issuer of the underlying securities. Depositary
Receipts may not necessarily be denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of unsponsored Depositary Receipts are not obligated to disclose material
information regarding the underlying securities or their issuer in the United States and, therefore, there may not
be a correlation between such information and the market value of the Depositary Receipts. ADRs are Depositary Receipts
that are bought and sold in the United States and are typically issued by a US bank or trust company which evidence
ownership of underlying securities by a foreign corporation. GDRs, IDRs and other types of Depositary Receipts are
typically issued by foreign banks or trust companies, although they may also be issued by United States banks or
trust companies, and evidence ownership of underlying securities issued by either a foreign or a United States corporation.
Generally, Depositary Receipts in registered form are designed for use in the United States securities markets
and Depositary Receipts in bearer form are designed for use in securities markets outside the United States. Depositary
Receipts, including those denominated in US dollars will be subject to foreign currency exchange rate risk.
However, by investing in US dollar-denominated ADRs rather than directly in foreign issuers’ stock, a fund avoids currency
risks during the settlement period. In general, there is a large, liquid market in the United States for most ADRs.
However, certain Depositary Receipts may not be listed on an exchange and therefore may be illiquid securities.
Derivatives.
A derivative is a financial contract, the value of which depends on, or is derived from, the value of an underlying
asset such as a security or an index. A fund may invest in futures contracts and other derivatives. Compared to
conventional securities, derivatives can be more sensitive to changes in interest rates or to sudden fluctuations in market
prices and thus a fund’s losses may be greater if it invests in derivatives than if it invests only in conventional securities.
Currency Transactions.
Certain of the funds may enter into foreign currency futures contracts and forward currency contracts
designed to offset a fund’s exposure to non-US currency. A forward foreign currency exchange contract (“forward
contract”)
involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally traded in the interbank market conducted directly between currency traders (usually large,
commercial banks) and their customers. A forward contract generally has no margin deposit requirement, and no
commissions are charged at any stage for trades.
A non-deliverable forward
contract (“NDF”)
is a forward contract where there is no physical settlement of two currencies at
maturity. NDFs are contracts between parties in which a net settlement amount based on the change in the specified foreign
exchange rate is paid by one party to the other. Each fund’s obligations with respect to each NDF is accrued on
a daily basis and an amount of cash or liquid securities at least equal to such amount maintained in an account at the
Trust’s custodian bank. The risk of loss with respect to NDFs generally is limited to the net amount of payments that
a fund is contractually obligated to make or receive.
A foreign currency futures
contract is a contract involving an obligation to deliver or acquire the specified amount of a
specific currency, at a specified price and at a specified future time. Futures contracts may be settled on a net cash payment
basis rather than by the sale and delivery of the underlying currency.
Currency exchange transactions
involve a significant degree of risk and the markets in which currency exchange transactions are
effected are highly volatile, specialized and technical. Significant changes, including changes in liquidity and prices, can
occur in such markets within very short periods of time, often within minutes. Currency exchange trading risks include,
but are not limited to, exchange rate risk, maturity gap, interest rate risk, and potential interference by foreign governments
through regulation of local exchange markets, foreign investment or particular transactions in foreign currency.
If a fund utilizes foreign currency transactions at an inappropriate time, such transactions may not serve their
intended purpose and may lower the fund's returns. For index-based ETFs, such transactions are intended to improve
the correlation of the fund’s return with the performance of its Underlying Index and may lower the fund’s return.
A fund could experience losses if the value of any currency forwards and futures positions is poorly correlated with
its other investments or if it could not close out its positions because of an illiquid market. Such contracts are subject
to the risk that the counterparty will default on its obligations. In addition, a fund will incur transaction costs, including
trading commissions, in connection with certain foreign currency transactions.
General Characteristics of Futures
and Options. A
fund may enter into futures and options contracts to the extent consistent
with its investment objective and policies. A fund may only enter into futures contracts and options that are
traded on a US or non-US exchange. No fund will use futures or options for speculative purposes.
Futures contracts provide
for the future sale by one party and purchase by another party of a specified amount of a specific
instrument or index at a specified future time and at a specified price. Each fund may enter into futures contracts to
purchase the underlying securities when the Advisor and/or Subadvisor, as applicable, anticipate purchasing the underlying
securities and believe prices will rise before the purchase will be made.
A call option gives a
holder the right to purchase a specific security at a specified price (“exercise
price”)
within a specified period of time. A put option
gives a holder the right to sell a specific security at a specified exercise price within
a specified period of time. The initial purchaser of a call option pays the “writer”
a premium, which is paid at the time of purchase
and is retained by the writer whether or not such option is exercised. Each Fund may purchase put
options to hedge its portfolio against the risk of a decline in the market value of securities held and may purchase call
options to hedge against an increase in the price of securities it is committed to purchase. Each Fund may write put
and call options along with a long position in options to increase its ability to hedge against a change in the market value
of the securities it holds or is committed to purchase.
There are several risks
accompanying the utilization of futures contracts and options on futures contracts. First, a position
in futures contracts and options on futures contracts may be closed only on the exchange on which the contract was
made (or a linked exchange). While each fund plans to utilize futures contracts only if an active market exists for such
contracts, there is no guarantee that a liquid market will exist for the contract at a specified time. Furthermore,
because,
by definition, futures contracts project price levels in the future and not current levels of valuation, market circumstances
may result in a discrepancy between the price of the futures contract and the movement in the price of
the underlying reference asset. In the event of adverse price movements, a fund would continue to be required to
make daily cash payments to maintain its required margin. In such situations, if a fund has insufficient cash, it may have
to sell portfolio securities to meet daily margin requirements at a time when it may be disadvantageous to do so.
In addition, each fund may be required to deliver the instruments underlying the futures contracts it has sold.
The risk of loss in trading
futures contracts or uncovered call options in some strategies (e.g., selling uncovered stock index
futures contracts) is potentially unlimited. The funds do not plan to invest in futures and options to a significant extent
or use futures and options contracts in this way. The risk of a futures position may still be large as traditionally measured
due to the low margin deposits required. In many cases, a relatively small price movement in a futures contract
may result in immediate and substantial loss or gain to the investor relative to the size of a required margin deposit.
A fund, however, may utilize futures and options contracts in a manner designed to limit their risk exposure to
levels comparable to a direct investment in the types of stocks in which they invest.
For index-based ETFs,
a fund’s use of futures and options on futures involves the risk of imperfect or even negative correlation
to the Underlying Index if the index underlying the futures contract differs from the Underlying Index. There is
also the risk of loss by a fund of margin deposits in the event of bankruptcy of a broker with whom a fund has an open
position in the futures contract or option. The purchase of put or call options will be based upon predictions by the
Advisor and/or Subadvisor, as applicable, as to anticipated trends which could prove to be incorrect.
Because the futures market
generally imposes less burdensome margin requirements than the securities market, an
increased amount of participation by speculators in the futures market could result in price fluctuations. Certain financial
futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day.
The daily limit establishes the maximum amount by which the price of a futures contract may vary either up or down
from the previous day’s settlement price at the end of a trading session. Once the daily limit has been reached in
a particular type of contract, no trades may be made on that day at a price beyond that limit. It is possible that futures
contract prices could move to the daily limit for several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and subjecting each fund to substantial losses. In the event of adverse price
movements, each fund would be required to make daily cash payments of variation margin.
Options on Futures Contracts.
An option on a futures contract, as contrasted with the direct investment in such a contract,
gives the purchaser the right, in return for the premium paid, to assume a position in the underlying futures contract
at a specified exercise price at any time prior to the expiration date of the option. Upon exercise of an option, the
delivery of the futures position by the writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer’s futures margin account that represents the amount by which the market
price of the futures contract exceeds (in the case of a call) or is less than (in the case of a put) the exercise price
of the option on the futures contract. The potential for loss related to the purchase of an option on a futures contract
is limited to the premium paid for the option plus transaction costs. Because the value of the option is fixed at
the point of sale, there are no daily cash payments by the purchaser to reflect changes in the value of the underlying contract;
however, the value of the option changes daily and that change would be reflected in the NAV of each fund. The
potential for loss related to writing call options is unlimited. The potential for loss related to writing put options is
limited to the agreed upon price per Share, also known as the strike price, less the premium received from writing the
put.
Each fund may purchase
and write put and call options on futures contracts that are traded on an exchange as a hedge against
changes in value of its portfolio securities, or in anticipation of the purchase of securities, and may enter into closing
transactions with respect to such options to terminate existing positions. There is no guarantee that such closing
transactions can be effected.
Upon entering into a
futures contract, a fund will be required to deposit with the broker an amount of cash or cash equivalents
known as “initial
margin,”
which is in the nature of a performance bond or good faith deposit on the contract and
is returned to each fund upon termination of the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments, known as “variation
margin,”
to and from the broker will be made daily as the price
of
the reference asset underlying the futures contract fluctuates, making the long and short positions in the futures contract
more or less valuable, a process known as “marking-to-market.”
At any time prior to the expiration of a futures contract,
each fund may elect to close the position by taking an opposite position, which will operate to terminate each
fund’s existing position in the contract.
Swap Agreements.
Over-the-counter (“OTC”)
swap agreements are contracts between parties in which one party agrees
to make periodic payments to the other party based on the change in market value or level of a specified rate, index
or asset. In return, the other party agrees to make periodic payments to the first party based on the return of a
different specified rate, index or asset. Swap agreements will usually be performed on a net basis, with each fund receiving
or paying only the net amount of the two payments. The net amount of the excess, if any, of a fund’s obligations over
its entitlements with respect to each swap is accrued on a daily basis and an amount of liquid assets having an aggregate
value at least equal to the accrued excess will be maintained by each fund. Cleared swaps are transacted through
futures commission merchants (“FCMs”)
that are members of central clearinghouses with the clearinghouse serving
as a central counterparty similar to transactions in futures contracts. The use of swaps is a highly specialized activity
that involves investment techniques and risks different from those associated with ordinary portfolio security transactions.
These transactions generally do not involve the delivery of securities or other underlying assets or principal.
The risk of loss with
respect to OTC swaps generally is limited to the net amount of payments that the fund is contractually obligated
to make. Swap agreements are subject to the risk that the swap counterparty will default on its obligations. If
such a default occurs, a fund will have contractual remedies pursuant to the agreements related to the transaction. However,
such remedies may be subject to bankruptcy and insolvency laws which could affect such fund’s rights as a
creditor (e.g., a fund may not receive the net amount of payments that it contractually is entitled to receive). Central clearing
through FCMs is expected to decrease counterparty risk and increase liquidity compared to un-cleared swaps because
central clearing interposes a central clearinghouse as the counterpart to each participant’s swap. However, central
clearing does not eliminate counterparty risk or illiquidity risk entirely. In addition depending on the size of a fund
and other factors, the margin required under the rules of a clearinghouse and by a clearing member FCM may be
in excess of the collateral required to be posted by a fund to support its obligations under a similar un-cleared swap.
It is expected, however, that regulators will adopt rules imposing certain margin requirements, including minimums, on
un-cleared swaps in the near future, which could reduce the distinction.
Regulations Impacting Derivatives
and the Lending of Portfolio Securities. Regulations
adopted by the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and
other regulators throughout the world, which recently took effect with respect to the funds, requires counterparties that
are part of US or foreign global systemically important banking organizations to include contractual restrictions on
close-out and cross default in agreements relating to qualified financial contracts. Securities lending agreements are
included in the category of qualified financial contracts (as well as repurchase agreements and agreements relating to
swaps, currency forwards and other derivatives). The restrictions prevent the funds from closing out a qualified financial
contract during a specified time period (e.g., two days) if the counterparty is subject to resolution proceedings and
prohibit the funds from exercising default rights during that period due to a receivership or similar proceeding of an
affiliate of the counterparty. Implementation of these requirements may increase credit and other risks to the funds.
Recent Developments. Pursuant
to regulations adopted by the SEC in October 2020, registered investment companies that
invest in derivatives instruments must comply with new Rule 18f-4 under the Investment Company Act. Among other
things, Rule 18f-4 requires funds that invest in derivatives instruments beyond a specified limited amount to implement
a value-at-risk based limit to their use of certain derivative instruments, maintain a comprehensive derivatives risk
management program, and appoint a derivatives risk manager. A fund that limits its use of derivatives instruments is
not subject to the full requirements of Rule 18f-4 and instead qualifies as a “limited
derivatives user.”
This new regulatory framework eliminates and
replaces the asset segregation and coverage framework established by prior SEC
guidance and regulations. Since the compliance date on August 19, 2022, the funds comply with Rule 18f-4 as one
of three types: funds that are not derivatives users, funds that are “limited
derivatives users”
and funds that are derivatives users that must
adopt a derivatives risk management program in compliance with Rule 18f-4. Rule 18f-4 also
governs a fund's use of certain other transactions that create future payment and/or delivery obligations by the fund,
such as short sale borrowings and reverse repurchase agreements or similar financing transactions, and certain transactions
entered into on a when-issued, delayed-delivery or forward-commitment basis. The requirements of Rule
18f-4
may limit a fund's ability to engage in derivatives transactions and certain other transactions noted above as part
of its investment strategies. These requirements may also increase the cost of doing business, which could adversely affect
the performance of a fund.
Energy Infrastructure Companies.
These are companies that own and operate assets that are used in the energy infrastructure
sector, including assets used in exploring, developing, producing, generating, transporting (including marine),
transmitting, terminal operation, storing, gathering, processing, refining, distributing, mining or marketing of
natural gas, natural gas liquids, crude oil, refined petroleum products (including biodiesel and ethanol), coal or electricity, or
that provide energy infrastructure related services. Energy infrastructure companies operate, among other things, assets
used in exploring, developing, producing, generating, transporting, transmitting, storing, gathering, processing, refining,
distributing, mining, marketing or generation of natural gas, natural gas liquids, crude oil, refined petroleum products
(including biodiesel and ethanol), coal or electricity.
Environmental, Social and Governance
(ESG) Considerations. Although a fund does not seek to implement
a specific ESG strategy unless disclosed in
its Prospectus, portfolio management may consider ESG factors as part of the
investment process for actively managed funds, when available.
ESG factors are considered together with more traditional
subjects of investment analysis such as market position, growth prospects, and business strategy, as part of
a fund’s overall fundamental research process. When evaluating ESG factors, portfolio management may rely on data
obtained from a variety of sources, including company annual reports and sustainability reports, as well as other publicly
available information. For most asset classes and market segments, portfolio management also has access to
ESG research and assessments, including research provided by internal DWS analysts which consider ESG risks and
opportunities, as well as access to proprietary grades and additional information from DWS’s proprietary ESG software
tool (the
“DWS
ESG Engine”).
For funds that do not seek to implement a specific ESG strategy, portfolio management
generally considers
those ESG factors it deems financially material (also referred
to as “sustainability
risks”)
when making investment decisions, and the materiality of ESG considerations in a fund’s process will differ from
strategy to strategy, from sector to sector, and from portfolio manager to portfolio manager, and, in some cases, ESG
considerations may not represent a material component of a fund’s investment process. Certain funds (“ESG-dedicated
funds”)
incorporate specific ESG considerations into their investment objectives, strategies, and/or processes, as described
in a fund’s Prospectus. Because investors can differ in their views of what constitutes positive or negative ESG
characteristics, a fund may invest in issuers that do not reflect the beliefs and values with respect to ESG of any particular
investor. ESG considerations may affect a fund’s exposure to certain companies or industries, and an ESG-dedicated fund
may forego certain investment opportunities. While portfolio management views ESG considerations as having the
potential to contribute to a fund’s long-term performance, there is no guarantee that such results will be achieved.
As portfolio management
weighs the ESG attributes of a potential investment, they may use the DWS ESG
Engine.
The DWS ESG
Engine
uses multiple external data providers and public data sources, and provides automated analysis of
multiple ESG factors or issues, including a number of proprietary DWS ESG assessments.
The DWS ESG Engine
covers most listed asset classes but there is
limited information on high yield, municipal bonds, emerging markets, IPOs
and certain other types of securities due to incomplete vendor coverage. Through the DWS
ESG Engine,
portfolio management may also access issuer-specific
contextual analysis that provides additional information about an issuer’s ESG
risks and opportunities, risk mitigation actions or plans and other characteristics. An additional DWS internal review
process allows for adjustments to certain individual ESG assessment
scores, as calculated by the DWS ESG Engine.
An internal review may occur, for example, if it is deemed that information is not reflected in the existing ESG grade
because new information or insights have emerged that the ESG data vendors
have not yet processed. Examples
of information that may be considered in this
review process include, but are not limited to, the announcement
of new (or withdrawal from previously announced)
climate-related commitments, or the resolution of legacy (or involvement in
new) controversies.
Equity Securities.
An investment in a fund should be made with an understanding of the risks inherent in an investment in
equity securities, including the risk that the financial condition of issuers may become impaired or that the general condition
of the stock market may deteriorate (either of which may cause a decrease in the value of the portfolio securities
and thus in the value of Shares of a fund). Common stocks are susceptible to general stock market fluctuations and
to volatile increases and decreases in value as market confidence and perceptions of their issuers change. These investor
perceptions are based on various and unpredictable factors, including expectations regarding government,
economic,
monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or
regional political, economic or banking crises. Holders of common stocks incur more risks than holders of preferred stocks
and debt obligations because common stockholders generally have rights to receive payments from stock issuers
inferior to the rights of creditors, or holders of debt obligations or preferred stocks. Further, unlike debt securities, which
typically have a stated principal amount payable at maturity (the value of which, however, is subject to market fluctuations
prior to maturity), or preferred stocks, which typically have a liquidation preference and which may have stated
optional or mandatory redemption provisions, common stocks have neither a fixed principal amount nor a maturity.
Although most of the
securities in each Underlying Index or fund portfolio are listed on a national securities exchange, the
principal trading market for some may be in the over-the-counter market. The existence of a liquid trading market for
certain securities may depend on whether dealers will make a market in such securities.
Dividend-paying stocks
may underperform non-dividend paying stocks (and the stock market as a whole) over any period
of time. In addition, issuers of dividend-paying stocks may have discretion to defer or stop paying dividends for
a stated period of time, or the anticipated acceleration of dividends may not occur as a result of, among other things,
a sharp rise in interest rates or an economic downturn. If the dividend-paying stocks held by the fund reduce or
stop paying dividends, the fund’s ability to generate income may be adversely affected.
Changes in the dividend
policies of companies in a fund’s portfolio and capital resources available for these companies’ dividend
payments may adversely affect the fund. Depending upon market conditions, dividend-paying stocks that meet
the fund’s investment criteria may not be widely available and/or may be highly concentrated in only a few market sectors.
In addition, in the current
economic environment, global markets are experiencing a very high level of volatility and an
increased risk of corporate failures. The insolvency or other corporate failures of any one or more of a fund’s portfolio holdings
may have an adverse effect on a fund’s performance.
Tracking Stocks.
A tracking stock is a separate class of common stock whose value is linked to a specific business unit
or operating division within a larger company and which is designed to “track”
the performance of such business unit or division.
The tracking stock may pay dividends to shareholders independent of the parent company. The parent company,
rather than the business unit or division, generally is the issuer of tracking stock. However, holders of the tracking
stock may not have the same rights as holders of the company’s common stock.
Fixed Income Securities.
An investment in a fund should also be made with an understanding of the risks inherent in
an investment in fixed income securities or bonds. A bond is an interest-bearing security issued by a company, governmental
unit or, in some cases, a non-US entity. The issuer of a bond has a contractual obligation to pay interest at
a stated rate on specific dates and to repay principal (the bond’s face value) periodically or on a specified maturity date.
An issuer may have the right to redeem or “call”
a bond before maturity, in which case the investor may have to
reinvest the proceeds at lower market rates. Most bonds bear interest income at a “coupon”
rate that is fixed for the life of the bond.
The value of a fixed rate bond usually rises when market interest rates fall, and falls when market interest
rates rise. Accordingly, a fixed rate bond’s yield (income as a percent of the bond’s current value) may differ from
its coupon rate as its value rises or falls. Other types of bonds bear income at an interest rate that is adjusted periodically.
Because of their adjustable interest rates, the values of “floating-rate”
or “variable-rate”
bonds generally fluctuate less in response to
market interest rate movements than the value of similar fixed rate bonds. The funds may
treat some of these bonds as having a shorter maturity for purposes of calculating the weighted average maturity of
its investment portfolio. In addition, bonds may be senior or subordinated obligations. Senior obligations generally have
the first claim on a corporation’s earnings and assets and, in the event of liquidation, are paid before subordinated obligations.
Bonds may be unsecured (backed only by the issuer’s general creditworthiness) or secured (also backed by
specified collateral).
In
a low or negative interest rate environment, debt instruments may trade at negative yields, which means the purchaser of
the instrument may receive at maturity less than the total amount invested. In addition, in a negative interest rate environment,
if a bank charges negative interest, instead of receiving interest on deposits, a depositor must pay the bank
fees to keep money with the bank. To the extent a fund holds a negatively-yielding debt instrument or has a bank
deposit with a negative interest rate, the fund would generate a negative return on that investment.
In response to market
volatility and economic uncertainty in connection with the COVID-19 pandemic, the US government and
certain foreign central banks took steps to stabilize markets by, among other things, reducing interest rates, including pursuing
negative interest rate policies in some instances. In recent
years, the US Federal Reserve and certain foreign central
banks have raised interest rates in response to increased inflation. A rising interest rate environment may cause
investors to move out of fixed-income and related securities on a large scale, which could adversely affect the price
and liquidity of such securities and could also result in increased redemptions from a fund. Recent increased inflation
may cause fixed-income securities and related markets to experience heightened levels of interest rate volatility and
liquidity risk. A sharp rise in interest rates could cause a fund’s share price to decline.
More recently, the US Federal Reserve and certain foreign central
banks have subsequently cut interest rates as inflation has decreased.
These considerations
may limit a fund’s ability to locate fixed-income instruments containing the desired risk/return profile.
Changing interest rates could have unpredictable effects on the markets, may expose fixed-income and related markets
to heightened volatility and potential illiquidity and may increase interest rate risk for a fund.
Foreign Securities.
To the extent a fund invests in stocks of non-US issuers, certain of the fund’s investments in such
stocks may be in the form of American Depositary Receipts (“ADRs”),
Global Depositary Receipts (“GDRs”)
and Non-Voting Depositary Receipts (“NVDRs”)
(collectively, “Depositary
Receipts”).
Depositary Receipts are receipts, typically
issued by a bank or trust issuer, which evidence ownership of underlying securities issued by a non-US issuer. For
ADRs, the depository is typically a US financial institution and the underlying securities are issued by a non- US issuer.
For other forms of Depositary Receipts, the depository may be a non-US or a US entity, and the underlying securities
may be issued by a non-US or a US issuer. Depositary Receipts are not necessarily denominated in the same
currency as their underlying securities. Generally, ADRs, issued in registered form, are designed for use in the US
securities markets, NVDRs are designed for use in the Thai securities market and GDRs are tradable both in the United
States and in Europe and are designed for use throughout the world.
In general, Depositary
Receipts will be sponsored, but a fund may invest in unsponsored ADRs under certain circumstances. The
issuers of unsponsored Depositary Receipts are not obligated to disclose material information in the United States. Therefore,
there may be less information available regarding such issuers and there may be no correlation between available
information and the market value of the Depositary Receipts.
Investing in the securities
of non-US issuers involves special risks and considerations not typically associated with investing
in US issuers. These include differences in accounting, auditing and financial reporting standards, the possibility of
expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations, political instability which
could affect US investments in non-US countries, and potential restrictions on the flow of international capital. Non-US
issuers may be subject to less governmental regulation than US issuers. Moreover, individual non-US economies may
differ favorably or unfavorably from the US economy in such respects as growth of gross domestic product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of payment positions.
The foreign countries
in which a fund invests may become subject to economic and trade sanctions or embargoes imposed
by the US or foreign governments or the United Nations. Such sanctions or other actions could result in the devaluation
of a country’s currency or a decline in the value and liquidity of securities of issuers in that country. In addition,
such sanctions could result in a freeze on an issuer’s securities which would prevent a fund from selling securities
it holds. The value of the securities issued by companies that operate in or have dealings with these countries may
be negatively impacted by any such sanction or embargo and may reduce a fund’s returns. The risks related to sanctions
or embargoes are greater in emerging and frontier market countries.
Gold or Precious
Metals. Gold and other precious metals held by or on behalf of
a fund may be held on either an allocated or
an unallocated basis inside or outside the US. Placing gold or precious metals in an allocated custody account
gives a fund a direct interest in specified gold bars or precious metals, whereas an unallocated deposit does not
and instead gives a fund a right only to compel the counterparty to deliver a specific amount of gold or precious metals,
as applicable. Consequently, a fund could experience a loss if the counterparty to an unallocated depository arrangement
becomes bankrupt or fails to deliver the gold or precious metals as requested. An allocated gold or precious metals
custody account also involves the risk that the gold or precious metals will be stolen or damaged while in transit.
Both allocated and unallocated arrangements require a fund as seller to deliver, either by book entry or physically, the
gold or precious metals sold in advance of the receipt of payment. These custody risks would apply to a wholly-owned subsidiary
of a fund to the extent the subsidiary holds gold or precious metals.
In addition, in order
to qualify for the special tax treatment accorded RICs
and their shareholders, a fund must, among other
things, derive at least 90% of its income from certain specified sources (qualifying income). Capital gains from the
sale of gold or other precious metals will not constitute qualifying income. As a result, a fund may not be able to sell
or otherwise dispose of all or a portion of its gold or precious metal holdings without realizing significant adverse tax
consequences, including paying a tax at the fund level, or the failure to qualify as a RIC
under Subchapter M of the Code. Rather than
incur those tax consequences, a fund may choose to hold some amount of gold or precious metal
that it would otherwise sell.
Illiquid Securities.
Illiquid securities are investments that a fund reasonably expects cannot be sold or disposed of in
current market conditions in seven calendar days or less without the sale or disposition significantly changing the market
value of the investment, as determined pursuant to the fund’s liquidity risk management program (LRM Program) adopted
pursuant to Rule 22e-4 under the 1940 Act. Under a fund’s LRM Program, the fund may not hold more than 15%
of its net assets in illiquid securities. The LRM Program administrator is responsible for determining the liquidity classification
of a fund’s investments and monitoring compliance with the 15% limit on illiquid securities. Historically, illiquid
securities have included securities subject to contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily marketable and repurchase agreements having
a maturity of longer than seven days. Securities which have not been registered under the 1933 Act are referred to
as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Non-publicly
traded securities (including Rule 144A Securities) may involve a high degree of business and financial risk
and may result in substantial losses. These securities may be less liquid than publicly traded securities, and it may
take longer to liquidate these positions than would be the case for publicly traded securities. Companies whose securities
are not publicly traded may not be subject to the disclosure and other investor protection requirements applicable
to companies whose securities are publicly traded. Certain securities may be deemed to be illiquid as a result
of the Advisor’s receipt from time to time of material, non-public information about an issuer, which may limit the
Advisor’s ability to trade such securities for the account of any of its clients, including a fund. In some instances, these
trading restrictions could continue in effect for a substantial period of time. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a fund might be unable to dispose of illiquid securities promptly
or at reasonable prices and might thereby experience difficulty funding redemptions and other cash needs. An
investment in illiquid securities is subject to the risk that should a fund desire to sell any of these securities when a
ready buyer is not available at a price that is deemed to be representative of their value, the value of a fund’s net assets
could be adversely affected.
An investment in illiquid
securities is also subject to the risk of delays on resale and uncertainty in valuation. A fund might
also have to register such illiquid securities in order to dispose of them, resulting in additional expense and delay.
A fund selling its securities in a registered offering may be deemed to be an “underwriter”
for purposes of Section 11 of the 1933 Act.
In such event, a fund may be liable to purchasers of the securities under Section 11 if the
registration statement prepared by the issuer, or the prospectus forming a part of it, is materially inaccurate or misleading,
although a fund may have a due diligence defense. Adverse market conditions could impede such a public offering
of securities.
Inflation.
Inflation creates uncertainty over the future real value of an investment (the value after adjusting for inflation). The
real value of certain assets or real income from investments will be less in the future as inflation decreases the value
of money. As inflation increases, the present value of a fund's assets and distributions may decline. This risk is
more
prevalent with respect to debt securities held by a fund. Inflation rates may change frequently and drastically as
a result of various factors, including unexpected shifts in the domestic or global economy. Moreover, a fund's investments may
not keep pace with inflation, which may result in losses to fund shareholders or adversely affect the real value of
shareholders' investment in a fund. Fund shareholders' expectation of future inflation can also impact the current value
of a fund’s portfolio, resulting in lower asset values and potential losses. This risk may be elevated compared to
historical market conditions and could be impacted by
monetary policy measures and the current interest rate environment.
Investment Companies and Other Pooled
Investment Vehicles. A fund may acquire securities of other registered
investment companies and other pooled investment
vehicles (collectively, investment funds) to the extent that such investments
are consistent with its investment objective, policies, strategies and restrictions and the limitations of the
1940 Act. Pursuant to the 1940 Act, a fund’s investment in investment companies is limited to, subject to certain exceptions:
(i) 3% of the total outstanding voting stock of any one investment company; (ii) 5% of the fund’s total assets
with respect to any one investment company; and (iii) 10% of the fund’s total assets with respect to investment companies
in the aggregate. In October 2020, the SEC adopted certain regulatory changes and took other actions related
to the ability of an investment company to invest in the securities of another investment company. These changes
include, among other things, the rescission of certain SEC exemptive orders permitting investments in excess of
the statutory limits and the withdrawal of certain related SEC staff no-action letters, and the adoption of Rule 12d1-4 under
the 1940 Act. Rule 12d1-4, which became effective on January 19, 2021, permits a fund to invest in other investment
companies beyond the statutory limits, subject to certain conditions. The rescission of the applicable exemptive orders
and the withdrawal of the applicable no-action letters was effective on January 19, 2022. Since such time, an investment
company may no longer rely on the aforementioned exemptive orders and no-action letters and is subject instead
to Rule 12d1-4 and other applicable rules under Section 12(d)(1). The impact of these regulatory changes on the
funds is still uncertain. To the extent allowed by law or regulation, each fund may invest its assets in the securities of
investment companies that are money market funds, including those advised by the Advisor or otherwise affiliated with
the Advisor, in excess of the limits discussed above. Investment funds may include money market mutual funds operated
in accordance with Rule 2a-7, closed-end funds, and exchange-traded funds (ETFs) (including investment funds
managed by the Advisor and its affiliates). A fund will indirectly bear its proportionate share of any management fees
and other expenses paid by such other investment funds.
Because a fund may acquire
securities of funds managed by the Advisor or an affiliate of the Advisor, the Advisor may have
a conflict of interest in selecting funds. The Advisor considers such conflicts of interest as part of its investment process
and has established practices designed to minimize such conflicts. The Advisor, any subadvisor and any affiliates of
the Advisor, as applicable, earn fees at varying rates for providing services to underlying affiliated funds. The Advisor and
any subadvisor may, therefore, have a conflict of interest in selecting underlying affiliated funds advised by the Advisor
or an affiliate and in determining whether to invest in an unaffiliated fund from which they will not receive any
fees. However, the Advisor and any subadvisor to a fund will select investments that it believes are appropriate to
meet the fund’s investment objectives.
ETFs and closed-end funds
trade on a securities exchange and their shares may trade at a premium or discount to their
net asset value. A fund will incur brokerage costs when it buys and sells shares of ETFs and closed-end funds. ETFs
that seek to track the composition and performance of a specific index may not replicate exactly the performance of
their specified index because of trading costs and operating expenses incurred by the ETF. At times, there may not
be an active trading market for shares of some ETFs and closed-end funds and trading of ETF and closed-end fund
shares may be halted or delisted by the listing exchange.
To the extent consistent
with its investment objective, policies, strategies and restrictions, a fund may invest in commodity-related
ETFs. Certain commodity-related ETFs may not be registered as investment companies under the 1940
Act and shareholders of such commodity-related ETFs, including the investing affiliated fund, will not have the regulatory
protections provided to investors in registered investment companies. Commodity-related ETFs may invest in
commodities directly (such as purchasing gold) or they may seek to track a commodities index by investing in commodity-linked
derivative instruments. Commodity-related ETFs are subject to the risks associated with the commodities or
commodity-linked derivative instruments in which they invest. A fund’s ability to invest in commodity-related ETFs may
be limited by its intention to qualify as a RIC under the Code. In addition, under recent amendments to rules of
the
Commodity Futures Trading Commission (CFTC), a fund’s investment in commodity-related ETFs may subject the fund
and/or the Advisor to certain registration, disclosure and reporting requirements of the CFTC. The Advisor will monitor
a fund’s use of commodity-related ETFs to determine whether the fund and/or the Advisor will need to comply with
CFTC rules.
IPO Risk.
Securities issued through an initial public offering (IPO) can experience an immediate drop in value if the demand
for the securities does not continue to support the offering price. Information about the issuers of IPO securities is
also difficult to acquire since they are new to the market and may not have lengthy operating histories. A fund may engage
in short-term trading in connection with its IPO investments, which could produce higher trading costs and adverse
tax consequences.
Lending of Portfolio Securities.
To generate additional income, a fund may lend a percentage of its investment securities to
approved institutional borrowers who need to borrow securities in order to complete certain transactions, such as covering
short sales, avoiding failures to deliver securities or completing arbitrage operations, in exchange for collateral in
the form of cash or US government securities. By lending its investment securities, a fund attempts to increase its
net investment income through the receipt of interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would belong to a fund. A fund may lend its investment securities
so long as the terms, structure and the aggregate amount of such loans are not inconsistent with the 1940 Act
or the rules and regulations or interpretations of the SEC thereunder, which currently require that (a) the borrower pledge
and maintain with a fund collateral consisting of liquid, unencumbered assets having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such collateral whenever the price of the
securities loaned rises or the value of non-cash collateral declines (i.e., the borrower “marks
to the market”
on a daily basis), (c) the loan be made subject
to termination by a fund at any time, and (d) a fund receives a reasonable return
on the loan (consisting of the return achieved on investment of the cash collateral, less the rebate owed to borrowers,
plus distributions on the loaned securities and any increase in their market value). A fund may pay reasonable fees
in connection with loaned securities, pursuant to written contracts, including fees paid to a fund’s custodian and fees
paid to a securities lending agent, including a securities lending agent that is an affiliate of the Advisor. Voting rights
may pass with the loaned securities, but if an event occurs that the Advisor determines to be a material event affecting
an investment on loan, the loan must be called and the securities voted. Cash collateral received by a fund may
be invested in a money market fund managed by the Advisor (or one of its affiliates).
A fund is subject to
all investment risks associated with the reinvestment of any cash collateral received, including, but
not limited to, interest rate, credit and liquidity risk associated with such investments. To the extent the value or return
of a fund’s investments of the cash collateral declines below the amount owed to a borrower, a fund may incur losses
that exceed the amount it earned on lending the security. If the borrower defaults on its obligation to return securities
lent because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities
lent or gaining access to collateral. If a fund is not able to recover securities lent, a fund, through its securities lending
agent, may sell the collateral and purchase a replacement investment in the market, incurring the risk that the
value of the replacement security is greater than the value of the collateral. However, loans will be made only to borrowers
selected by a fund’s delegate after a commercially reasonable review of relevant facts and circumstances, including
the creditworthiness of the borrower. A fund also bears the risk that the contractual obligations of its securities lending
agent and/or the borrower may not cover all potential losses to the fund in connection with the securities lending
transaction.
In the case of securities lending transactions,
payments in lieu of dividends are not qualified dividend income.
Micro-Cap Companies.
Micro-capitalization company stocks have customarily involved more investment risk than large
company stocks. There can be no assurance that this will continue to be true in the future. Micro-capitalization companies
may have limited product lines, markets or financial resources; may lack management depth or experience; and
may be more vulnerable to adverse general market or economic developments than large companies. The prices of
micro-capitalization company securities are often more volatile than prices associated with large company issues, and
can display abrupt or erratic movements at times, due to limited trading volumes and less publicly available information.
Also,
because micro-capitalization companies normally have fewer shares outstanding and these shares trade less frequently
than large companies, it may be more difficult for a fund to buy and sell significant amounts of such shares without
an unfavorable impact on prevailing market prices.
Some of the companies
in which a fund may invest may distribute, sell or produce products which have recently been brought
to market and may be dependent on key personnel. The securities of micro-capitalization companies are often traded
over-the-counter and may not be traded in the volumes typical on a national securities exchange. Consequently, in
order to sell this type of holding, a fund may need to discount the securities from recent prices or dispose of the securities
over a long period of time.
Mining and Exploration Risks.
The business of mining by its nature involves significant risks and hazards, including environmental
hazards, industrial accidents, labor disputes, discharge of toxic chemicals, fire, drought, flooding and natural
acts. The occurrence of any of these hazards can delay production, increase production costs and result in liability
to the operator of the mines. A mining operation may become subject to liability for pollution or other hazards against
which it has not insured or cannot insure, including those in respect of past mining activities for which it was not
responsible.
Exploration for gold
and other precious metals is speculative in nature, involves many risks and frequently is unsuccessful. There
can be no assurance that any mineralisation discovered will result in an increase in the proven and probable reserves
of a mining operation. If reserves are developed, it can take a number of years from the initial phases of drilling
and identification of mineralisation until production is possible, during which time the economic feasibility of production
may change. Substantial expenditures are required to establish ore reserves properties and to construct mining
and processing facilities. As a result of these uncertainties, no assurance can be given that the exploration programs
undertaken by a particular mining operation will actually result in any new commercial mining.
Municipal Securities Risk.
Municipal securities are subject to the risk that litigation, legislation or other political events, local
business or economic conditions, credit rating downgrades or the bankruptcy, of the issuer could have a significant effect
on an issuer’s ability to make payments of principal and/or interest or otherwise affect the value of such securities. In
addition, there is a risk that, as a result of the recent economic crisis, the ability of any issuer to pay, when due, the
principal or interest on its municipal bonds may be materially affected. Certain municipalities may have difficulty meeting
their obligations due to, among other reasons, changes in underlying demographics.
Municipal securities
can be significantly affected by political changes as well as uncertainties in the municipal market related
to government regulation, taxation, legislative changes or the rights of municipal security holders. Because many
municipal securities are issued to finance similar projects, especially those relating to education, health care, transportation,
utilities and water and sewer, conditions in those sectors can affect the overall municipal market. In addition,
changes in the financial condition of an individual municipal insurer can affect the overall municipal market. A
number of municipalities have had significant financial problems recently, and these and other municipalities could, potentially,
continue to experience significant financial problems resulting from lower tax revenues and/or decreased aid
from state and local governments in the event of an economic downturn. This could potentially decrease the fund’s income
or hurt its ability to preserve capital and liquidity. Municipal securities may include revenue bonds, which are generally
backed by revenue from a specific project or tax. The issuer of a revenue bond makes interest and principal payments
from revenues generated from a particular source or facility, such as a tax on particular property or revenues generated
from a municipal water or sewer utility or an airport. Revenue bonds generally are not backed by the full faith
and credit and general taxing power of the issuer. Municipal securities backed by current or anticipated revenues from
a specific project or specific assets can be negatively affected by the discontinuance of the taxation supporting the
project or assets or the inability to collect revenues for the project or from the assets due to factors such as lower property
tax collections as a result of lower home values, lower sales tax revenues as a result of consumers cutting back
spending and lower income tax revenue as a result of a higher unemployment rate. In addition, since some municipal
obligations may be secured or guaranteed by banks and other institutions, the risk to the fund could increase if
the banking or financial sector suffers an economic downturn and/or if the credit ratings of the institutions issuing the
guarantee are downgraded or at risk of being downgraded by a national rating organization. Municipal instruments may
be susceptible to periods of economic stress, which could affect the market values and marketability of many or
all municipal obligations of issuers in a state, US territory, or possession. The municipal securities market can be
susceptible
to increases in volatility and decreases in liquidity. Liquidity can decline unpredictably in response to overall economic
conditions or credit tightening. Increases in volatility and decreases in liquidity may be caused by a rise in interest
rates (or the expectation of a rise in interest rates).
The market for municipal
bonds may be less liquid than for taxable bonds. There may also be less publicly available information
on the financial condition of issuers of municipal securities than for public corporations. This means that it
may be harder to buy and sell municipal securities, especially on short notice, and municipal securities may be more difficult
for the fund to value accurately than securities of public corporations. Since the fund invests a significant portion
of its portfolio in municipal securities, the fund’s portfolio may have greater exposure to liquidity risk than a fund
that invests in non-municipal securities. In addition, the value and liquidity of many municipal securities have decreased
as a result of the recent financial crisis, which has also adversely affected many municipal securities issuers and
may continue to do so. The markets for many credit instruments, including municipal securities, have experienced periods
of illiquidity and extreme volatility since the latter half of 2007. In response to the global economic downturn, governmental
cost burdens may be reallocated among federal, state and local governments. In addition, issuers of municipal
securities may seek protection under the bankruptcy laws. For example, Chapter 9 of the United States Code
(the “Bankruptcy
Code”)
provides a financially distressed municipality protection from its creditors while it develops and
negotiates a plan for reorganizing its debts. “Municipality”
is defined broadly by the Bankruptcy Code as a “political
subdivision or public agency or instrumentality
of a state”
and may include various issues of securities in which the fund
invests. The reorganization of a municipality’s debts may include extending debt maturities, reducing the amount of
principal or interest, refinancing the debt or taking other measures, which may significantly affect the rights of creditors
and the value of the securities issued by the municipality and the value of the fund’s investments.
Some longer-term municipal
securities give the investor the right to “put”
or sell the security at par (face value) within a
specified number of days following the investor’s request – usually one to seven days. This demand feature enhances a
security’s liquidity by shortening its effective maturity and enables it to trade at a price equal to or very close to par. If
a demand feature terminates prior to being exercised, the fund would hold the longer-term security, which could experience
substantially more volatility. Municipal securities are subject to credit and market risk. Generally, prices of
higher quality issues tend to fluctuate more with changes in market interest rates than prices of lower quality issues and
prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues.
Prices and yields on
municipal securities are dependent on a variety of factors, including general money-market conditions, the
financial condition of the issuer, general conditions of the municipal securities market, the size of a particular offering,
the maturity of the obligation and the rating of the issue. A number of these factors, including the ratings of particular
issues, are subject to change from time to time. Available information about the financial condition of an issuer
of municipal securities may not be as extensive as that which is made available by corporations whose securities are
publicly traded. As a result, municipal securities may be more difficult to value than securities of public corporations.
Many state and local
governments that issue municipal securities are currently under significant economic and financial stress
and may not be able to satisfy their obligations. The taxing power of any governmental entity may be limited and
an entity’s credit may depend on factors which are beyond the entity’s control.
Electric Utilities Bond Risk.
The electric utilities industry has been experiencing, and will continue to experience, increased competitive
pressures. Federal legislation may open transmission access to any electricity supplier, although it is not presently
known to what extent competition will evolve. Other risks include: (a) the availability and cost of fuel; (b) the
availability and cost of capital; (c) the effects of conservation on energy demand; (d) the effects of rapidly changing environmental,
safety and licensing requirements, and other federal, state and local regulations, (e) timely and sufficient rate
increases and governmental limitations on rates charged to customers; (f) the effects of opposition to nuclear power;
(g) increases in operating costs; and (h) obsolescence of existing equipment, facilities and products.
Industrial Development Bond Risk.
Industrial developments bonds are revenue bonds issued by or
on behalf of public authorities to obtain funds
to finance various public and/or privately operated facilities, including those for business and
manufacturing, housing, sports, pollution control, airport, mass transit, port and parking facilities. These bonds are
normally secured only by the revenues from the project and not by state or local government tax payments. Consequently, the
credit quality of these securities is dependent upon the ability of the user of the facilities financed by the bonds
and
any guarantor to meet its financial obligations. Payment of interest on and repayment of principal of such bonds are
the responsibility of the user and/or any guarantor. These bonds are subject to a wide variety of risks, many of which
relate to the nature of the specific project. Generally, the value and credit quality of these bonds are sensitive to
the risks related to an economic slowdown.
Lease Obligations Risk.
Lease obligations may have risks not normally associated with
general obligation or other revenue bonds. Leases
and installment purchase or conditional sale contracts (which may provide for title to the leased asset
to pass eventually to the issuer) have developed as a means for governmental issuers to acquire property and equipment
without the necessity of complying with the constitutional statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain “nonappropriation”
clauses that provide that the governmental issuer
has no obligation to make future payments under the lease or contract unless money is appropriated for that purpose
by the appropriate legislative body on an annual or other periodic basis. Consequently, continued lease payments on
those lease obligations containing “non-appropriation”
clauses are dependent on future legislative actions. If these legislative
actions do not occur, the holders of the lease obligation may experience difficulty in exercising their rights, including
disposition of the property. In such circumstances, the fund might not recover the full principal amount of the
obligation.
Municipal Bond Tax Risk.
There is no guarantee that the fund’s income will be exempt from federal or state income taxes.
Events occurring after the date of issuance of a municipal bond or after the fund’s acquisition of a municipal bond
may result in a determination that interest on that bond is includible in gross income for US federal income tax purposes
retroactively to its date of issuance. Such a determination may cause a portion of prior distributions by the fund
to its shareholders to be taxable to those shareholders in the year of receipt. Federal or state changes in income or
alternative minimum tax (“AMT”)
rates or in the tax treatment of municipal bonds may make municipal bonds less attractive
as investments and cause them to lose value.
Municipal Market Disruption Risk.
The value of municipal securities may be affected by uncertainties in the municipal market
related to legislation or litigation involving the taxation of municipal securities or the rights of municipal securities holders
in the event of a bankruptcy. Proposals to restrict or eliminate the federal income tax exemption for interest on
municipal securities are introduced before Congress from time to time. Proposals also may be introduced before state
legislatures that would affect the state tax treatment of a municipal fund’s distributions. If such proposals were enacted,
the availability of municipal securities and the value of a municipal fund’s holdings would be affected. Municipal bankruptcies
are relatively rare, and certain provisions of the US Bankruptcy Code governing such bankruptcies are unclear
and remain untested. Further, the application of state law to municipal issuers could produce varying results among
the states or among municipal securities issuers within a state. These legal uncertainties could affect the municipal
securities market generally, certain specific segments of the market, or the relative credit quality of particular securities.
There is also the possibility that as a result of litigation or other conditions, the power or ability of issuers to
meet their obligations for the payment of interest and principal on their municipal securities may be materially affected
or their obligations may be found to be invalid or unenforceable. Such litigation or conditions may from time to
time have the effect of introducing uncertainties in the market for municipal securities or certain segments thereof, or
of materially affecting the credit risk with respect to particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the fund’s municipal securities in the same manner. Any of these
effects could have a significant impact on the prices of some or all of the municipal securities held by the fund.
Resource Recovery Bond Risk.
Resource recovery bonds are a type of revenue bond issued to build facilities such as
solid waste incinerators or waste-to-energy plants. Typically, a private corporation is involved, at least during the construction
phase, and the revenue stream is secured by fees or rents paid by municipalities for use of the facilities. These
bonds are normally secured only by the revenues from the project and not by state or local government tax receipts.
Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities financed
by the bonds and any guarantor to meet its financial obligations. The viability of a resource recovery project, environmental
protection regulations, and project operator tax incentives may affect the value and credit quality of resource
recovery bonds.
Special Tax
Bond Risk. Special tax bonds are usually backed and payable through
a single tax, or series of special taxes such
as incremental property taxes. The failure of the tax levy to generate adequate revenue to pay the debt service
on the bonds may cause the value of the bonds to decline. Adverse conditions and developments affecting a
particular project may result in lower revenues to the issuer of the municipal securities, which may adversely affect the
value of the fund’s portfolio.
Transportation Bond Risk.
Transportation bonds may be issued to finance the construction of airports, toll roads, highways or
other transit facilities. Airport bonds are dependent on the general stability of the airline industry and on the stability of
a specific carrier who uses the airport as a hub. Air traffic generally follows broader economic trends and is also affected
by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as
toll levels, the presence of competing roads and the general economic health of an area. Fuel costs and availability also
affect other transportation-related securities, as do the presence of alternate forms of transportation, such as public
transportation. Municipal securities that are issued to finance a particular transportation project often depend solely
on revenues from that project to make principal and interest payments. Adverse conditions and developments affecting
a particular project may result in lower revenues to the issuer of the municipal securities.
Water and Sewer Bond Risk.
Water and sewer revenue bonds are often considered to have relatively secure credit as
a result of their issuer’s importance, monopoly status and generally unimpeded ability to raise rates. Despite this, lack
of water supply due to insufficient rain, run-off or snow pack is a concern that has led to past defaults. Further, public
resistance to rate increases, costly environmental litigation, and federal environmental mandates are challenges faced
by issuers of water and sewer bonds.
Preferred Stock.
Preferred stock is an equity security, but possesses certain attributes of debt securities. Holders of preferred
stock normally have the right to receive dividends at a fixed rate when and as declared by the issuer’s board of
directors, but do not otherwise participate in amounts available for distribution by the issuing corporation. Dividends on
preferred stock may be cumulative, and, in such cases, all cumulative dividends usually must be paid prior to dividend payments
to common stockholders. Preferred stock has a preference (i.e., ranks higher) in liquidation (and generally dividends)
over common stock, but is subordinated (i.e., ranks lower) in liquidation to fixed income securities. Because of
this preference, preferred stocks generally entail less risk than common stocks. As a general rule, the market value of
preferred stocks with fixed dividend rates and no conversion rights moves inversely with interest rates and perceived credit
risk, with the price determined by the dividend rate. Some preferred stocks are convertible into other securities (e.g.,
common stock) at a fixed price and ratio or upon the occurrence of certain events. The market price of convertible preferred
stocks generally reflects an element of conversion value. Because many preferred stocks lack a fixed maturity date,
these securities generally fluctuate substantially in value when interest rates change; such fluctuations often exceed
those of long-term bonds of the same issuer. Some preferred stocks pay an adjustable dividend that may be based
on an index, formula, auction procedure or other dividend rate reset mechanism. In the absence of credit deterioration, adjustable
rate preferred stocks tend to have more stable market values than fixed rate preferred stocks.
All preferred stocks
are also subject to the same types of credit risks as corporate bonds. In addition, because preferred stock
is subordinate to debt securities and other obligations of an issuer, deterioration in the credit rating of the issuer will
cause greater changes in the value of a preferred stock than in a more senior debt security with similar yield characteristics.
Preferred stocks may be rated by S&P and Moody’s although there is no minimum rating which a preferred
stock must have to be an eligible investment for a fund.
In summary, there are a number of special
risks associated with investing in preferred stocks, including:
Credit and Subordination Risk.
Credit risk is the risk that a preferred stock in a fund’s portfolio will decline in price or the
issuer of the preferred stock will fail to make dividend, interest, or principal payments when due because the issuer
experiences a decline in its financial status. As noted above, preferred stocks are generally subordinated to bonds
and other debt instruments in a company’s capital structure in terms of having priority to corporate income, claims
to corporate assets, and liquidation payments and, therefore, will be subject to greater credit risk than more senior
debt instruments.
Interest Rate
Risk. Interest rate risk is the risk that a preferred stock will
decline in value because of changes in market interest
rates. As described above, when market interest rates rise, the market value of a preferred stock generally will
generally fall. Preferred stocks with longer periods before maturity may be more sensitive to interest rate changes.
Deferral and Omission Risk.
Preferred stocks may have provisions that permit the issuer, at its discretion, to defer or omit
distributions for a stated period without any adverse consequences to the issuer. In certain cases, deferring or omitting
distributions may be mandatory. If a fund owns a preferred stock that is deferring its distributions, the fund may
be required to report income for tax purposes although it has not yet received such income.
Call, Reinvestment, and Income Risk.
During periods of declining interest rates, an issuer may be able to exercise an option
to redeem its outstanding preferred stock at par earlier than scheduled, which is generally known as call risk. If
this occurs, a fund may be forced to reinvest in lower yielding securities. This is known as reinvestment risk. Preferred stocks
frequently have call features that allow the issuer to repurchase the stock prior to its stated maturity. An issuer may
redeem an obligation if the issuer can refinance the obligation at a lower cost due to declining interest rates or an
improvement in the credit standing of the issuer, or in the event of regulatory changes affecting the capital treatment of
its outstanding preferred stock. Another risk associated with a declining interest rate environment is that the income from
a fund’s portfolio may decline over time when the fund invests the proceeds from share sales at market interest rates
that are below the portfolio’s current earnings rate.
Liquidity Risk. Certain
preferred stocks may be substantially less liquid than many other stocks, such as common stocks
or US Government securities. Illiquid preferred stocks involve the risk that the stock may not be able to be sold
at the time desired by a fund or at prices approximating the value at which the fund is carrying the stock on its books.
Limited Voting Rights Risk. Generally,
traditional preferred stocks offer no voting rights with respect to the issuer unless
preferred dividends have been in arrears for a specified number of periods, at which time the preferred stock holders
may elect a number of directors to the issuer’s board. Generally, once all the arrearages have been paid, the preferred
stock holders no longer have voting rights.
Special Redemption Rights Risk.
In certain varying circumstances, an issuer of preferred stock may redeem the stock prior
to a specified date. For instance, for certain types of preferred stocks, a redemption may be triggered by a change in
US federal income tax or securities laws. As with call provisions, a redemption by the issuer may negatively impact the
return of the preferred stock held by a fund.
Lastly, dividends from
certain preferred stocks may not be eligible for the corporate dividends-received deduction or for
treatment.
Privatized Enterprises. A
fund may invest in foreign securities which may include securities issued by enterprises that
have undergone or are currently undergoing privatization. The governments of certain foreign countries have, to varying
degrees, embarked on privatization programs contemplating the sale of all or part of their interests in state enterprises.
A fund’s investments in the securities of privatized enterprises may include privately negotiated investments in
a government or state-owned or controlled company or enterprise that has not yet conducted an initial equity offering, investments
in the initial offering of equity securities of a state enterprise or former state enterprise and investments in
the securities of a state enterprise following its initial equity offering.
In certain jurisdictions,
the ability of foreign entities, such as a fund, to participate in privatizations may be limited by local
law, or the price or terms on which a fund may be able to participate may be less advantageous than for local investors.
Moreover, there can be no assurance that governments that have embarked on privatization programs will continue
to divest their ownership of state enterprises, that proposed privatizations will be successful or that governments will
not re-nationalize enterprises that have been privatized.
In the case of the enterprises
in which a fund may invest, large blocks of the stock of those enterprises may be held by
a small group of stockholders, even after the initial equity offerings by those enterprises. The sale of some portion or
all of those blocks could have an adverse effect on the price of the stock of any such enterprise.
Prior
to making an initial equity offering, most state enterprises or former state enterprises go through an internal reorganization
of management. Such reorganizations are made in an attempt to better enable these enterprises to compete
in the private sector. However, certain reorganizations could result in a management team that does not function
as well as an enterprise’s prior management and may have a negative effect on such enterprise. In addition, the
privatization of an enterprise by its government may occur over a number of years, with the government continuing to
hold a controlling position in the enterprise even after the initial equity offering for the enterprise.
Prior to privatization,
most of the state enterprises in which a fund may invest enjoy the protection of and receive preferential
treatment from the respective sovereigns that own or control them. After making an initial equity offering, these
enterprises may no longer have such protection or receive such preferential treatment and may become subject to
market competition from which they were previously protected. Some of these enterprises may not be able to operate
effectively in a competitive market and may suffer losses or experience bankruptcy due to such competition.
Repurchase Agreements.
A repurchase agreement is an instrument under which the purchaser (i.e., a fund) acquires the
security and the seller agrees, at the time of the sale, to repurchase the security at a mutually agreed upon time and
price, thereby determining the yield during the purchaser’s holding period. Repurchase agreements may be construed to
be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. If a repurchase
agreement is construed to be a collateralized loan, the underlying securities will not be considered to be owned
by each fund but only to constitute collateral for the seller’s obligation to pay the repurchase price, and, in the event
of a default by the seller, each fund may suffer time delays and incur costs or losses in connection with the disposition
of the collateral.
In any repurchase transaction,
collateral for a repurchase agreement may include cash items, obligations issued by the
US government or its agencies or instrumentalities and any other debt security that the Advisor and/or Subadvisor, as
applicable, determines at the time the repurchase agreement is entered into: (i) is issued by an issuer that has an exceptionally
strong capacity to meet its financial obligations; and (ii) is sufficiently liquid that it can be sold at approximately its
carrying value in the ordinary course of business within seven calendar days. Collateral, however, is not limited to the
foregoing and may include for example obligations rated below the highest category by NRSROs. Collateral for a
repurchase agreement may also include securities that a fund could not hold directly without the repurchase obligation.
Repurchase agreements
pose certain risks for a fund that utilizes them. Such risks are not unique to the funds but are
inherent in repurchase agreements. The funds seek to minimize such risks but such risks cannot be eliminated. Lower
quality collateral and collateral with longer maturities may be subject to greater price fluctuations than higher quality
collateral and collateral with shorter maturities. If the repurchase agreement counterparty were to default, lower
quality collateral may be more difficult to liquidate than higher quality collateral. Should the counterparty default and
the amount of collateral not be sufficient to cover the counterparty’s repurchase obligation, a fund would retain the
status of an unsecured creditor of the counterparty (i.e., the position the fund would normally be in if it were to hold,
pursuant to its investment policies, other unsecured debt securities of the defaulting counterparty) with respect to
the amount of the shortfall. As an unsecured creditor, a fund would be at risk of losing some or all of the principal and
income involved in the transaction.
Restricted Securities/Rule 144A Securities.
The funds may invest in securities offered pursuant to Rule 144A under the
1933 Act (“Rule
144A securities”),
which are restricted securities. They may be less liquid and more difficult to value
than other investments because such securities may not be readily marketable in broad public markets. The funds
may not be able to sell a restricted security promptly or at a reasonable price. Although there is a substantial institutional
market for Rule 144A securities, it is not possible to predict exactly how the market for Rule 144A securities will
develop. A restricted security that was liquid at the time of purchase may subsequently become illiquid and its value
may decline as a result. Restricted securities that are deemed illiquid will count towards a fund’s limitation on illiquid
securities. In addition, transaction costs may be higher for restricted securities than for more liquid securities. The
funds may have to bear the expense of registering Rule 144A securities for resale and the risk of substantial delays
in effecting the registration.
Reverse Repurchase
Agreements. A fund may enter into “reverse
repurchase agreements,”
which are repurchase agreements in which a fund,
as the seller of the securities, agrees to repurchase such securities at an agreed time and
price. Under a reverse repurchase agreement, a fund continues to receive any principal and interest payments on
the underlying security during the term of the agreement. A fund’s obligations under reverse repurchase agreements are
treated as borrowings requiring the necessary asset coverage under Section 18(f) of the 1940 Act. Such transactions may
increase fluctuations in the market value of fund assets and its yield.
Russian Securities.
As a result of political and military actions undertaken by Russia in recent years, including the military
incursions in Ukraine in February 2022, the US, the European Union and other countries have instituted broad-ranging economic
sanctions against Russia and certain Russian individuals, banking entities and corporations. Among other things,
these sanctions froze certain Russian assets, prohibited trading in certain Russian securities and doing business with
certain Russian individuals and entities, including large financial institutions. These sanctions also included the removal
of some Russian banks from the Society for Worldwide Interbank Financial Telecommunications (SWIFT), the
electronic network that connects banks globally. These sanctions, and any additional sanctions or other intergovernmental actions
that may be undertaken against Russia in the future, may result in the devaluation of Russian currency, a downgrade
in Russia’s credit rating, and a decline in the value and liquidity of Russian securities. Retaliatory actions or
countermeasures that are being taken or may be taken in the future by Russia (including cyberattacks on other governments,
corporations or individuals, the closure of Russian securities markets or the seizure of foreign residents’ assets),
may further decrease the value and liquidity of Russian securities. Any or all of these potential results could push
Russia’s economy into a recession. In addition, beginning in March 2022, certain index providers began removing Russian
securities from their indices, including certain indices utilized by the funds. As a result of the sanctions, Russian government
countermeasures, trading halts on U.S. and non-U.S. exchanges and the collective impact on the trading markets
for Russian securities, a fund’s ability to buy and sell Russian investments has been impaired. For example, a
fund may be required to freeze or otherwise be unable to sell or deliver existing investments in Russian securities, including,
for index-based ETFs, securities that may have been removed from a fund’s Underlying Index, or may be prohibited
from investing or otherwise be unable to invest in certain Russian securities. As a result, certain funds have
used, and may in the future use, fair valuation procedures approved by the Board to value certain Russian securities, which
could result in such securities being valued at zero. These sanctions, and the continued disruption of the Russian economy,
could have a negative effect on the performance of a fund to the extent their Underlying Indexes and/or their
portfolios contain the securities of Russian issuers. It is impossible to predict when the sanctions imposed as a
result of the Russian incursion into Ukraine, restrictions on trading Russian securities or other ramifications for the Russian
economy and financial markets around the world will be relieved.
Short Sales.
When a fund makes a short sale, it borrows the security sold short and delivers it to the broker-dealer through
which it made the short sale. Each fund may have to pay a fee to borrow particular securities and is often obligated
to turn over any payments received on such borrowed securities to the lender of the securities. Each fund secures
its obligation to replace the borrowed security by depositing collateral with the broker-dealer, usually in cash, US
Government securities or other liquid securities similar to those borrowed. With respect to uncovered short positions, the
funds are required to deposit similar collateral with its custodian, if necessary, to the extent that the value of both collateral
deposits in the aggregate is at all times equal to at least 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account that is convertible or exchangeable into
the security sold short within 90 days without restriction other than the payment of money). Depending on arrangements made
with the broker-dealer from which a fund borrowed the security, regarding payment received by the fund on such
security, the fund may not receive any payments (including interest) on its collateral deposited with such broker-dealer. Because
making short sales in securities that it does not own exposes a fund to the risks associated with those securities,
such short sales involve speculative exposure risk. Each fund will incur a loss as a result of a short sale if the
price of the security increases between the date of the short sale and the date on which the fund replaces the borrowed
security. Each fund will realize a gain on a short sale if the security declines in price between those dates. There
can be no assurance that the funds will be able to close out a short sale position at any particular time or at an acceptable
price.
Each fund may also make
short sales “against
the box”
without being subject to such limitations. In a short sale “against-the-box,”
at the time of the sale, a fund owns or has the immediate and unconditional right to acquire the identical
security at no additional cost. If a fund makes a short sale against the box, the fund would not immediately
deliver
the securities sold and would not receive the proceeds from the sale. The seller is said to have a short position in
the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. To secure its
obligation to deliver securities sold short, a fund will deposit in escrow in a separate account with the custodian an
equal amount of the securities sold short or securities convertible into or exchangeable for such securities. Each fund
can close out its short position by purchasing and delivering an equal amount of the securities sold short, rather than
by delivering securities already held by the fund because the fund might want to continue to receive interest and
dividend payments on securities in its portfolio that are convertible into the securities sold short.
Short-Term Instruments and Temporary
Investments. Short-term instruments, including money market instruments,
may be used on an ongoing basis to provide liquidity
or for other reasons, including, for index-based ETFs, to the extent
necessary to help each fund track its underlying index. Money market instruments are generally short-term investments
that may include but are not limited to: (i) Shares of money market funds (including those advised by the
Advisor and/or Subadvisor, as applicable); (ii) obligations issued or guaranteed by the US government, its agencies or
instrumentalities (including government-sponsored enterprises); (iii) negotiable certificates of deposit (“CDs”),
bankers’ acceptances, fixed-time deposits
and other obligations of US and non-US banks (including non-US branches) and similar institutions;
(iv) commercial paper rated, at the date of purchase, “Prime-1”
by Moody’s Investors Service, Inc. or “A-1”
by Standard & Poor’s Financial Services LLC or, if unrated, of comparable quality as determined by the Advisor and/or
Subadvisor, as applicable; (v) non-convertible corporate debt securities (e.g., bonds and debentures) with remaining maturities
at the date of purchase of not more than 397 days and that satisfy the credit quality requirements set forth in
Rule 2a-7 under the 1940 Act; (vi) repurchase agreements; and (vii) short-term US dollar-denominated obligations of
non-US banks (including US branches) that, in the opinion of the Advisor and/or Subadvisor, as applicable, are of comparable
quality to obligations of US banks which may be purchased by a fund. Any of these instruments may be purchased
on a current or forward-settled basis. Time deposits are non-negotiable deposits maintained in banking institutions
for specified periods of time at stated interest rates. Bankers’ acceptances are time drafts drawn on commercial banks
by borrowers, usually in connection with international transactions.
Small Companies.
The Advisor believes that many small companies often may have sales and earnings growth rates that
exceed those of larger companies, and that such growth rates may, in turn, be reflected in more rapid share price appreciation
over time. Investing in smaller company stocks, however, involves greater risk than is customarily associated with
investing in larger, more established companies. For example, smaller companies can have limited product lines, markets,
or financial and managerial resources. Smaller companies may also be dependent on one or a few key persons, and
may be more susceptible to losses and risks of bankruptcy. Also, the securities of smaller companies may be thinly
traded (and therefore have to be sold at a discount from current market prices or sold in small lots over an extended
period of time or their stock values may fluctuate more sharply than other securities). Transaction costs in smaller
company stocks may be higher than those of larger companies.
Special Taxation Risks for Funds that
Invest in Underlying Funds. To the extent a fund invests in an
Underlying Fund, the fund’s exposure to
the portfolio investments of such Underlying Fund through its investment in the Underlying Fund’s
shares may be less tax efficient than the fund investing directly in the Underlying Fund’s portfolio investments. The
fund will not be able to offset its taxable income and gains with losses incurred by the Underlying Fund because the
Underlying Fund is treated as a corporation for US federal income tax purposes. The fund’s sales of shares in the Underlying
Fund, including those resulting from changes in the fund’s allocation of assets, could cause the recognition of
additional taxable gains. A portion of any such gains may be short-term capital gains, which will be taxable as ordinary dividend
income when distributed to the fund’s shareholders.
Further, certain losses
recognized on sales of shares in an Underlying Fund may be deferred indefinitely under the wash
sale rules. Any loss realized by the fund on a disposition of shares in an Underlying Fund held for six months or less
will be treated as a long-term capital loss to the extent of any amounts treated as distributions to the fund of net long-term
capital gain with respect to the Underlying Fund’s shares (including any amounts credited to the fund as undistributed
capital gains). Short-term capital gains earned by the Underlying Fund will be treated as ordinary dividends when
distributed to the fund and therefore may not be offset by any short-term capital losses incurred by the fund. The
fund’s short-term capital losses might instead offset long-term capital gains realized by the fund, which would otherwise
be eligible for reduced US federal income tax rates when distributed to individual and certain other non-corporate shareholders.
Structured Notes
(including Equity-Linked Notes (ELNs)). Structured notes are
hybrid debt securities, the interest rate or
principal of which is determined by reference to changes in value of a specific security or securities, reference rate,
or index. ELNs are a type of structured note that have their principal and/or interest based on the performance of
a single equity security, a basket of equity securities, or an equity index. ELNs may be designed to provide for protection
of principal in exchange for limited participation in the appreciation of the underlying equity securities or equity
index, or may not be principal protected. In addition, ELNs may be leveraged or unleveraged, and may trade on
a securities exchange, on over-the-counter markets or through privately negotiated transactions. Because ELNs are
structured to seek the characteristics of the underlying equity securities or equity index with written call options or
put options, the fund may not benefit fully from an increase in value of the underlying instrument. Correlation between the
price of an ELN and the underlying instruments may be imperfect. Indexed securities, similar to structured notes, are
typically, but not always, debt securities whose value at maturity or coupon rate is determined by reference to other
securities. The performance of a structured note or indexed security is based upon the performance of the underlying instrument.
The terms of a structured
note may provide that, in certain circumstances, no principal is due on maturity and, therefore, may
result in loss of investment. Structured notes may be indexed positively or negatively to the performance of the underlying
instrument such that the appreciation or deprecation of the underlying instrument will have a similar effect to
the value of the structured note at maturity or at the time of any coupon payment. In addition, changes in the interest
rate and value of the principal at maturity may be fixed at a specific multiple of the change in value of the underlying
instrument, making the value of the structured note more volatile than the underlying instrument. In addition, structured
notes may be less liquid and more difficult to price accurately than less complex securities or traditional debt
securities. Structured notes are also subject to counterparty risk, which is the risk that the issuer of the structured note
will default on its commitments. Structured notes, including ELNs, based on underlying equity instruments have the
risks inherent in the underlying equity instruments, including market risk, but are also exposed to risks applicable to
debt instruments, such as credit risk and interest rate risk.
The federal income tax
treatment of a structured note will depend on the particular features of the structured note and
in some cases may be uncertain. No assurance can be given that the IRS
will accept, or a court will uphold, how a fund characterizes
and treats structured notes for federal income tax purposes.
Tax Risks. As
with any investment, you should consider how your investment in Shares of the fund will be taxed. The
tax information in the Prospectus and this SAI is provided as general information. You should consult your own tax
professional about the federal, state, local and non-US tax
consequences of an investment in Shares of the fund.
US Government Securities.
A fund may invest in obligations issued or guaranteed as to both principal and interest by
the US Government, its agencies, instrumentalities or sponsored enterprises which include: (a) direct obligations of
the US Treasury; and (b) securities issued or guaranteed by US Government agencies.
Examples of direct obligations
of the US Treasury are Treasury bills, notes, bonds and other debt securities issued by the
US Treasury. These instruments are backed by the “full
faith and credit”
of the United States. They differ primarily in
interest rates, the length of maturities and the dates of issuance. Treasury bills have original maturities of one year or
less. Treasury notes have original maturities of one to ten years and Treasury bonds generally have original maturities of
greater than ten years.
Some agency securities
are backed by the full faith and credit of the United States (such as Maritime Administration Title
XI Ship Financing Bonds and Agency for International Development Housing Guarantee Program Bonds) and others
are backed only by the rights of the issuer to borrow from the US Treasury (such as Federal Home Loan Bank Bonds
and Federal National Mortgage Association Bonds), while still others, such as the securities of the Federal Farm Credit
Bank, are supported only by the credit of the issuer. With respect to securities supported only by the credit of the
issuing agency or by an additional line of credit with the US Treasury, there is no guarantee that the US Government will
provide support to such agencies and such securities may involve risk of loss of principal and interest.
US
Government securities may include “zero
coupon”
securities that have been stripped by the US Government of their
unmatured interest coupons and collateralized obligations issued or guaranteed by a US Government agency or instrumentality.
Because interest on zero coupon securities is not distributed on a current basis but is, in effect, compounded, zero
coupon securities tend to be subject to greater risk than interest-paying securities of similar maturities.
Interest rates on US
Government securities may be fixed or variable. Interest rates on variable rate obligations are adjusted
at regular intervals, at least annually, according to a formula reflecting then current specified standard rates, such
as 91-day US Treasury bill rates. These adjustments generally tend to reduce fluctuations in the market value of the
securities.
The government guarantee
of the US Government securities in a fund’s portfolio does not guarantee the net asset value
of the shares of a fund. There are market risks inherent in all investments in securities and the value of an investment
in a fund will fluctuate over time. Normally, the value of investments in US Government securities varies inversely
with changes in interest rates. For example, as interest rates rise the value of investments in US Government securities
will tend to decline, and as interest rates fall the value of a fund’s investments in US Government securities will
tend to increase. In addition, the potential for appreciation in the event of a decline in interest rates may be limited or
negated by increased principal prepayments with respect to certain mortgage-backed securities, such as GNMA Certificates.
Prepayments of high interest rate mortgage-backed securities during times of declining interest rates will
tend to lower the return of a fund and may even result in losses to a fund if some securities were acquired at a premium.
Moreover, during periods of rising interest rates, prepayments of mortgage-backed securities may decline, resulting
in the extension of a fund’s average portfolio maturity. As a result, a fund’s portfolio may experience greater volatility
during periods of rising interest rates than under normal market conditions.
Because of the rising
US Government debt burden and potential limitations caused by the statutory debt ceiling, it is
possible that the US Government may not be able to meet its financial obligations or that securities issued by the US
Government may experience credit downgrades. In the past, US sovereign credit has experienced downgrades and
there can be no guarantee that it will not experience further downgrades in the future by rating agencies. Such a
credit event may adversely impact the financial markets and the fund. From time to time, uncertainty regarding the status
of negotiations in the US Government to increase the statutory debt ceiling and/or failure to increase the statutory debt
ceiling could increase the risk that the US Government may default on payments on certain US Government securities,
cause the credit rating of the US Government to be downgraded or increase volatility in financial markets, result
in higher interest rates, reduce prices of US Treasury securities and/or increase the costs of certain kinds of debt.
Warrants.
The holder of a warrant has the right, until the warrant expires, to purchase a given number of shares of a particular
issuer at a specified price. Such investments can provide a greater potential for profit or loss than an equivalent investment
in the underlying security. Prices of warrants do not necessarily move, however, in tandem with the prices of
the underlying securities and are, therefore, considered speculative investments. Warrants pay no dividends and confer
no rights other than a purchase option. Thus, if a warrant held by a fund were not exercised by the date of its expiration,
a fund would lose the entire purchase price of the warrant.
When-Issued and Delayed-Delivery Securities.
A fund may purchase securities on a when-issued or delayed-delivery basis.
Delivery of and payment for these securities can take place a month or more after the date of the purchase commitment.
The payment obligation and the interest rate that will be received on when-issued and delayed-delivery securities
are fixed at the time the buyer enters into the commitment. Due to fluctuations in the value of securities purchased
or sold on a when-issued or delayed-delivery basis, the yields obtained on such securities may be higher or
lower than the yields available in the market on the dates when the investments are actually delivered to the buyers. When-issued
securities may include securities purchased on a “when,
as and if issued”
basis, under which the issuance of the security
depends on the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or
debt restructuring. The value of such securities is subject to market fluctuation during this period and no interest or
income, as applicable, accrues to a fund until settlement takes place.
At
the time a fund makes the commitment to purchase securities on a when-issued or delayed delivery basis, it will record
the transaction, reflect the value each day of such securities in determining its net asset value and, if applicable, calculate
the maturity for the purposes of average maturity from that date. At the time of settlement a when-issued security
may be valued at less than the purchase price. Rule 18f-4 under the 1940 Act permits a fund to invest in a security
on a when-issued or delayed-delivery basis and the transaction will be deemed not to involve a senior security, provided
that the fund intends to physically settle the transaction and the transaction will settle within 35 days of its trade
date. If a fund chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as
with the disposition of any other portfolio obligation, incur a gain or loss due to market fluctuation. When a fund engages
in when-issued or delayed-delivery transactions, it relies on the other party to consummate the trade and is,
therefore, exposed to counterparty risk. Failure of the seller to do so may result in a fund’s incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
Investments, Practices and
Techniques, and Risks of the Underlying Money Market
Funds
To the extent that a
fund invests in a money market fund advised by DWS Investment Management Americas, Inc., an
affiliate of DBX, certain of these risks would also apply to that fund.
Adjustable Rate Securities.
The interest rates paid on the adjustable rate securities in which a fund invests generally are
readjusted at periodic intervals, usually by reference to a predetermined interest rate index. Adjustable rate securities include
US Government securities and securities of other issuers. Some adjustable rate securities are backed by pools of
mortgage loans. There are three main categories of interest rate indices: those based on US Treasury securities, those
derived from a calculated measure such as a cost of funds index and those based on a moving average of mortgage
rates. Commonly used indices include the one-year, three-year and five-year constant maturity Treasury rates,
the three-month Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month, three-month, six-month
or one-year Secured Overnight Financing Rate (SOFR), the prime rate of a specific bank or commercial paper
rates. As with fixed-rates securities, changes in market interest rates and changes in the issuer’s creditworthiness may
affect the value of adjustable rate securities.
Some indices, such as
the one-year constant maturity Treasury rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of Funds index (Cost of Funds Index), tend to lag behind changes
in market rate levels and tend to be somewhat less volatile. To the extent that the Cost of Funds index may reflect
interest changes on a more delayed basis than other indices, in a period of rising interest rates, any increase may
produce a higher yield later than would be produced by such other indices, and in a period of declining interest rates,
the Cost of Funds index may remain higher for a longer period of time than other market interest rates, which may
result in a higher level of principal prepayments on adjustable rate securities which adjust in accordance with the
Cost of Funds index than adjustable rate securities which adjust in accordance with other indices. In addition, dislocations
in the member institutions of the 11th District Federal Home Loan Bank in recent years have caused and may
continue to cause the Cost of Funds index to change for reasons unrelated to changes in general interest rate levels.
Furthermore, any movement in the Cost of Funds index as compared to other indices based upon specific interest
rates may be affected by changes in the method used to calculate the Cost of Funds index.
If prepayments of principal
are made on the securities during periods of rising interest rates, a fund generally will be able
to reinvest such amounts in securities with a higher current rate of return. However, a fund will not benefit from increases
in interest rates to the extent that interest rates rise to the point where they cause the current coupon of adjustable
rate securities held as investments by a fund to exceed the maximum allowable annual or lifetime reset limits
(cap rates) for a particular adjustable rate security. Also, a fund’s net asset value could vary to the extent that current
yields on adjustable rate securities are different than market yields during interim periods between coupon reset
dates.
During
periods of declining interest rates, the coupon rates may readjust downward, resulting in lower yields to a fund.
Further, because of this feature, the value of adjustable rate securities is unlikely to rise during periods of declining interest
rates to the same extent as fixed-rate instruments. Interest rate declines may result in accelerated prepayment of
adjustable rate securities, and the proceeds from such prepayments must be reinvested at lower prevailing interest rates.
London Interbank Offered
Rate (LIBOR), a common benchmark rate previously used for certain floating rate securities, has
been phased out as of the end of 2021 for most maturities and currencies. As of the end of June 2023, certain remaining
widely used US Dollar LIBOR rates that were published for an additional period of time to assist with the transition
were also phased out. In addition, to aid in the transition, the Financial Conduct Authority in the United Kingdom,
LIBOR's regulator, has required the continued publishing of certain “synthetic”
US Dollar LIBOR rates for a period of 15 months
after June 30, 2023 for use in certain cases. The transition process from LIBOR to SOFR for US
Dollar LIBOR rates has become increasingly well defined, especially following the signing of the federal Adjustable Interest
Rate (LIBOR) Act in March 2022 (discussed below). There is no assurance that the composition or characteristics of
any such alternative reference rate will be similar to or produce the same value or economic equivalence as LIBOR or
that it will have the same volume or liquidity as did LIBOR prior to its discontinuance or unavailability, which may affect
the value or liquidity of, or return on, certain of a fund’s investments.
On March 15, 2022, the
federal Adjustable Interest Rate (LIBOR) Act was signed into law, which provided a statutory alternative
rate-setting methodology on a nationwide basis for certain LIBOR-based instruments that contained no, or
insufficient, alternative rate-setting provisions. On December 16, 2022, the Board of Governors of the Federal Reserve System
adopted a final rule to implement the LIBOR Act, which, among other things, established alternative benchmark rates
based on SOFR to replace LIBOR by operation of law following the cessation date in such instruments that referenced
the following US Dollar LIBOR rates: the overnight rate and the one-, three-, six- and 12-month rates. The transition
of LIBOR-based instruments from LIBOR to a replacement rate as a result of amendment, application of existing
alternative rate-setting provisions, statutory requirements or otherwise may result in a reduction in the value of
certain instruments held by a fund or a reduction in the effectiveness of related fund transactions such as hedges. An
instrument’s transition to a replacement rate could also result in variations in the reported yields of a fund that holds
such instrument. In addition, a liquid market for newly-issued instruments that use alternative reference rates still
may be developing. There may also be challenges for a fund to enter into hedging transactions against such newly-issued instruments
until a market for such hedging transactions develops. All of the aforementioned may adversely affect a fund’s
performance or net asset value.
Borrowing.
Under the 1940 Act, a fund is required to maintain continuous asset coverage of 300% with respect to permitted
borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline
to less than 300% due to market fluctuations or otherwise, even if such liquidation of a fund's holdings may be
disadvantageous from an investment standpoint.
Credit Facility.
A fund and other affiliated funds (“Participants”)
share in a revolving credit facility provided by a syndication of
banks. A fund may borrow money under this credit facility for temporary or emergency purposes, including the funding
of shareholder redemption requests, that otherwise might require the untimely disposition of securities. A fund’s
ability to borrow is subject to the terms and conditions of its credit arrangements, which in some cases may limit
the fund’s ability to borrow under the credit facility. Participants are charged an annual commitment fee, which is
allocated based on net assets, among each of the Participants. Interest is charged to a fund on its borrowings at current
commercial rates. A fund can prepay loans at any time and may at any time terminate, or from time to time reduce,
without the payment of a premium or penalty, its commitment under the credit facility subject to compliance with
certain conditions.
Borrowing may exaggerate
changes in the net asset value of fund shares and in the return on a fund’s portfolio. Borrowing will
cost a fund interest expense and other fees, which may reduce a fund’s return. A fund is required to maintain continuous
asset coverage with respect to its borrowings and may be required to sell some of its holdings to reduce debt
and restore coverage at times when it is not advantageous to do so. There is no assurance that a borrowing strategy
will be successful. Upon the expiration of the term of a fund’s existing credit arrangement, the lender may not
be willing to extend further credit to a fund or may only be willing to do so at an increased cost to a fund. If a fund
is
not able to extend its credit arrangement, it may be required to liquidate holdings to repay amounts borrowed from the
lender. Because the funds are joint participants in the credit facility, any given fund may be unable to borrow some or
all of its requested amount at any particular time. This may be true particularly during times of market stress. In addition,
if a fund’s assets increase, there is no assurance that the lender will be willing to make additional loans to a
fund in order to allow it to borrow the amounts desired by a fund to facilitate redemptions.
Commodity Pool Operator Exclusion.
The Advisor currently intends to operate the fund (unless otherwise noted) in
compliance with the requirements of Rule 4.5 of the Commodity Futures Trading Commission (CFTC). As a result, a
fund is not deemed to be a “commodity
pool”
under the Commodity Exchange Act (CEA) and will be limited in its ability
to use futures and options on futures or commodities or engage in swap transactions for other than bona fide hedging
purposes. Provided a fund operates within the limits of Rule 4.5 of the CFTC, a fund will be excluded from registration
with and regulation under the CEA and the Advisor will not be deemed to be a “commodity
pool operator”
with respect to the operations of a fund. If
a fund were no longer able to claim the exclusion, the fund and the Advisor would
be subject to regulation under the CEA.
Credit Enhancement.
Mortgage-backed securities and asset-backed securities are often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of failure by obligors on underlying assets
to make payments, such securities may contain elements of credit enhancement. Such credit enhancement falls
into two categories: (1) liquidity protection and (2) protection against losses resulting from ultimate default by an
obligor on the underlying assets. Liquidity protection refers to the provision of advances, generally by the entity administering
the pool of assets, to ensure that the pass-through of payments due on the underlying pool occurs in a
timely fashion. Protection against losses resulting from ultimate default enhances the likelihood of ultimate payment of
the obligations on at least a portion of the assets in the pool. Such protection may be provided through guarantees, insurance
policies or letters of credit obtained by the issuer or sponsor from third parties; through various means of structuring
the transaction; or through a combination of such approaches. A fund may pay any additional fees for such credit
enhancement, although the existence of credit enhancement may increase the price of a security.
The ratings of mortgage-backed
securities and asset-backed securities for which third-party credit enhancement provides liquidity
protection or protection against losses from default are generally dependent upon the continued creditworthiness of
the provider of the credit enhancement. The ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in cases where the delinquency and loss
experience on the underlying pool of assets is better than expected.
Examples of credit enhancement
arising out of the structure of the transaction include “senior-subordinated
securities”
(multiple class securities with one or more
classes subordinate to other classes as to the payment of principal thereof and
interest thereon, with the result that defaults on the underlying assets are borne first by the holders of the subordinated class),
creation of “reserve
funds”
(where cash or investments, sometimes funded from a portion of the payments on
the underlying assets, are held in reserve against future losses) and “over-collateralization”
(where the scheduled payments on, or the principal
amount of, the underlying assets exceed those required to make payment of the securities and
pay any servicing or other fees). The degree of credit enhancement provided for each issue is generally based on
historical information with respect to the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that which is anticipated could adversely affect the return on an investment in such a security.
Certain of a fund’s
other investments may be credit-enhanced by a guaranty, letter of credit, or insurance from a third party.
Any bankruptcy, receivership, default, or change in the credit quality of the third party providing the credit enhancement may
adversely affect the quality and marketability of the underlying security and could cause losses to a fund and affect
a fund’s share price.
Fixed Income Securities.
Fixed income securities, including corporate debt obligations, generally expose a fund to the
following types of risk: (1) interest rate risk (the potential for fluctuations in bond prices due to changing interest rates);
(2) income risk (the potential for a decline in a fund’s income due to falling market interest rates); (3) credit risk (the
possibility that a bond issuer will fail to make timely payments of either interest or principal to a fund); (4) prepayment risk
or call risk (the likelihood that, during periods of falling interest rates, securities with high stated interest rates will
be prepaid, or “called”
prior to maturity, requiring a fund to invest the proceeds at generally lower interest rates);
and
(5) extension risk (the likelihood that as interest rates increase, slower than expected principal payments may extend
the average life of fixed income securities, which will have the effect of locking in a below-market interest rate,
increasing the security’s duration and reducing the value of the security).
In periods of declining
interest rates, the yield (income from a fixed income security held by a fund over a stated period
of time) of a fixed income security may tend to be higher than prevailing market rates, and in periods of rising interest
rates, the yield of a fixed income security may tend to be lower than prevailing market rates. In addition, when interest
rates are falling, the inflow of net new money to a fund will likely be invested in portfolio instruments producing lower
yields than the balance of a fund’s portfolio, thereby reducing the yield of a fund. In periods of rising interest rates,
the opposite can be true. The net asset value of a fund can generally be expected to change as general levels of
interest rates fluctuate. The value of fixed income securities in a fund’s portfolio generally varies inversely with changes
in interest rates. Prices of fixed income securities with longer effective maturities are more sensitive to interest rate
changes than those with shorter effective maturities.
Corporate debt obligations
generally offer less current yield than securities of lower quality, but lower-quality securities generally
have less liquidity, greater credit and market risk, and as a result, more price volatility.
In a low or negative
interest rate environment, debt instruments may trade at negative yields, which means the purchaser of
the instrument may receive at maturity less than the total amount invested. In addition, in a negative interest rate environment,
if a bank charges negative interest, instead of receiving interest on deposits, a depositor must pay the bank
fees to keep money with the bank. To the extent a fund holds a negatively-yielding debt instrument or has a bank
deposit with a negative interest rate, the fund would generate a negative return on that investment.
In response to market
volatility and economic uncertainty in connection with the COVID-19 pandemic, the US government and
certain foreign central banks took steps to stabilize markets by, among other things, reducing interest rates, including pursuing
negative interest rate policies in some instances. In recent
years, the US Federal Reserve and certain foreign central
banks have raised interest rates in response to increased inflation. A rising interest rate environment may cause
investors to move out of fixed-income and related securities on a large scale, which could adversely affect the price
and liquidity of such securities and could also result in increased redemptions from a fund. Recent increased inflation
may cause fixed-income securities and related markets to experience heightened levels of interest rate volatility and
liquidity risk. A sharp rise in interest rates could cause a fund’s share price to decline.
More recently, the US Federal Reserve and certain foreign central
banks have subsequently cut interest rates as inflation has decreased.
These considerations
may limit a fund’s ability to locate fixed-income instruments containing the desired risk/return profile.
Changing interest rates could have unpredictable effects on the markets, may expose fixed-income and related markets
to heightened volatility and potential illiquidity, and may increase interest rate risk for a fund.
Illiquid Securities.
For funds other than money market funds, illiquid securities are investments that a fund reasonably expects
cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or
disposition significantly changing the market value of the investment, as determined pursuant to the fund’s liquidity risk
management program (LRM Program) adopted pursuant to Rule 22e-4 under the 1940 Act. Under a fund’s LRM Program,
the fund may not hold more than 15% of its net assets in illiquid securities. The LRM Program administrator is
responsible for determining the liquidity classification of a fund’s investments and monitoring compliance with the 15%
limit on illiquid securities. For money market funds operated in accordance with Rule 2a-7 under the 1940 Act, limitations
on investment in illiquid securities include that a fund may not hold more than 5% of its total assets in illiquid
securities, defined as securities that cannot be sold or disposed of in the ordinary course of business within seven
calendar days at approximately the value ascribed to them by the fund. Money market funds are not subject to
the requirements of Rule 22e-4 under the 1940 Act and therefore are not subject to the LRM Program. Historically, illiquid
securities have included securities subject to contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily marketable and repurchase agreements having
a maturity of longer than seven days. Securities which have not been registered under the 1933 Act are referred to
as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Non-publicly
traded securities (including Rule 144A Securities) may involve a high degree of business and financial risk
and may result in substantial losses. These securities may be less liquid than publicly traded securities, and it
may
take longer to liquidate these positions than would be the case for publicly traded securities. Companies whose securities
are not publicly traded may not be subject to the disclosure and other investor protection requirements applicable
to companies whose securities are publicly traded. Certain securities may be deemed to be illiquid as a result
of the Advisor’s receipt from time to time of material, non-public information about an issuer, which may limit the
Advisor’s ability to trade such securities for the account of any of its clients, including a fund. In some instances, these
trading restrictions could continue in effect for a substantial period of time. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be unable to dispose of illiquid securities
promptly or at reasonable prices and might thereby experience difficulty satisfying redemptions within seven days.
An investment in illiquid securities is subject to the risk that should a fund desire to sell any of these securities when
a ready buyer is not available at a price that is deemed to be representative of their value, the value of a fund’s net
assets could be adversely affected.
Mutual funds do not typically
hold a significant amount of illiquid securities because of the potential for delays on resale
and uncertainty in valuation. A mutual fund might also have to register such illiquid securities in order to dispose of
them, resulting in additional expense and delay. A fund selling its securities in a registered offering may be deemed to
be an “underwriter”
for purposes of Section 11 of the 1933 Act. In such event, a fund may be liable to purchasers of
the securities under Section 11 if the registration statement prepared by the issuer, or the prospectus forming a part
of it, is materially inaccurate or misleading, although a fund may have a due diligence defense. Adverse market conditions
could impede such a public offering of securities.
A large institutional
market has developed for certain securities that are not registered under the 1933 Act, including repurchase
agreements, commercial paper, non-US securities, municipal securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered security can be readily resold
or on an issuer’s ability to honor a demand for repayment. The fact that there are contractual or legal restrictions on
resale of such investments to the general public or to certain institutions may not be indicative of their liquidity.
Impact of Large Redemptions and Purchases
of Fund Shares. From time to time, shareholders of a fund (which
may include affiliated and/or non-affiliated
registered investment companies that invest in a fund) may make relatively large
redemptions or purchases of fund shares. These transactions may cause a fund to have to sell securities or invest
additional cash, as the case may be. While it is impossible to predict the overall impact of these transactions over
time, there could be adverse effects on a fund’s performance to the extent that a fund may be required to sell securities
or invest cash at times when it would not otherwise do so. These transactions could also accelerate the recognition
of taxable income if sales of securities resulted in capital gains or other income and could also increase transaction
costs, which may impact a fund’s expense ratio and adversely affect a fund’s performance.
Inflation.
Inflation creates uncertainty over the future real value of an investment (the value after adjusting for inflation). The
real value of certain assets or real income from investments will be less in the future as inflation decreases the value
of money. As inflation increases, the present value of a fund's assets and distributions may decline. This risk is more
prevalent with respect to debt securities held by a fund. Inflation rates may change frequently and drastically as
a result of various factors, including unexpected shifts in the domestic or global economy. Moreover, a fund's investments may
not keep pace with inflation, which may result in losses to fund shareholders or adversely affect the real value of
shareholders' investment in a fund. Fund shareholders' expectation of future inflation can also impact the current value
of a fund’s portfolio, resulting in lower asset values and potential losses. This risk may be elevated compared to
historical market conditions and could be impacted by
monetary policy measures and the current interest rate environment.
Interfund Borrowing and Lending Program.
The DWS funds have received exemptive relief from the SEC, which permits
the funds to participate in an interfund lending program. The interfund lending program allows the participating funds
to borrow money from and loan money to each other for temporary or emergency purposes. The program is subject
to a number of conditions designed to ensure fair and equitable treatment of all participating funds, including the
following: (1) no fund may borrow money through the program unless it receives a more favorable interest rate than
a rate approximating the lowest interest rate at which bank loans would be available to any of the participating funds
under a loan agreement; and (2) no fund may lend money through the program unless it receives a more favorable return
than that available from an investment in repurchase agreements and, to the extent applicable, money market
cash
sweep arrangements. In addition, a fund may participate in the program only if and to the extent that such participation is
consistent with a fund’s investment objectives and policies (for instance, money market funds would normally participate only
as lenders and tax exempt funds only as borrowers). Interfund loans and borrowings have a maximum duration of
seven days. Loans may be called on one day’s notice. A fund may have to borrow from a bank at a higher interest rate
if an interfund loan is called or not renewed. Any delay in repayment to a lending fund could result in a lost investment opportunity
or additional costs. The program is subject to the oversight and periodic review of the Board.
Mortgage-Backed Securities.
Mortgage-backed securities represent direct or indirect participations in or obligations collateralized
by and payable from mortgage loans secured by real property, which may include subprime mortgages. A
fund may invest in mortgage-backed securities issued or guaranteed by (i) US Government agencies or instrumentalities such
as the Government National Mortgage Association (GNMA) (also known as Ginnie Mae), the Federal National Mortgage
Association (FNMA) (also known as Fannie Mae) and the Federal Home Loan Mortgage Corporation (FHLMC) (also
known as Freddie Mac) or (ii) other issuers, including private companies.
GNMA is a government-owned
corporation that is an agency of the US Department of Housing and Urban Development. It
guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest
on its mortgage-backed securities. Until recently, FNMA and FHLMC were government-sponsored corporations owned
entirely by private stockholders. Both issue mortgage-related securities that contain guarantees as to timely payment
of interest and principal but that are not backed by the full faith and credit of the US government. The value of
the companies’ securities fell sharply in 2008 due to concerns that the firms did not have sufficient capital to offset losses.
In mid-2008, the US Treasury was authorized to increase the size of home loans that FNMA and FHLMC could purchase
in certain residential areas and, until 2009, to lend FNMA and FHLMC emergency funds and to purchase the
companies’ stock. In September 2008, the US Treasury announced that FNMA and FHLMC had been placed in conservatorship
by the Federal Housing Finance Agency (FHFA), a newly created independent regulator created under the
Federal Housing Finance Regulatory Reform Act of 2008 (Reform Act). In addition to placing the companies in conservatorship,
the US Treasury announced three additional steps that it intended to take with respect to FNMA and
FHLMC. First, the US Treasury has entered into senior preferred stock purchase agreements (“SPSPAs”)
under which, if the FHFA determines that FNMA’s
or FHLMC’s liabilities have exceeded its assets under generally accepted accounting
principles, the US Treasury will contribute cash capital to the company in an amount equal to the difference between
liabilities and assets. The SPSPAs are designed to provide protection to the senior and subordinated debt and
the mortgage-backed securities issued by FNMA and FHLMC. Second, the US Treasury established a new secured lending
credit facility that is available to FNMA and FHLMC, which terminated on December 31, 2009. Third, the US Treasury
initiated a temporary program to purchase FNMA and FHLMC mortgage-backed securities, which terminated on
December 31, 2009. No assurance can be given that the US Treasury initiatives discussed above with respect to the
debt and mortgage-backed securities issued by FNMA and FHLMC will be successful, or, with respect to initiatives that
have expired, that the US Treasury would undertake similar initiatives in the future.
FHFA, as conservator
or receiver for FNMA and FHLMC, has the power to repudiate any contract entered into by FNMA
or FHLMC prior to FHFA’s appointment as conservator or receiver, as applicable, if FHFA determines, in its sole
discretion, that performance of the contract is burdensome and that repudiation of the contract promotes the orderly
administration of FNMA’s or FHLMC’s affairs. The Reform Act requires FHFA to exercise its right to repudiate any
contract within a reasonable period of time after its appointment as conservator or receiver. FHFA, in its capacity as
conservator, has indicated that it has no intention to repudiate the guaranty obligations of FNMA or FHLMC because FHFA
views repudiation as incompatible with the goals of the conservatorship. However, in the event that FHFA, as conservator
or if it is later appointed as receiver for FNMA or FHLMC, were to repudiate any such guaranty obligation, the
conservatorship or receivership estate, as applicable, would be liable for actual direct compensatory damages in accordance
with the provisions of the Reform Act. Any such liability could be satisfied only to the extent of FNMA’s or
FHLMC’s assets available therefor.
In the event of repudiation,
the payments of interest to holders of FNMA or FHLMC mortgage-backed securities would be
reduced if payments on the mortgage loans represented in the mortgage loan groups related to such mortgage-backed securities
are not made by the borrowers or advanced by the servicer. Any actual direct compensatory damages for repudiating
these guaranty obligations may not be sufficient to offset any shortfalls experienced by such mortgage-backed security
holders. Further, in its capacity as conservator or receiver, FHFA has the right to transfer or sell any asset or
liability
of FNMA or FHLMC without any approval, assignment or consent. Although FHFA has stated that it has no present
intention to do so, if FHFA, as conservator or receiver, were to transfer any such guaranty obligation to another party,
holders of FNMA or FHLMC mortgage-backed securities would have to rely on that party for satisfaction of the guaranty
obligation and would be exposed to the credit risk of that party.
In addition, certain
rights provided to holders of mortgage-backed securities issued by FNMA and FHLMC under the operative
documents related to such securities may not be enforced against FHFA, or enforcement of such rights may
be delayed, during the conservatorship or any future receivership. The operative documents for FNMA and FHLMC mortgage-backed
securities may provide (or with respect to securities issued prior to the date of the appointment of the
conservator may have provided) that upon the occurrence of an event of default on the part of FNMA or FHLMC, in
its capacity as guarantor, which includes the appointment of a conservator or receiver, holders of such mortgage-backed securities
have the right to replace FNMA or FHLMC as trustee if the requisite percentage of mortgage-backed securities holders
consent. The Reform Act prevents mortgage-backed security holders from enforcing such rights if the event of
default arises solely because a conservator or receiver has been appointed. The Reform Act also provides that no person
may exercise any right or power to terminate, accelerate or declare an event of default under certain contracts to
which FNMA or FHLMC is a party, or obtain possession of or exercise control over any property of FNMA or FHLMC, or
affect any contractual rights of FNMA or FHLMC, without the approval of FHFA, as conservator or receiver, for a period
of forty-five (45) or ninety (90) days following the appointment of FHFA as conservator or receiver, respectively.
On June 3, 2019, under
the Federal Housing Finance Agency’s “Single
Security Initiative”
intended to maximize liquidity for both Fannie
Mae and Freddie Mac mortgage-backed securities in the TBA security market, Fannie Mae and Freddie Mac
expect to start issuing uniform mortgage-backed securities (“UMBS”)
in place of their current separate offerings of
TBA-eligible mortgage-backed securities. The issuance of UMBS may not achieve the intended results and may have
unanticipated or adverse effects on the market for mortgage-backed securities.
The market value and
yield of these mortgage-backed securities can vary due to market interest rate fluctuations and early
prepayments of underlying mortgages. These securities represent ownership in a pool of federally insured mortgage loans
with a maximum maturity of 30 years. A decline in interest rates may lead to a faster rate of repayment of the underlying
mortgages, and may expose a fund to a lower rate of return upon reinvestment. To the extent that such mortgage-backed
securities are held by a fund, the prepayment right will tend to limit to some degree the increase in
net asset value of a fund because the value of the mortgage-backed securities held by a fund may not appreciate as
rapidly as the price of non-callable debt securities. Mortgage-backed securities are subject to the risk of prepayment and
the risk that the underlying loans will not be repaid. Because principal may be prepaid at any time, mortgage-backed securities
may involve significantly greater price and yield volatility than traditional debt securities. At times, a fund may
invest in securities that pay higher than market interest rates by paying a premium above the securities’ par value. Prepayments
of these securities may cause losses on securities purchased at a premium. Unscheduled payments, which
are made at par value, will cause a fund to experience a loss equal to any unamortized premium.
When interest rates rise,
mortgage prepayment rates tend to decline, thus lengthening the life of a mortgage-related security
and increasing the price volatility of that security, affecting the price volatility of a fund’s shares. The negative effect
of interest rate increases on the market-value of mortgage backed securities is usually more pronounced than it
is for other types of fixed-income securities potentially increasing the volatility of a fund.
Interests in pools of
mortgage-backed securities differ from other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both interest and principal payments. In effect, these payments
are a “pass-through”
of the monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional payments are caused by repayments of principal
resulting from the sale of the underlying property, refinancing or foreclosure, net of fees or costs which may be
incurred. Some mortgage-related securities (such as securities issued by GNMA) are described as “modified
pass-through.”
These securities entitle the holder to receive
all interest and principal payments owed on the mortgage pool, net of certain
fees, at the scheduled payment dates regardless of whether or not the mortgagor actually makes the payment.
Commercial
banks, savings and loan institutions, private mortgage insurance companies, mortgage bankers and other secondary
market issuers also create pass-through pools of conventional 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 non-governmental issuers generally offer a higher rate of interest than government and
government-related pools because there are no direct or indirect government or agency guarantees of payments. 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. Such insurance and guarantees and the
creditworthiness of the issuers thereof will be considered in determining whether a mortgage-related security meets
a fund’s investment quality standards. There can be no assurance that the private insurers or guarantors can meet
their obligations under the insurance policies or guarantee arrangements. A fund may buy mortgage-related securities
without insurance or guarantees. Although the market for such securities is becoming increasingly liquid, securities
issued by certain private organizations may not be readily marketable.
Due to prepayments of
the underlying mortgage instruments, mortgage-backed securities do not have a known actual maturity.
In the absence of a known maturity, market participants generally refer to an estimated average life. An average
life estimate is a function of an assumption regarding anticipated prepayment patterns. The assumption is based
upon current interest rates, current conditions in the relevant housing markets and other factors. The assumption is
necessarily subjective, and thus different market participants could produce somewhat different average life estimates with
regard to the same security. There can be no assurance that the average estimated life of portfolio securities will
be the actual average life of such securities.
Fannie Mae Certificates.
Fannie Mae is a federally chartered corporation organized and existing under the Federal National
Mortgage Association Charter Act of 1938. The obligations of Fannie Mae are obligations solely of Fannie Mae
and are not backed by the full faith and credit of the US government.
Each Fannie Mae Certificate
will represent a pro rata interest in one or more pools of FHA Loans, VA Loans or conventional mortgage
loans (i.e., mortgage loans that are not insured or guaranteed by any governmental agency) of the following types:
(1) fixed-rate level payment mortgage loans; (2) fixed-rate growing equity mortgage loans; (3) fixed-rate graduated payment
mortgage loans; (4) variable rate mortgage loans; (5) other adjustable rate mortgage loans; and (6) fixed-rate and
adjustable mortgage loans secured by multifamily projects.
Freddie Mac Certificates.
Freddie Mac is a federally chartered corporation of the United States created pursuant to the
Emergency Home Finance Act of 1970, as amended (FHLMC Act). The obligations of Freddie Mac are obligations solely
of Freddie Mac and are not backed by the full faith and credit of the US government.
Freddie Mac Certificates
represent a pro rata interest in a group of conventional mortgage loans (Freddie Mac Certificate group)
purchased by Freddie Mac. The mortgage loans underlying the Freddie Mac Certificates will consist of fixed-rate or
adjustable rate mortgage loans with original terms to maturity of between ten and thirty years, substantially all of which
are secured by first liens on one- to four-family residential properties or multifamily projects. Each mortgage loan
must meet the applicable standards set forth in the FHLMC Act. A Freddie Mac Certificate group may include whole
loans, participating interests in whole loans and undivided interests in whole loans and participations comprising another
Freddie Mac Certificate group.
Ginnie Mae Certificates.
The National Housing Act of 1934, as amended (Housing Act), authorizes Ginnie Mae to guarantee the
timely payment of the principal of and interest on certificates that are based on and backed by a pool of mortgage loans
insured by the Federal Housing Administration under the Housing Act, or Title V of the Housing Act of 1949 (FHA
Loans), or guaranteed by the Department of Veterans Affairs under the Servicemen’s Readjustment Act of 1944, as
amended (VA Loans), or by pools of other eligible mortgage loans. The Housing Act provides that the full faith and credit
of the US government is pledged to the payment of all amounts that may be required to be paid under any Ginnie
Mae guaranty. In order to meet its obligations under such guaranty, Ginnie Mae is authorized to borrow from the
US Treasury with no limitations as to amount.
The
Ginnie Mae Certificates in which a fund invests will represent a pro rata interest in one or more pools of the following
types of mortgage loans: (1) fixed-rate level payment mortgage loans; (2) fixed-rate graduated payment mortgage loans;
(3) fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans secured by manufactured (mobile) homes;
(5) mortgage loans on multifamily residential properties under construction; (6) mortgage loans on completed multifamily
projects; (7) fixed-rate mortgage loans as to which escrowed funds are used to reduce the borrower’s monthly
payments during the early years of the mortgage loans (“buy
down”
mortgage loans); (8) mortgage loans that provide
for adjustments in payments based on periodic changes in interest rates or in other payment terms of the
mortgage loans; and (9) mortgage backed serial notes.
Multiple Class Mortgage-Backed Securities.
A fund may invest in multiple class mortgage-backed securities including collateralized
mortgage obligations (CMOs) and real estate mortgage investment conduits (REMIC Certificates). These securities
may be issued by US government agencies and instrumentalities such as Fannie Mae or Freddie Mac or by
trusts formed by private originators of, or investors in, mortgage loans, including savings and loan associations, mortgage
bankers, commercial banks, insurance companies, investment banks and special purpose subsidiaries of the
foregoing. In general, CMOs are debt obligations of a legal entity that are collateralized by a pool of mortgage loans
or mortgage-backed securities the payments on which are used to make payments on the CMOs or multiple class
mortgage-backed securities. REMIC Certificates represent beneficial ownership interests in a REMIC trust, generally consisting
of mortgage loans or Fannie Mae, Freddie Mac or Ginnie Mae guaranteed mortgage-backed securities. To the
extent that a CMO or REMIC Certificate is collateralized by Ginnie Mae guaranteed mortgage-backed securities, holders
of the CMO or REMIC Certificate receive all interest and principal payments owed on the mortgage pool, net of
certain fees, regardless of whether the mortgagor actually makes the payments, as a result of the GNMA guaranty, which
is backed by the full faith and credit of the US government. The obligations of Fannie Mae or Freddie Mac under their
respective guaranty of the REMIC Certificates are obligations solely of Fannie Mae or Freddie Mac, respectively.
Fannie Mae REMIC Certificates
are issued and guaranteed as to timely distribution of principal and interest by Fannie Mae.
These certificates are obligations solely of Fannie Mae and are not backed by the full faith and credit of the US government.
In addition, Fannie Mae will be obligated to distribute the principal balance of each class of REMIC Certificates in
full, whether or not sufficient funds are otherwise available.
Freddie Mac guarantees
the timely payment of interest on Freddie Mac REMIC Certificates and also guarantees the payment
of principal as payments are required to be made on the underlying mortgage participation certificates (PCs). These
certificates are obligations solely of Freddie Mac and are not backed by the full faith and credit of the US government. PCs
represent undivided interests in specified level payment residential mortgages or participations therein purchased by
Freddie Mac and placed in a PC pool. With respect to principal payments on PCs, Freddie Mac generally guarantees ultimate
collection of all principal of the related mortgage loans without offset or deduction. Freddie Mac also guarantees timely
payment of principal of certain PCs.
CMOs and REMIC Certificates
are issued in multiple classes. Each class of CMOs or REMIC Certificates, often referred to
as a “tranche,”
is issued at a specific adjustable or fixed interest rate and must be fully retired no later than its final distribution
date. Principal prepayments on the underlying mortgage loans or the mortgage-backed securities underlying the
CMOs or REMIC Certificates may cause some or all of the classes of CMOs or REMIC Certificates to be retired substantially
earlier than their final distribution dates. Generally, interest is paid or accrues on all classes of CMOs or REMIC
Certificates on a monthly basis.
The principal of and
interest on the mortgage-backed securities may be allocated among the several tranches in various ways.
In certain structures (known as sequential pay CMOs or REMIC Certificates), payments of principal, including any
principal prepayments, on the mortgage-backed securities generally are applied to the classes of CMOs or REMIC Certificates
in the order of their respective final distribution dates. Thus, no payment of principal will be made on any class
of sequential pay CMOs or REMIC Certificates until all other classes having an earlier final distribution date have been
paid in full. Additional structures of CMOs and REMIC Certificates include, among others, “parallel
pay”
CMOs and REMIC Certificates. Parallel pay CMOs
or REMIC Certificates are those which are structured to apply principal payments
and prepayments of the mortgage-backed securities to two or more classes concurrently on a proportionate or
disproportionate basis. These simultaneous payments are taken into account in calculating the final distribution date
of each class.
A
wide variety of REMIC Certificates may be issued in parallel pay or sequential pay structures. These securities include accrual
certificates (Z Bonds), which only accrue interest at a specified rate until all other certificates having an earlier final
distribution date have been retired and are converted thereafter to an interest-paying security, and planned amortization class
(PAC) certificates, which are parallel pay REMIC Certificates that generally require that specified amounts of principal
be applied on each payment date to one or more classes of REMIC Certificates (PAC Certificates), even though
all other principal payments and prepayments of the mortgage-backed securities are then required to be applied to
one or more other classes of the PAC Certificates. The scheduled principal payments for the PAC Certificates generally have
the highest priority on each payment date after interest due has been paid to all classes entitled to receive interest currently.
Shortfalls, if any, are added to the amount payable on the next payment date. The PAC Certificate payment schedule
is taken into account in calculating the final distribution date of each class of PAC. In order to create PAC tranches,
one or more tranches generally must be created that absorb most of the volatility in the underlying mortgage-backed securities.
These tranches tend to have market prices and yields that are much more volatile than other PAC classes.
The prices of certain
CMOs and REMIC Certificates, depending on their structure and the rate of prepayments, may be
volatile. Some CMOs may also not be as liquid as other securities. In addition, the value of a CMO or REMIC Certificate,
including those collateralized by mortgage-backed securities issued or guaranteed by US government agencies or
instrumentalities, may be affected by other factors, such as the availability of information concerning the pool and its
structure, the creditworthiness of the servicing agent for the pool, the originator of the underlying assets, or the entities
providing credit enhancement. The value of these securities also can depend on the ability of their servicers to
service the underlying collateral and is, therefore, subject to risks associated with servicers' performance, including mishandling
of documentation. A fund is permitted to invest in other types of mortgage-backed securities that may be
available in the future to the extent consistent with its investment policies and objective.
Impact of Sub-Prime Mortgage Market.
A fund may invest in mortgage-backed, asset-backed and other fixed-income securities
whose value and liquidity may be adversely affected by the critical downturn in the sub-prime mortgage lending
market in the US. Sub-prime loans, which have higher interest rates, are made to borrowers with low credit ratings
or other factors that increase the risk of default. Concerns about widespread defaults on sub-prime loans have also
created heightened volatility and turmoil in the general credit markets. As a result, a fund’s investments in certain fixed-income
securities may decline in value, their market value may be more difficult to determine, and a fund may have
more difficulty disposing of them.
Obligations of Banks and Other Financial
Institutions. A fund may invest in US dollar-denominated fixed
rate or variable rate obligations of US or foreign
financial institutions, including banks. Obligations of domestic and foreign financial
institutions in which a fund may invest include (but are not limited to) certificates of deposit, bankers’ acceptances, bank
time deposits, commercial paper, and other US dollar-denominated instruments issued or supported by the credit of
US or foreign financial institutions, including banks, commercial and savings banks, savings and loan associations and
other institutions.
Certificates of deposit
are negotiable certificates evidencing the obligations of a bank to repay funds deposited with it
for a specified period of time. Banker’s acceptances are credit instruments evidencing the obligations of a bank to pay
a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay
the face amount of the instrument upon maturity. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time deposits that may be held by a fund will
not benefit from insurance from the Bank Insurance Fund or the Savings Association Insurance Fund administered by
the Federal Deposit Insurance Corporation. Fixed time deposits may be withdrawn on demand, but may be subject to
early withdrawal penalties that vary with market conditions and the remaining maturity of the obligation.
Obligations of foreign
branches of US banks and foreign banks may be general obligations of the parent bank in addition to
the issuing bank or may be limited by the terms of a specific obligation and by government regulation. Investments in
obligations of foreign banks may entail risks that are different in some respects from those of investments in obligations of
US domestic banks because of differences in political, regulatory and economic systems and conditions. These risks
include the possibility that these obligations may be less marketable than comparable obligations of United States banks,
and the selection of these obligations may be more difficult because there may be less publicly available information concerning
foreign banks. Other risks include future political and economic developments, currency blockage, the
possible
imposition of withholding taxes on interest payments, possible seizure or nationalization of foreign deposits, difficulty
or inability to pursue legal remedies and obtain or enforce judgments in foreign courts, possible establishment of
exchange controls or the adoption of other foreign governmental restrictions that might affect adversely the payment of
principal and interest on bank obligations. Foreign branches of US banks and foreign banks may also be subject to less
stringent reserve requirements and to different accounting, auditing, reporting and record keeping standards than
those applicable to domestic branches of US banks.
Repurchase Agreements.
A fund may invest in repurchase agreements pursuant to its investment guidelines. In a repurchase
agreement, a fund acquires ownership of a security (Obligation) and simultaneously commits to resell that
security to the seller, typically a bank or broker/dealer, at a specified time and price.
In accordance with current
SEC guidance, DWS Government & Agency Securities Portfolio, Government Cash Management Portfolio,
DWS Government Money Market VIP, DWS Central Cash Management Government Fund, DWS Treasury Portfolio
and DWS Money Market Prime Series may also transfer uninvested
cash balances into a single joint account (a
Joint Account). The daily aggregate balance of a Joint Account will be invested in one or more repurchase agreements. The
Board has established and periodically reviews procedures applicable to transactions involving Joint Accounts.
A repurchase agreement
provides a means for a fund to earn income on funds for periods as short as overnight. The repurchase
price may be higher than the purchase price, the difference being income to a fund, or the purchase and repurchase
prices may be the same, with interest at a stated rate due to a fund together with the repurchase price upon
repurchase. In either case, the income to a fund is unrelated to the interest rate on the Obligation itself. Obligations will
be held by the custodian or in the Federal Reserve Book Entry System.
The SEC has finalized
new rules requiring the central clearing of certain repurchase transactions involving U.S. Treasuries. Historically,
such transactions have not been required to be cleared and voluntary clearing of such transactions has generally
been limited. The new clearing requirements could increase the fund’s costs of executing certain investment strategies.
It is not clear whether
a court would consider the Obligation purchased by a fund subject to a repurchase agreement as
being owned by a fund or as being collateral for a loan by a fund to the seller. In the event of the commencement of
bankruptcy or insolvency proceedings with respect to the seller of the Obligation before repurchase of the Obligation under
a repurchase agreement, a fund may encounter delay and incur costs before being able to sell the security. Delays
may involve loss of interest or decline in price of the Obligation. If the court characterizes the transaction as a
loan and a fund has not perfected a security interest in the Obligation, a fund may be required to return the Obligation to
the seller’s estate and be treated as an unsecured creditor of the seller. As an unsecured creditor, a fund would be
at risk of losing some or all of the principal and income involved in the transaction. As with any unsecured debt obligation
purchased for a fund, the Advisor seeks to reduce the risk of loss through repurchase agreements by analyzing the
creditworthiness of the obligor, in this case the seller of the Obligation. Apart from the risk of bankruptcy or insolvency proceedings,
there is also the risk that the seller may fail to repurchase the Obligation, in which case a fund may incur a
loss if the proceeds to a fund of the sale to a third party are less than the repurchase price. However, if the market value
(including interest) of the Obligation subject to the repurchase agreement becomes less than the repurchase price
(including interest), a fund will direct the seller of the Obligation to deliver additional securities so that the market value
(including interest) of all securities subject to the repurchase agreement will equal or exceed the repurchase price.
Reverse Repurchase Agreements.
A fund may enter into “reverse
repurchase agreements,”
which are repurchase agreements in which a fund,
as the seller of the securities, agrees to repurchase such securities at an agreed time and
price. Under a reverse repurchase agreement, a fund continues to receive any principal and interest payments on
the underlying security during the term of the agreement. A fund’s obligations under reverse repurchase agreements are
generally treated as derivatives transactions subject to the requirements of Rule 18f-4, except for DWS money market
funds in which a fund’s obligations under reverse repurchase agreements are treated as borrowings requiring the
necessary asset coverage under Section 18(f) of the 1940 Act. Such transactions may increase fluctuations in the market
value of fund assets and its yield.
The
SEC has finalized new rules requiring the central clearing of certain repurchase transactions involving U.S. Treasuries. Historically,
such transactions have not been required to be cleared and voluntary clearing of such transactions has generally
been limited. The new clearing requirements could increase the fund’s costs of executing certain investment strategies.
Special Information Concerning Master-Feeder
Fund Structure. The following applies to the extent that the
fund employs the master-feeder fund structure.
Unlike other open-end management investment companies (mutual funds) which
directly acquire and manage their own portfolio securities, a fund seeks to achieve its investment objective by investing
substantially all of its assets in a master portfolio (Portfolio), a separate registered investment company with the
same investment objective as a fund. Therefore, an investor’s interest in the Portfolio’s securities is indirect. In addition
to selling a beneficial interest to a fund, the Portfolio may sell beneficial interests to other mutual funds, investment
vehicles or institutional investors. Such investors will invest in the Portfolio on the same terms and conditions and
will pay a proportionate share of the Portfolio’s expenses. However, the other investors investing in the Portfolio are
not required to sell their shares at the same public offering price as a fund due to variations in sales commissions and
other operating expenses. Therefore, investors in a fund should be aware that these differences may result in differences
in returns experienced by investors in the different funds that invest in the Portfolio. Such differences in returns
are also present in other mutual fund structures.
Smaller funds investing
in the Portfolio may be materially affected by the actions of larger funds investing in the Portfolio. For
example, if a large fund withdraws from the Portfolio, the remaining funds may experience higher pro rata operating expenses,
thereby producing lower returns (however, this possibility exists as well for traditionally structured funds which
have large institutional investors). Also, the Portfolio may be required to sell investments at a price or time not advantageous
to the Portfolio in order to meet such a redemption. Additionally, the Portfolio may become less diverse, resulting
in increased portfolio risk. Also, funds with a greater pro rata ownership in the Portfolio could have effective voting
control of the operations of the Portfolio. Whenever a fund is requested to vote on a matter pertaining to the Portfolio,
the fund will vote its interests in the Portfolio without a meeting of shareholders of the fund if the proposal is
one that would not require the vote of shareholders of the fund as long as such action is permissible under applicable statutory
and regulatory requirements. In addition, whenever the fund is required to vote on a particular matter relating to
the Portfolio, the fund will hold a meeting of the shareholders of the fund and, at the meeting of the investors of the
Portfolio, will cast its vote in the same proportion as the votes of the fund’s shareholders even if all the fund’s shareholders
did not vote.
Certain changes in the
Portfolio’s investment objectives, policies or restrictions may require a fund to withdraw its interest
in the Portfolio. Any such withdrawal could result in a distribution “in
kind”
of portfolio securities (as opposed to a cash
distribution from the Portfolio). If securities are distributed, a fund could incur brokerage, tax or other charges in
converting the securities to cash. In addition, the distribution in kind may result in a less diversified portfolio of investments
or adversely affect the liquidity of a fund. Notwithstanding the above, there are other means for meeting redemption
requests, such as borrowing.
A fund may withdraw its
investment from the Portfolio at any time, if the Board determines that it is in the best interests of
the shareholders of a fund to do so. Upon any such withdrawal, the Board would consider what action might be taken,
including the investment of all the assets of a fund in another pooled investment entity having the same investment objective
as a fund or the retaining of an investment advisor to manage a fund’s assets in accordance with the investment policies
described herein with respect to the Portfolio.
Stable Net Asset Value (for all money
market funds except Government Cash Management Portfolio). A
fund effects purchases and redemptions at its
net asset value per share. In fulfillment of its responsibilities under Rule 2a-7
of the 1940 Act, the Board has approved policies reasonably designed, taking into account current market conditions and
a fund’s investment objective, to stabilize a fund’s net asset value per share, and the Board will periodically review the
Advisor’s operations under such policies at regularly scheduled Board meetings. In addition to imposing limitations on
the quality, maturity, diversity and liquidity of portfolio instruments held by a fund as described in the prospectus, those
policies include a weekly monitoring by the Advisor of unrealized gains and losses in a fund and, when necessary, in
an effort to avoid a material deviation of a fund’s net asset value per share determined by reference to market valuations
from a fund’s $1.00 price per share, taking corrective action, such as adjusting the maturity of a fund, or,
if
possible, realizing gains or losses to offset in part unrealized losses or gains. The result of those policies may be that
the yield on shares of a fund will be lower than would be the case if the policies were not in effect. Such policies also
provide for certain action to be taken with respect to portfolio securities which experience a downgrade in rating or
suffer a default.
There is no assurance
that a fund’s net asset value per share will be maintained at $1.00. Pursuant to rules relating to
money market funds, a fund may be required to publicly disclose, among other things: (1) financial support payments from
DIMA or its affiliates to the fund for the purpose of stabilizing the value of the fund or (2) a deviation of the fund’s
net asset value per share determined by reference to market valuations from the fund’s $1.00 price per share by
0.25% or greater. To the extent a fund were to make such disclosures, it could cause significant redemptions from the
fund and further impair the fund’s ability to maintain a stable $1.00 share price. This risk may be heightened for a
fund to the extent it has a large proportion of institutional investors.
Stand-by Commitments.
A stand-by commitment is a right acquired by a fund, when it purchases a municipal obligation from
a broker, dealer or other financial institution (seller), to sell up to the same principal amount of such securities back
to the seller, at a fund’s option, at a specified price. Stand-by commitments are also known as “puts.”
The exercise by a fund of a stand-by commitment is subject to
the ability of the other party to fulfill its contractual commitment.
Stand-by commitments
acquired by a fund may have the following features: (1) they will be in writing and will be physically
held by a fund’s custodian; (2) a fund’s right to exercise them will be unconditional and unqualified; (3) they will
be entered into only with sellers which in the Advisor’s opinion present a minimal risk of default; (4) although stand-by
commitments will not be transferable, municipal obligations purchased subject to such commitments may be
sold to a third party at any time, even though the commitment is outstanding; and (5) their exercise price will be (i)
a fund’s acquisition cost (excluding any accrued interest which a fund paid on their acquisition), less any amortized market
premium or plus any amortized original issue discount during the period a fund owned the securities, plus (ii) all
interest accrued on the securities since the last interest payment date.
A fund expects that stand-by
commitments generally will be available without the payment of any direct or indirect consideration.
However, if necessary or advisable, a fund will pay for stand-by commitments, either separately in cash or
by paying a higher price for portfolio securities which are acquired subject to the commitments.
It is difficult to evaluate
the likelihood of use or the potential benefit of a stand-by commitment. Therefore, it is expected that
the Advisor will determine that stand-by commitments ordinarily have a “fair
value”
of zero, regardless of whether any direct or
indirect consideration was paid. However, if the market price of the security subject to the stand-by commitment
is less than the exercise price of the stand-by commitment, such security will ordinarily be valued at such
exercise price. Where a fund has paid for a stand-by commitment, its cost will be reflected as unrealized depreciation for
the period during which the commitment is held.
The IRS has issued a
favorable revenue ruling to the effect that, under specified circumstances, a RIC
will be the owner of tax-exempt municipal obligations
acquired subject to a put option. The IRS has also issued private letter rulings
to certain taxpayers (which do not serve as precedent for other taxpayers) to the effect that tax-exempt interest received
by a RIC
with respect to such obligations will be tax-exempt in the hands of the company and may be distributed to
its shareholders as exempt-interest dividends. The IRS has subsequently announced that it will not ordinarily issue advance
ruling letters as to the identity of the true owner of property in cases involving the sale of securities or participation interests
therein if the purchaser has the right to cause the security, or the participation interest therein, to be purchased by
either the seller or a third party. A fund intends to take the position that it owns any municipal obligations acquired subject
to a stand-by commitment and that tax-exempt interest earned with respect to such municipal obligations will
be tax-exempt in its hands. There is no assurance that the IRS will agree with such position in any particular case.
Third Party Puts.
A fund may purchase long-term fixed rate bonds that have been coupled with an option granted by
a third party financial institution allowing a fund at specified intervals to tender (put) the bonds to the institution and
receive the face value thereof (plus accrued interest). These third party puts are available in several different forms, may
be represented by custodial receipts or trust certificates and may be combined with other features such as interest rate
swaps. A fund receives a short-term rate of interest (which is periodically reset), and the interest rate differential
between
that rate and the fixed rate on the bond is retained by the financial institution. The financial institution granting the
option does not provide credit enhancement, and in the event that there is a default in the payment of principal or
interest, or downgrading of a bond to below investment grade, or a loss of the bond’s tax-exempt status, the put option
will terminate automatically. As a result, a fund would be subject to the risks associated with holding such a long-term
bond and the weighted average maturity of that fund’s portfolio would be adversely affected.
These bonds coupled with
puts may present the same tax issues as are associated with Stand-By Commitments. As
with any Stand-By Commitments acquired by a fund, a fund intends to take the position that it is the owner of any
municipal obligation acquired subject to a third-party put, and that tax-exempt interest earned with respect to such
municipal obligations will be tax-exempt in its hands. There is no assurance that the IRS will agree with such position
in any particular case. Additionally, the federal income tax treatment of certain other aspects of these investments, including
the treatment of tender fees and swap payments, in relation to various RIC
tax provisions is unclear. However, the Advisor
seeks to manage a fund’s portfolio in a manner designed to minimize any adverse impact from these investments.
US Government Securities.
A fund may invest in obligations issued or guaranteed as to both principal and interest by
the US Government, its agencies, instrumentalities or sponsored enterprises which include: (a) direct obligations of
the US Treasury; and (b) securities issued or guaranteed by US Government agencies.
Examples of direct obligations
of the US Treasury are Treasury bills, notes, bonds and other debt securities issued by the
US Treasury. These instruments are backed by the “full
faith and credit”
of the United States. They differ primarily in
interest rates, the length of maturities and the dates of issuance. Treasury bills have original maturities of one year or
less. Treasury notes have original maturities of one to ten years and Treasury bonds generally have original maturities of
greater than ten years.
Some agency securities
are backed by the full faith and credit of the United States (such as Maritime Administration Title
XI Ship Financing Bonds and Agency for International Development Housing Guarantee Program Bonds) and others
are backed only by the rights of the issuer to borrow from the US Treasury (such as Federal Home Loan Bank Bonds
and Federal National Mortgage Association Bonds), while still others, such as the securities of the Federal Farm Credit
Bank, are supported only by the credit of the issuer. With respect to securities supported only by the credit of the
issuing agency or by an additional line of credit with the US Treasury, there is no guarantee that the US Government will
provide support to such agencies and such securities may involve risk of loss of principal and interest.
US Government securities
may include “zero
coupon”
securities that have been stripped by the US Government of their
unmatured interest coupons and collateralized obligations issued or guaranteed by a US Government agency or instrumentality.
Because interest on zero coupon securities is not distributed on a current basis but is, in effect, compounded, zero
coupon securities tend to be subject to greater risk than interest-paying securities of similar maturities.
Interest rates on US
Government securities may be fixed or variable. Interest rates on variable rate obligations are adjusted
at regular intervals, at least annually, according to a formula reflecting then current specified standard rates, such
as 91-day US Treasury bill rates. These adjustments generally tend to reduce fluctuations in the market value of the
securities.
The government guarantee
of the US Government securities in a fund’s portfolio does not guarantee the net asset value
of the shares of a fund. There are market risks inherent in all investments in securities and the value of an investment
in a fund will fluctuate over time. Normally, the value of investments in US Government securities varies inversely
with changes in interest rates. For example, as interest rates rise the value of investments in US Government securities
will tend to decline, and as interest rates fall the value of a fund’s investments in US Government securities will
tend to increase. In addition, the potential for appreciation in the event of a decline in interest rates may be limited or
negated by increased principal prepayments with respect to certain mortgage-backed securities, such as GNMA Certificates.
Prepayments of high interest rate mortgage-backed securities during times of declining interest rates will
tend to lower the return of a fund and may even result in losses to a fund if some securities were acquired at a
premium.
Moreover, during periods of rising interest rates, prepayments of mortgage-backed securities may decline, resulting
in the extension of a fund’s average portfolio maturity. As a result, a fund’s portfolio may experience greater volatility
during periods of rising interest rates than under normal market conditions.
Because of the rising
US Government debt burden and potential limitations caused by the statutory debt ceiling, it is
possible that the US Government may not be able to meet its financial obligations or that securities issued by the US
Government may experience credit downgrades. In the past, US sovereign credit has experienced downgrades and
there can be no guarantee that it will not experience further downgrades in the future by rating agencies. Such a
credit event may adversely impact the financial markets and the fund. From time to time, uncertainty regarding the status
of negotiations in the US Government to increase the statutory debt ceiling and/or failure to increase the statutory debt
ceiling could increase the risk that the US Government may default on payments on certain US Government securities,
cause the credit rating of the US Government to be downgraded or increase volatility in financial markets, result
in higher interest rates, reduce prices of US Treasury securities and/or increase the costs of certain kinds of debt.
Variable and Floating Rate Instruments.
Debt instruments purchased by a fund may be structured to have variable or
floating interest rates. The interest rate on variable and floating rate securities may be reset daily, weekly or on some
other reset period and may have a floor or ceiling on interest rate changes. The interest rate of variable rate securities
ordinarily is determined by reference to or is a percentage of an objective standard such as a bank’s prime rate,
the 90-day US Treasury Bill rate, or the rate of return on commercial paper or bank certificates of deposit. Generally, the
changes in the interest rate on variable rate securities reduce the fluctuation in the market value of such securities. Accordingly,
as interest rates decrease or increase, the potential for capital appreciation or depreciation is less than for
fixed-rate obligations. A fund may purchase variable rate securities on which stated minimum or maximum rates, or
maximum rates set by state law, limit the degree to which interest on such instruments may fluctuate; to the extent it
does, increases or decreases in value of such instruments may be somewhat greater than would be the case without such
limits. Because the adjustment of interest rates on the variable rate securities is made in relation to movements of
the applicable rate adjustment index, the instruments are not comparable to long-term fixed interest rate securities. Accordingly,
interest rates on the variable rate securities may be higher or lower than current market rates for fixed rate
obligations of comparable quality with similar final maturities. A money market fund determines the maturity of variable
rate securities in accordance with Rule 2a-7, which allows a fund to consider certain of such instruments as having
maturities shorter than the maturity date on the face of the instrument.
The Advisor will consider
the earning power, cash flows and other liquidity ratios of the issuers and guarantors of such
instruments and, if the instrument is subject to a demand feature (described below), will continuously monitor the
issuer’s financial ability to meet payment on demand. Where necessary to ensure that a variable or floating rate instrument
is equivalent to the quality standards applicable to a fund’s fixed income investments, the issuer’s obligation to
pay the principal of the instrument will be backed by an unconditional bank letter or line of credit, guarantee or commitment
to lend. Any bank providing such a bank letter, line of credit, guarantee or loan commitment will meet a
fund’s investment quality standards relating to investments in bank obligations. The Advisor will also monitor the creditworthiness
of issuers of such instruments to determine whether a fund should continue to hold the investments.
The absence of an active
secondary market for certain variable and floating rate notes could make it difficult to dispose of
the instruments, and a fund could suffer a loss if the issuer defaults or during periods in which a fund is not entitled to
exercise its demand rights. When a reliable trading market for the variable and floating rate instruments held by a fund
does not exist and a fund may not demand payment of the principal amount of such instruments within seven days,
the instruments may be deemed illiquid and therefore subject to a fund’s limitation on investments in illiquid securities.
Variable Rate Demand Securities.
A fund may purchase variable rate demand securities, which are variable rate securities that
permit a fund to demand payment of the unpaid principal balance plus accrued interest upon a specified number of
days’ notice to the issuer or its agent. The demand feature may be backed by a bank letter of credit or guarantee issued
with respect to such instrument. A bank that issues a repurchase commitment may receive a fee from a fund
for
this arrangement. The issuer of a variable rate demand security may have a corresponding right to prepay in its discretion
the outstanding principal of the instrument plus accrued interest upon notice comparable to that required for
the holder to demand payment.
Variable Rate Master Demand Notes.
A fund may purchase variable rate master demand notes, which are unsecured instruments
that permit the indebtedness thereunder to vary and provide for periodic adjustments in the interest rate. Because
variable rate master demand notes are direct lending arrangements between a fund and the issuer, they are
not ordinarily traded. Although no active secondary market may exist for these notes, a fund will purchase only those
notes under which it may demand and receive payment of principal and accrued interest daily or may resell the note
at any time to a third party. These notes are not typically rated by credit rating agencies.
When-Issued and Delayed-Delivery Securities.
A fund may purchase securities on a when-issued or delayed-delivery basis.
Delivery of and payment for these securities can take place a month or more after the date of the purchase commitment.
The payment obligation and the interest rate that will be received on when-issued and delayed-delivery securities
are fixed at the time the buyer enters into the commitment. Due to fluctuations in the value of securities purchased
or sold on a when-issued or delayed-delivery basis, the yields obtained on such securities may be higher or
lower than the yields available in the market on the dates when the investments are actually delivered to the buyers. When-issued
securities may include securities purchased on a “when,
as and if issued”
basis, under which the issuance of the security
depends on the occurrence of a subsequent event, such as approval of a merger, corporate reorganization or
debt restructuring. The value of such securities is subject to market fluctuation during this period and no interest or
income, as applicable, accrues to a fund until settlement takes place.
At the time a fund makes
the commitment to purchase securities on a when-issued or delayed delivery basis, it will record
the transaction, reflect the value each day of such securities in determining its net asset value and, if applicable, calculate
the maturity for the purposes of average maturity from that date. At the time of settlement a when-issued security
may be valued at less than the purchase price. Rule 18f-4 under the 1940 Act permits a fund to invest in a security
on a when-issued or delayed-delivery basis and the transaction will be deemed not to involve a senior security, provided
that the fund intends to physically settle the transaction and the transaction will settle within 35 days of its trade
date. If a fund chooses to dispose of the right to acquire a when-issued security prior to its acquisition, it could, as
with the disposition of any other portfolio obligation, incur a gain or loss due to market fluctuation. When a fund engages
in when-issued or delayed-delivery transactions, it relies on the other party to consummate the trade and is,
therefore, exposed to counterparty risk. Failure of the seller to do so may result in a fund’s incurring a loss or missing
an opportunity to obtain a price considered to be advantageous.
Yields and Ratings.
The yields on certain obligations in which a fund may invest (such as commercial paper and bank obligations),
are dependent on a variety of factors, including general market conditions, conditions in the particular market
for the obligation, the financial condition of the issuer, the size of the offering, the maturity of the obligation and
the ratings of the issue. The ratings of Moody’s, S&P and Fitch represent their opinions as to the quality of the securities
that they undertake to rate. Ratings, however, are general and are not absolute standards of quality or value. Consequently,
obligations with the same rating, maturity and interest rate may have different market prices. See “Ratings
of Investments”
for descriptions of the ratings provided by certain recognized rating organizations.
Part II:
Appendix II-F—Taxes
The following is intended
to be a general summary of certain federal income tax consequences of investing in a fund. This
discussion does not address all aspects of taxation (including state, local, and foreign taxes) that may be relevant to
particular shareholders in light of their own investment or tax circumstances, or to particular types of shareholders (including
insurance companies, tax-advantaged retirement plans, financial institutions or broker-dealers, that
are subject to special treatment under the US
federal income tax laws. Current and prospective investors are therefore advised to
consult with their tax advisors before making an investment in a fund. This summary is based on the laws in effect on
the date of this SAI and on existing judicial and administrative interpretations thereof, all of which are subject to change,
possibly with retroactive effect. This summary assumes that investors
holds shares of a fund as capital assets (within
the meaning of the Code). Shareholders should consult their own tax advisors regarding their particular situation and
the possible application of U.S. federal, state, local, non-U.S. or other tax laws, and any proposed tax law changes.
For purposes of this
summary, a “U.S.
shareholder”
is a beneficial owner of Shares of a fund that is, for federal income tax
purposes, (i) an individual who is a citizen or resident of the United States, (ii) a corporation created or organized in
or under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate the income of which
is subject to U.S. federal income tax regardless of its source or (iv) a trust (x) with respect to which a court within
the United States is able to exercise primary supervision over its administration and one or more United States persons
have the authority to control all of its substantial decisions or (y) that has in effect a valid election under applicable
U.S. Treasury regulations to be treated as a United States person (as such term is defined under the Code). The
term “non-U.S.
shareholder”
as used in this summary means a beneficial owner of Shares of a fund that is neither a
U.S. Shareholder nor a partnership for federal income tax purposes.
If an entity treated
as a partnership for federal income tax purposes holds shares of a fund, the federal income tax treatment
of the partnership and its partners generally will depend in part upon the status and activities of the partnership and
its partners and certain determinations made at the partner level.
Regulated Investment Company Qualifications.
Each fund intends to qualify for treatment as a separate RIC under Subchapter
M of the Code. To qualify for treatment as a RIC, each fund must annually distribute at least 90% of its investment
company taxable income (which includes dividends, interest and net short-term capital gains) and meet several
other requirements. Among such other requirements are the following: (i) at least 90% of each fund’s annual gross
income must be derived from dividends, interest, payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or non-US currencies, other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or
currencies, and net income derived from interests in qualified publicly-traded partnerships (i.e., partnerships that are
traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90%
or more of their gross income from interest, dividends, capital gains and other traditionally permitted mutual fund
income); and (ii) at the close of each quarter of each fund’s taxable year, (a) at least 50% of the market value of each
fund’s total assets must be represented by cash and cash items, US government securities, securities of other RICs
and other securities, with such other securities limited for purposes of this calculation in respect of any one issuer
to an amount not greater than 5% of the value of the fund’s total assets and not greater than 10% of the outstanding
voting securities of such issuer, and (b) not more than 25% of the value of each fund’s total assets may be
invested in the securities (other than US government securities or the securities of other RICs) of any one issuer, or
two or more issuers of which 20% or more of the voting stock is held by the fund and that are engaged in the same
or similar trades or businesses or related trades or businesses, or the securities of one or more qualified publicly-traded partnerships.
The Treasury Department is authorized to promulgate regulations under which gains from foreign currencies (and
options, futures, and forward contracts on foreign currency) would constitute qualifying income for purposes of the
test described in (i) above only if such gains are directly related to investing in securities. To date, such regulations have
not been issued.
Although in general the
passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to
items attributable to an interest in a qualified publicly-traded partnership. A fund’s investments in partnerships, if any,
including in qualified publicly-traded partnerships, may result in a fund being subject to state, local, or non-US income,
franchise or withholding taxes.
Taxation
of Regulated Investment Companies. As a RIC, a fund will not
be subject to US federal income tax on the portion
of its taxable investment income and capital gains that it distributes to its shareholders, provided that it satisfies
a minimum distribution requirement. To satisfy the minimum distribution requirement, a fund must distribute to
its shareholders an amount at least equal to the sum of (i) 90% of its “investment
company taxable income”
as that term is defined in the Code determined
without regard to the deduction for dividends paid (i.e., taxable income other
than its net long-term capital gain over its net short-term
capital loss) for the taxable year,
plus or minus certain adjustments, and (ii)
90% of its net tax-exempt income for the taxable year. A fund will be subject to income tax at regular
corporate rates on any taxable income or gains that it does not distribute to its shareholders. If a fund fails to qualify
for any taxable year as a RIC or fails to meet the distribution requirement, all of its taxable income will be subject
to federal income tax at regular corporate income tax rates without any deduction for distributions to shareholders, and
such distributions (including any distributions of net tax-exempt income and net long-term capital gain) generally will
be taxable to shareholders as ordinary dividends to the extent of the fund’s current or
accumulated earnings and profits. In such event,
distributions to individuals and other non-corporate shareholders should be eligible to be treated as
qualified dividend income and distributions to corporate shareholders generally should be eligible for the dividends received
deduction, provided in both cases the shareholder meets certain holding period and other requirements. Although
each fund intends to distribute substantially all of its net investment income and its capital gains for each taxable
year, each fund will be subject to US federal income taxation to the extent any such income or gains are not distributed.
If a fund fails to qualify as a RIC in any year, it must pay out its earnings and profits accumulated in that year
in order to qualify again as a RIC. If a fund fails to qualify as a RIC for a period greater than two taxable years, the
fund may be required to recognize any net built-in gains with respect to certain of its assets (i.e., the excess of the
aggregate gains, including items of income, over aggregate losses that would have been realized with respect to
such assets if the fund had been liquidated) if it qualifies as a RIC in a subsequent year.
If a fund does not on
a timely basis receive applicable government approvals in the PRC to repatriate funds associated with
direct investment in A-Shares, the fund may be unable to satisfy the minimum distribution requirement described above.
Excise Tax.
A fund will be subject to a 4% excise tax on certain undistributed income if it does not generally distribute,
or be deemed to have distributed, to its
shareholders in each calendar year an amount at least equal to the sum of (i)
98% of its ordinary income for the calendar year (taking into account certain deferrals and elections) plus (ii) 98.2% of
its capital gain net income (reduced by certain ordinary losses) for the 12 months ended October 31 of such year. For
this purpose, however, any ordinary income or capital gain net income retained by a fund that is subject to corporate income
tax in the taxable year ending within the relevant calendar year will be considered to have been distributed. In
addition, the minimum amounts that must be distributed in any year to avoid the excise tax will be increased or decreased
to reflect any under-distribution or over-distribution, as the case may be, from the previous year. Each fund intends
to declare and distribute dividends and distributions in the amounts and at the times necessary to avoid the application
of this 4% excise tax.
If a fund does not on
a timely basis receive applicable government approvals in the PRC to repatriate funds associated with
direct investment in A-Shares, a fund may be unable to avoid the excise tax.
Fund Losses.
If a fund has a “net
capital loss”
(that is, capital losses in excess of capital gains) for a taxable year, the
excess of the fund’s net short-term capital losses over its net long-term capital gains is treated as a short-term capital
loss arising on the first day of the fund’s next taxable year, and the excess (if any) of the fund’s net long-term capital
losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the fund’s
next taxable year. These losses can be carried forward indefinitely to offset capital gains, if any, in years following the
year of the loss.
Under certain circumstances,
a fund may elect to treat certain losses as though they were incurred on the first day of
the taxable year following the taxable year in which they were actually incurred.
Taxation of US Shareholders.
Dividends and other distributions by a fund are generally treated under the Code as received
by the U.S.
shareholders at the time the dividend or distribution is made. However, any dividend or distribution declared
by a fund in October, November or December of any calendar year and payable to U.S.
shareholders of record
on
a specified date in such a month shall be deemed to have been received by each U.S.
shareholder on December 31 of such calendar
year and to have been paid by the fund on such December 31, provided such dividend is actually paid
by the fund during January of the following calendar year.
Each fund intends to
distribute annually to its U.S.
shareholders substantially all of its investment company taxable income
(determined without regard to the deduction for dividends paid) and any net long-term
capital gains in excess of net short-term
capital losses (taking into account any available capital loss carryovers). However, if a fund retains for
investment an amount equal to all or a portion of its net long-term capital gains in excess of its net short-term capital
losses (taking into account any available capital loss carryovers), it will be subject to a corporate tax (currently at
a maximum rate of 21%) on the amount retained. In that event, the fund may report such retained amounts as undistributed
capital gains in a notice to its U.S.
shareholders who (i) will be required to include in income for federal income
tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount, (ii) will be entitled
to credit their proportionate shares of the federal income tax paid by the fund on the undistributed amount against
their federal income tax liabilities, if any, and to claim refunds to the extent their credits exceed their liabilities, if
any, and (iii) will be entitled to increase their tax basis, for federal income tax purposes, in their Shares by an amount equal
to the difference between the amount of undistributed capital gains included in the U.S.
shareholder's gross income and the federal income
tax deemed paid by the U.S.
shareholder under clause (ii) of the preceding sentence. Organizations
or persons not subject to US federal income tax on such capital gains will be entitled to a refund of their
pro rata share of such taxes paid by the fund upon filing appropriate returns or claims for refund with the IRS.
Distributions of net
long-term capital gains, if any, that a fund reports as capital
gains dividends are taxable as long-term capital
gains, whether paid in cash or reinvested in additional Shares and regardless of how long a U.S.
shareholder has held Shares of the fund. All
other dividends of a fund (including dividends from short-term capital gains) from its current
or
accumulated earnings and profits (“regular
dividends”)
are generally subject to federal income tax as ordinary income,
subject to the discussion of qualified dividend income and tax-exempt dividends below.
If a non-corporate U.S.
shareholder receives a regular dividend qualifying for the long-term capital gains rates and such
dividend constitutes an “extraordinary
dividend,”
and the non-corporate U.S.
shareholder subsequently recognizes a loss on
the sale or exchange of stock in respect of which the extraordinary dividend was paid, then the loss will be long-term
capital loss to the extent of such extraordinary dividend. An “extraordinary
dividend”
on common stock for this purpose is generally
a dividend (i) in an amount greater than or equal to 10% of the taxpayer’s tax basis (or trading value)
in a Share of stock, aggregating dividends with ex-dividend dates within an 85-day period or (ii) in an amount greater
than 20% of the taxpayer’s tax basis (or trading value) in a Share of stock, aggregating dividends with ex-dividend dates
within a 365-day period.
Distributions in excess
of a fund’s current and accumulated earnings and profits will, as to each U.S.
shareholder, be treated as a tax-free return
of capital to the extent of a U.S.
shareholder’s basis in Shares of the fund, and as a capital gain
thereafter. Because a return of capital distribution will reduce
the basis of a U.S.
shareholder's Shares, a return of capital distribution
may result in a higher capital gain or lower capital loss when those Shares on which the distribution was
paid are sold. U.S.
shareholders receiving
dividends or distributions in the form of additional Shares should generally be
treated for federal income tax purposes as receiving a distribution in an amount equal to the amount of money that
the U.S.
shareholders receiving cash dividends or distributions will receive and should generally have a cost basis in
the Shares received equal to such amount.
Investors considering
buying Shares just prior to a dividend or capital gain distribution should be aware that, although the
price of Shares purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution
may nevertheless be taxable to them. If a fund is the holder of record of any security on the record date for
any dividends payable with respect to such security, such dividends will be included in the fund’s gross income not
as of the date received but as of the later of (i) the date such security became ex-dividend with respect to such dividends
(i.e., the date on which a buyer of the security would not be entitled to receive the declared, but unpaid, dividends);
or (ii) the date the fund acquired such security. Accordingly, in order to satisfy its income distribution requirements, a
fund may be required to pay dividends based on anticipated earnings, and U.S.
shareholders may receive dividends in an earlier year than would
otherwise be the case.
In
certain situations, a fund may, for a taxable year, defer all or a portion of its capital losses, currency losses and certain
other ordinary losses until the next taxable year in computing its investment company taxable income and net
capital gain, which will defer the recognition of such realized losses. Such deferrals and other rules regarding gains and
losses may affect the tax character of shareholder distributions.
An additional 3.8% Medicare
tax is imposed on certain net investment income (including ordinary dividends and capital gain
distributions received from a fund and net gains from redemptions or other taxable dispositions of fund Shares) of
US individuals, estates and trusts to the extent that such person’s “modified
adjusted gross income”
(in the case of an individual) or “adjusted
gross income”
(in the case of an estate or trust) exceeds certain threshold amounts.
Sales of Shares. Upon
the sale or exchange of Shares of a fund, a U.S.
shareholder will realize a taxable gain or loss equal
to the difference between the amount realized and the U.S.
shareholder’s basis in Shares of a fund. Such gain or
loss will be treated as capital gain or loss if the Shares are capital assets in the U.S.
shareholder’s hands and will be long-term
capital gain or loss if the Shares are held for more than one year and short-term capital gain or loss if the
Shares are held for one year or less. Any loss realized on a sale or exchange will be disallowed to the extent the Shares
disposed of are replaced, including replacement through the reinvesting of dividends and capital gains distributions in
the fund, within a 61-day period beginning 30 days before and ending 30 days after the disposition of the Shares. In
such a case, the basis of the Shares acquired will be increased to reflect the disallowed loss. Any loss realized by a
U.S.
shareholder on the sale of a fund Share held by the U.S.
shareholder for six months or less will be treated for federal
income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of long-term
capital gains received by the U.S.
shareholder with respect to such Share. Any loss realized by a U.S.
shareholder on the sale of fund shares held
by the U.S.
shareholder for six months or less will be disallowed to the extent of any exempt-interest
dividends received by the U.S.
shareholder with respect to such shares, unless a fund declares exempt-interest dividends
on a daily basis in an amount equal to at least 90% of its net tax-exempt interest and distributes such dividends on
a monthly or more frequent basis. A U.S.
shareholder’s ability to utilize capital losses may be limited under the Code.
Legislation passed by
Congress requires reporting of adjusted cost basis information for covered securities, which generally
include shares of a RIC acquired after January 1, 2012, to the IRS and to taxpayers.
U.S.
shareholders should
contact their financial intermediaries with respect to reporting of cost basis and available elections
for their accounts. Because the federal income tax treatment of a sale or exchange of fund Shares depends on
your purchase price and your personal tax position, you should keep your regular account statements to use in determining
your federal income tax liability.
Back-Up Withholding.
In certain cases, withholding will be required at the applicable withholding rate (currently 24%), from
any distributions and redemption proceeds paid
to a U.S.
shareholder who: (i) has failed to provide a correct taxpayer
identification number; (ii) is subject to back-up withholding by the IRS; (iii) has failed to certify that such U.S.
shareholder is not subject to back-up withholding;
or (iv) has not certified that such shareholder is a US person (including a
US resident alien). Back-up withholding is not an additional tax and any amount withheld may be credited against a
shareholder’s US federal income tax liability.
Creation Units.
An authorized participant who exchanges securities for Creation Units generally will recognize a gain or
a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and
the sum of the exchanger’s aggregate basis in the securities surrendered, plus the amount of cash paid for such Creation
Units. A person who redeems Creation Units will generally recognize a gain or loss equal to the difference between
the exchanger’s basis in the Creation Units and the sum of the aggregate market value of any securities received,
plus the amount of any cash received for such Creation Units. The IRS, however, may assert that a loss realized
upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing “wash
sales,”
or on the basis that there has been no significant change in economic position.
Any
capital gain or loss realized upon the acquisition of Creation Units will generally be treated as long-term capital gain
or loss if the securities exchanged for such Creation Units have been held for more than one year. Any capital gain
or loss realized upon the redemption of Creation Units will generally be treated as long-term capital gain or loss if
the Shares comprising the Creation Units have been held for more than one year. Otherwise, such capital gains or losses
will be treated as short-term capital gains or losses.
The Trust, on behalf
of each fund, has the right to reject an order for a purchase of Shares of the fund if the purchaser (or
group of purchasers) would, upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares of
a given fund and if, pursuant to Sections 351 and 362 of the Code, that fund would have a basis in the securities different
from the fair market
value of such securities on the date of deposit. If a fund’s basis in such securities on the
date of deposit was less than fair market
value on such date, the fund, upon disposition of the securities, would recognize
more taxable gain or less taxable loss than if its basis in the securities had been equal to fair
market value. It
is not anticipated that the Trust will exercise the right of rejection except in a case where the Trust determines that accepting
the order could result in material adverse tax consequences to a fund or its shareholders. The Trust also has
the right to require information necessary to determine beneficial Share ownership for purposes of the 80% determination.
Investment in the Underlying Funds.
A fund’s exposure to securities through an underlying fund (i.e., the Underlying Funds)
may be less tax efficient than a direct investment in securities. The fund will not be able to offset its taxable income
and gains with losses incurred by the underlying fund because the underlying fund(s) are treated as corporations for
federal income tax purposes. The fund’s sales of shares of an underlying fund, including those resulting from changes in
the fund’s allocation of assets, could cause the recognition of additional taxable gains. A portion of any such gains may
be short-term capital gains, which will be taxable as ordinary dividend income when distributed to the fund’s shareholders.
Further, certain losses recognized on sales of shares of the underlying fund may be deferred indefinitely under
the wash sale rules. Any loss realized by the fund on a disposition of shares of the underlying fund held for six months
or less will be treated as a long-term capital loss to the extent of any amounts treated as distributions to the fund
of net long-term capital gain with respect to the underlying fund’s shares (including any amounts credited to the fund
as undistributed capital gains). Short-term capital gains earned by the underlying fund will be treated as ordinary dividends
when distributed to the fund and therefore may not be offset by any short-term capital losses incurred by the
fund. The fund’s short-term capital losses might instead offset long-term capital gains realized by the fund, which would
otherwise be eligible for reduced federal income tax rates when distributed to individual and certain other non-corporate
U.S.
shareholders.
Taxation of Certain Derivatives.
A fund’s transactions in zero coupon securities, non-US currencies, forward contracts, options
and futures contracts (including options, futures contracts and forward contracts on non-US currencies), to the
extent permitted, will be subject to special provisions of the Code (including provisions relating to “hedging
transactions”
and “straddles”)
that, among other things, may affect the character of gains and losses realized by the fund (i.e., may affect
whether gains or losses are ordinary or capital), accelerate recognition of income to the fund and defer fund losses.
These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions
also (i) will require a fund to mark-to-market certain types of the positions in its portfolio (i.e., treat them as
if they were closed out at the end of each year) and (ii) may cause a fund to recognize income without receiving cash
with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for
avoiding income and excise taxes. Each fund will monitor its transactions, will make the appropriate tax elections and
will make the appropriate entries in its books and records when it acquires any zero coupon security, non-US currency,
forward contract, option, futures contract or hedged investment in order to mitigate the effect of these rules and
prevent disqualification of the fund as a RIC.
A fund’s investment
in so-called “Section
1256 contracts,”
such as regulated futures contracts, most non-US currency forward
contracts traded in the interbank market and options on most security indexes, are subject to special tax rules.
All Section 1256 contracts held by a fund at the end of its taxable year are required to be marked to their market value,
and any unrealized gain or loss on those positions will be included in the fund’s income as if each position had been
sold for its fair market value at the end of the taxable year. The resulting gain or loss will be combined with any gain
or loss realized by the fund from positions in Section 1256 contracts closed during the taxable year. Provided
such
positions were held as capital assets and were not part of a “hedging
transaction”
nor part of a “straddle,”
60% of the resulting net gain or loss will be
treated as long-term capital gain or loss, and 40% of such net gain or loss will be
treated as short-term capital gain or loss, regardless of the period of time the positions were actually held by the fund.
As a result of entering
into swap contracts, a fund may make or receive periodic net payments. A fund may also make or
receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction.
Periodic net payments will generally constitute ordinary income or deductions, while termination of a swap
will generally result in capital gain or loss (which will be a long-term capital gain or loss if the fund has been a party
to the swap for more than one year). With respect to certain types of swaps, a fund may be required to currently recognize
income or loss with respect to future payments on such swaps or may elect under certain circumstances to
mark such swaps to market annually for federal income tax purposes as ordinary income or loss. The tax treatment of
many types of credit default swaps is uncertain.
Qualified Dividend Income.
Distributions by a fund of investment company taxable income (including any short-term capital
gains), whether received in cash or reinvested in Shares, will be taxable for federal income tax purposes either as
ordinary income or as qualified dividend income, eligible for the reduced maximum rate to U.S.
individuals of either 15% or 20% (depending
on whether the individual’s income exceeds certain threshold amounts) to the extent the fund
receives qualified dividend income on the securities it holds and the fund reports the distribution as qualified dividend
income and certain holding period and other requirements are satisfied. Distributions by a fund of its net short-term
capital gains will be taxable as ordinary income. Capital gain distributions consisting of a fund’s net capital gains
will be taxable as long-term capital gains. Qualified dividend income is, in general, dividend income from taxable US
corporations (but generally not from entities treated as real estate investment trusts for federal income tax purposes (“US
REITs”))
and certain non-US corporations (e.g., non-US corporations that are not “passive
foreign investment companies”
and which are incorporated in a possession of the US or in certain countries with a comprehensive tax treaty
with the US, or the stock of which is readily tradable on an established securities market in the US). Under current
IRS guidance, the United States has appropriate comprehensive income tax treaties with the following countries: Australia,
Austria, Bangladesh, Barbados, Belgium, Bulgaria, Canada, Chile,
China (but not with Hong Kong, which is treated
as a separate jurisdiction for US tax purposes), Cyprus, the Czech Republic, Denmark, Egypt, Estonia, Finland, France,
Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan, Latvia, Lithuania,
Luxembourg, Malta, Mexico, Morocco, the Netherlands, New Zealand, Norway, Pakistan, the Philippines, Poland,
Portugal, Romania, Slovak Republic, Slovenia, South Africa, South
Korea, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Trinidad
and Tobago, Tunisia, Turkey, Ukraine, the United Kingdom, and Venezuela.
A dividend from a fund
will not be treated as qualified dividend income to the extent that (i) the shareholder has not held
the Shares on which the dividend was paid for 61 days during the 121-day period that begins on the date that is
60 days before the date on which the Shares become ex-dividend with respect to such dividend or the fund fails to
satisfy those holding period requirements with respect to the securities it holds that paid the dividends distributed to
the shareholder (or, in the case of certain preferred stocks, the holding requirement of 91 days during the 181-day period
beginning on the date that is 90 days before the date on which the stock becomes ex- dividend with respect to
such dividend); (ii) the fund or the shareholder is under an obligation (whether pursuant to a short sale or otherwise) to
make related payments with respect to substantially similar or related property; or (iii) the shareholder elects to treat
such dividend as investment income under Section 163(d)(4)(B) of the Code. Dividends received by a fund from a
US REIT or another RIC may be treated as qualified dividend income only to the extent the dividend distributions are
attributable to qualified dividend income received by such US REIT or other RIC. It is expected that dividends received
by a fund from a US REIT and distributed to a shareholder generally will be taxable to a
U.S. shareholder as ordinary
income.
For taxable years beginning
after December 31, 2017 and before January 1, 2026, qualified US REIT dividends (i.e., US
REIT dividends other than capital gain dividends and portions of US REIT dividends designated as qualified dividend income)
are eligible for a 20% federal income tax deduction in the case of U.S.
individuals, trusts and estates. A fund that
receives qualified US REIT dividends may elect to pass the special character of this income through to its shareholders. To
be eligible to treat distributions from a fund as qualified US REIT dividends, a shareholder must hold Shares of the fund
for more than 45 days during the 91-day period beginning on the date that is 45 days before the date on which
the
Shares become ex dividend with respect to such dividend and the shareholder must not be under an obligation (whether
pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar
or related property. If a fund does not elect to pass the special character of this income through to shareholders or
if a shareholder does not satisfy the above holding period requirements, the shareholder will not be entitled to the 20%
deduction for the shareholder’s share of the fund’s qualified US REIT dividend income.
If you lend your fund
Shares pursuant to securities lending arrangements you may lose the ability to use non-US tax credits
passed through by the fund or to treat fund dividends (paid while the Shares are held by the borrower) as qualified
dividend income. Consult your financial intermediary or tax advisor. If you enter into a short sale with respect to
Shares of the fund, substitute payments made to the lender of such Shares may not be deductible. Consult your financial
intermediary or tax advisor.
Corporate Dividends Received Deduction.
Dividends paid by a fund that are attributable to dividends received
by the fund from US corporations may qualify
for the dividends received deduction for corporations. A 46-day minimum holding
period during the 90-day period that begins 45 days prior to ex-dividend date (or 91-day minimum holding period
during the 180-day period beginning 90 days prior to ex-dividend date for preferred stock) during which risk of loss
may not be diminished is required for the applicable shares, at both the fund and shareholder level, for a dividend to
be eligible for the dividends received deduction. The dividends received deduction, if available, is reduced to the extent
the shares with respect to which the dividends are received are treated as debt-financed under federal income tax
law. The dividends received deduction also may be reduced as a result of a fund’s securities lending activities, hedging
activities or a high portfolio turnover rate or as a result of certain derivative transactions entered into by a fund.
Excess Inclusion Income.
Under current law, a fund serves to block unrelated business taxable income from being realized
by its tax-exempt U.S.
shareholders.
Notwithstanding the foregoing, a tax-exempt U.S.
shareholder could realize unrelated business
taxable income by virtue of its investment in the fund if shares in the fund constitute debt-financed property
in the hands of the tax-exempt U.S.
shareholder within the meaning of Code Section 514(b). Certain types of
income received by the fund from US REITs, real estate mortgage investment conduits, taxable mortgage pools or
other investments may cause the fund to designate some or all of its distributions as “excess
inclusion income.”
To U.S.
shareholders, such excess inclusion income may (i) constitute taxable income, as “unrelated
business taxable income”
for those shareholders who would otherwise be tax-exempt such as individual retirement accounts, 401(k) accounts,
Keogh plans, pension plans and certain charitable entities; (ii) not be offset by otherwise allowable deductions for
tax purposes; (iii) not be eligible for reduced US withholding for non-US shareholders even from tax treaty countries; and
(iv) cause the fund to be subject to tax if certain “disqualified
organizations”
as defined by the Code are fund shareholders.
If a charitable remainder annuity trust or a charitable remainder unitrust (each as defined in Code Section 664)
has “unrelated
business taxable income”
for a taxable year, a 100% excise tax on the “unrelated
business taxable income”
is imposed on the trust.
Non-US Investments.
Under Section 988 of the Code, gains or losses attributable to fluctuations in exchange rates between
the time a fund accrues income or receivables or expenses or other liabilities denominated in a currency other
than the fund’s “functional
currency”
and the time the fund actually collects such receivables or income or pays such
expenses or liabilities are generally treated as ordinary income or ordinary loss. In general, assuming the fund’s functional
currency for federal income tax purposes is the US dollar, gains (and losses) realized on debt instruments will
be treated as Section 988 gain (or loss) to the extent attributable to changes in exchange rates between the US dollar
and the currencies in which the instruments are denominated. Similarly, gain or losses on non-US currency, non-US
currency forward contracts and certain non-US currency options or futures contracts denominated in non-US currency,
to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are
also treated as ordinary income or loss unless the fund were to elect otherwise. Certain funds (or a “qualified
business unit”
of the fund) may treat the RMB as its functional currency. Under those circumstances, the fund generally would
not be expected to recognize gains or losses on its RMB-denominated securities based on the value of the RMB
relative to the US dollar, but a fund may recognize Section 988 gain (or loss) based on fluctuations in the value of
the RMB relative to the US dollar between the acquisition and disposition dates of US currency, between the date on
which a fund dividend is declared and the date on which it is paid, and potentially in connection with fund redemptions.
Income
received by the funds from sources within foreign countries (including, for example, interest and dividends on
securities of non-US issuers) may be subject to withholding and other taxes imposed by such countries. In some cases,
gain on the sale of shares of foreign issuers may also be subject to foreign tax. Tax treaties between such countries
and the US may reduce or eliminate such taxes. Foreign taxes paid by the funds will reduce the return from the
funds’ investments.
Each fund may be subject
to non-US income taxes withheld at the source. Each fund, if more than 50% of the value of
its total assets at the close of its taxable year consists of securities of foreign corporations, may elect to “pass
through”
to its investors the amount of non-US income taxes paid by the fund provided that both the fund and the investor
satisfy certain holding period requirements, with the result that each investor at the time of deemed distribution will
(i) include in gross income, even though not actually received, the investor’s pro rata share of the fund’s non-US income
taxes, and (ii) either deduct (in calculating US taxable income) or credit (in calculating US federal income tax) the
investor’s pro rata share of the fund’s non-US income taxes. A non-US shareholder
invested in the fund in a year that the fund
elects to “pass
through”
its non-US taxes may be treated as receiving additional dividend income subject to
US withholding tax. A non-US tax credit may not exceed the investor’s US federal income tax otherwise payable with
respect to the investor’s non-US source income. For this purpose, shareholders must treat as non-US source gross
income (i) their proportionate Shares of non-US taxes paid by the fund and (ii) the portion of any dividend paid by
the fund that represents income derived from non-US sources; the fund’s gain from the sale of securities will generally
be treated as US-source income. Certain limitations will be imposed to the extent to which the non-US tax credit
may be claimed. Tax-exempt shareholders and shareholders investing
through tax-advantaged accounts will not ordinarily benefit from
this election relating to foreign taxes.
A-Shares Tax Risk. Uncertainties
in the Chinese tax rules governing taxation of income and gains from investments in
A-Shares could result in unexpected tax liabilities for a fund. China generally imposes withholding tax at a rate of 10%
on dividends and interest derived by nonresident enterprises from issuers resident in China. China also imposes withholding
tax at a rate of 10% on capital gains derived by nonresident enterprises from investments in an issuer resident
in China, subject to an exemption or reduction pursuant to domestic law or a double taxation agreement or arrangement.
Since the respective
inception of the Shanghai-Hong Kong Stock Connect program (“Shanghai
Connect”
and the Shenzhen-Hong Kong Stock Connect program
(“Shenzhen
Connect”),
foreign investors (including the funds) investing in
A-Shares listed on the SSE through Shanghai Connect and those listed on the SZSE through Shenzhen Connect would
be temporarily exempt from the PRC corporate income tax and value-added tax on the gains on disposal of such
A-Shares. Dividends would be subject to PRC corporate income tax on a withholding basis at 10%, unless reduced under
a double tax treaty with China upon application to and obtaining approval from the competent tax authority. Since
November 17, 2014, the corporate income tax for QFIs, with respect to capital gains, has been temporarily lifted.
The withholding tax relating to the realized gains from shares in land-rich companies prior to November 17, 2014 has
been paid by Xtrackers Harvest ETFs, while realized gains from shares in non-land-rich companies prior to November 17,
2014 were granted by treaty relief pursuant to the PRC-US Double Taxation Agreement. During 2015, revenue authorities
in the PRC made arrangements for the collection of capital gains taxes for investments realized between November
17, 2009 and November 16, 2014. A fund could be subject to tax liability for any tax payments for which reserves
have not been made or that were not previously withheld. The impact of any such tax liability on a fund’s return
could be substantial. A fund may also be liable to the Advisor or Subadvisor for any tax that is imposed on the Advisor
or Subadvisor by the PRC with respect to the fund’s investments. If the fund’s direct investments in A-Shares through
the Subadvisor’s QFI license become subject to repatriation
restrictions or delays, the fund may be unable to
satisfy distribution requirements applicable to RICs under the Internal Revenue Code
of 1986, as
amended (the “Code”),
and be subject to tax at the fund level. In the event such restrictions are imposed, a fund may borrow funds to
the extent necessary to distribute to shareholders income sufficient to maintain the fund’s status as a RIC.
The current PRC tax laws
and regulations and interpretations thereof may be revised or amended in the future, potentially retroactively,
including with respect to the possible liability of a fund for the taxation of income and gains from investments in
A-Shares through Stock Connect or obligations of a QFI. The withholding taxes on dividends, interest and capital gains
may in principle be subject to a reduced rate under an applicable tax treaty, but the application of such treaties in
the case of a QFI acting for a foreign investor such as the funds is also uncertain. Finally, it is also unclear whether
an
RQFII would also be eligible for BT exemption, which has been granted to QFIIs, with respect to gains derived prior
to May 1, 2016. In practice, the BT has not been collected. However, the imposition of such taxes on the fund could
have a material adverse effect on the fund’s returns. Under the value-added tax regime, BT exemption granted to
QFIIs with respect to gains realized from the trading of PRC marketable securities has been grandfathered (i.e. QFIIs
continue to enjoy exemption on gains under the value-added tax regime). Since May 1, 2016, RQFIIs are exempt from
PRC value-added tax, which replaced the BT with respect to gains realized from the disposal of securities, including A-Shares.
Certain Debt Instruments.
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 a fund may be treated as debt securities that are issued originally at a discount.
Generally, the amount of the original issue discount for U.S.
federal income tax purposes (“OID”)
is treated as interest income and is required
to be accrued (and required to be distributed by a fund) over the term of the debt security,
even though payment of that amount is not received until a later time upon partial or full repayment or disposition of
the debt security. In addition, payment-in-kind debt securities will give rise to income which is required to be distributed and,
in the case of a taxable obligation, is taxable, even though a fund holding the security receives no interest payment in
cash during the year. A portion of the OID includable in income with respect to certain high-yield corporate debt securities
may be treated as a dividend (to the extent of the earnings and
profits of the corporate issuer) for 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 a fund 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 interest
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
a fund may be treated as having acquisition discount, or OID in the case of certain types of debt securities. Generally, the
fund will be required to accrue the acquisition discount, or OID, over the term of the debt security, even though payment
of that amount is not received until a later time, upon partial or full repayment or disposition of the debt security.
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.
The funds generally will
be required to distribute dividends to shareholders representing discount on debt securities that
is accrued, even though cash representing such income may not have been received by the fund. Cash to pay such
dividends may be obtained from sales proceeds of securities held by the fund.
A fund
may invest a portion of its net assets in below investment grade
instruments. Investments in these types of instruments
may present special tax issues for the fund. US federal income tax rules are not entirely clear about issues
such as when the fund may cease to accrue interest, OID or market discount, when and to what extent deductions may
be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated
between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are
taxable. These and other issues will be addressed by the funds to the extent necessary in order to seek to ensure that
they distribute sufficient income that they do not become subject to US federal income or excise tax.
Passive Foreign Investment Companies.
If a fund holds shares in “passive
foreign investment companies”
(“PFICs”),
it may be subject to US federal income tax on
a portion of any “excess
distribution”
or gain from the disposition of such shares
even if such income is distributed as a taxable dividend by the fund to its shareholders. Additional charges in
the nature of interest may be imposed on the fund in respect of deferred taxes arising from such distributions or gains.
A
fund may be eligible to elect to treat the PFIC as a “qualified
electing fund”
under the Code, in which case, the fund would
generally be required to include in income each year a portion of the ordinary earnings and net capital gains
of the qualified electing fund, even if not distributed to the fund, and such amounts would be subject to the 90%
and excise tax distribution requirements described above. In order to make this election, the fund would be required
to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to
obtain.
Alternatively, a fund
may make a mark-to-market election that would result in the fund being treated as if it had sold and
repurchased its PFIC stock at the end of each year. In such case, the fund would report any gains resulting from such
deemed sales as ordinary income and would deduct any losses resulting from such deemed sales as ordinary losses
to the extent of previously recognized gains. The election must be made separately for each PFIC owned by the
fund and, once made, would be effective for all subsequent taxable years, unless revoked with the consent of the
IRS. By making either of these elections,
the fund could potentially ameliorate the adverse tax consequences with
respect to its ownership of shares in a PFIC, but in any particular year may be required to recognize income in excess
of the distributions it receives from PFICs and its proceeds from dispositions of PFIC stock. A fund may have to
distribute this excess income and gain to satisfy the 90% distribution requirement and to avoid imposition of the 4%
excise tax. In order to distribute this income and avoid tax at the fund level, a fund might be required to liquidate portfolio
securities that it might otherwise have continued to hold, potentially resulting in additional taxable gain or loss.
A fund will make the
appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate the
effects of these rules.
Reporting. If
a shareholder recognizes a loss with respect to a fund’s Shares of $2 million or more for an individual shareholder
or $10 million or more for a corporate shareholder, the shareholder must file with the IRS a disclosure statement
on Form 8886. Direct shareholders of portfolio securities are in many cases exempted from this reporting requirement,
but under current guidance, shareholders of a RIC are not exempted. The fact that a loss is reportable under
these regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper.
Shareholders should consult their tax advisors to determine the applicability of these regulations in light of their
individual circumstances.
Other Taxes.
Dividends, distributions and redemption proceeds may also be subject to additional state, local and non-US
taxes depending on each shareholder’s particular situation.
Taxation of Non-US Shareholders.
Dividends paid by a fund to non-US shareholders are generally subject to withholding tax
at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income
and short-term capital gains. Non-US investors considering buying Shares just prior to a distribution should be
aware that, although the price of Shares purchased at that time may reflect the amount of the forthcoming distribution, such
distribution may nevertheless be subject to US withholding tax. In order to obtain a reduced rate of withholding, a
non-US shareholder will be required to provide an applicable IRS Form W-8 certifying its entitlement to benefits under
an income tax treaty. The withholding tax does not apply to regular dividends paid to a non-US shareholder who
provides a Form W-8ECI, certifying that the dividends are effectively connected with the non-US shareholder’s conduct
of a trade or business within the United States. Instead, the effectively connected dividends will be subject to
regular US income tax as if the non-US shareholder were a US shareholder. A non-US corporation receiving effectively connected
dividends may also be subject to additional “branch
profits tax”
imposed at a rate of 30% (or lower treaty rate).
A non-US shareholder who fails to provide an applicable IRS Form W-8 or other applicable form may be subject to
back-up withholding at the appropriate rate.
In general, US federal
withholding tax will not apply to any gain or income realized by a non-US shareholder in respect of
any distributions of net long-term capital gains over net short-term capital losses, or upon the sale or other disposition of
Shares of a fund, unless the non-U.S.
shareholder is present in the United States for 183 days or more during the taxable
year or the special rules relating to gain attributable to the sale or exchange of US real property interests discussed
below apply to the non-U.S. shareholder's sale of Shares of the Fund.
The
Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”)
makes a non-US shareholder
subject to US tax on disposition of a US real
property interest as if such person were a US shareholder.
Such gain is sometimes referred to as “FIRPTA
gain”. The
Code provides a look-through rule for distributions of “FIRPTA
gain”
by a RIC if all of the following requirements
are met: (i) the RIC is classified as a “qualified
investment entity”
(which includes a RIC if, in general, more than
50% of the RIC’s assets consists of interests in US real property); and (ii) you are a non-US shareholder that
owns more than 5% of a fund’s shares at any time during the one-year period ending on the date of the distribution. If
these conditions are met, fund distributions to you to the extent derived from gain from the disposition of a US real
property interest (“USRPI”),
may also be treated as USRPI gain and therefore subject to US federal income tax, and
requiring that you file a nonresident US income tax return. Also, such gain may be subject to a 30% branch profits tax
in the hands of a non-US shareholder that is a corporation. Even if a non-US shareholder does not own more than 5%
of a fund’s shares, fund distributions that are attributable to gain from the sale or disposition of a USRPI will be taxable
as ordinary dividends subject to withholding at a 30% or lower treaty rate.
Further, if a fund is
a “US
real property holding corporation,”
any gain realized on the sale or exchange of fund shares by
a non-U.S.
shareholder that owns more than 5% of a class of fund shares would generally be taxed in the same manner
as for a US shareholder. A fund will be a “US
real property holding corporation”
if, in general, 50% or more of the fair market value of its assets
consists of US real property interests, including stock of certain US REITs.
Properly reported dividends
received by a nonresident alien or foreign entity are generally exempt from US federal withholding
tax when they (i) are paid in respect of the fund’s “qualified
net interest income”
(generally, the fund’s US source interest
income, reduced by expenses that are allocable to such income), or (ii) are paid with respect to the
fund’s “qualified
short-term capital gains”
(generally, the excess of the fund’s net short-term capital gain over the fund’s
long-term capital loss for such taxable year). However, depending on the circumstances, the fund may report all,
some or none of the fund’s potentially eligible dividends as such qualified net interest income or as qualified short-term capital
gains, and a portion of the fund’s distributions (e.g. interest from non US sources or any foreign currency gains) would
be ineligible for this potential exemption from withholding. In case of shares held through an intermediary, the intermediary
may withhold on a payment even if the fund reports the payment as eligible for the exemption from withholding.
In order to qualify for this exemption from withholding, a non-US shareholder must have provided appropriate withholding
certificates (e.g., an executed W-8BEN, etc.) certifying foreign status.
Shares of a fund held
by a non-US shareholder at death will be considered situated within the United States and generally
will be subject to the US estate tax.
The Foreign Account Tax
Compliance Act (“FATCA”)
generally requires a fund to obtain information sufficient to identify the
status of each of its shareholders. If a shareholder fails to provide this information or otherwise fails to comply with
FATCA, a fund may be required to withhold under FATCA at a rate of 30% with respect to that shareholder on fund
dividends and distributions and redemption proceeds. Pursuant to proposed regulations, the Treasury Department has
indicated its intent to eliminate the requirements under FATCA of withholding on gross proceeds from the sale, exchange,
maturity or other disposition of relevant financial instruments (including redemption of shares of a RIC). The
Treasury Department has indicated that taxpayers may rely on these proposed regulations pending their finalization. A
fund may disclose the information that it receives from (or concerning) its shareholders to the IRS, non-U.S. taxing authorities
or other parties as necessary to comply with FATCA, related intergovernmental agreements or other applicable law
or regulation. Each investor is urged to consult its tax advisor regarding the applicability of FATCA and any other reporting
requirements with respect to the investor’s own situation, including investments through an intermediary.
Standby Commitments.
A fund may purchase municipal securities together with the right to resell the securities to
the seller at an agreed upon price or yield within a specified period prior to the maturity date of the securities. Such a
right to resell is commonly known as a “put”
and is also referred to as a “standby
commitment.”
The fund may pay for a standby commitment either
in cash or in the form of a higher price for the securities which are acquired subject to
the standby commitment, thus increasing the cost of securities and reducing the yield otherwise available. Additionally, the
fund may purchase beneficial interests in municipal securities held by trusts, custodial arrangements or partnerships and/or
combined with third- party puts or other types of features such as interest rate swaps; those investments may require
the fund to pay “tender
fees”
or other fees for the various features provided. The IRS has issued a revenue ruling
to the effect that, under specified circumstances, a RIC will be the owner of tax-exempt municipal obligations
acquired
subject to a put option. The IRS has also issued private letter rulings to certain taxpayers (which do not serve as
precedent for other taxpayers) to the effect that tax-exempt interest received by a RIC with respect to such obligations will
be tax-exempt in the hands of the company and may be distributed to its shareholders as exempt-interest dividends. The
IRS has subsequently announced that it will not ordinarily issue advance ruling letters as to the identity of the true
owner of property in cases involving the sale of securities or participation interests therein if the purchaser has the
right to cause the security, or the participation interest therein, to be purchased by either the seller or a third-party. The
fund, where relevant, intends to take the position that it is the owner of any municipal obligations acquired subject to
a standby commitment or other third-party put and that tax-exempt interest earned with respect to such municipal obligations
will be tax-exempt in its hands. There is no assurance that the IRS will agree with such position in any particular
case. If the fund is not viewed as the owner of such municipal obligations, it will not be permitted to treat the
exempt interest paid on such obligations as belonging to it. This may affect the fund’s eligibility to pay exempt-interest dividends
to its shareholders. Additionally, the federal income tax treatment of certain other aspects of these investments, including
the treatment of tender fees paid by the fund, in relation to various RIC tax provisions is unclear. However, the
Advisor intends to manage the fund’s portfolio in a manner designed to minimize any adverse impact from the tax
rules applicable to these investments.
As described herein,
in certain circumstances the fund may be required to recognize taxable income or gain even though
no corresponding amounts of cash are received concurrently. The fund may therefore be required to obtain cash
to satisfy its distribution requirements by selling securities at times when it might not otherwise be desirable to
do so or by borrowing the necessary cash, thereby incurring interest expense.
Exempt-interest dividends.
Any dividends paid by the Xtrackers Municipal Infrastructure Revenue Bond ETF and the
Xtrackers California Municipal Bond ETF that are reported by a fund as exempt-interest dividends will not be subject to
regular federal income tax. A fund will be qualified to pay exempt-interest dividends to its shareholders if, at the end
of each quarter of a fund’s taxable year, at least 50% of the total value of a fund’s assets consists of obligations of
a state or political subdivision thereof the interest on which is exempt from federal income tax under Code section 103(a).
Distributions that a
fund reports as exempt-interest dividends are treated as interest excludable from U.S.
shareholders’ gross income for federal
income tax purposes but may result in liability for federal AMT purposes and for state and local
tax purposes for both individual and corporate U.S.
shareholders. For example, if a fund invests in “private
activity bonds,”
certain U.S.
shareholders may be subject to AMT on the part of a fund’s distributions derived from interest on
such bonds.
Interest on indebtedness
incurred directly or indirectly to purchase or carry shares of a fund will not be deductible to the
extent it is deemed related to exempt-interest dividends paid by a fund. The portion of interest that is not deductible is
equal to the total interest paid or accrued on the indebtedness, multiplied by the percentage of a fund’s total distributions (not
including capital gain dividends) paid to the shareholder that are exempt-interest dividends. Under rules used by the
IRS to determine when borrowed funds are considered incurred for the purpose of purchasing or carrying particular assets,
the purchase of shares may be considered to have been made with borrowed funds even though such funds are
not directly traceable to the purchase of Shares.
In addition, the Code may require a U.S.
shareholder that receives exempt-interest dividends
to treat as taxable income a portion of certain otherwise non-taxable social security and railroad
retirement benefit payments. A portion of any exempt-interest dividend paid by a fund that represents income derived
from certain revenue or private activity bonds held by a fund may not retain its tax-exempt status in the hands of
a shareholder who is a “substantial
user”
of a facility financed by such bonds, or a “related
person”
thereof. Moreover, some or all of the exempt-interest
dividends distributed by a fund may be a specific preference item, or a component of
an adjustment item, for purposes of the AMT applicable to individuals. The receipt of dividends and distributions from
a fund may affect a foreign corporate shareholder’s federal “branch
profits”
tax liability and the federal “excess
net passive income”
tax liability of a shareholder that is a Subchapter S corporation. In addition, for taxable years beginning
after December 31, 2022, exempt interest dividends may affect the corporate AMT for certain corporate shareholders.
Shareholders should consult their own tax advisors as to whether they are (i) “substantial
users”
with respect to a facility or “related”
to such users within the meaning of the Code or (ii) subject to the AMT, the federal “branch
profits”
tax or the federal “excess
net passive income”
tax. Additionally, any loss realized upon the sale or exchange
of fund shares with a tax holding period of six months or less will be disallowed to the extent of any distributions
treated
as exempt-interest dividends with respect to such shares unless a fund declares exempt-interest dividends on
a daily basis in an amount equal to at least 90% of its net tax-exempt interest and distributes such dividends on a
monthly or more frequent basis.
Shareholders that are
required to file tax returns are required to report tax-exempt interest income, including exempt-interest dividends,
on their federal income tax returns. A fund will inform shareholders of the federal income tax status of its distributions
after the end of each calendar year, including the amounts, if any, that qualify as exempt-interest dividends and
any portions of such amounts that constitute tax preference items under the AMT.
Shareholders who have not held shares of a fund
for a full taxable year may have reported as tax-exempt or as a tax preference item a percentage of
their distributions which is different from the percentage of a fund’s income that was tax-exempt or comprising tax
preference items during the period of their investment in a fund. Shareholders should consult their tax advisors for
more information.
PRC Taxation.
Uncertainties in the Chinese tax rules governing taxation of income and gains from investments in A-Shares
could result in unexpected tax liabilities for a fund. China generally imposes withholding tax at a rate of 10% on
dividends and interest derived by nonresident enterprises (including QFIs) from issuers resident in China. China also
imposes withholding tax at a rate of 10% on capital gains derived by nonresident enterprises from investments in
an issuer resident in China, subject to an exemption or reduction pursuant to domestic law or a double taxation agreement
or arrangement.
Since the respective
inception of Shanghai Connect and Shenzhen Connect, foreign investors (including the funds) investing
in A-Shares listed on the SSE through Shanghai Connect and those listed on the SZSE through Shenzhen Connect
would be temporarily exempt from the PRC corporate income tax and value-added tax on the gains on disposal of
such A-Shares. Dividends would be subject to PRC corporate income tax on a withholding basis at 10%, unless reduced
under a double tax treaty with China upon application to and obtaining approval from the competent tax authority.
Since November 17, 2014,
the corporate income tax for QFIs, with respect to capital gains, has been temporarily lifted.
The withholding tax relating to the realized gains from shares in land-rich companies prior to November 17, 2014 has
been paid by the Xtrackers Harvest ETFs, while realized gains from shares in non-land-rich companies prior to November
17, 2014 were granted by treaty relief pursuant to the PRC-US Double Taxation Agreement. During 2015, revenue
authorities in the PRC made arrangements for the collection of capital gains taxes for investments realized between
November 17, 2009 and November 16, 2014. A fund could be subject to tax liability for any tax payments for
which reserves have not been made or that were not previously withheld. The impact of any such tax liability on a
fund’s return could be substantial. A fund may also be liable to the Advisor or Subadvisor for any tax that is imposed on
the Advisor or Subadvisor by the PRC with respect to the fund’s investments. If a fund’s direct investments in A-Shares
through the Subadvisor’s QFI license become subject to
repatriation restrictions or delays, the fund may be
unable to satisfy distribution requirements applicable to RICs under the Code,
and be subject to tax at the fund level. In
the event such restrictions are imposed, a fund may borrow funds to the extent necessary to distribute to shareholders
income sufficient to maintain the fund’s status as a RIC.
The current PRC tax laws
and regulations and interpretations thereof may be revised or amended in the future, potentially retroactively,
including with respect to the possible liability of a fund for the taxation of income and gains from investments in
A-Shares through Stock Connect or obligations of a QFI. The withholding taxes on dividends, interest and capital gains
may in principle be subject to a reduced rate under an applicable tax treaty, but the application of such treaties in
the case of a QFI acting for a foreign investor such as the funds is also uncertain. Finally, it is also unclear whether an
RQFII would also be eligible for BT exemption, which has been granted to QFIIs, with respect to gains derived prior
to May 1, 2016. In practice, the BT has not been collected. However, the imposition of such taxes on a fund could
have a material adverse effect on a fund’s returns. Under the value-added tax regime, BT exemption granted to
QFIIs with respect to gains realized from the trading of PRC marketable securities has been grandfathered (i.e. QFIIs
continue to enjoy exemption on gains under the value-added tax regime). Since May 1, 2016, RQFIIs are exempt from
PRC value added tax, which replaced the PRC Business Tax with respect to gains realized from the disposal of securities,
including A-Shares.
The
PRC rules for taxation of QFIs are evolving and certain tax regulations to be issued by the PRC State Administration of
Taxation and/or PRC Ministry of Finance to clarify the subject matter may apply retrospectively, even if such rules are
adverse to a fund and their shareholders.
If the PRC begins applying
tax rules regarding the taxation of income from A-Shares investments to QFIs and/or begins collecting
capital gains taxes on such investments (whether made through Stock Connect or a QFI), a fund could be subject
to withholding tax liability in excess of the amount reserved (if any). The impact of any such tax liability on a fund’s
return could be substantial. A fund will be liable to the Advisor and/or Subadvisor for any Chinese tax that is imposed
on the Advisor and/or Subadvisor with respect to the fund’s investments.
The sale or other transfer
by the Advisor and/or Subadvisor of A-Shares or B-Shares will be subject to PRC Stamp Duty
at a rate of 0.05% on the transacted value. The Advisor and/or Subadvisor will not be subject to PRC Stamp Duty
when it acquires A-Shares and B-Shares.
It is also unclear how
China’s business tax may apply to activities of a QFI and how such application may be affected by
tax treaty provisions.
The foregoing discussion is a summary
of certain material US federal income tax considerations only and is not
intended as a substitute for careful tax planning. Purchasers of Shares should consult their own tax advisors as
to the tax consequences of investing in such Shares, including under state, local and non-US tax laws. Finally,
the foregoing discussion is based on applicable provisions of the Code, regulations, judicial authority and
administrative interpretations in effect on the date of this SAI. Changes in applicable authority could materially affect
the conclusions discussed above, and such changes often occur.
Part II:
Appendix II-G—Proxy
Voting Policy and Guidelines
DWS investment advisors
(“DWS”)1
registered with the SEC
have adopted and implemented the following Proxy Voting
Policy and Guidelines – DWS Americas (“Policy
and Guidelines”).
The Policy and Guidelines are reasonably designed
to ensure that proxies are voted in the best economic interest of DWS’s advisory clients2
with voting rights (i.e.,
equity securities) and in accordance with its fiduciary duties and local regulation. The Policy and Guidelines apply to
DWS when on behalf of client accounts, it has taken on the responsibility to vote, or provide recommendations relating
to proxies.
The guidelines attached
as Attachment A represent a set of recommendations (the “Guidelines”)
that were determined by the DWS Proxy Voting
Sub-Committee (“the
PVSC”).
These Guidelines were developed and approved by the PVSC to
provide DWS with a comprehensive list of recommendations that represent how DWS will generally vote proxies for
its clients. The Guidelines are closely aligned with, although not identical to, those of its proxy voting agent, Institutional Shareholder
Services (“ISS”).
As a fiduciary, DWS owes its clients a duty of loyalty and duty of care. As a result, DWS has
a fiduciary obligation to vote proxies in the best economic interest of clients taking into consideration reasonable costs
without considering any relationship that it or its parent or affiliates may have with an issuer. In addition, the organizational
structures and documents of the various DWS legal entities allow, where necessary or appropriate, the
execution by individual DWS subsidiaries of the proxy voting rights independently of any parent or affiliated company.
Capitalised terms have the meaning ascribed
to them in the Glossary.
DWS’s
Proxy Voting Responsibilities
Proxy votes are the property
of DWS’s advisory clients.As such, DWS’s authority
and responsibility to vote such proxies depend
upon its contractual relationships with its clients or other delegated authority. DWS has delegated responsibility for
effecting its advisory clients’ proxy votes to ISS, an
independent third-party proxy voting specialist. ISS analyses and
votes DWS’s advisory clients’ proxies in accordance with the Guidelines or DWS’s specific instructions. Where a
client has given specific instructions as to how a proxy should be voted, DWS will notify ISS to carry out those instructions.
Where no specific instruction exists, DWS will follow the procedures in voting the proxies set forth in this
document. Certain Taft-Hartley clients may direct DWS to have ISS vote their proxies in accordance with Taft-Hartley Voting
Guidelines.
1
These include DWS Investment Management Americas, Inc. (“DIMA”),
DBX Advisors LLC (“DBX”)
and RREEF Americas L.L.C. (“RREEF”)
as well as DWS registered investment advisors based outside of the U.S. who provide services to U.S.
accounts based on delegation from DIMA, DBX or RREEF.
2
For purposes of this document, “clients”
refers to persons or entities: (i) for which DWS serves as investment advisor or
sub-advisor; (ii) for which DWS votes proxies; and (iii) that have an economic or beneficial ownership interest in the
portfolio securities of issuers soliciting such proxies.
Clients may in certain
instances contract with their custodial agent and notify DWS that they wish to engage in securities lending
transactions. In such cases, it is the responsibility of the custodian to deduct the number of shares that are on
loan so that they do not get voted twice. DWS generally does not recall shares during a particular proxy vote but
may recall shares under the limited circumstances
described below. DWS
maintains a list of U.S.
and Canadian
securities for certain clients that it does
not intend to lend through a securities lending program during a given proxy voting season
based on such factors as the overall ownership level to impact a vote, expected proxy votes on various matters or
potential revenue associated with the security being out on loan over the period. DWS
will also recall shares of securities on loan
during a particular proxy vote for all products that have adopted an environmental, social and governance
(“ESG”)
dedicated investment strategy. The handling of all recall requests is beyond DWS’s control and may not be satisfied
in time for DWS to vote the shares in question. When shares remain
on loan through a securities lending program, the portfolio management
teams will not be able to participate in the votes.
Proxy Voting Activities are Conducted in the Best Economic
Interest of Clients
DWS has adopted the following
Policies and Guidelines to ensure that proxies are voted in accordance with the best economic
interest of its clients, as determined by DWS in good faith after appropriate review. DWS believes that this responsibility
includes consideration of the economic effect on companies of certain relevant ESG
factors.
Portfolio managers or
research analysts in the DWS Investment Platform with appropriate standing (“Portfolio
Management”)3
review recommendations for the U.S. accounts
they manage from ISS on how to vote proxies based on its application of
the Guidelines. Portfolio Management and members of the PVSC may request that the PVSC consider voting a particular
proxy contrary to the Guidelines or recommendations from ISS based on its application of the Guidelines, if
they believe that it may not be in the best economic interest
of clients to vote the proxy in accordance with the Guidelines
or ISS recommendations.
The Proxy Voting Sub-Committee
The PVSC is an internal
working group established by the applicable DWS’s Investment Risk Oversight Committee pursuant
to written Terms of Reference. The PVSC is responsible for overseeing DWS’s proxy voting activities, including:
•
Adopting,
monitoring and updating the Guidelines that provide how DWS will generally vote proxies pertaining to
a comprehensive list of common proxy voting matters;
•
Making
decisions on how to vote proxies where: (i) the issues are not covered by specific client instruction or the
Guidelines; or (ii) where an exception to the Guidelines may be in the best economic interest of DWS’s clients;
•
Review
recommendations raised by Portfolio Management, the PVSC and others to vote a particular proxy contrary to
the Guidelines or recommendations from ISS based on its application of the Guidelines; and
•
Monitoring
DWS’s Proxy Vendor Oversight Group (“Proxy
Vendor Oversight”)
proxy voting activities (see below).
DWS’s Proxy Vendor
Oversight, a function of DWS’s Operations Group, is responsible for coordinating with ISS to administer
DWS’s proxy voting process and for voting proxies in accordance with any specific client instructions or, if
there are none, the Guidelines, and overseeing ISS’s
proxy responsibilities in this regard.
3
Portfolio Management also includes portfolio managers from DWS
registered investment advisors
based outside the U.S. who provided services to the U.S. accounts
based on a delegation from DIMA, DBX or RREEF.
Availability of Proxy Voting Policies and Proxy Voting
Record
Copies of this Policy
and Guidelines, as it may be updated from time to time are made available to clients as required by
law and otherwise at DWS’s discretion. Clients may also obtain information on how their proxies were voted by DWS
as required by law and otherwise at DWS’s discretion. Note, however, that DWS must not selectively disclose its
investment company clients’ proxy voting records. Proxy Vendor Oversight will make proxy voting reports available to
advisory clients upon request. The investment companies’ proxy voting records will be disclosed to shareholders by
means of publicly available annual filings of each company’s proxy voting record for the 12-month periods ending June
30, if so required by relevant law.
Procedures
The key aspects of DWS’s proxy voting
process are delineated below.
The DWS Proxy Voting Guidelines
The Guidelines set forth
the PVSC’s standard voting positions on a comprehensive list of common proxy voting matters. The
PVSC has developed and continues to update the Guidelines based on consideration of current corporate governance principles,
industry standards, client feedback, and the impact of the matter on issuers and the value of the investments.
The PVSC will review
the Guidelines as necessary to support the best economic interest
of DWS’s clients and, in any event, at
least annually. The PVSC will make changes to the Guidelines, whether as a result of the annual review or
otherwise, taking solely into account the best economic interest
of clients. Before changing the Guidelines, the PVSC
will thoroughly review and evaluate the proposed change and the reasons therefore, and the PVSC Chairperson(s) will
ask PVSC members whether anyone outside or within the DWS organization (including Deutsche Bank and its affiliates)
or any entity that identifies itself as an DWS advisory client has requested or attempted to influence the proposed
change and whether any member has a conflict of interest with respect to the proposed change. If any such
matter is reported to the PVSC Chairperson(s), the Chairperson(s) will promptly notify the Conflicts of Interest Management
Sub-Committee and will defer the approval, if possible. Lastly, the PVSC will fully document its rationale for
approving any change to the Guidelines.
The Guidelines may reflect
a voting position that differs from the actual practices of the public company(ies) within the
Deutsche Bank organization or of the investment companies for which DWS or an affiliate serves as investment advisor
or sponsor. Investment companies, particularly closed-end investment companies, are different from traditional operating
companies. These differences may call for differences in the actual practices of the investment company and
the voting positions of the investment company on the same or similar matters. Further, the manner in which DWS
votes proxies on behalf investment company proxies may differ from the voting recommendations made by a DWS-advised
or sponsored investment company soliciting proxies from its shareholders.
Proxy Voting Recommendations and Decisions Made on a
Case-by-Case Basis
Proxy Vendor Oversight
will refer to Portfolio Management and members of the PVSC for review and recommendations on
how to vote proxies prepared by ISS based upon the Guidelines. The proxies shall be voted on a case-by-case basis
based on ISS’s application of the Guidelines. Portfolio Management and members of PVSC may request that the
PVSC consider voting a particular proxy contrary to the Guidelines
if they believe that it may not be in the best economic interest
of clients to vote the proxy in accordance with the Guidelines.
Specific Proxy Voting Decisions Made by the PVSC
Proxy Vendor Oversight
will refer to the PVSC only proxy proposals: (i) that are not covered by specific client instructions or
the Guidelines; or (ii) that, in accordance with this Policy and Guidelines, have been appealed. The Proxy Vendor Oversight
team will present to Portfolio Management and members of the PVSC all proposals voted on a case-by-case basis
in accordance with the Guidelines which will include recommendations from ISS based on ISS’s application of the
Guidelines and, in certain instances as outlined in the Guidelines
or its Sustainability Proxy Voting Guidelines
(“Sustainability”)
Policy on social and sustainability issues. In addition,
DWS may in certain circumstance consider
the Coalition for Environmentally Responsible
Economies (“CERES”)
guidance
on environmental and social matters contained
in the CERES Roadmap 2030. Portfolio Management may appeal a recommendation when they believe that
it may not be in the best economic interest of the client to vote in accordance with the recommendation, and such
appeal will be referred by the Proxy Vendor Oversight team to the PVSC for consideration.
The DWS Corporate Governance
Center (“CGC”)
provides support to the PVSC but
does not make any voting recommendations
or determinations. The CGC will research recommendations from
ISS based on the Sustainability
Policy or CERES Roadmap 2030 to assess whether
such recommendations are in the best economic interest
of clients and will inform the PVSC Chairperson(s)
of any such ISS recommendations that the CGC believes may not be in the best
economic interest
of clients. The CGC will periodically provide a report to the PVSC that includes details of its
analysis
with respect to the ISS recommendations based on the Sustainability
Policy or CERES Roadmap 2030 and
how DWS voted on each proxy. The CGC may also,
at the PVSC’s request, provide research and analysis related to other
proxy matters.
Additionally, if Proxy
Vendor Oversight, the PVSC Chairperson(s), any member of the PVSC or Portfolio Management believes
that voting a particular proxy in accordance with the Guidelines may not be in the best economic interest
of clients, that individual may bring the matter
to the attention of the PVSC Chairperson(s) and/or Proxy Vendor Oversight.
If Proxy Vendor Oversight
refers a proxy proposal to the PVSC (or Action Group) or the PVSC (or
Action Group) determines that
voting a particular proxy in accordance with the Guidelines is not in the best economic interest
of clients, the PVSC (or Action Group) will
evaluate and instruct the Proxy Vendor Oversight team to vote the proxy in accordance with
its fiduciary duty and subject to the procedures below regarding conflicts. Proxy Vendor Oversight shall periodically report
to the PVSC the details of any instructions received from any Action Group.
The PVSC endeavours to determine how to
vote particular proxies prior to the voting deadline.
Proxies that Cannot Be Voted or Instances When DWS Abstains
from Voting
In some cases, the PVSC
may determine that it is in the best economic interest
of its clients not to vote certain proxies,
or that it may not be feasible to vote certain proxies. If the conditions below are met with regard to a proxy proposal,
DWS will not vote on the issue:
•
Neither
the Guidelines nor specific client instructions cover an issue;
•
ISS
does not make a recommendation on the issue; or
•
There
is not sufficient time prior to the voting deadline to make a determination as to what voting decision would be
in the client’s best interest.
In addition, it is DWS’s
policy not to vote proxies of issuers subject to laws of those jurisdictions that impose restrictions upon
selling shares after proxies are voted, in order to preserve liquidity. In other cases, it may not be possible to vote
certain proxies, despite good faith efforts to do so. For example, some jurisdictions do not provide adequate notice
to shareholders so that proxies may be voted on a timely basis. Voting rights on securities that have been loaned
to third-parties transfer to those third-parties, with loan termination often being the only way to attempt to vote
proxies on the loaned securities. Lastly, the PVSC may determine that the costs to the client(s) associated with voting
a particular proxy or group of proxies outweighs the economic benefits expected from voting the proxy or group of
proxies.
There may be instances
when DWS holds a position in a private company requiring a voting decision. ISS
does not provide research and is unable to provide
a voting recommendation based on the Guidelines with respect
to private companies. As a
result, DWS will refer all private company proxies to portfolio management for a review based on information
that is available to them. Portfolio management will submit any recommendations to vote
“For”
or “Against”
proposals for private companies to the
PVSC for consideration. DWS will
vote to “Abstain”
for proposals for private companies
if portfolio management does
not have a recommendation to vote “For”
or “Against”
based on the available information.
Proxy Vendor Oversight
will coordinate with the PVSC Chairperson(s) regarding any specific proxies and any categories of
proxies that will not or cannot be voted. The reasons for not voting any proxy shall be documented.
Conflict of Interest Procedures
Procedures to Address Conflicts of Interest and Improper
Influence
In
the limited circumstances where the PVSC votes proxies,4
the PVSC will vote those proxies in accordance with what it,
in good faith, determines to be the best economic interest of DWS’s clients.5
As a matter of Compliance policy, the
PVSC and Proxy Vendor Oversight are structured to be independent from other parts
of Deutsche Bank. Members of the PVSC and the employee responsible for Proxy Vendor Oversight are employees of
DWS. As such, they may not be subject to the supervision or control of any employees of Deutsche Bank Corporate and
Investment Banking division (“CIB”).
Their compensation cannot be based upon their contribution to any business activity
outside of DWS without prior approval of Legal and Compliance. They can have no contact with employees of
Deutsche Bank outside of DWS regarding specific clients, business matters, or initiatives without the prior approval of
Legal and Compliance. They furthermore may not discuss proxy votes with any person outside of DWS (and within DWS
only on a need-to-know basis).
Conflict Review Procedures
The “Conflicts
of Interest Management Sub-Committee”
within DWS monitors for potential material conflicts of interest in
connection with proxy proposals that are to be evaluated by the PVSC. The Conflicts of Interest Management Sub-Committee members
include DWS Compliance, the chief compliance officers of the advisors and the DWS Funds. Promptly upon a
determination that a proxy vote shall be presented to the PVSC, the PVSC Chairperson(s) shall notify the Conflicts of
Interest Management Sub-Committee. The Conflicts of Interest Management Sub-Committee shall promptly collect and
review any information deemed reasonably appropriate to evaluate, in its reasonable judgment, if DWS or any person
participating in the proxy voting process has, or has the appearance of, a material conflict of interest. For the purposes
of this policy, a conflict of interest shall be considered “material”
to the extent that a reasonable person could
expect the conflict to influence, or appear to influence, the PVSC’s decision on the particular vote at issue. PVSC should
provide the Conflicts of Interest Management Sub-Committee a reasonable amount of time (no less than 24 hours
for the Americas/Europe and 48 hours for APAC) to perform all necessary and appropriate reviews. To the extent that
a conflicts review cannot be sufficiently completed by the Conflicts of Interest Management Sub-Committee the proxies
will be voted in accordance with the standard Guidelines.
4
As mentioned above, the PVSC votes proxies where: (i) neither
a specific client instruction nor a Guideline directs how
the proxy should be voted; or (ii) where voting in accordance with the Guidelines may not be in the best economic interest
of clients. Further, the PVSC will review recommendations for proxies if Portfolio Management or a member of
the PVSC recommends voting contrary to the ISS recommendation if they believe that it may not be in the best economic
interest of the client to vote in accordance with the Guidelines or ISS recommendation based on its application of
the Guidelines.
5
Proxy Vendor Oversight, who serves as the non-voting secretary
of the PVSC, may receive routine calls from proxy solicitors
and other parties interested in a particular proxy vote. Any contact that attempts to exert improper pressure or
influence shall be reported to the Conflicts of Interest Management Sub-Committee.
The information considered
by the Conflicts of Interest Management Sub-Committee may include without limitation information
regarding: (i) DWS client relationships; (ii) any relevant personal conflict known by the Conflicts of Interest Management
Sub-Committee or brought to the attention of that sub-committee; and (iii) any communications with members
of the PVSC (or anyone participating or providing information to the PVSC) and any person outside or within the
DWS organization (including Deutsche Bank and its affiliates) or any entity that identifies itself as an DWS advisory client
regarding the vote at issue. In the context of any determination, the Conflicts of Interest Management Sub-Committee may
consult with and shall be entitled to rely upon all applicable outside experts, including legal counsel.
Upon
completion of the investigation, the Conflicts of Interest Management Sub-Committee will document its findings and
conclusions. If the Conflicts of Interest Management Sub-Committee determines that: (i) DWS has a material conflict
of interest that would prevent it from deciding how to vote the proxies concerned without further client consent; or
(ii) certain individuals should be recused from participating in the proxy vote at issue, the Conflicts of Interest Management Sub-Committee
will so inform the PVSC Chairperson(s).
If notified that DWS
has a material conflict of interest as described above, the PVSC chairperson(s) will obtain instructions as
to how the proxies should be voted either from: (i) if time permits, the affected clients; or (ii) in accordance with the
standard Guidelines. If notified that certain individuals should be recused from the proxy vote at issue, the PVSC Chairperson(s)
shall do so in accordance with the procedures set forth below.
Note: Any DWS employee
who becomes aware of a potential, material conflict of interest in respect of any proxy vote
to be made on behalf of clients shall notify Compliance or the Conflicts of Interest Management Sub-Committee. Compliance
shall call a meeting of the Conflicts of Interest Management Sub-Committee to evaluate such conflict and
determine a recommended course of action.
Procedures to be followed by the PVSC
At the beginning of any discussion regarding
how to vote any proxy, the PVSC Chairperson(s) (or his or her delegate) will
inquire as to whether any PVSC member (whether voting or ex officio) or any person participating in the proxy voting
process has a personal conflict of interest or has knowledge of an actual or apparent conflict that has not been reported
to the Conflicts of Interest Management Sub-Committee.
The PVSC Chairperson(s)
also will inquire of these same parties whether they have actual knowledge regarding whether any
Director, officer, or employee outside or within the DWS organization (including Deutsche Bank and its affiliates) or
any entity that identifies itself as an DWS advisory client, has: (i) requested that DWS, Proxy Vendor Oversight (or any
member thereof), or a PVSC member vote a particular proxy in a certain manner; (ii) attempted to influence DWS, Proxy
Vendor Oversight (or any member thereof), a PVSC member or any other person in connection with proxy voting activities;
or (iii) otherwise communicated with a PVSC member, or any other person participating or providing information to
the PVSC regarding the particular proxy vote at issue and which incident has not yet been reported to the Conflicts of
Interest Management Sub-Committee.
If any such incidents
are reported to the PVSC Chairperson(s), the Chairperson(s) will promptly notify the Conflicts of
Interest Management Sub-Committee and, if possible, will delay the vote until the Conflicts of Interest Management Sub-Committee
can complete the conflicts review.
If a delay is not possible, the Conflicts of Interest Management Sub-Committee
will instruct the PVSC (i) whether anyone should be recused from the proxy voting process or (ii) whether
DWS should vote the proxy in accordance with the standard guidelines, seek instructions as to how to vote the
proxy at issue from ISS or, if time permits, the affected clients. These inquiries and discussions will be properly reflected
in the PVSC’s minutes.
Duty to Report.
Any DWS employee, including any PVSC member (whether voting or ex officio), that is aware of any actual
or apparent conflict of interest relevant to, or any attempt by any person outside or within the DWS organization (including
Deutsche Bank and its affiliates) or any entity that identifies itself as an DWS advisory client to influence how
DWS votes its proxies has a duty to disclose the existence of the situation to the PVSC Chairperson(s) (or his or
her designee) and the details of the matter to the Conflicts of Interest Management Sub-Committee. In the case of
any person participating in the deliberations on a specific vote, such disclosure should be made before engaging in
any activities or participating in any discussion pertaining to that vote.
The PVSC will recuse from participating
in a specific proxy vote any PVSC members (whether voting or ex officio) and/or
any other person who: (i) are personally involved in a material conflict of interest; or (ii) who, as determined by
the Conflicts of Interest Management Sub-Committee, have actual knowledge of a circumstance or fact that could affect
their independent judgment, in respect of such vote. The PVSC will also exclude from consideration the views
of
any person (whether requested or volunteered) if the PVSC or any member thereof knows, or if the Conflicts of Interest
Management Sub-Committee has determined, that such other person has a material conflict of interest with respect
to the particular proxy or has attempted to influence the vote in any manner prohibited by these policies.
If, after excluding all
relevant PVSC voting members pursuant to the paragraph above, there are three or more PVSC voting
members remaining, those remaining PVSC members will determine how to vote the proxy in accordance with
these Policies and Guidelines. If there are fewer than three PVSC voting members remaining, the PVSC Chairperson(s) will
vote the proxy in accordance with the standard Guidelines or will obtain instructions as to how to have the proxy voted
from, if time permits, the affected clients and otherwise from ISS.
Affiliated Investment Companies, Rule 12d1-4 and Affiliated
Public Companies
For investment companies for which DWS
or an affiliate serves as investment advisor
or principal underwriter, such proxies are voted
in the same proportion as the vote of all other shareholders (i.e., “mirror”
or “echo”
voting). In addition, if a registered investment
company (including an exchange traded fund) advised by DWS or
an affiliate together with DWS advisory clients,
in aggregate, (i) hold more than 25% of the outstanding voting securities of an investment company
that is not a registered closed-end fund or business development company, or (ii) hold more than 10% of the
outstanding voting securities of an investment company that is a registered closed-end fund or business development company,
then DWS will vote its holdings in such registered investment company’s securities in the same proportion as
the vote of all other holders of such securities (i.e., “mirror”
or “echo”
voting) as required by Rule 12d1-4 of the 1940 Act.
Master Fund proxies solicited from feeder Funds are voted in accordance with applicable provisions of Section 12
of 1940 Act.
Affiliated Public Companies
For proxies solicited by non-investment
company issuers of or within the DWS or Deutsche Bank organization (e.g., shares
of DWS or Deutsche Bank), these proxies will be voted in the same proportion as the vote of other shareholders (i.e.,
“mirror”
or “echo”
voting). In markets where mirror voting is not permitted, DWS will “Abstain”
from voting such shares.
Note: With respect to
affiliated registered investment companies that invest in the DWS Central Cash Management Government
Fund (registered under the 1940
Act), the affiliated registered investment companies are not required to
engage in echo voting with respect to proxies of the DWS Central Cash Management Government Fund and the investment
advisor
will use these Guidelines and may determine, with respect to proxies of the DWS Central Cash Management
Government Fund, to vote contrary to the positions in the Guidelines, consistent with the Fund’s best interest.
Other Procedures that Limit Conflicts of Interest
DWS and other entities
in the Deutsche Bank organization have adopted a number of policies, procedures, and internal controls
that are designed to avoid various conflicts of interest, including those that may arise in connection with proxy
voting, including but not limited to:
•
Code
of Conduct– DB Group;
•
Conflicts
of Interest Policy – DWS Group;
•
Code
of Ethics – DWS Group;
The PVSC expects that
these policies, procedures, and internal controls will greatly reduce the chance that the PVSC (or
its members) would be involved in, aware of, or influenced by an actual or apparent conflict of interest.
RECORDKEEPING
At a minimum, the following
records must be properly maintained and readily accessible in order to evidence compliance with
this Policy.
•
DWS
will maintain a record of each proxy vote cast by DWS that includes among other things, company name, meeting
date, proposals presented, vote cast, and shares voted.
•
Proxy
Vendor Oversight maintains records for each of the proxy ballots it votes. Specifically, the records include, but
are not limited to:
−
The
proxy statement (and any additional solicitation materials) and relevant portions of annual statements;
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Any
additional information considered in the voting process that may be obtained from an issuing company, its
agents, or proxy research firms;
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Analyst
worksheets created for stock option plan and share increase analyses; and
−
Proxy
Edge print-screen of actual vote election.
•
DWS
will: (i) retain this Policy and the Guidelines; (ii) maintain records of requests from Portfolio Management and
members of the PVSC to appeal a recommendation on how to vote a proxy; (iii) maintain minutes of the meeting
of the PVSC; (iv) maintain records of client requests for proxy voting information; and (v) retain any documents prepared
by Proxy Vendor Oversight,
the CGC or
the PVSC that were material to making a voting decision or that
memorialized the basis for a proxy voting decision.
•
The
PVSC also will create and maintain appropriate records documenting its compliance with this Policy, including records
of its deliberations and decisions regarding conflicts of interest and their resolution.
•
With
respect to DWS’s investment company clients, ISS will create and maintain records of each company’s proxy
voting record for the 12-month periods ending June 30. DWS will compile the following information for each
matter relating to a portfolio security considered at any shareholder meeting held during the period covered by
the report (and with respect to which the company was entitled to vote):
•
The
name of the issuer of the portfolio security;
•
The
exchange ticker symbol of the portfolio security (if symbol is available through reasonably practicable means);
•
The
Council on Uniform Securities Identification Procedures (“CUSIP”)
number for the portfolio security (if the number is available
through reasonably practicable means);
•
The
shareholder meeting date;
•
A
brief identification of the matter voted on;
•
Whether
the matter was proposed by the issuer or by a security holder;
•
Whether
the company cast its vote on the matter;
•
How
the company cast its vote (e.g., for or against proposal, or abstain; for or withhold regarding election of Directors);
and
•
Whether
the company cast its vote for or against Management.
Note:
This list is intended to provide guidance only in terms of the records that must be maintained in accordance with
this policy. In addition, please note that records must be maintained in accordance with the Records Management Policy
-
Deutsche Bank Group and applicable policies and procedures thereunder.
With respect to electronically
stored records, “properly
maintained”
is defined as complete, authentic (unalterable), usable
and backed-up. At a minimum, records should be retained for a period of not less than six years (or longer, if necessary
to comply with applicable regulatory requirements), the first three years in an appropriate DWS office.
OVERSIGHT RESPONSIBILITIES
Proxy Vendor Oversight
will review a reasonable sampling of votes based on its procedures on a regular basis to ensure
that ISS has cast the votes in a manner consistent with the Guidelines. Proxy Vendor Oversight will provide the
PVSC with a quarterly report of its review and identify any issues encountered during the period. Proxy Vendor Oversight
will also perform a post season review once a year on certain proposals to assess whether ISS voted consistent with
the Guidelines.
In addition, the PVSC
will, in cooperation with Proxy Vendor Oversight and DWS Compliance, consider, on at least an annual
basis, whether ISS has the capacity and competence to adequately analyze the matters for which it is responsible. This
includes whether ISS has effective polices, and methodologies and a review of ISS’s policies and procedures with
respect to conflicts.
The PVSC also monitors
the proxy voting process by reviewing summary proxy information presented by ISS to determine, among
other things, whether any changes should be made to the Guidelines. This review will take place at least quarterly and
is documented in the PVSC’s meeting minutes.
The PVSC, in cooperation
with Proxy Vendor Oversight and DWS Compliance, will review and document, no less frequently
than annually, the adequacy of the Guidelines, including whether the Guidelines continue to be reasonably designed
to ensure that DWS votes in the best interest of its clients.
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A
sub-group of the PVSC (as defined below) that will
include
the Chairperson(s) and at least one other
member
of the PVSC. |
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Institutional
Shareholder Services, Inc. |
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Proxy
Voting Sub-Committee |
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Securities
and Exchange Commission |
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Investment
Company Act of 1940, as amended |
LIST OF ANNEXES AND ATTACHMENTS
Attachment A – DWS Proxy Voting Guidelines
– DWS Americas
Proxy Voting Guidelines – DWS Americas
TABLE OF CONTENTS
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Problematic
Takeover Defenses, Capital
Structure
and Governance Structure |
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Problematic
Audit-Related Practices |
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Problematic
Compensation Practices |
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Problematic
Pledging of Company Stock |
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Voting
on Director Nominees in Contested
Elections
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Proxy
Contests/Proxy Access |
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Other
Board Related Proposals |
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Adopt
Anti-Hedging/Pledging/Speculative
Investments
Policy |
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Classification/Declassification
of the Board |
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Director
and Officer Indemnification, Liability
Protection
and Exculpation |
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Establish/Amend
Nominee Qualifications |
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Establish
Other Board Committee Proposals |
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Filling
Vacancies/Removal of Directors |
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Majority
of Independent Directors/
Establishment
of Independent Committees |
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Majority
Vote Standard for the Election of
Directors
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Require
More Nominees than Open Seats |
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Shareholder
Engagement Policy (Shareholder
Advisory
Committee) |
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Auditor
Indemnification and Limitation of
Liability
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Shareholder
Proposals Limiting Non-Audit
Services
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Shareholder
Proposals on Audit Firm
Rotation
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SHAREHOLDER
RIGHTS & DEFENSES |
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Advance
Notice Requirements for
Shareholder Proposals/Nominations
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Amend
Bylaws without Shareholder
Consent
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Control
Share Acquisition Provisions |
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Control
Share Cash-Out Provisions |
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Shareholder
Litigation Rights |
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Federal
Forum Selection Provisions |
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Exclusive
Forum Provisions for State Law
Matters
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Net
Operating Loss (NOL) Protective
Amendments
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Poison
Pills (Shareholder Rights Plans) |
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Shareholder
Proposals to Put Pill to a Vote
and/or
Adopt a Pill Policy |
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Management
Proposals to Ratify a Poison Pill |
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Management
Proposals to Ratify a Pill to
Preserve
Net Operating Losses (NOLs) |
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Proxy
Voting Disclosure, Confidentiality, and
Tabulation
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Ratification
Proposals: Management
Proposals
to Ratify Existing Charter or Bylaw
Provisions
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Reimbursing
Proxy Solicitation Expenses |
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Reincorporation
Proposals |
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Shareholder
Ability to Act by Written Consent |
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Shareholder
Ability to Call Special Meetings |
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State
Antitakeover Statutes |
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Supermajority
Vote Requirements |
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Virtual
Shareholder Meetings |
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Adjustments
to Par Value of Common Stock |
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Common
Stock Authorization |
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Issue
Stock for Use with Rights Plan |
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Preferred
Stock Authorization |
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Share
Issuance Mandates at U.S. Domestic
Issuers
Incorporated Outside the U.S. |
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Share
Repurchase Programs |
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Share
Repurchase Programs Shareholder
Proposals
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Stock
Distributions: Splits and Dividends |
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Corporate
Reorganization/Debt
Restructuring/Prepackaged
Bankruptcy Plans/
Reverse
Leveraged Buyouts/Wrap Plans |
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Formation
of Holding Company |
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Going
Private and Going Dark Transactions
(LBOs
and Minority Squeeze-outs) |
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Private
Placements/Warrants/Convertible
Debentures
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Reorganization/Restructuring
Plan
(Bankruptcy)
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Special
Purpose Acquisition Corporations
(SPACs)
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Special
Purpose Acquisition Corporations
(SPACs)
- Proposals for Extensions |
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Value
Maximization Shareholder Proposals |
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Advisory
Votes on Executive
Compensation—Management
Proposals
(Say-on-Pay)
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Frequency
of Advisory Vote on Executive
Compensation
(“Say
When on Pay”)
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Voting
on Golden Parachutes in an
Acquisition,
Merger, Consolidation, or
Proposed
Sale |
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Equity-Based
and Other Incentive Plans |
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Further
Information on certain EPSC Factors: |
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Amending
Cash and Equity Plans (including
Approval
for Tax Deductibility (162(m)) |
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Specific
Treatment of Certain Award Types in
Equity
Plan Evaluations |
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Operating
Partnership (OP) Units in Equity
Plan
Analysis of Real Estate Investment
Trusts
(REITs) |
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401(k)
Employee Benefit Plans |
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Employee
Stock Ownership Plans (ESOPs) |
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Employee
Stock Purchase Plans—Qualified
Plans
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Employee
Stock Purchase Plans—Non-
Qualified
Plans |
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Option
Exchange Programs/Repricing
Options
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Stock
Plans in Lieu of Cash |
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Transfer
Stock Option (TSO) Programs |
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Shareholder
Ratification of Director Pay
Programs
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Equity
Plans for Non-Employee Directors |
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Non-Employee
Director Retirement Plans |
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Shareholder
Proposals on Compensation |
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Bonus
Banking/Bonus Banking “Plus”
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Compensation
Consultants-Disclosure of
Board
or Company’s Utilization |
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Disclosure/Setting
Levels or Types of
Compensation
for Executives and Directors |
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Golden
Coffins/Executive Death Benefits |
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Hold
Equity Past Retirement or for a
Significant
Period of Time |
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Pay
for Performance/Performance-Based
Awards
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Pay
for Superior Performance |
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Pre-Arranged
Trading Plans (10b5-1 Plans) |
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Prohibit
Outside CEOs from Serving on
Compensation
Committees |
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Recoupment
of Incentive or Stock
Compensation
in Specified Circumstances |
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Severance
and Golden Parachute
Agreements
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Share
Buyback Impact on Incentive Program
Metrics
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Supplemental
Executive Retirement Plans
(SERPs)
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Termination
of Employment Prior to
Severance
Payment/Eliminating Accelerated
Vesting
of Unvested Equity |
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Amend
Quorum Requirements |
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Change
Date, Time, or Location of Annual
Meeting
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SOCIAL
AND ENVIRONMENTAL ISSUES |
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Endorsement
of Principles |
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Genetically
Modified Ingredients |
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Reports
on Potentially Controversial
Business/Financial
Practices |
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Pharmaceutical
Pricing, Access to
Medicines,
and Prescription Drug
Reimportation
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Product
Safety and Toxic/Hazardous Materials |
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Tobacco-Related
Proposals |
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Say
on Climate (SoC) Management
Proposals
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Say
on Climate (SoC) Shareholder Proposals |
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Climate
Change/Greenhouse Gas (GHG)
Emissions
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Gender
Identity, Sexual Orientation, and
Domestic
Partner Benefits |
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Gender,
Race / Ethnicity Pay Gap |
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Racial
Equity and/or Civil Rights Audit
Guidelines
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Environment
and Sustainability |
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Facility
and Workplace Safety |
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General
Environmental Proposals and
Community
Impact Assessments |
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Operations
in Protected Areas |
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Data
Security, Privacy, and Internet Issues |
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Environmental,
Social, and Governance (ESG)
Compensation-Related
Proposals |
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Human
Rights, Human Capital
Management, and
International
Operations
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Operations
in High Risk Markets |
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Weapons
and Military Sales |
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Political
Expenditures and Lobbying
Congruency
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REGISTERED
INVESTMENT COMPANY
PROXIES
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Closed
End Fund - Unilateral Opt-In to
Control Share
Acquisition Statutes |
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Converting
Closed-end Fund to Open-end
Fund
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Investment
Advisory Agreements |
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Approving
New Classes or Series of
Shares
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Preferred
Stock Proposals |
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Changing
a Fundamental Restriction to a
Nonfundamental
Restriction |
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Change
Fundamental Investment
Objective to
Nonfundamental |
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Change
in Fund's Subclassification |
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Business
Development Companies—
Authorization
to Sell Shares of Common
Stock at a Price
below Net Asset Value |
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Disposition
of Assets/Termination/
Liquidation
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Changes
to the Charter Document |
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Changing
the Domicile of a Fund |
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Authorizing
the Board to Hire and
Terminate Subadvisors
Without
Shareholder Approval
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Shareholder
Proposals for Mutual Funds |
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Establish
Director Ownership Requirement |
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Reimburse
Shareholder for Expenses
Incurred
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Terminate
the Investment Advisor |
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INTERNATIONAL
PROXY VOTING |
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NOTE:
Because of the unique oversight structure and regulatory scheme applicable to closed-end and open-end investment companies,
except as otherwise noted, these voting guidelines are not applicable to holdings of shares of closed-end and
open-end investment companies (except Real Estate Investment Trusts).
In voting proxies that
are noted case-by-case, DWS will vote such proxies based on recommendations from ISS based on
its application of the Guidelines.
DWS’s policy is
to generally vote for director nominees6,
except under the following circumstances (with new nominees
considered on case-by-case basis):
DWS’s policy is to generally vote
against7
or withhold from non-independent directors when (See Appendix 1 for Classification
of Directors):
•
Independent
directors comprise 50 percent or less of the board;
•
The
non-independent director serves on the audit, compensation, or nominating committee;
•
The
company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;
or
•
The
company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the
functions of such a committee.
6
A “new
nominee”
is a director who is being presented for election by shareholders for the first time. Recommendations on
new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of
their appointment and the problematic governance issue in question.
7
In general, companies with a plurality vote standard use “Withhold”
as the contrary vote option in director elections; companies
with a majority vote standard use “Against”.
However, it will vary by company and the proxy must be checked to
determine the valid contrary vote option for the particular company.
Attendance at Board and Committee Meetings
DWS’s policy is to generally vote
against or withhold from directors (except nominees who served only part of the fiscal
year8)
who attend less than 75 percent of the aggregate of their board and committee meetings for the period for
which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons
for director absences are generally limited to the following:
•
Medical
issues/illness;
•
Family
emergencies; and
•
Missing
only one meeting (when the total of all meetings is three or fewer).
In
cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor
attendance, DWS’s policy is to generally vote against or withhold from appropriate members of the nominating/governance committees
or the full board.
If the proxy disclosure
is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate
of his/her board and committee meetings during his/her period of service, DWS’s policy is to generally vote
against or withhold from the director(s) in question.
DWS’s policy is to generally vote
against or withhold from individual directors who:
•
Sit
on more than four public company boards; or
•
Are
CEOs of public companies who sit on the boards of more than one public company besides their own—withhold only
at their outside board9
DWS’s policy is to generally vote
against or withhold from the chair of the nominating committee (or other directors on
a case-by-case basis) at companies where there are no women on the company's board. An exception will be made
if there was at least one woman on the board at the preceding annual meeting and the board makes a firm commitment
to return to a gender-diverse status within a year.
Racial and/or Ethnic Diversity:
For companies in the
Russell 3000 or S&P 1500 indices, DWS’s policy is to
generally vote against or withhold from the
chair of the nominating committee (or other directors on a case-by-case basis) where the board has no apparent racially
or ethnically diverse members10.
An exception will be made if (i) there was racial and/or ethnic diversity on the
board at the preceding annual meeting and the board makes a firm commitment to appoint at least one racial and/or
ethnic diverse member within a year; or (ii) there are no new nominees proposed for election to the board.
8
Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.
9
Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate boards, DWS
will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (˃50 percent ownership)
subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside
the parent/subsidiary relationships.
10
Aggregate diversity statistics provided by the board will only
be considered if specific to racial and/or ethnic diversity.
DWS’s policy is
to vote case-by-case for new nominees who are up for election to serve as a combined Chair and CEO,
taking into considerations the following:
•
A
majority independent board and/or the presence of independent directors on a key board committees;
•
A
clearly defined lead independent director serving as an appropriate counterbalance to a combined CEO/chair role.
DWS’s
policy is to generally vote for an incumbent director who is a combined Chair and CEO up for reelection.
DWS’s policy is
to generally vote case-by-case on individual directors, committee members, or the entire board of directors
as appropriate if:
•
The
board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous
year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received
opposition of a majority of the shares cast in the previous year. Factors that will be considered are:
−
Disclosed
outreach efforts by the board to shareholders in the wake of the vote;
−
Rationale
provided in the proxy statement for the level of implementation;
−
The
subject matter of the proposal;
−
The
level of support for and opposition to the resolution in past meetings;
−
Actions
taken by the board in response to the majority vote and its engagement with shareholders;
−
The
continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals);
and
−
Other
factors as appropriate.
•
The
board failed to act on takeover offers where the majority of shares are tendered;
or
•
At
the previous board election, any director received more than 50 percent withhold/against votes of the shares cast
and the company has failed to address the issue(s) that caused the high withhold/against vote.
DWS’s policy is
to generally vote case-by-case on Compensation Committee members (or, in exceptional cases, the full
board) and the Say on Pay proposal if:
•
The
company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be
considered are:
The company's response, including:
•
Disclosure
of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated);
•
Disclosure
of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
and
−
Disclosure
of specific and meaningful actions taken to address shareholders' concerns;
•
Other
recent compensation actions taken by the company;
•
Whether
the issues raised are recurring or isolated;
•
The
company's ownership structure; and
•
Whether
the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
•
The
board implements an advisory vote on executive compensation on a less frequent basis than the frequency that
received the plurality of votes cast.
Accountability
Problematic Takeover Defenses, Capital Structure and
Governance Structure
DWS’s policy is to generally vote
against or withhold from all nominees (except new nominees, who should be considered case-by-case)
if:
•
The
company has a poison pill with a deadhand or slowhand feature11;
•
The
board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or
lowering the trigger, without shareholder approval; or
•
The
company has a long-term poison pill, (with a term of over one year) that was not approved by the public shareholders.12
DWS’s policy is
to generally vote case-by-case on nominees if the board adopts an initial short-term pill (with a term of
one year or less) without shareholder approval, taking into consideration:
•
The
disclosed rationale for the adoption;
•
The
company’s market capitalization (including absolute level and sudden changes);
•
A
commitment to put any renewal to a shareholder vote; and
•
Other
factors as relevant
DWS’s policy is to generally vote
for directors of a company employing a common stock structure with unequal voting rights.13
Classified Board Structure:
DWS’s policy is to generally vote
against or withhold directors individually, committee members, or the entire board (except
new nominees, who should be considered
case-by-case), if the company’s board is classified, and a continuing director
responsible for a problematic governance issue at the board/committee level that would warrant a withhold /
against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
11
If the short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder vote, DWS
will generally still withhold or vote against nominees at the next shareholder meeting following its adoption.
12Approval
prior to, or in connection, with a company’s becoming publicly traded or in connection with a de-SPAC transaction,
is sufficient.
13This
generally includes classes of common stock that have additional votes per share than other shares; classes of
shares that are not entitled to vote on all the same ballot items or nominees; or stock with time-phased voting rights
(“loyalty
shares”).
Removal of
Shareholder Discretion on Classified Boards
DWS’s policy is
to generally vote against or withhold directors individually, committee members, or the entire board (except
new nominees, who should be considered case-by-case), if the company has opted into, or failed to opt out of,
state laws requiring a classified board structure.
Problematic Governance Structure
For companies that hold or held their
first annual meeting of public shareholders after February 1, 2015, DWS’s policy is
to generally vote against or withhold from directors individually, committee member, or the entire board (except new
nominees, who should be considered case-by-case) if, prior to or in connection with the company’s public offering, the
company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to
shareholder rights:
•
Supermajority
vote requirements to amend the bylaws or charter;
•
A
classified board structure; or
•
Other
egregious provisions.
A provision which specifies
that the problematic structure(s) will be sunset within seven years of the date of going public
will be considered a mitigating factor.
Unless the adverse provision
is reversed or removed, DWS’s policy is to generally vote case-by-case on director nominees in
subsequent years.
Unilateral Bylaw/Charter Amendments
DWS’s policy is to generally vote
against or withhold from directors individually, committee members, or the entire board
(except new nominees who should be considered case-by-case) if
the board amends the company's bylaws or charter
without shareholder approval in a manner that materially diminishes shareholders' rights or that could adversely impact
shareholders, considering the following factors:
•
The
board's rationale for adopting the bylaw/charter amendment without shareholder ratification;
•
Disclosure
by the company of any significant engagement with shareholders regarding the amendment;
•
The
level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter;
•
The
board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
•
The
company's ownership structure;
•
The
company's existing governance provisions;
•
The
timing of the board's amendment to the bylaws/charter in connection with a significant business development; and
•
Other
factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on share-holders.
Unless the adverse amendment
is reversed or submitted to a binding shareholder vote, in subsequent years DWS’s policy
is generally to vote case-by-case on director nominees.
DWS’s
policy is to generally vote against (except new nominees, who should be considered case-by-case) if the directors:
•
Adopted
supermajority vote requirements to amend the bylaws or charter; or
•
Eliminated
shareholders' ability to amend bylaws.
•
Adopted
a fee-shifting provision; or
•
Adopted
another provision deemed egregious.
Restricting Binding Shareholder Proposals
DWS’s policy is to generally vote
against or withhold from the members of the governance committee if:
•
The
company’s governing documents impose undue restrictions on shareholders ability to amend the bylaws.
Such restrictions include
but are not limited to: outright prohibition on the submission of binding shareholder proposals or
share ownership requirements, subject matter restrictions, or time holding requirements in excess of Rule 14a-8 under
the Securities Exchange Act of 1934. DWS’s policy is to generally vote against or withhold on an ongoing basis in
such cases.
Submission of management
proposals to approve or ratify requirements in excess of the requirements under Rule 14a-8
for the submission of binding bylaw amendments will generally be viewed as insufficient restoration of shareholders’ rights.
DWS’s policy is to generally vote against or withhold on an ongoing basis until shareholders are provided with an
unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Director Performance Evaluation
DWS’s policy is to generally vote
against or withhold from (the members of the governance committee) if the board lack
mechanisms to promote accountability and oversight, coupled with sustained poor performance relative to peers. Sustained
poor performance is measured by one-, three- and five-year total shareholder returns in the bottom half of a
company’s four-digit GICS industry group (Russell 3000 companies only). Take into consideration the company’s operational
metrics and other factors as warranted. Problematic provisions include but are not limited to:
•
A
classified board structure;
•
A
supermajority vote requirement;
•
Either
a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;
•
The
inability of shareholders to call special meetings;
•
The
inability of shareholders to act by written consent;
•
A
multi-class capital structure; and/or
•
A
non-shareholder-approved poison pill.
Management Proposals to Ratify Existing Charter or Bylaw
Provisions
DWS’s
policy is to generally vote against/withhold from individual directors, members of the governance committee, or
the full board, where boards ask shareholders to ratify existing charter or bylaw provisions considering the following factors:
•
The
presence of a shareholder proposal addressing the same issue on the same ballot;
•
The
board's rationale for seeking ratification;
•
Disclosure
of actions to be taken by the board should the ratification proposal fail;
•
Disclosure
of shareholder engagement regarding the board’s ratification request;
•
The
level of impairment to shareholders' rights caused by the existing provision;
•
The
history of management and shareholder proposals on the provision at the company’s past meetings;
•
Whether
the current provision was adopted in response to the shareholder proposal;
•
The
company's ownership structure; and
•
Previous
use of ratification proposals to exclude shareholder proposals.
Problematic Audit-Related Practices
DWS’s policy is to generally vote
against or withhold from the members of the Audit Committee if:
•
The
non-audit fees paid to the auditor are excessive;
•
The
company receives an adverse opinion on the company’s financial statements from its auditor; or
•
There
is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with
its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against
the audit firm.
DWS’s policy is to generally vote
case-by-case on members of the Audit Committee and potentially the full board if:
•
Poor
accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP;
and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence,
and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether
withhold/against votes are warranted.
Problematic Compensation Practices
In the absence of an
Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, DWS’s
policy is to generally vote against or withhold from the members of the Compensation Committee and potentially the
full board if:
•
There
is an unmitigated misalignment between CEO pay and company performance (pay for performance);
•
The
company maintains significant problematic pay practices; or
•
The
board exhibits a significant level of poor communication and responsiveness to shareholders.
DWS’s
policy is to generally vote against or withhold from the Compensation Committee chair, other committee members, or
potentially the full board if:
•
The
company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared
frequency of say on pay; or
•
The
company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.
DWS’s policy is
to generally vote against members of the board committee responsible for approving/setting non-employee director
compensation if there is a pattern (i.e.,
two or more years) of awarding excessive non-employee director compensation
without disclosing a compelling rationale or other mitigating factors.
Problematic Pledging of Company Stock
DWS’s policy is
to generally vote against the members of the committee that oversees risks related to pledging, or the
full board, where a significant level of pledged company stock by executives or directors raises concerns.
The following factors will be considered:
•
The
presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;
•
The
magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading
volume;
•
Disclosure
of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
•
Disclosure
in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged
company stock; and
•
Any
other relevant factors.
For companies that are
significant greenhouse gas (GHG) emitters, through their operations or value chain14,
DWS’s policy is to generally vote case-by
case on the election of the incumbent chair of the responsible committee (or other directors)
in cases where DWS determines that the company is not taking the minimum steps needed to understand, assess
and mitigate the risks related to climate change to the company and the larger economy which may lead to regulatory
risks.
Minimum steps to understand and mitigate
those risks are considered to be the following.
•
Detailed
disclosure of climate-related risks, such as according to the framework established by the Task Force on
Climate-related Financial Disclosures (TCFD), including:
−
Board
governance measures;
−
Risk
management analyses; and
DWS’s policy is
to generally vote case-by-case on directors individually, committee members, or the entire board, due
to:
•
Material
failures of governance, stewardship, risk oversight15,
or fiduciary responsibilities at the company, including failures
to adequately manage or mitigate environmental, social and governance (ESG) risks;
•
Failure
to replace management as appropriate; or
•
Egregious
actions related to a director’s service on other boards that raise substantial doubt about his or her ability
to effectively oversee management and serve the best interests of shareholders at any company.
14Companies
defined as “significant
GHG emitters”
will be those on the current Climate Action 100+ Focus Group list.
15
Examples of failure of risk oversight include but are not limited to: bribery; large or serial fines or sanctions from regulatory
bodies; demonstrably poor oversight of environmental and social issues, including climate change; significant adverse
legal judgments or settlement; or hedging of company stock.
Voting on Director Nominees in Contested Elections
In cases where companies are targeted
in connection with public “vote-no”
campaigns, evaluate director nominees under
the existing governance policies for voting on director nominees in uncontested elections. Take into consideration the
arguments submitted by shareholders and other publicly available information.
Proxy Contests/Proxy Access
DWS’s policy is to generally vote
case-by-case on the election of directors in contested elections, considering the following
factors:
•
Long-term
financial performance of the company relative to its industry;
•
Management’s
track record;
•
Background
to the contested election;
•
Nominee
qualifications and any compensatory arrangements;
•
Strategic
plan of dissident slate and quality of the critique against management;
•
Likelihood
that the proposed goals and objectives can be achieved (both slates); and
•
Stock
ownership positions.
In the case of candidates
nominated pursuant to proxy access, DWS’s policy is to generally vote case-by-case considering any
applicable factors listed above or additional factors which may be relevant, including those that are specific to the
company, to the nominee(s) and/or to the nature of the election (such as whether there are more candidates than board
seats).
Other Board-Related Proposals
Adopt Anti-Hedging/Pledging/Speculative Investments Policy
DWS’s policy is to generally vote
for proposals seeking a policy that prohibits named executive officers from engaging in
derivative or speculative transactions involving company stock, including hedging, holding stock in a margin account, or
pledging stock as collateral for a loan. However, the company’s existing policies regarding responsible use of company stock
will be considered.
DWS believes Board refreshment
is best implemented through an ongoing program of individual director evaluations, conducted
annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity
as needed.
DWS’s policy is to generally vote
case-by-case on management proposals regarding director term/tenure limits, considering:
•
The
rationale provided for adoption of the term/tenure limit;
•
The
robustness of the company’s board evaluation process;
•
Whether
the limit is of sufficient length to allow for a broad range of director tenures;
•
Whether
the limit would disadvantage independent directors compared to non-independent directors; and
•
Whether
the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner.
DWS’s policy is
to generally vote case-by-case on shareholder proposals asking for the company to adopt director term/tenure
limits, considering:
•
The
scope of the shareholder proposal; and
•
Evidence
of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.
DWS’s policy is to generally vote
against management and shareholder proposals to limit the tenure of independent directors
through mandatory retirement ages. DWS’s policy is to generally vote for proposals to remove mandatory age
limits.
DWS’s
policy is to generally vote for proposals seeking to fix the board size or designate a range for the board size. DWS’s
policy is to generally vote against proposals that give management the ability to alter the size of the board outside
of a specified range without shareholder approval.
Classification/Declassification of the Board
DWS’s policy is to generally vote
against proposals to classify (stagger) the board. DWS’s policy is to generally vote for
proposals to repeal classified boards and to elect all directors annually.
DWS’s policy is to generally vote
for proposals seeking disclosure on a CEO succession planning policy, considering, at
a minimum, the following factors:
•
The
reasonableness/scope of the request; and
•
The
company’s existing disclosure on its current CEO succession planning process.
DWS’s policy is to generally vote
against management proposals to eliminate cumulate voting, and for shareholder proposals
to restore or provide for cumulative voting, unless:
•
The
company has proxy access16,
thereby allowing shareholders to nominate directors to the company’s ballot; and
•
The
company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are
more nominees than seats, and a director resignation policy to address failed elections.
DWS’s policy is
to generally vote for proposals for cumulative voting at controlled companies (insider voting power ˃ 50%).
Director and Officer Indemnification, Liability Protection
and Exculpation
DWS’s policy is to generally vote
case-by-case on proposals on director and officer indemnification, liability protection and
exculpation17.
16 A
proxy access right that meets the recommended guidelines.
17Indemnification:
the condition of being secured against loss or damage.
Limited liability: a person’s
financial liability is limited to the fixed sum, or personal financial assets are not at risk if the
individual loses a lawsuit that results in financial award/damages to the plaintiff.
Exculpation: to eliminate
or limit the personal liability of a director or officer to the corporation or its shareholders for monetary
damages for breach of fiduciary duty as a director or officer.
DWS’s policy is
to consider the stated rationale for the proposed change. DWS will also consider, among other factors, the
extent to which the proposal would:
•
Eliminate
directors' and officers' liability for monetary damages for violating the duty of care;
•
Eliminate
directors’ and officers’ liability for monetary damages for violating the duty of loyalty;
•
Expand
coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than
mere carelessness; or
•
Expand
the scope of indemnification to provide for mandatory indemnification of company officials in connection with
acts that previously the company was permitted to provide indemnification for, at the discretion of the company's board
(i.e., “permissive
indemnification”),
but that previously the company was not required to indemnify.
DWS’s policy is
to generally vote for those proposals providing such expanded coverage in cases when a director’s or
officer’s legal defense was unsuccessful if both of the following apply:
•
If
the individual was found to have acted in good faith and in a manner that the individual reasonably believed was
in the best interests of the company; and
•
If
only the individual’s legal expenses would be covered.
Establish/Amend Nominee Qualifications
DWS’s policy is to generally vote
case-by-case on proposals that establish or amend director qualifications. Votes should
be based on the reasonableness of the criteria and the degree to which they may preclude dissident nominees from
joining the board.
DWS’s policy is
to generally vote case-by-case on shareholder resolutions seeking a director nominee who possesses a
particular subject matter expertise, considering:
•
The
company’s board committee structure, existing subject matter expertise, and board nomination provisions relative
to that of its peers;
•
The
company’s existing board and management oversight mechanisms regarding the issue for which board oversight is
sought;
•
The
company’s disclosure and performance relating to the issue for which board oversight is sought and any significant
related controversies; and
•
The
scope and structure of the proposal.
Establish Other Board Committee Proposals
•
DWS’s
policy is to generally vote against shareholder proposals to establish a new board committee, as such proposals
seek a specific oversight mechanism/structure that potentially limits a company’s flexibility to determine an
appropriate oversight mechanism for itself. However, the following factors will be considered:
•
Existing
oversight mechanisms (including current committee structure) regarding the issue for which board oversight is
sought;
•
Level
of disclosure regarding the issue for which board oversight is sought;
•
Company
performance related to the issue for which board oversight is sought;
•
Board
committee structure compared to that of other companies in its industry sector; and
•
The
scope and structure of the proposal.
Filling Vacancies/Removal of Directors
DWS’s policy is to generally vote
against proposals that provide that directors may be removed only for cause.
•
DWS’s
policy is to generally vote for proposals to restore shareholders’ ability to remove directors with or without cause.
•
DWS’s
policy is to generally vote against proposals that provide that only continuing directors may elect replacements to
fill board vacancies.
•
DWS’s
policy is to generally vote for proposals that permit shareholders to elect directors to fill board vacancies.
DWS’s policy is to generally vote
for shareholder proposals requiring that the board chair position be filled by an independent director,
taking into consideration the following:
•
The
scope and rationale of the proposal;
•
The
company's current board leadership structure;
•
The
company's governance structure and practices;
•
Company
performance; and
•
Any
other relevant factors that may be applicable.
The following factors will increase the
likelihood of a “for”
recommendation:
•
A
majority non-independent board and/or the presence of non-independent directors on key board committees;
•
A
weak or poorly defined lead independent director role that fails to serve as an appropriate counterbalance to a
combined CEO/chair role;
•
The
presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of
CEO and chair, and/or departure from a structure with an independent chair;
•
Evidence
that the board has failed to oversee and address material risks facing the company;
•
A
material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or
if the board has materially diminished shareholder rights; or
•
Evidence
that the board has failed to intervene when management’s interests are contrary to shareholders' interests.
Majority of Independent Directors/Establishment of Independent
Committees
DWS’s policy is to generally vote
for shareholder proposals asking that a majority or more of directors be independent unless
the board composition already meets the proposed threshold by DWS’s definition of Independent Director.
DWS’s policy is
to generally vote for shareholder proposals asking that board audit, compensation, and/or nominating committees
be composed exclusively of independent directors unless they currently meet that standard.
Majority Vote Standard for the Election of Directors
DWS’s policy is to generally vote
for management proposals to adopt a majority of votes cast standard for directors in
uncontested elections. DWS’s policy is to generally vote against such proposals if no carve-out for a plurality vote standard
in contested elections is included.
DWS’s policy is
to generally vote for precatory and binding shareholder resolutions requesting that the board change the
company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it
does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out
for a plurality vote standard when there are more nominees than board seats.
Companies are strongly
encouraged to also adopt a post-election policy (also known as a director resignation policy) that
will provide guidelines so that the company will promptly address the situation of a holdover director.
DWS’s policy is to generally vote
for management and shareholder proposals for proxy access with the following provisions:
•
Ownership
threshold: maximum requirement not more than three percent (3%)
of the voting power;
•
Ownership
duration: maximum requirement not longer than three (3) years
of continuous ownership for each member of the nominating group;
•
Aggregation:
minimal or no limits on the number of shareholders permitted to form a nominating group;
and
•
Cap:
cap on nominees of generally twenty-five percent (25%) of the board.
DWS will review for reasonableness
any other restrictions on the right of proxy access. DWS’s policy is to generally vote
against proposals that are more restrictive than these guidelines.
Require More Nominees than Open Seats
DWS’s policy is to generally vote
against shareholder proposals that would require a company to nominate more candidates than
the number of open board seats.
Shareholder Engagement Policy (Shareholder
Advisory Committee)
DWS’s policy is to generally vote
for shareholder proposals requesting that the board establish an internal mechanism/process, which
may include a committee, in order to improve communications between directors and shareholders, unless the
company has the following features, as appropriate:
•
Established
a communication structure that goes beyond the exchange requirements to facilitate the exchange of
information between shareholders and members of the board;
•
Effectively
disclosed information with respect to this structure to its shareholders;
•
Company
has not ignored majority-supported shareholder proposals or a majority withhold vote on a director nominee;
and
•
The
company has an independent chair or a lead director. This individual must be made available for periodic consultation and
direct communication with major shareholders.
Auditor Indemnification and Limitation of Liability
DWS’s policy is to generally vote
case-by-case on the issue of auditor indemnification and limitation of liability. Factors to
be assessed include, but are not limited to:
•
The
terms of the auditor agreement—the degree to which these agreements impact shareholders' rights;
•
The
motivation and rationale for establishing the agreements;
•
The
quality of the company’s disclosure; and
•
The
company’s historical practices in the audit area.
DWS’s policy is
to generally vote against or withhold from members of an audit committee in situations where there is
persuasive evidence that the audit committee entered into an inappropriate indemnification agreement with its auditor
that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
DWS’s policy is to generally vote
for proposals to ratify auditors unless any of the following apply:
•
An
auditor has a financial interest in or association with the company, and is therefore not independent;
•
There
is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of
the company’s financial position;
•
Poor
accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP;
or
•
Fees
for non-audit services (“Other”
fees) are excessive.
Non-audit fees are excessive if:
•
Non-audit
(“other”)
fees ˃ audit fees + audit-related fees + tax compliance/preparation fees
Tax compliance and preparation
include the preparation of original and amended tax returns and refund claims, and tax
payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added
to “Other”
fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other”
fees.
In circumstances where
“Other”
fees include fees related to significant one-time capital structure events (such as initial
public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and
nature of those fees that are an exception to the standard “non-audit
fee”
category, then such fees may be excluded from
the non-audit fees considered in determining the ratio of non-audit to audit/audit-related fees/tax compliance and
preparation for purposes of determining whether non-audit fees are excessive.
Shareholder Proposals Limiting Non-Audit Services
DWS’s policy is to generally vote
case-by-case on shareholder proposals asking companies to prohibit or limit their auditors
from engaging in non-audit services.
Shareholder Proposals on Audit Firm Rotation
DWS’s policy is to generally vote
case-by-case on shareholder proposals asking for audit firm rotation, taking into account:
•
The
tenure of the audit firm;
•
The
length of rotation specified in the proposal;
•
Any
significant audit-related issues at the company;
•
The
number of Audit Committee meetings held each year;
•
The
number of financial experts serving on the committee; and
•
Whether
the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive
price.
SHAREHOLDER RIGHTS &
DEFENSES
Advance Notice Requirements for Shareholder Proposals/Nominations
DWS’s policy is to generally vote
case-by-case on advance notice proposals, giving support to those proposals which allow
shareholders to submit proposals/nominations as close to the meeting date as reasonably possible and within the
broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and shareholder review.
To
be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120
days prior to the anniversary of the previous year’s meeting and have a submittal window of no shorter than 30 days
from the beginning of the notice period. The submittal window is the period under which shareholders must file their
proposals/nominations prior to the deadline.
In general, support additional
efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting
position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with
the necessary information to review such proposals.
Amend Bylaws without Shareholder Consent
DWS’s policy is to generally vote
against proposals giving the board exclusive authority to amend the bylaws.
DWS’s policy is
to generally vote case-by-case on proposals giving the board the ability to amend the bylaws in addition to
shareholders, taking into account the following:
•
Any
impediments to shareholders' ability to amend the bylaws (i.e.,
supermajority voting requirements);
•
The
company's ownership structure and historical voting turnout;
•
Whether
the board could amend bylaws adopted by shareholders; and
•
Whether
shareholders would retain the ability to ratify any board-initiated amendments.
Control Share Acquisition Provisions
DWS’s policy is to generally vote
for proposals to opt out of control share acquisition statutes unless doing so would enable
the completion of a takeover that would be detrimental to shareholders.
DWS’s policy is
to generally vote against proposals to amend the charter to include control share acquisition provisions. DWS’s
policy is to generally vote for proposals to restore voting rights to the control shares.
Control share acquisition
statutes function by denying shares their voting rights when they contribute to ownership in
excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval
of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require
a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying
up a large block of shares.
Control Share Cash - Out Provisions
DWS’s policy is to generally vote
for proposals to opt out of control share cash-out statutes.
Control share cash-out
statutes give dissident shareholders the right to “cash-out”
of their position in a company at the expense
of the shareholder who has taken a control position. In other words, when an investor crosses a preset threshold
level, remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the
highest acquiring price.
Disgorgement Provisions
DWS’s policy is to generally vote
for proposals to opt out of state disgorgement provisions.
Disgorgement provisions
require an acquirer or potential acquirer of more than a certain percentage of a company's stock
to disgorge, or pay back, to the company any profits realized from the sale of that company's stock purchased 24
months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of
time (between 18 months and 24 months) prior to the investor's gaining control status are subject to these recapture-of-profits
provisions.
DWS’s policy is to generally vote
case-by-case on proposals to adopt fair price provisions (provisions that stipulate that
an acquirer must pay the same price to acquire all shares as it paid to acquire the control shares), evaluating factors
such as the vote required to approve the proposed acquisition, the vote required to repeal the fair price provision, and
the mechanism for determining the fair price.
DWS’s policy is
to generally vote against fair price provisions with shareholder vote requirements greater than a majority of
disinterested shares.
DWS’s policy is to generally vote
for proposals to opt out of state freeze-out provisions. Freeze-out provisions force an
investor who surpasses a certain ownership threshold in a company to wait a specified period of time before gaining control
of the company.
DWS’s policy is to generally vote
for proposals to adopt anti-greenmail charter or bylaw amendments or otherwise restrict
a company’s ability to make greenmail payments.
DWS’s policy is
to generally vote case-by-case on anti-greenmail proposals when they are bundled with other charter or
bylaw amendments.
Greenmail payments are
targeted share repurchases by management of company stock from individuals or groups seeking
control of the company. Since only the hostile party receives payment, usually at a substantial premium over the
market value of its shares, the practice discriminates against all other shareholders.
Shareholder Litigation Rights
Federal Forum Selection Provisions
Federal forum selection
provisions require that U.S federal courts be the sole forum for shareholders to litigate claims arising
under federal securities law.
DWS’s
policy is to generally vote for federal forum selection provisions in the charter or bylaws that specify “the
district courts of the United States”
as the exclusive forum for federal securities law matters, in the absence of serious concerns about
corporate governance or board responsiveness to shareholders.
DWS’s policy is
to generally vote against provisions that restrict the forum to a particular federal district court; unilateral adoption
(without a shareholder vote) of such a provision will generally be considered a one-time failure under the Unilateral
Bylaw/Charter Amendments policy.
Exclusive Forum Provisions for State Law Matters
Exclusive forum provisions
in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the
company, for claims arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
DWS’s policy is to generally vote
for charter or bylaw provisions that specify courts located within the state of Delaware as
the exclusive forum for corporate law matters for Delaware corporations, in the absence of serious concerns about corporate
governance or board responsiveness to shareholders.
For states other than
Delaware, DWS’s policy is to generally vote case-by-case on exclusive forum provisions, taking into
consideration:
•
The
company's stated rationale for adopting such a provision;
•
Disclosure
of past harm from duplicative shareholder lawsuits in more than one forum;
•
The
breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply
and the definition of key terms; and
•
Governance
features such as shareholders' ability to repeal the provision at a later date (including the vote standard applied
when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through
annual director elections and a majority vote standard in uncontested elections.
DWS’s policy is
to generally vote against provisions that specify a state other than the state of incorporation as the exclusive
forum for corporate law matters, or that specify a particular local court within the state; unilateral adoption of
such provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee-shifting provisions
in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all
litigation expenses of the defendant corporation and its directors and officers.
DWS’s policy is to generally vote
against provisions that mandate fee-shifting whenever plaintiffs are not completely successful
on the merits (i.e.,
including cases where the plaintiffs are partially successful).
Unilateral adoption of
a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments
policy.
Net Operating Loss (NOL) Protective Amendments
DWS’s
policy is to generally vote against proposals to adopt a protective amendment for the stated purpose of protecting a
company's net operating losses (NOL) if the effective term of the protective amendment would exceed the shorter of
three years and the exhaustion of the NOL.
DWS’s policy is
to generally vote case-by-case, considering the following factors, for management proposals to adopt an
NOL protective amendment that would remain in effect for the shorter of three years (or less) and the exhaustion of
the NOL:
•
The
ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result
in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder);
•
Shareholder
protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon
exhaustion or expiration of the NOL);
•
The
company's existing governance structure including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and
•
Any
other factors that may be applicable.
Poison Pills (Shareholder Rights Plans)
Shareholder Proposals to Put Pill to a Vote and/or Adopt
a Pill Policy
DWS’s policy is to generally vote
for shareholder proposals requesting that the company submit its poison pill to a shareholder
vote or redeem it unless the company has: (1) A shareholder-approved poison pill in place; or (2) The company
has adopted a policy concerning the adoption of a pill in the future specifying that the board will only adopt a
shareholder rights plan if either:
•
Shareholders
have approved the adoption of the plan; or
•
The
board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under
the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval
(i.e., the “fiduciary
out”
provision). A poison pill adopted under this fiduciary out will be put to a shareholder ratification
vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on
this issue, the plan will immediately terminate.
If the shareholder proposal
calls for a time period of less than 12 months for shareholder ratification after adoption, DWS’s
policy is to generally vote for the proposal, but add the caveat that a vote within 12 months would be considered sufficient
implementation.
Management Proposals to Ratify a Poison Pill
DWS’s policy is to generally vote
case-by-case on management proposals on poison pill ratification, focusing on the features
of the shareholder rights plan. Rights plans should contain the following attributes:
•
No
lower than a 20 percent trigger, flip-in or flip-over;
•
A
term of no more than three years;
•
No
deadhand, slowhand, no-hand, or similar feature that limits the ability of a future board to redeem the pill;
•
Shareholder
redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying
offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote
on rescinding the pill.
In addition, the rationale
for adopting the pill should be thoroughly explained by the company. In examining the request for
the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover
defenses, and any problematic governance concerns.
Management Proposals to Ratify a Pill to Preserve Net
Operating Losses (NOLs)
DWS’s policy is to generally vote
against proposals to adopt a poison pill for the stated purpose of protecting a company's net
operating losses (NOL) if the term of the pill would exceed the shorter of three years and the exhaustion of the NOL.
DWS’s policy is
to vote case-by-case on management proposals for poison pill ratification, considering the following factors,
if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
•
The
ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent);
•
Shareholder
protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or
expiration of NOLs);
•
The
company's existing governance structure including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and
•
Any
other factors that may be applicable.
Proxy Voting Disclosure, Confidentiality, and Tabulation
DWS’s policy is to generally vote
case-by-case on proposals regarding proxy voting mechanics, taking into consideration whether
implementation of the proposal is likely to enhance or protect shareholder rights. Specific issues covered under
the policy include, but are not limited to, confidential voting of individual proxies and ballots, confidentiality of running
vote tallies, and the treatment of abstentions and/or broker non-votes in the company's vote-counting methodology.
While a variety of factors
may be considered in each analysis, the guiding principles are: transparency, consistency, and
fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
•
The
scope and structure of the proposal;
•
The
company's stated confidential voting policy (or other relevant policies) and whether it ensures a “level
playing field”
by providing shareholder proponents with equal access to vote information prior to the annual meeting;
•
The
company's vote standard for management and shareholder proposals and whether it ensures consistency and
fairness in the proxy voting process and maintains the integrity of vote results;
•
Whether
the company's disclosure regarding its vote counting method and other relevant voting policies with respect
to management and shareholder proposals are consistent and clear;
•
Any
recent controversies or concerns related to the company's proxy voting mechanics;
•
Any
unintended consequences resulting from implementation of the proposal; and
•
Any
other factors that may be relevant.
Ratification Proposals: Management Proposals to Ratify
Existing Charter or Bylaw Provisions
DWS’s policy is to generally vote
against management proposals to ratify provisions of the company’s existing charter or
bylaws, unless these governance provisions align with best practice.
In addition, voting against/withhold
from individual directors, members of the governance committee, or the full board may
be warranted, considering:
•
The
presence of a shareholder proposal addressing the same issue on the same ballot;
•
The
board's rationale for seeking ratification;
•
Disclosure
of actions to be taken by the board should the ratification proposal fail;
•
Disclosure
of shareholder engagement regarding the board’s ratification request;
•
The
level of impairment to shareholders' rights caused by the existing provision;
•
The
history of management and shareholder proposals on the provision at the company’s past meetings;
•
Whether
the current provision was adopted in response to the shareholder proposal;
•
The
company's ownership structure; and
•
Previous
use of ratification proposals to exclude shareholder proposals.
Reimbursing Proxy Solicitation Expenses
DWS’s policy is to generally vote
case-by-case on proposals to reimburse proxy solicitation expenses.
When voting in conjunction
with support of a dissident slate, DWS’s policy is to generally vote for the reimbursement of
all appropriate proxy solicitation expenses associated with the election.
DWS’s policy is
to generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in
connection with nominating one or more candidates in a contested election where the following apply:
•
The
election of fewer than 50 percent of the directors to be elected is contested in the election;
•
One
or more of the dissident’s candidates is elected;
•
Shareholders
are not permitted to cumulate their votes for directors; and
The election occurred, and the expenses
were incurred, after the adoption of this bylaw.
Reincorporation Proposals
Management or shareholder proposals to
change a company's state of incorporation should be evaluated case-by-case, giving
consideration to both financial and corporate governance concerns including the following:
•
Reasons
for reincorporation;
•
Comparison
of company's governance practices and provisions prior to and following the reincorporation; and
•
Comparison
of corporation laws of original state and destination state.
DWS’s policy is
to generally vote for reincorporation when the economic factors outweigh any neutral or negative governance
changes.
Shareholder Ability to Act by Written Consent
General Recommendation:
DWS’s policy is to generally vote against management and shareholder proposals to restrict
or prohibit shareholders' ability to act by written consent.
DWS’s policy is
to generally vote for management and shareholder proposals that provide shareholders with the ability to
act by written consent, taking into account the following factors:
•
Shareholders'
current right to act by written consent;
•
The
inclusion of exclusionary or prohibitive language;
•
Investor
ownership structure; and
•
Shareholder
support of, and management's response to, previous shareholder proposals.
DWS’s policy is
to vote case-by-case on shareholder proposals if, in addition to the considerations above, the company has
the following governance and antitakeover provisions:
•
An
unfettered18
right for shareholders to call special meetings at a 10 percent threshold;
•
A
majority vote standard in uncontested director elections;
•
No
non-shareholder-approved pill; and
•
An
annually elected board.
18
“Unfettered”
means no restrictions on agenda items, no restrictions on the number of shareholders who can group together
to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than
30 days after the last annual meeting and no greater than 90 prior to the next annual meeting.
Shareholder Ability to Call Special Meetings
DWS’s
policy is to generally vote against management or shareholder proposals to restrict or prohibit shareholders’ ability
to call special meetings.
DWS’s policy is
to generally vote for management or shareholder proposals that provide shareholders with the ability to
call special meetings taking into account the following factors:
•
Shareholders’
current right to call special meetings;
•
Minimum
ownership threshold necessary to call special meetings (10 percent preferred);
•
The
inclusion of exclusionary or prohibitive language;
•
Investor
ownership structure; and
•
Shareholder
support of, and management’s response to, previous shareholder proposals.
DWS’s policy is to generally vote
against proposals that ask the board to consider non-shareholder constituencies or other
non-financial effects when evaluating a merger or business combination.
State Antitakeover Statutes
DWS’s policy is to generally vote
case-by-case on proposals to opt in or out of state takeover statutes (including fair price
provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and anti-greenmail provisions).
Supermajority Vote Requirements
DWS’s policy is to generally vote
against proposals to require a supermajority shareholder vote.
•
DWS’s
policy is to generally vote for management or shareholder proposals to reduce supermajority vote requirements. However,
for companies with shareholder(s) who have significant ownership levels, DWS’s policy is to generally vote
case-by-case, taking into account:
•
Quorum
requirements; and
Virtual Shareholder Meetings
DWS’s policy is to generally vote
for management proposals allowing for the convening of shareholder meetings by electronic
means, so long as they do not preclude in-person meetings. Companies are encouraged to disclose the circumstances
under which virtual-only19
meetings would be held, and to allow for comparable rights and opportunities for
shareholders to participate electronically as they would have during an in-person meeting.
19
Virtual-only shareholder meeting” refers to a meeting of
shareholders that is held exclusively using technology without
a corresponding in-person meeting.
DWS’s policy is to vote case-by-case
on shareholder proposals concerning virtual-only meetings, considering:
•
Scope
and rationale of the proposal; and
•
Concerns
identified with the company’s prior meeting practices.
Adjustments to Par Value of Common Stock
DWS’s policy is to generally vote
for management proposals to reduce the par value of common stock unless the action
is being taken to facilitate an anti-takeover device or some other negative corporate governance action.
DWS’s policy is to vote for management
proposals to eliminate par value.
Common Stock Authorization
General Authorization Requests
DWS’s policy is to generally vote
case-by-case on proposals to increase the number of authorized shares of common stock
that are to be used for general corporate purposes:
•
if
share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of
up to 50% of current authorized shares;
•
If
share usage is 50% to 100% of the current authorized, vote for an increase of up to 100% of current authorized shares;
•
If
share usage is greater than current authorized shares, vote for an increase of up to the current share usage;
or
•
In
the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization.
DWS’s policy is
to generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s
prior or ongoing use of authorized shares is problematic, including, but not limited to:
•
The
proposal seeks to increase the number of authorized shares of the class of common stock that has superior voting
rights to other share classes;
•
On
the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization;
•
The
company has a non-shareholder approved poison pill (including an NOL pill); or
•
The
company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval.
However, DWS’s
policy is to generally vote for proposed increases beyond the above ratios or problematic situations when
there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
•
In,
or subsequent to, the company’s most recent 10-k filing, the company discloses that there is substantial doubt about
its ability to continue as a going concern;
•
The
company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve
the increase in authorized capital; or
•
A
government body has in the past year required the company to increase capital ratios.
For companies incorporated
in states that allow increases in authorized capital without shareholder approval, DWS’s policy
is to generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to
the above policies.
Specific Authorization Requests
DWS’s policy is to generally vote
for proposals to increase the number of authorized common shares where the primary purpose
of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private
placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For
such transactions, the allowable increase will be the greater of:
•
twice
the amount needed to support the transactions on the ballot, and
•
the
allowable increase as calculated for general issuances above.
DWS’s policy is to generally vote
against proposals to create a new class of common stock unless:
•
The
company discloses a compelling rationale for the dual-class capital structure, such as:
•
The
company's auditor has concluded that there is substantial doubt about the company's ability to continue as a
going concern; or
•
The
new class of shares will be transitory;
•
The
new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short
term and long term; and
•
The
new class is not designed to preserve or increase the voting power of an insider or significant shareholder.
Issue Stock for Use with Rights Plan
General Recommendation:
DWS’s policy is to generally vote against proposals that increase authorized common stock
for the explicit purpose of implementing a non-shareholder-approved shareholder rights plan (poison pill).
Preemptive Rights
General Recommendation:
DWS’s policy is to generally vote case-by-case on shareholder proposals that seek pre-emptive rights,
taking into consideration:
•
The
size of the company;
•
The
shareholder base; and
•
The
liquidity of the stock.
Preferred Stock Authorization
General Authorization Requests
DWS’s policy is to generally vote
case-by-case on proposals to increase the number of authorized shares of preferred stock
that are to be used for general corporate purposes as follows:
•
If
share usage (outstanding plus reserved) is less than 50% of the current authorized shares, vote for an increase of
up to 50% of current authorized shares;
•
If
share usage is 50% to 100% of the current authorized, vote for an increase up to 100% of current authorized shares;
•
If
share usage is greater than current authorized shares, vote for an increase of up to the current share usage;
•
In
the case of a stock split, the allowable increase is calculated (per above) based on the post-split adjusted authorization;
or
•
If
no preferred shares are currently issued and outstanding, vote against the request, unless the company discloses a
specific use for the shares.
DWS’s policy is
to generally vote against proposed increases, even if within the above ratios, if the proposal or the company’s
prior or ongoing use of authorized shares is problematic, including, but not limited to:
•
If
the shares requested are blank check preferred shares that can be used for antitakeover purposes20;
•
The
company seeks to increase a class of non-convertible preferred shares entitled to more than one vote per share
on matters that do not solely affect the rights of preferred stockholders “supervoting
shares”);
•
The
company seeks to increase a class of convertible preferred shares entitled to a number of votes greater than the
number of common shares into which they are convertible (“supervoting
shares”)
on matters that do not solely affect the rights of preferred
stockholders;
•
The
stated intent of the increase in the general authorization is to allow the company to increase an existing designated
class of supervoting preferred shares;
•
On
the same ballot is a proposal for a reverse split for which support is warranted despite the fact that it would result
in an excessive increase in the share authorization;
•
The
company has a non-shareholder approved poison pill (including NOL pill); or
•
The
company has previous sizeable placements (within the past 3 years) of stock with insiders at prices substantially below
market value, or with problematic voting rights, without shareholder approval.
20
To be acceptable, appropriate disclosure would be needed that
the shares are “declawed”;
i.e., representation by the board that it will
not, without prior stockholder approval, issue or use the preferred stock for any defensive or anti-takeover
purpose or for the purpose of implementing any stockholder rights plan.
However, DWS’s
policy is to generally vote for proposed increases beyond the above ratios or problematic situations when
there is disclosure of specific and severe risks to shareholders of not approving the request, such as:
•
In,
or subsequent to, the company’s most recent 10-k filing, the company discloses that there is substantial doubt about
its ability to continue as a going concern;
•
The
company states that there is a risk of imminent bankruptcy or imminent liquidation if shareholders do not approve
the increase in authorized capital; or
•
A
government body has in the past year required the company to increase capital ratios.
For companies incorporated
in states that allow increases in authorized capital without shareholder approval, DWS’s policy
is to generally vote withhold or against all nominees if a unilateral capital authorization increase does not conform to
the above policies.
Specific Authorization Requests
DWS’s policy is to generally vote
for proposals to increase the number of authorized preferred shares where the primary purpose
of the increase is to issue shares in connection with transaction(s) (such as acquisitions, SPAC transactions, private
placements, or similar transactions) on the same ballot, or disclosed in the proxy statement, that warrant support. For
such transactions, the allowable increase will be the greater of:
•
twice
the amount needed to support the transactions on the ballot, and
•
the
allowable increase as calculated for general issuances above.
DWS’s policy is to generally vote
case-by-case on recapitalizations (reclassifications of securities), taking into account the
following:
•
More
simplified capital structure;
•
Fairness
of conversion terms;
•
Impact
on voting power and dividends;
•
Reasons
for the reclassification;
•
Conflicts
of interest; and
•
Other
alternatives considered.
DWS’s policy is to generally vote
for management proposals to implement a reverse stock split if:
•
The
number of authorized shares will be proportionately reduced; or
•
The
effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with
ISS's
Common Stock Authorization policy.
DWS’s policy is
to generally vote case-by-case on proposals that do not meet either of the above conditions, taking into
consideration the following factors:
•
Stock
exchange notification to the company of a potential delisting;
•
Disclosure
of substantial doubt about the company's ability to continue as a going concern without additional financing;
•
The
company's rationale; or
•
Other
factors as applicable.
Share Issuance Mandates at U.S. Domestic Issuers Incorporated
Outside the U.S.
For U.S. domestic Issuers incorporated
outside the U.S. and listed solely on a U.S. exchange, DWS’ policy is to generally vote
for resolutions to authorize the issuance of common shares up to 20% of currently issued common share capital, where
not tied to a specific transaction or financing proposal.
For pre-revenue or other
early-stage companies that are heavily reliant on periodic equity financing, DWS’ policy is to
generally vote for resolutions to authorize the issuance of common shares up to 50% of currently issued common share
capital. The burden of proof will be on the company to establish that it has a need for the higher limit.
Renewal of such mandates should be sought
at each year’s annual meeting.
DWS’s policy is to generally vote
case-by-case on share issuances for a specific transaction or financing proposal.
Share Repurchase Programs
For U.S.-incorporated companies, and foreign-incorporated
U.S. Domestic Issuers that are traded solely on U.S. exchanges, DWS’s
policy is to generally vote for management proposals to institute open-market share repurchase plans in which all
shareholders may participate on equal terms, or to grant the board authority to conduct open-market repurchases, in
the absence of company-specific concerns regarding:
•
The
use of buybacks to inappropriately manipulate incentive compensation metrics,
•
Threats
to the company's long-term viability, or
•
Other
company-specific factors as warranted.
DWS’s policy is
to generally vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing
the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares
from insiders at a premium to market price.
Share Repurchase Programs Shareholder Proposals
DWS’s policy is to generally vote
against shareholder proposals prohibiting executives from selling shares of company stock
during periods in which the company has announced that it may or will be repurchasing shares of its stock. DWS’s
policy is to generally vote for the proposal when there is a pattern of abuse by executives exercising options or
selling shares during periods of share buybacks.
Stock Distributions: Splits and Dividends
DWS’s policy is to generally vote
for management proposals to increase the common share authorization for stock split
or stock dividend, provided that the effective increase in authorized shares is equal to or is less than the allowable increase
calculated in accordance with ISS's
Common Stock Authorization policy.
DWS’s policy is to generally vote
case-by-case on the creation of tracking stock, weighing the strategic value of the transaction
against such factors as:
•
Adverse
governance changes;
•
Excessive
increases in authorized capital stock;
•
Unfair
method of distribution;
•
Diminution
of voting rights;
•
Adverse
conversion features;
•
Negative
impact on stock option plans; and
•
Alternatives
such as spin-off.
DWS’s policy is to generally vote
for proposals to restore or provide shareholders with rights of appraisal.
Asset Purchases
DWS’s policy is to generally vote
case-by-case on asset purchase proposals, considering the following factors:
•
Financial
and strategic benefits;
•
How
the deal was negotiated;
•
Other
alternatives for the business; and
DWS’s policy is to generally vote
case-by-case on asset sales, considering the following factors:
•
Impact
on the balance sheet/working capital;
•
Potential
elimination of diseconomies;
•
Anticipated
financial and operating benefits;
•
Anticipated
use of funds;
•
Value
received for the asset;
•
How
the deal was negotiated; and
DWS’s policy is to generally vote
case-by-case on bundled or “conditional”
proxy proposals. In the case of items that are
conditioned upon each other, examine the benefits and costs of the packaged items. In instances when the joint effect
of the conditioned items is not in shareholders’ best interests, vote against the proposals. If the combined effect
is positive, support such proposals.
DWS’s
policy is to generally vote case-by-case on proposals regarding conversion of securities. When evaluating these proposals,
the investor should review the dilution to existing shareholders, the conversion price relative to market value,
financial issues, control issues, termination penalties, and conflicts of interest.
DWS’s policy is
to vote for the conversion if it is expected that the company will be subject to onerous penalties or will
be forced to file for bankruptcy if the transaction is not approved.
Corporate Reorganization/Debt Restructuring/Prepackaged
Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap Plans
DWS’s policy is to generally vote
case-by-case on proposals to increase common and/or preferred shares and to issue shares
as part of a debt restructuring plan, after evaluating:
•
Dilution
to existing shareholders' positions;
•
Terms
of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties;
exit strategy;
•
Financial
issues - company's financial situation; degree of need for capital; use of proceeds; effect of the financing on
the company's cost of capital;
•
Management's
efforts to pursue other alternatives;
•
Control
issues - change in management; change in control, guaranteed board and committee seats; standstill provisions;
voting agreements; veto power over certain corporate actions; and
•
Conflict
of interest - arm's length transaction, managerial incentives.
DWS’s policy is
to generally vote for the debt restructuring if it is expected that the company will file for bankruptcy if
the transaction is not approved.
Formation of Holding Company
DWS’s policy is to generally vote
case-by-case on proposals regarding the formation of a holding company, taking into
consideration the following:
•
The
reasons for the change;
•
Any
financial or tax benefits;
•
Increases
in capital structure; and
•
Changes
to the articles of incorporation or bylaws of the company.
Absent compelling financial
reasons to recommend for the transaction, DWS’s policy is to generally vote against the formation
of a holding company if the transaction would include either of the following:
•
Increases
in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”);
or
•
Adverse
changes in shareholder rights.
Going Private and Going Dark Transactions (LBOs and
Minority Squeeze-outs)
DWS’s policy is to generally vote
case-by-case on going private transactions, taking into account the following:
•
How
the deal was negotiated;
•
Other
alternatives/offers considered; and
DWS’s policy is
to vote case-by-case on going dark transactions, determining whether the transaction enhances shareholder value
by taking into consideration:
•
Whether
the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and
market research of the stock); and
•
Balanced
interests of continuing vs. cashed-out shareholders, taking into account the following:
•
Are
all shareholders able to participate in the transaction?
•
Will
there be a liquid market for remaining shareholders following the transaction?
•
Does
the company have strong corporate governance?
•
Will
insiders reap the gains of control following the proposed transaction?
•
Does
the state of incorporation have laws requiring continued reporting that may benefit shareholders?
DWS’s policy is to generally vote
case-by-case on proposals to form joint ventures, taking into account the following:
•
Percentage
of assets/business contributed;
•
Financial
and strategic benefits;
•
Other
alternatives; and
DWS’s policy is to generally vote
case-by-case on liquidations, taking into account the following:
•
Management’s
efforts to pursue other alternatives;
•
Appraisal
value of assets; and
•
The
compensation plan for executives managing the liquidation.
DWS’s policy is
to generally vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
DWS’s policy is to generally vote
case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of
the proposed transaction, balancing various and sometimes countervailing factors including:
•
Valuation
- Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness
opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on
the offer premium, market reaction, and strategic rationale.
•
Market
reaction - How has the market responded to the proposed deal?
A negative market reaction should cause closer scrutiny of a
deal.
•
Strategic
rationale - Does the deal make sense strategically? From where
is the value derived? Cost and revenue synergies should not be
overly aggressive or optimistic, but reasonably achievable. Management should also have
a favorable track record of successful integration of historical acquisitions.
•
Negotiations
and process - Were the terms of the transaction negotiated at
arm's-length? Was the process fair and equitable? A fair process
helps to ensure the best price for shareholders. Significant negotiation “wins”
can also signify the deal makers' competency. The comprehensiveness
of the sales process (e.g., full auction, partial auction, no
auction) can also affect shareholder value.
•
Conflicts
of interest - Are insiders benefiting from the transaction disproportionately
and inappropriately as compared to non-insider shareholders?
As the result of potential conflicts, the directors and officers of the company may be
more likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests
may have influenced these directors and officers to support or recommend the merger. The CIC figure presented
in the “ISS
Transaction Summary”
section of this report is an aggregate figure that can in certain cases be
a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be
excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
•
Governance
- Will the combined company have a better or worse governance profile than the current governance profiles
of the respective parties to the transaction? If the governance profile is to change for the worse, the burden
is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
Private Placements/Warrants/Convertible Debentures
DWS’s
policy is to generally vote case-by-case on proposals regarding private placements, warrants, and convertible debentures
taking into consideration:
•
Dilution
to existing shareholders' position: The amount and timing of shareholder ownership dilution should be weighed
against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common
stock, absent pre-emptive rights, is typically dilutive to existing shareholders, share price appreciation is
often the necessary event to trigger the exercise of “out
of the money”
warrants and convertible debt. In these instances from a value
standpoint, the negative impact of dilution is mitigated by the increase in the company's stock
price that must occur to trigger the dilutive event.
•
Terms
of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features,
termination penalties, exit strategy):
−
The
terms of the offer should be weighed against the alternatives of the company and in light of company's financial
condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be
at a premium to the then prevailing stock price at the time of private placement.
−
When
evaluating the magnitude of a private placement discount or premium, consider factors that influence the
discount or premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information
asymmetry, and anticipation of future performance.
−
The
company's financial condition;
−
Degree
of need for capital;
−
Effect
of the financing on the company's cost of capital;
−
Current
and proposed cash burn rate; and
−
Going
concern viability and the state of the capital and credit markets.
•
Management's
efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A
fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint
ventures, partnership, merger, or sale of part or all of the company.
−
Guaranteed
board and committee seats;
−
Veto
power over certain corporate actions; and
−
Minority
versus majority ownership and corresponding minority discount or majority control premium.
−
Conflicts
of interest should be viewed from the perspective of the company and the investor;
and
−
Were
the terms of the transaction negotiated at arm's length? Are managerial incentives aligned with shareholder interests?
−
The
market's response to the proposed deal. A negative market reaction is a cause for concern. Market reaction
may be addressed by analysing the one-day impact on the unaffected stock price.
DWS’s policy is
to generally vote for the private placement, or for the issuance of warrants and/or convertible debentures in
a private placement, if it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring Plan (Bankruptcy)
DWS’s policy is to generally vote
case-by-case on proposals to common shareholders on bankruptcy plans of reorganization, considering
the following factors including, but not limited to:
•
Estimated
value and financial prospects of the reorganized company;
•
Percentage
ownership of current shareholders in the reorganized company;
•
Whether
shareholders are adequately represented in the reorganization process (particularly through the existence of
an Official Equity Committee);
•
The
cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);
•
Existence
of a superior alternative to the plan of reorganization; and
•
Governance
of the reorganized company.
Special Purpose Acquisition Corporations (SPACs)
DWS’s policy is to generally vote
case-by-case on SPAC mergers and acquisitions taking into account the following:
•
Valuation
- Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and
the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company
provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to
the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may
be applied to the target, if it is a private entity.
•
Market
reaction - How has the market responded to the proposed deal?
A negative market reaction may be a cause for concern. Market
reaction may be addressed by analysing the one-day impact on the unaffected stock price.
•
Deal
timing - A main driver for most transactions is that the SPAC
charter typically requires the deal to be complete within 18
to 24 months, or the SPAC is to be liquidated. Evaluate the valuation, market reaction, and potential conflicts
of interest for deals that are announced close to the liquidation date.
•
Negotiations
and process - What was the process undertaken to identify potential
target companies within specified industry or location specified
in charter? Consider the background of the sponsors.
•
Conflicts
of interest - How are sponsors benefiting from the transaction
compared to IPO shareholders? Potential conflicts could arise
if a fairness opinion is issued by the insiders to qualify the deal rather than a third party or if
management is encouraged to pay a higher price for the target because of an 80 percent rule (the charter requires that
the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be
sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a
transaction to be completed within the 18-24 month timeframe.
•
Voting
agreements - Are the sponsors entering into enter into any voting
agreements/tender offers with shareholders who are likely to
vote against the proposed merger or exercise conversion rights?
•
Governance
- What is the impact of having the SPAC CEO or founder on key committees following the proposed merger?
Special Purpose Acquisition Corporations (SPACs) - Proposals
for Extensions
DWS’s policy is to generally vote
case-by-case on SPAC extension proposals taking into account the length of the requested
extension, the status of any pending transaction(s) or progression of the acquisition process, any added incentive
for non-redeeming shareholders, and any prior extension requests.
•
Length
of request: Typically, extension requests range from two to six
months, depending on the progression of the SPAC's acquisition
process.
•
Pending
transaction(s) or progression of the acquisition process: Sometimes
an initial business combination was already put to a shareholder
vote, but, for varying reasons, the transaction could not be consummated by the termination
date and the SPAC is requesting an extension. Other times, the SPAC has entered into a definitive transaction
agreement, but needs additional time to consummate or hold the shareholder meeting.
•
Added
incentive for non-redeeming shareholders: Sometimes the SPAC
sponsor (or other insiders) will contribute, typically as a loan
to the company, additional funds that will be added to the redemption value of each public share
as long as such shares are not redeemed in connection with the extension request. The purpose of the “equity
kicker”
is to incentivize shareholders to hold their shares through the end of the requested extension or until
the time the transaction is put to a shareholder vote, rather than electing redemption at the extension proposal meeting.
•
Prior
extension requests: Some SPACs request additional time beyond
the extension period sought in prior extension requests.
DWS’s policy is to generally vote
case-by-case on spin-offs, considering:
•
Tax
and regulatory advantages;
•
Planned
use of the sale proceeds;
•
Benefits
to the parent company;
•
Corporate
governance changes; and
•
Changes
in the capital structure.
Value Maximization Shareholder Proposals
DWS’s policy is to generally vote
case-by-case on shareholder proposals seeking to maximize shareholder value by:
•
Hiring
a financial advisor to explore strategic alternatives;
•
Selling
the company; or
•
Liquidating
the company and distributing the proceeds to shareholders.
These proposals should be evaluated based
on the following factors:
•
Prolonged
poor performance with no turnaround in sight;
•
Signs
of entrenched board and management (such as the adoption of takeover defenses);
•
Strategic
plan in place for improving value;
•
Likelihood
of receiving reasonable value in a sale or dissolution; and
•
The
company actively exploring its strategic options, including retaining a financial advisor.
Advisory Votes on Executive Compensation—Management
Proposals (Say-on-Pay)
DWS’s policy is to generally vote
case-by-case on ballot items related to executive pay and practices, as well as certain aspects
of outside director compensation.
DWS’s policy is to vote against
Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”)
if:
•
There
is an unmitigated misalignment between CEO pay and company performance (pay for performance);
•
The
company maintains significant problematic pay practices; or
•
The
board exhibits a significant level of poor communication and responsiveness to shareholders.
DWS’s policy is
to generally vote against or withhold from the members of the Compensation Committee and potentially the
full board if:
•
There
is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment,
problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously,
or a combination thereof;
•
The
board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes
cast;
•
The
company has recently practiced or approved problematic pay practices, such as option repricing or option backdating;
or
•
The
situation is egregious.
Frequency of Advisory Vote on Executive Compensation
(“Say When
on Pay”)
DWS’s policy is to generally vote
for annual advisory votes on compensation, which provide the most consistent and clear
communication channel for shareholder concerns about companies' executive pay programs.
Voting on Golden Parachutes in an Acquisition, Merger,
Consolidation, or Proposed Sale
DWS’s policy is to generally vote
case-by-case on say on Golden Parachute proposals, including consideration of existing change-in-control
arrangements maintained with named executive officers but also considering new or extended arrangements.
Features that may result
in an “against”
recommendation include one or more of the following, depending on the number,
magnitude, and/or timing of issue(s):
•
Single-
or modified-single-trigger cash severance;
•
Single-trigger
acceleration of unvested equity awards;
•
Full
acceleration of equity awards granted shortly before the change in control;
•
Acceleration
of performance awards above the target level of performance without compelling rationale;
•
Excessive
cash severance (generally ˃3x base salary and bonus);
•
Excise
tax gross-ups triggered and payable; or
•
Excessive
golden parachute payments (on an absolute basis or as a percentage of transaction equity value);
•
Recent
amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary
equity grants) that may make packages so attractive as to influence merger agreements that may not
be in the best interests of shareholders; or
•
The
company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory
vote.
Recent amendment(s) that
incorporate problematic features will tend to carry more weight on the overall analysis. However,
the presence of multiple legacy problematic features will also be closely scrutinized.
In
cases where the golden parachute vote is incorporated into a company's advisory vote on compensation (management say-on-pay),
DWS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight
to that component of the overall evaluation.
Equity-Based and Other Incentive Plans
DWS’s policy is to generally vote
case-by-case on certain equity-based compensation plans21
depending on a combination of certain plan features
and equity grant practices, where positive factors may counterbalance negative factors, and vice
versa, as evaluated using an “Equity
Plan Scorecard”
(EPSC) approach with three pillars:
•
Plan
Cost: The total estimated cost of the company’s equity
plans relative to industry/market cap peers, measured by the
company's estimated Shareholder Value Transfer (SVT) in relation to peers and considering both:
−
SVT
based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;
and
−
SVT
based only on new shares requested plus shares remaining for future grants.
−
Quality
of disclosure around vesting upon a change in control (CIC);
−
Discretionary
vesting authority;
−
Liberal
share recycling on various award types;
−
Lack
of minimum vesting period for grants made under the plan; and
−
Dividends
payable prior to award vesting.
−
The
company’s three-year burn rate relative to its industry/market cap peers;
−
Vesting
requirements in CEO's recent equity grants (3-year look-back);
−
The
estimated duration of the plan (based on the sum of shares remaining available and the new shares requested,
divided by the average annual shares granted in the prior three years);
−
The
proportion of the CEO's most recent equity grants/awards subject to performance conditions;
−
Whether
the company maintains a sufficient claw-back policy; and
−
Whether
the company maintains sufficient post-exercise/vesting share-holding requirements.
21
Proposals evaluated under the EPSC policy generally include those
to approve or amend (1) stock option plans for employees
and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and
(3) omnibus stock incentive plans for employees and/or employees and directors; amended plans will be further evaluated
case-by-case.
DWS’s policy is
to generally vote against the plan proposal if the combination of above factors indicates that the plan is
not, overall, in shareholders' interests, or if any of the following egregious factors (“overriding
factors”)
apply:
•
Awards
may vest in connection with a liberal change-of-control definition;
•
The
plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly
permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a
history of repricing – for non-listed companies);
•
The
plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances;
•
The
plan is excessively dilutive to shareholders' holdings;
•
The
plan contains an evergreen (automatic share replenishment) feature; or
•
Any
other plan features are determined to have a significant negative impact on shareholder interests.
Further Information on certain EPSC Factors:
Shareholder Value Transfer (SVT)
The cost of the equity
plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option
pricing model that assesses the amount of shareholders’ equity flowing out of the company to employees and directors.
SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed,
shares available under existing plans, and shares granted but unexercised (using two measures, in the case of
plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans,
unless limitations are placed on the most expensive types of awards (for example, full-value awards), the assumption is
made that all awards to be granted will be the most expensive types.
For proposals that are
not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if
it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in
each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for
each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry
group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted
upwards or downwards for the specific company by plugging the company-specific performance measures, size
and cash compensation into the industry cap equations to arrive at the company’s benchmark.22
22
For plans evaluated under the Equity Plan Scorecard policy, the
company's SVT benchmark is considered along with other factors.
Three-Year Value-Adjusted Burn Rate
A “Value-Adjusted
Burn Rate”
is used for stock plan valuations. Value-Adjusted Burn Rate benchmarks will be calculated as
the greater of: (1) an industry-specific threshold based on three-year burn rates within the company's GICS group segmented
by S&P 500, Russell 3000 index (less the S&P 500) and non-Russell 3000 index; and (2) a de minimis threshold
established separately for each of the S&P 500, the Russell 3000 index less the S&P 500, and the non-Russell 3000
index. Year-over-year burn-rate benchmark changes will be limited to a predetermined range above or below the prior
year's burn-rate benchmark.
The Value-Adjusted Burn rate is calculated
as follows:
Value-Adjusted Burn Rate
= ((# of options * option’s dollar value using a Black-Scholes model) + (# of full-value awards *
stock price)) / (Weighted average common shares * stock price).
Egregious Factors
Liberal Change in Control Definition
DWS’s policy is
to generally vote against equity plans if the plan has a liberal definition of change in control and the equity
awards could vest upon such liberal definition of change in control, even though an actual change in control may
not occur. Examples of such a definition include, but are not limited to, announcement or commencement of a tender
offer, provisions for acceleration upon a “potential”
takeover, shareholder approval of a merger or other transactions, or
similar language.
DWS’s policy is
to generally vote against plans that expressly permit the repricing or exchange of underwater stock options/stock
appreciate rights (SARs) without prior shareholder approval. “Repricing”
typically includes the ability to do any of the following:
•
Amend
the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;
•
Cancel
outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise
price of the original options or SARs;
•
Cancel
underwater options in exchange for stock awards; or
•
Provide
cash buyouts of underwater options.
DWS’s policy is
to generally vote against or withhold from members of the Compensation Committee who approved repricing
(as defined above or otherwise determined by ISS), without prior shareholder approval, even if such repricings are
allowed in their equity plan.
DWS’s policy is
to generally vote against plans that do not expressly prohibit repricing or cash buyout of underwater options
without shareholder approval if the company has a history of repricing/buyouts without shareholder approval, and
the applicable listing standards would not preclude them from doing so.
Problematic Pay Practices or Significant Pay-for-Performance
Disconnect
If the equity plan on
the ballot is a vehicle for problematic pay practices, DWS’s policy is to generally vote against the plan.
DWS’s policy is
to generally vote against an equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment.
Considerations in voting against the equity plan may include, but are not limited to:
•
Severity
of the pay-for-performance misalignment;
•
Whether
problematic equity grant practices are driving the misalignment; and/or
•
Whether
equity plan awards have been heavily concentrated to the CEO and/or the other NEOs.
Amending Cash and Equity Plans (including Approval for
Tax Deductibility (162(m))
General Recommendation:
DWS’s policy is to generally vote case-by-case on amendments to cash and equity incentive plans.
DWS’s policy is
to generally vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the
proposal:
•
Addresses
administrative features only; or
•
Seeks
approval for Section 162(m) purposes only and the plan administering committee consists entirely of independent directors.
Note that if the company is presenting the plan to shareholders for the first time for any reason (including after
the company’s initial public offering), or if the proposal is bundled with other material plan amendments, then
the recommendation will be case-by-case (see below).
DWS’s policy is
to generally vote against proposals to amend executive cash, stock, or cash and stock incentive plans if
the proposal:
•
Seeks
approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of
independent directors.
DWS’s policy is
to generally vote case-by-case on all other proposals to amend c ash incentive plans. This includes plans
presented to shareholders for the first time after the company's IPO and/or proposals that bundle material amendment(s) other
than those for Section 162(m) purposes.
DWS’s policy is
to generally vote case-by-case on all other proposals to amend equity incentive plans, considering the
following:
•
If
the proposal requests additional shares and/or the amendments include a term extension or addition of full value
awards as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well
as an analysis of the overall impact of the amendments;
•
If
the plan is being presented to shareholders for the first time (including after the company's IPO), whether or not
additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as
well as an analysis of the overall impact of any amendments;
and
•
If
there is no request for additional shares and the amendments do not include a term extension or addition of full
value awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact
of the amendments, and the EPSC evaluation will be shown only for informational purposes.
In the first two case-by-case
evaluation scenarios, the EPSC evaluation/score is the more heavily weighted consideration.
Specific Treatment of Certain Award Types in Equity
Plan Evaluations
Dividend Equivalent Rights
Options that have Dividend
Equivalent Rights (DERs) associated with them will have a higher calculated award value than
those without DERs under the binomial model, based on the value of these dividend streams. The higher value will
be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan
specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should
be captured.
Operating Partnership (OP) Units in Equity Plan Analysis
of Real Estate Investment Trusts (REITs)
For Real Estate Investment
Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership
(OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value
Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Other Compensation Plans
401(k) Employee Benefit Plans
DWS’s policy is to generally vote
for proposals to implement a 401(k) savings plan for employees.
Employee Stock Ownership Plans (ESOPs)
General Recommendation: DWS’s
policy is to generally vote for proposals to implement an ESOP or increase authorized shares
for existing ESOPs, unless the number of shares allocated to the ESOP is excessive (more than five percent of
outstanding shares).
Employee Stock Purchase Plans—Qualified Plans
DWS’s policy is to generally vote
case-by-case on qualified employee stock purchase plans. DWS’s policy is to generally vote
for employee stock purchase plans where all of the following apply:
•
Purchase
price is at least 85 percent of fair market value;
•
Offering
period is 27 months or less; and
•
The
number of shares allocated to the plan is 10 percent or less of the outstanding shares.
DWS’s policy is
to generally vote against qualified employee stock purchase plans where when the plan features do not
meet all of the above criteria.
Employee Stock Purchase Plans—Non-Qualified Plans
DWS’s policy is to generally vote
case-by-case on nonqualified employee stock purchase plans. DWS’s policy is to generally
vote for nonqualified employee stock purchase plans with all the following features:
•
Broad-based
participation;
•
Limits
on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;
•
Company
matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20
percent from market value; and
•
No
discount on the stock price on the date of purchase when there is a company matching contribution.
DWS’s policy is
to generally vote against nonqualified employee stock purchase plans when the plan features do not meet
all of the above criteria. If the matching contribution or effective discount exceeds the above, DWS may evaluate the
SVT cost of the plan as part of the assessment.
Option Exchange Programs/Repricing Options
DWS’s policy is to generally vote
case-by-case on management proposals seeking approval to exchange/reprice options taking
into consideration:
•
Historic
trading patterns—the
stock price should not be so volatile that the options are likely to be back “in-the-money”
over the near term;
•
Rationale
for the re-pricing—was
the stock price decline beyond management's control;
•
Is
this a value-for-value exchange;
•
Are
surrendered stock options added back to the plan reserve;
•
Timing—repricing
should occur at least one year out from any precipitous drop in company's stock price;
•
Option
vesting—does
the new option vest immediately or is there a black-out period;
•
Term
of the option—the
term should remain the same as that of the replaced option;
•
Exercise
price—should
be set at fair market or a premium to market; and
•
Participants—executive
officers and directors must be excluded.
If the surrendered options
are added back to the equity plans for re-issuance, then also take into consideration the company’s
total cost of equity plans and its three-year average burn rate.
In addition to the above
considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should
clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater
options after a recent precipitous drop in the company’s stock price demonstrates poor timing and warrants additional
scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting
schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest
that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise
price of surrendered options should be above the 52-week high for the stock price.
DWS’s policy is to generally vote
for shareholder proposals to put option repricings to a shareholder vote.
Stock Plans in Lieu of Cash
DWS’s policy is to generally vote
case-by-case on plans that provide participants with the option of taking all or a portion
of their cash compensation in the form of stock.
DWS’s policy is
to generally vote for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
DWS’s policy is
to generally vote case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In
cases where the exchange is not dollar-for-dollar, the request for new or additional shares for such equity program will
be considered using the binomial option pricing model. In an effort to capture the total cost of total compensation, DWS
will not make any adjustments to carve out the in-lieu-of cash compensation.
Transfer Stock Option (TSO) Programs
One-time Transfers: DWS’s policy
is to generally vote against or withhold from compensation committee members if
they fail to submit one-time transfers to shareholders for approval.
DWS’s
policy is to generally vote case-by-case on one-time transfers. DWS’s policy is to generally vote for such proposals if:
•
Executive
officers and non-employee directors are excluded from participating;
•
Stock
options are purchased by third-party financial institutions at a discount to their fair value using option pricing models
such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and
•
There
is a two-year minimum holding period for sale proceeds (cash or stock) for all participants.
Additionally, management
should provide a clear explanation of why options are being transferred to a third-party institution
and whether the events leading up to a decline in stock price were beyond management's control. A review of
the company's historic stock price volatility should indicate if the options are likely to be back “in-the-money”
over the near term.
Ongoing TSO program:
DWS’s policy is to generally vote against equity plan proposals if the details of ongoing TSO programs
are not provided to shareholders. Since TSOs will be one of the award types under a stock plan, the ongoing TSO
program, structure and mechanics must be disclosed to shareholders. The specific criteria to be considered in evaluating
these proposals include, but not limited, to the following:
•
Cost
of the program and impact of the TSOs on company’s total option expense; and
•
Option
repricing policy.
Amendments to existing
plans that allow for introduction of transferability of stock options should make clear that only
options granted post-amendment shall be transferable.
Shareholder Ratification of Director Pay Programs
DWS’s policy is to generally vote
case-by-case on management proposals seeking ratification of non-employee director compensation,
based on the following factors:
•
If
the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support;
and
•
An
assessment of the following qualitative factors:
−
The
relative magnitude of director compensation as compared to companies of a similar profile;
−
The
presence of problematic pay practices relating to director compensation;
−
Director
stock ownership guidelines and holding requirements;
−
Equity
award vesting schedules;
−
The
mix of cash and equity-based compensation;
−
Meaningful
limits on director compensation;
−
The
availability of retirement benefits or perquisites; and
−
The
quality of disclosure surrounding director compensation.
Equity Plans for Non-Employee Directors
DWS’s policy is to generally vote
case-by-case on compensation plans for non-employee directors, based on:
•
The
total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s
estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for
future grants, plus outstanding unvested/unexercised grants;
•
The
company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and
•
The
presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk).
On occasion, non-employee
director stock plans will exceed the plan cost or burn-rate benchmarks when combined with
employee or executive stock plans. In such cases, DWS’s policy is to generally vote case-by-case on the plan taking
into consideration the following qualitative factors:
•
The
relative magnitude of director compensation as compared to companies of a similar profile;
•
The
presence of problematic pay practices relating to director compensation;
•
Director
stock ownership guidelines and holding requirements;
•
Equity
award vesting schedules;
•
The
mix of cash and equity-based compensation;
•
Meaningful
limits on director compensation;
•
The
availability of retirement benefits or perquisites; and
•
The
quality of disclosure surrounding director compensation.
Non-Employee Director Retirement Plans
DWS’s policy is to generally vote
against retirement plans for non-employee directors. DWS’s policy is to generally vote
for shareholder proposals to eliminate retirement plans for non-employee directors.
Shareholder Proposals on Compensation
Bonus Banking/Bonus Banking “Plus”
DWS’s
policy is to generally vote case-by-case on proposals seeking deferral of a portion of annual bonus pay, with ultimate
payout linked to sustained results for the performance metrics on which the bonus was earned (whether for the
named executive officers or a wider group of employees), taking into account the following factors:
•
The
company’s past practices regarding equity and cash compensation;
•
Whether
the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio
(at least 50 percent for full tenure); and
•
Whether
the company has a rigorous claw-back policy in place.
Compensation Consultants—Disclosure of Board or
Company’s Utilization
DWS’s policy is to generally vote
for shareholder proposals seeking disclosure regarding the company, board, or compensation committee’s
use of compensation consultants, such as company name, business relationship(s), and fees paid.
Disclosure/Setting Levels or Types of Compensation for
Executives and Directors
DWS’s policy is to generally vote
for shareholder proposals seeking additional disclosure of executive and director pay
information, provided the information requested is relevant to shareholders' needs, would not put the company at
a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.
DWS’s policy is
to generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise
dictate the amount or form of compensation (such as types of compensation elements or specific metrics) to
be used for executive or directors.
DWS’s policy is
to generally vote against shareholder proposals that mandate a minimum amount of stock that directors must
own in order to qualify as a director or to remain on the board.
DWS’s policy is
to generally vote case-by-case on all other shareholder proposals regarding executive and director pay,
taking into account relevant factors, including but not limited to: company performance, pay level and design versus
peers, history of compensation concerns or pay-for-performance disconnect, and/or the scope and prescriptive nature
of the proposal.
Golden Coffins/Executive Death Benefits
DWS’s policy is to generally vote
for proposals calling for companies to adopt a policy of obtaining shareholder approval for
any future agreements and corporate policies that could oblige the company to make payments or awards following the
death of a senior executive in the form of unearned salary or bonuses, accelerated vesting or the continuation in force
of unvested equity grants, perquisites and other payments or awards made in lieu of compensation. This would not
apply to any benefit programs or equity plan proposals for which the broad-based employee population is eligible.
Hold Equity Past Retirement or for a Significant Period
of Time
DWS’s policy is to generally vote
case-by-case on shareholder proposals asking companies to adopt policies requiring senior
executive officers to retain a portion of net shares acquired through compensation plans. The following factors will
be taken into account:
•
The
percentage/ratio of net shares required to be retained;
•
The
time period required to retain the shares;
•
Whether
the company has equity retention, holding period, and/or stock ownership requirements in place and the
robustness of such requirements;
•
Whether
the company has any other policies aimed at mitigating risk taking by executives;
•
Executives'
actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding
period/retention ratio or the company’s existing requirements; and
•
Problematic
pay practices, current and past, which may demonstrate a short-term versus long-term focus.
DWS’s policy is to generally vote
case-by-case on proposals calling for an analysis of the pay disparity between corporate executives
and other non-executive employees. The following factors will be considered:
•
The
company’s current level of disclosure of its executive compensation setting process, including how the company considers
pay disparity;
•
If
any problematic pay practices or pay-for-performance concerns have been identified at the company; and
•
The
level of shareholder support for the company's pay programs.
DWS’s policy is
to generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio
in a specific way to set or limit executive pay.
Pay for Performance/Performance-Based Awards
DWS’s policy is to generally vote
case-by-case on shareholder proposals requesting that a significant amount of future long-term
incentive compensation awarded to senior executives shall be performance-based and requesting that the board
adopt and disclose challenging performance metrics to shareholders, based on the following analytical steps:
•
First,
vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent
options or restricted stock, indexed options or premium-priced options, unless the proposal is overly restrictive
or if the company has demonstrated that it is using a “substantial”
portion of performance-based awards for its top executives. Standard
stock options and performance-accelerated awards do not meet the criteria to be
considered as performance-based awards. Further, premium-priced options should have a meaningful premium to
be considered performance-based awards; and
•
Second,
assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based program
is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore,
if target performance results in an above target payout, vote for the shareholder proposal due to program’s
poor design. If the company does not disclose the performance metric of the performance-based equity program,
vote for the shareholder proposal regardless of the outcome of the first step to the test.
DWS’s policy is
to generally vote for the shareholder proposal if the company does not meet both of the above two steps.
Pay for Superior Performance
DWS’s policy is to generally vote
case-by-case on shareholder proposals that request the board establish a pay-for-superior performance
standard in the company's executive compensation plan for senior executives. These proposals generally include
the following principles:
•
Set
compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group
median;
•
Deliver
a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested, equity
awards;
•
Provide
the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria
used in the annual and performance-vested long-term incentive components of the plan;
•
Establish
performance targets for each plan financial metric relative to the performance of the company’s peer companies;
and
•
Limit
payment under the annual and performance-vested long-term incentive components of the plan to when the
company’s performance on its selected financial performance metrics exceeds peer group median performance.
Consider the following factors in evaluating
this proposal:
•
What
aspects of the company’s annual and long-term equity incentive programs are performance driven?
•
If
the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle
rates disclosed to shareholders or are they benchmarked against a disclosed peer group?
•
Can
shareholders assess the correlation between pay and performance based on the current disclosure?
•
What
type of industry and stage of business cycle does the company belong to?
Pre-Arranged Trading Plans (10b5-1 Plans)
DWS’s policy is to generally vote
for shareholder proposals calling for the addition of certain safeguards in prearranged trading
plans (10b5-1 plans) for executives. Safeguards may include:
•
Adoption,
amendment, or termination of a 10b5-1 Plan must be disclosed in a Form 8-K;
•
Amendment
or early termination of a 10b5-1 Plan is allowed only under extraordinary circumstances, as determined by
the board;
•
Request
that a certain number of days that must elapse between adoption or amendment of a 10b5-1 Plan and initial
trading under the plan;
•
Reports
on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
•
An
executive may not trade in company stock outside the 10b5-1 Plan;
or
•
Trades
under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the
executive.
Prohibit Outside CEOs from Serving
on Compensation Committees
General Recommendation:
DWS’s policy is to generally vote against proposals seeking a policy to prohibit any outside CEO
from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices
that raise concerns about the performance and composition of the committee.
Recoupment of Incentive or Stock Compensation in Specified
Circumstances
DWS’s policy is to generally vote
case-by-case on proposals to recoup incentive cash or stock compensation made to
senior executives if it is later determined that the figures upon which incentive compensation is earned turn out to
have been in error, or if the senior executive has breached company policy or has engaged in misconduct that may be
significantly detrimental to the company's financial position or reputation, or if the senior executive failed to manage or
monitor risks that subsequently led to significant financial or reputational harm to the company. Many companies have
adopted policies that permit recoupment in cases where an executive's fraud, misconduct, or negligence significantly contributed
to a restatement of financial results that led to the awarding of unearned incentive compensation. However, such
policies may be narrow given that not all misconduct or negligence may result in significant financial restatements. Misconduct,
negligence or lack of sufficient oversight by senior executives may lead to significant financial loss or reputational
damage that may have long-lasting impact.
In considering whether
to support such shareholder proposals, DWS will take into consideration the following factors:
•
If
the company has adopted a formal recoupment policy;
•
The
rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive
or stock compensation;
•
Whether
the company has chronic restatement history or material financial problems;
•
Whether
the company’s policy substantially addresses the concerns raised by the proponent;
•
Disclosure
of recoupment of incentive or stock compensation from senior executives or lack thereof; or
•
Any
other relevant factors.
Severance and
Golden Parachute
Agreements
DWS’s policy is
to generally vote case-by-case on shareholder proposals requiring
that executive severance (including
change-in-control
related) arrangements
or payments be submitted
for shareholder ratification.
Factors that will be considered include,
but not limited to:
•
The
company’s
severance or change-in-control agreements in place,
and
the presence of problematic features
(such
as excessive severance entitlements, single
triggers, excise
tax gross-ups, etc.);
•
Any
existing limits on cash severance payouts or policies which require shareholder ratification of severance payments exceeding
a certain level;
•
Any
recent severance-related controversies; and
•
Whether
the proposal is overly prescriptive,
such
as requiring shareholder approval of
severance that does not exceed market norms.
Share Buyback Impact on Incentive
Program Metrics
DWS’s policy is to generally vote
case-by-case on proposals requesting the company exclude the impact of share buybacks
from the calculation of incentive program metrics, considering the following factors:
•
The
frequency and timing of the company's share buybacks;
•
The
use of per-share metrics in incentive plans;
•
The
effect of recent buybacks on incentive metric results and payouts; and
•
Whether
there is any indication of metric result manipulation.
Supplemental Executive Retirement Plans (SERPs)
DWS’s policy is to generally vote
for shareholder proposals requesting to put extraordinary benefits contained in SERP agreements
to a shareholder vote unless the company’s executive pension plans do not contain excessive benefits beyond
what is offered under employee-wide plans.
DWS’s policy is
to generally vote for shareholder proposals requesting to limit the executive benefits provided under the
company’s supplemental executive retirement plan (SERP) by limiting covered compensation to a senior executive’s annual
salary or those pay elements covered for the general employee population.
DWS’s policy is to generally vote
for proposals calling for companies to adopt a policy of not providing tax gross-up payments
to executives, except in situations where gross-ups are provided pursuant to a plan, policy, or arrangement applicable
to management employees of the company, such as a relocation or expatriate tax equalization policy.
Termination of Employment Prior to Severance Payment/Eliminating
Accelerated Vesting of Unvested Equity
DWS’s policy is to generally vote
case-by-case on shareholder proposals seeking a policy requiring termination of employment
prior to severance payment and/or eliminating accelerated vesting of unvested equity.
The following factors will be considered:
•
The
company's current treatment of equity upon employment termination and/or in change-in-control situations (i.e.,
vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the
treatment of performance shares, etc.); and
•
Current
employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements.
DWS’s policy is
to generally vote for proposals seeking a policy that prohibits automatic acceleration of the vesting of
equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control
(except for pro rata vesting considering the time elapsed and attainment of any related performance goals between
the award date and the change in control).
ROUTINE
/ MISCELLANEOUS
DWS’s policy is to generally vote
against proposals to provide management with the authority to adjourn an annual or
special meeting absent compelling reasons to support the proposal.
DWS’s policy is
to generally vote for proposals that relate specifically to soliciting votes for a merger or transaction if
supporting that merger or transaction. DWS’s policy is to generally vote against proposals if the wording is too vague or
if the proposal includes “other
business.”
Amend Quorum Requirements
DWS’s policy is to generally vote
case-by-case on proposals to reduce quorum requirements for shareholder meetings below
a majority of the shares outstanding, taking into consideration:
•
The
new quorum threshold requested;
•
The
rationale presented for the reduction;
•
The
market capitalization of the company (size, inclusion in indices);
•
The
company’s ownership structure;
•
Previous
voter turnout or attempts to achieve quorum;
•
Any
provisions or commitments to restore quorum to a majority of shares outstanding, should voter turnout improve sufficiently;
and
•
Other
factors as appropriate.
In general, a quorum threshold kept as
close to a majority of shares outstanding as is achievable is preferred.
DWS’s policy is
to generally vote case-by-case on directors who unilaterally lower the quorum requirements below a majority
of the shares outstanding, taking into consideration the factors listed above.
DWS’s policy is to generally vote
for bylaw or charter changes that are of a housekeeping nature (updates or corrections).
General Recommendation:
DWS’s policy is to generally vote for proposals to change the corporate name unless there
is compelling evidence that the change would adversely impact shareholder value.
Change Date, Time, or Location of Annual Meeting
DWS’s
policy is to generally vote for management proposals to change the date, time, or location of the annual meeting unless
the proposed change is unreasonable.
DWS’s policy is
to generally vote against shareholder proposals to change the date, time, or location of the annual meeting
unless the current scheduling or location is unreasonable.
DWS’s policy is to generally vote
against proposals to approve other business when it appears as a voting item.
SOCIAL AND ENVIRONMENTAL ISSUES
DWS’s policy will consider the Coalition
for Environmentally Responsible Economies (“CERES”)
guidance
on certain environmental
and social matters contained in the CERES Roadmap 2030 as well as the recommendations of the
ISS Sustainability Proxy Voting Guidelines
“Sustainability”
Policy on social and sustainability issues. DWS will rely on ISS to
identify shareholder proposals addressing CERES Roadmap 2030 to examine theses proxy items and to provide DWS
with a voting recommendation based on ISS’s application of the Guidelines including any factors set forth in the
Guidelines. DWS will generally vote such proxies in accordance with ISS’s
recommendations for topics covered under CERES Roadmap 2030.
DWS’s policy is
to generally vote for social and environmental shareholder proposals that are in the best economic interest
of clients. DWS’s general policy is to vote for disclosure reports that seek additional information particularly when
it appears companies have not adequately addressed shareholders' social, workforce, and environmental concerns. In
determining vote recommendations on shareholder social, workforce, and environmental proposals, DWS will analyze the
following factors:
•
Whether
the proposal itself is well framed and reasonable;
•
Whether
adoption of the proposal would have either a positive or negative impact on the company’s short-term or
long-term share value
•
Whether
the company’s analysis and voting recommendation to shareholders is persuasive
•
The
degree to which the company’s stated position on the issues could affect its reputation or sales, or leave it vulnerable
to boycott or selective purchasing
•
Whether
the subject of the proposal is best left to the discretion of the board
•
Whether
the issues presented in the proposal are best dealt with through legislation, government regulation, or company-specific
action
•
The
company’s approach compared with its peers or any industry standard practices for addressing the issue(s) raised
by the proposal
•
Whether
the company has already responded in an appropriate or sufficient manner to the issue(s) raised by the proposal
•
Whether
there are significant controversies, fines, penalties or litigation associated with the company’s practices related
to the issue(s) raised in the proposal
•
If
the proposal requests increased disclosure or greater transparency, whether sufficient information is publicly available
to shareholders and whether it would be unduly burdensome for the company to compile and avail the requested
information to shareholders in a more comprehensive or amalgamated fashion
•
Whether
implementation of the proposal would achieve the objectives sought in the proposal
Endorsement of Principles
DWS’s policy is to generally vote
case-by-case on proposals seeking a company's endorsement of principles that support
a particular public policy position. Endorsing a set of principles may require a company to take a stand on an issue
that is beyond its own control and may limit its flexibility with respect to future developments. Management and
the board should be afforded the flexibility to make decisions on specific public policy positions based on their own
assessment of the most beneficial strategies for the company.
DWS’s policy is to generally vote
for proposals seeking a report on a company’s animal welfare standards, or animal welfare-related
risks, considering whether:
•
The
company has already published a set of animal welfare standards and monitors compliance;
•
The
company’s standards are comparable to industry peers; and
•
There
are no recent significant fines, litigation, or controversies related to the company’s and/or its suppliers' treatment
of animals.
DWS’s policy is to generally vote
case-by-case on proposals to phase out the use of animals in product testing, considering whether:
•
The
company is conducting animal testing programs that are unnecessary or not required by regulation;
•
The
company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers;
or
•
There
are recent, significant fines or litigation related to the company’s treatment of animals.
DWS’s policy is to generally vote
case-by-case on proposals requesting the implementation of Controlled Atmosphere Killing
(CAK) methods at company and/or supplier operations unless such methods are required by legislation or generally accepted
as the industry standard.
DWS’s
policy is to generally vote case-by-case on proposals requesting a report on the feasibility of implementing CAK
methods at company and/or supplier operations considering the availability of existing research conducted by the
company or industry groups on this topic and any fines or litigation related to current animal processing procedures at
the company.
Genetically Modified Ingredients
DWS’s policy is to generally vote
case-by-case on proposals requesting that a company voluntarily label genetically engineered
(GE) ingredients in its products.
DWS’s policy is
to generally vote for proposals asking for a report on the feasibility of labeling products containing GE
ingredients, taking into account:
•
The
potential impact of such labelling on the company's business;
•
The
quality of the company’s disclosure on GE product labelling, related voluntary initiatives, and how this disclosure compares
with industry peer disclosure; and
•
Company’s
current disclosure on the feasibility of GE product labelling.
DWS’s policy is
to generally vote case-by-case on proposals seeking a report on the social, health, and environmental effects
of genetically modified organisms (GMOs).
DWS’s policy is
to generally vote against proposals to phase out GE ingredients from the company's products, or proposals
asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products.
Reports on Potentially Controversial Business/Financial
Practices
DWS’s policy is to generally vote
for requests for reports on a company’s potentially controversial business or financial practices
or products, taking into account:
•
Whether
the company has adequately disclosed mechanisms in place to prevent abuses;
•
Whether
the company has adequately disclosed the financial risks of the products/practices in question;
•
Whether
the company has been subject to violations of related laws or serious controversies; and
•
Peer
companies’ policies/practices in this area.
Pharmaceutical Pricing, Access to Medicines, and Prescription
Drug Reimportation
DWS’s policy is to generally vote
against
proposals requesting that companies implement specific price restraints on pharmaceutical
products taking into account whether the company fails to adhere to legislative guidelines or industry norms
in its product pricing practices.
DWS’s policy is
to generally vote for proposals requesting that a company report on its product pricing or access to medicine
policies, considering:
•
The
potential for reputational, market, and regulatory risk exposure;
•
Existing
disclosure of relevant policies;
•
Deviation
from established industry norms;
•
Relevant
company initiatives to provide research and/or products to disadvantaged consumers;
•
Whether
the proposal focuses on specific products or geographic regions;
•
The
potential burden and scope of the requested report; and
•
Recent
significant controversies, litigation, or fines at the company.
DWS’s policy is
to generally vote for proposals requesting that a company report on the financial and legal impact of its
prescription drug reimportation policies unless such information is already publicly disclosed.
DWS’s policy is
to generally vote case-by-case on proposals requesting that companies adopt specific policies to encourage or
constrain prescription drug reimportation.
Product Safety and Toxic/Hazardous Materials
DWS’s policy is to generally vote
for proposals requesting that a company report on its policies, initiatives/procedures, and
oversight mechanisms related to toxic/hazardous materials or product safety in its supply chain, considering whether:
•
The
company already discloses similar information through existing reports such as a supplier code of conduct and/or
a sustainability report;
•
The
company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and
supply chain reporting and monitoring program based on industry norms or similar standards within a specified time
frame; or
•
The
company has not been recently involved in relevant significant controversies, fines, or litigation.
DWS’s policy is
to generally vote for resolutions requesting that companies develop a feasibility assessment to phase-out of
certain toxic/hazardous materials, or evaluate and disclose the potential financial and legal risks associated with utilizing
certain materials, considering:
•
The
company’s current level of disclosure regarding its product safety policies, initiatives, and oversight mechanisms;
•
Current
regulations in the markets in which the company operates; and
•
Recent
significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company.
DWS’s policy is to generally vote
against
resolutions requiring that a company reformulate its products.
Tobacco-Related Proposals
DWS’s policy is to generally vote
case-by-case on resolutions regarding the advertisement of tobacco products, considering:
•
Recent
related fines, controversies, or significant litigation;
•
Whether
the company complies with relevant laws and regulations on the marketing of tobacco;
•
Whether
the company’s advertising restrictions deviate from those of industry peers;
•
Whether
the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth;
and
•
Whether
restrictions on marketing to youth extend to foreign countries.
DWS’s policy is to generally vote
case-by-case on proposals regarding second-hand smoke, considering;
•
Whether
the company complies with all laws and regulations;
•
The
degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and
•
The
risk of any health-related liabilities.
DWS’s policy is
to generally vote against
resolutions to cease production of tobacco-related products, to avoid selling products
to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities. Such
business decisions are better left to company management or portfolio managers.
DWS’s policy is
to generally vote against
proposals regarding tobacco product warnings. Such decisions
are better left to public health authorities.
Say on Climate (SoC) Management Proposals
DWS’s policy is to generally vote
case-by-case on management proposals that request shareholders to approve the company’s
transition action plan23,
taking into account the completeness and rigor of the plan.
23
Variations of this request also include climate transition related
ambitions, or commitment to reporting on the implementation of
a climate plan.
Information that will be considered where
available includes the following:
•
The
extent to which the company’s climate related disclosures are in line with TCFD recommendations and meet other
market standards;
•
Disclosure
of its operational and supply chain Green House Gas (GHG) emissions (Scopes 1, 2, and 3);
•
The
completeness and rigor of company’s short-, medium-, and long-term targets for reducing operational and supply
chain GHG emissions (Scopes 1, 2 and 3 if relevant);
•
Whether
the company has sought and received third-party approval that its targets are science-based;
•
Whether
the company has made a commitment to be “net
zero”
for operational and supply chain emissions (Scopes 1, 2, and
3) by 2050;
•
Whether
the company discloses a commitment to report on the implementation of its plan in subsequent years;
•
Whether
the company’s climate data has received third-party assurance;
•
Disclosure
of how the company’s lobbying activities and its capital expenditures align with company strategy;
•
Whether
there are specific industry decarbonization challenges; and
•
The
company’s related commitment, disclosure, and performance compared to its industry peers.
Say on Climate (SoC) Shareholder Proposals
DWS’s policy is to generally vote
case-by-case on shareholder proposals that request the company to disclose a report on
providing its GHG emissions levels and reduction targets and/or its upcoming/approved climate transition action plan
and provide shareholders the opportunity to express approval or disapproval of its GHG emissions reduction plan, taking
into account information such as the following:
•
The
completeness and rigor of the company’s climate-related disclosure;
•
The
company’s actual GHG emissions performance;
•
Whether
the company has been the subject of recent, significant violations, fines litigation, or controversy related to
its GHG emissions; and
•
Whether
the proposal’s request is unduly burdensome (scope or timeframe) or overly prescriptive.
Climate Change/Greenhouse Gas (GHG) Emissions
DWS’s policy is to generally vote
for resolutions requesting that a company disclose information on the financial, physical,
or regulatory risks it faces related to climate change on its operations and investments or on how the company identifies,
measures, and manages such risks, considering:
•
Whether
the company already provides current, publicly-available information on the impact that climate change may
have on the company as well as associated company policies and procedures to address related risks and/or opportunities;
•
The
company's level of disclosure compared to industry peers; and
•
Whether
there are significant controversies, fines, penalties, or litigation associated with the company's climate change-related
performance.
DWS’s policy is
to generally vote for proposals requesting a report on greenhouse
gas (GHG) emissions from company operations and/or products and
operations, considering whether:
•
The
company already discloses current, publicly available information
on the impacts that GHG emissions may have on the company as
well as associated company policies and procedures to address related risks and/or opportunities;
•
The
company's level of disclosure is comparable to that of industry peers; or
•
There
are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions.
DWS’s
policy is to generally vote for proposals that call for the adoption of GHG reduction goals from products and operations,
taking into account:
•
Whether
the company provides disclosure of year-over-year GHG emissions performance data;
•
Whether
company disclosure lags behind industry peers;
•
The
company's actual GHG emissions performance;
•
The
company's current GHG emission policies, oversight mechanisms, and related initiatives; and
•
Whether
the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
GHG emissions.
DWS’s policy is to generally vote
for proposals requesting that a company report on its energy efficiency policies, considering
whether:
•
The
company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy
efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or
•
The
proponent requests adoption of specific energy efficiency goals within specific timelines.
DWS’s policy is to generally vote
for requests for reports on the feasibility of developing renewable energy resources unless
the report would be duplicative of existing disclosure or irrelevant to the company’s line of business.
DWS’s policy is
to generally vote case-by-case on proposals seeking increased investment in renewable energy resources taking
into consideration whether the terms of the resolution are overly restrictive.
DWS’s policy is
to generally vote for proposals that call for the adoption of renewable energy goals, taking into account:
•
The
scope and structure of the proposal;
•
The
company's current level of disclosure on renewable energy use and GHG emissions; and
•
The
company's disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate climate
change risks.
DWS’s policy is to generally vote
for requests for reports on a company's efforts to diversify the board, considering whether:
•
The
gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of
similar size and business; or
•
The
board already reports on its nominating procedures and gender and racial minority initiatives on the board and
within the company.
DWS’s policy is
to generally vote for proposals asking a company to increase the gender and racial minority representation on
its board, taking into account:
•
The
degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
•
The
level of gender and racial minority representation that exists at the company’s industry peers;
•
The
company’s established process for addressing gender and racial minority board representation;
•
Whether
the proposal includes an overly prescriptive request to amend nominating committee charter language;
•
The
independence of the company’s nominating committee;
•
Whether
the company uses an outside search firm to identify potential director nominees; and
•
Whether
the company has had recent controversies, fines, or litigation regarding equal employment practices.
DWS’s policy is to generally vote
for proposals requesting a company disclose its diversity policies or initiatives, or proposals
requesting disclosure of a company’s comprehensive workforce diversity data, including requests for EEO-1 data,
considering whether:
•
The
company publicly discloses equal opportunity policies and initiatives in a comprehensive manner;
•
The
company already publicly discloses comprehensive workforce diversity data; or
•
The
company has no recent significant EEO-related violations or litigation.
DWS’s policy is
to generally vote for shareholder proposals requesting nondiscrimination in salary, wages and all benefits.
DWS’s policy is
to generally vote for shareholder proposals calling for action on equal employment opportunity and antidiscrimination.
DWS’s policy is
to generally vote case-by-case on proposals seeking information on the diversity efforts of suppliers and
service providers.
Gender Identity, Sexual Orientation
and Domestic Partner Benefits
DWS’s policy is to generally vote
for proposals seeking to amend a company’s EEO statement or diversity policies to
prohibit discrimination based on sexual orientation and/or gender identity,
unless the change would be unduly burdensome.
Generally, vote for proposals to extend company benefits to domestic
partners.
DWS’s policy is
to generally vote for shareholder proposals seeking reports on a company’s initiatives to create a workplace
free of discrimination on the basis of sexual orientation or gender identity.
DWS’s
policy is to generally vote against shareholder proposals that seek to eliminate protection already afforded to gay
and lesbian employees.
Gender, Race / Ethnicity Pay Gap
DWS’s policy is to generally vote
case-by-case on
requests for reports on a company's pay data by gender or race /ethnicity,
or a report on a company’s policies and goals to reduce any gender, or race /ethnicity pay gaps, taking into account:
•
The
company's current policies and disclosure related to both its diversity and inclusion policies and practices and
its compensation philosophy on fair and equitable compensation practices;
•
Whether
the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race,
or ethnicity pay gap issues;
•
The
company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives is compared to its industry
peers; and
•
Local
laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.
Racial Equity and/or Civil Rights Audit Guidelines
DWS’s policy is to generally vote
for proposals asking a company to conduct an independent racial equity and/or civil rights
audit, taking into account:
•
The
company's established process or framework for addressing racial inequity and discrimination internally;
•
Whether
the company adequately discloses workforce diversity and inclusion metrics and goals;
•
Whether
the company has issued a public statement related to its racial justice efforts in recent years; or has committed
to internal policy review;
•
Whether
the company has engaged with impacted communities, stakeholders, and civil rights experts;
•
The
company’s track record in recent years of racial justice measures and outreach externally;
•
Whether
the company has been the subject of recent controversy, litigation, or regulatory actions related to racial inequity
or discrimination.
Environment and Sustainability
Facility and Workplace Safety
DWS’s policy is to generally vote
for requests for workplace safety reports, including reports on accident risk reduction efforts,
taking into account:
•
The
company’s current level of disclosure of its workplace health and safety performance data, health and safety management
policies, initiatives, and oversight mechanisms;
•
The
nature of the company’s business, specifically regarding company and employee exposure to health and safety
risks;
•
Recent
significant controversies, fines, or violations related to workplace health and safety; and
•
The
company's workplace health and safety performance relative to industry peers.
DWS’s policy is
to generally vote case-by-case on resolutions requesting that a company report on or implement safety/security risk
procedures associated with their operations and/or facilities, considering:
•
The
company’s compliance with applicable regulations and guidelines;
•
The
company’s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring;
and
•
The
existence of recent, significant violations, fines, or controversy regarding the safety and security of the company’s operations
and/or facilities.
General Environmental Proposals and Community Impact
Assessments
DWS’s policy is to generally vote
for requests for reports on policies and/or the potential (community) social and/or environmental
impact of company operations, considering:
•
Current
disclosure of applicable policies and risk assessment report(s) and risk management procedures;
•
The
impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure
to manage the company’s operations in question, including the management of relevant community and stakeholder
relations;
•
The
nature, purpose, and scope of the company’s operations in the specific region(s);
•
The
degree to which company policies and procedures are consistent with industry norms; and
•
The
scope of the resolution.
DWS’s policy is to generally vote
for proposals requesting greater disclosure of a company's (natural gas) hydraulic fracturing
operations, including measures the company has taken to manage and mitigate the potential community and
environmental impacts of those operations, considering:
•
The
company's current level of disclosure of relevant policies and oversight mechanisms;
•
The
company's current level of such disclosure relative to its industry peers;
•
Potential
relevant local, state, or national regulatory developments; and
•
Controversies,
fines, or litigation related to the company's hydraulic fracturing operations.
Operations in Protected Areas
DWS’s policy is to generally vote
for requests for reports on potential environmental damage as a result of company operations
in protected regions, considering whether:
•
Operations
in the specified regions are not permitted by current laws or regulations;
•
The
company does not currently have operations or plans to develop operations in these protected regions; or
•
The
company’s disclosure of its operations and environmental policies in these regions is comparable to industry peers.
DWS’s policy is
to generally vote for shareholder proposals asking companies to prepare reports or adopt policies on operations
that include mining, drilling or logging in environmentally sensitive areas.
DWS’s policy is
to generally vote for shareholder proposals seeking to curb or reduce the sale of products manufactured from
materials extracted from environmentally sensitive areas such as old growth forests.
DWS’s policy is to generally vote
for proposals to report on an existing recycling program or adopt a new recycling program,
taking into account:
•
The
nature of the company’s business;
•
The
current level of disclosure of the company's existing related programs;
•
The
timetable and methods of program implementation prescribed by the proposal;
•
The
company’s ability to address the issues raised in the proposal; and
•
How
the company's recycling programs compare to similar programs of its industry peers.
DWS’s policy is to generally vote
for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms
related to social, economic, and environmental sustainability, considering whether:
•
The
company already discloses similar information through existing reports or policies such as an environment, health,
and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or
•
The
company has formally committed to the implementation of a reporting program based on Global Reporting Initiative
(GRI) guidelines or a similar standard within a specified time frame.
DWS’s policy is to generally vote
for proposals requesting a company report on, or adopt a new policy on, water-related risks
and concerns, taking into account:
•
The
company's current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;
•
Whether
or not the company's existing water-related policies and practices are consistent with relevant internationally recognized
standards and national/local regulations;
•
The
potential financial impact or risk to the company associated with water-related concerns or issues; and
•
Recent,
significant company controversies, fines, or litigation regarding water use by the company and its suppliers.
DWS’s policy is to generally vote
against proposals restricting a company from making charitable contributions.
Charitable contributions
are generally useful for assisting worthwhile causes and for creating goodwill in the community. In
the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are
in the best interests of the company.
Data Security, Privacy, and Internet Issues
DWS’s policy is to generally vote
case-by-case on
proposals requesting the disclosure or implementation of data security, privacy,
or information access and management policies and procedures, considering:
•
The
level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech, information
access and management, and Internet censorship;
•
Engagement
in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow
of information on the Internet;
•
The
scope of business involvement and of investment in countries whose governments censor or monitor the Internet
and other telecommunications;
•
Applicable
market-specific laws or regulations that may be imposed on the company; and
•
Controversies,
fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship.
Environmental, Social, and Governance (ESG) Compensation-Related
Proposals
DWS’s policy is to generally vote
for proposals seeking a report or additional disclosure on the company’s approach, policies,
and practices on incorporating environmental and social criteria into its executive compensation strategy, considering:
•
The
scope and prescriptive nature of the proposal;
•
The
company’s current level of disclosure regarding its environmental and social performance and governance;
•
The
degree to which the board or compensation committee already discloses information on whether it has considered related
environmental or social criteria; and
•
Whether
the company has significant controversies or regulatory violations regarding social and/or environmental issues.
Human Rights, Human Capital Management, and International
Operations
DWS’s policy is to generally vote
for proposals requesting a report on company or company supplier labor and/or human
rights standards and policies unless such information is already publicly disclosed.
DWS’s policy is
to generally vote for proposals to implement company or company supplier labor and/or human rights standards
and policies, considering:
•
The
degree to which existing relevant policies and practices are disclosed;
•
Whether
or not existing relevant policies are consistent with internationally recognized standards;
•
Whether
company facilities and those of its suppliers are monitored and how;
•
Company
participation in fair labor organizations or other internationally recognized human rights initiatives;
•
Scope
and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;
•
Recent,
significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;
•
The
scope of the request; and
•
Deviation
from industry sector peer company standards and practices.
DWS’s policy is
to generally vote for proposals requesting that a company conduct an assessment of the human rights risks
in its operations or in its supply chain, or report on its human rights risk assessment process, considering:
•
The
degree to which existing relevant policies and practices are disclosed, including information on the implementation of
these policies and any related oversight mechanisms;
•
The
company’s industry and whether the company or its suppliers operate in countries or areas where there is a
history of human rights concerns;
•
Recent
significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and
whether the company has taken remedial steps; and
•
Whether
the proposal is unduly burdensome or overly prescriptive.
DWS’s policy is to generally vote
case-by-case on
requests for a report on a company’s use of mandatory arbitration on
employment-related claims, taking into account:
•
The
company's current policies and practices related to the use of mandatory arbitration agreements on workplace claims;
•
Whether
the company has been the subject of recent controversy, litigation, or regulatory actions related to the use
of mandatory arbitration agreements on workplace claims; and
•
The
company's disclosure of its policies and practices related to the use of mandatory arbitration agreements compared
to its peers.
Operations in High Risk Markets
DWS’s policy is to generally vote
case-by-case on
requests for a report on a company’s potential financial and reputational risks
associated with operations in “high-risk”
markets, such as a terrorism-sponsoring state or politically/socially unstable region,
taking into account:
•
The
nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption;
•
Current
disclosure of applicable risk assessment(s) and risk management procedures;
•
Compliance
with U.S. sanctions and laws;
•
Consideration
of other international policies, standards, and laws; and
•
Whether
the company has been recently involved in recent, significant controversies, fines, or litigation related to
its operations in “high-risk”
markets.
DWS’s policy is to generally vote
case-by-case on
proposals calling for companies to report on the risks associated with
outsourcing/plant closures, considering:
•
Controversies
surrounding operations in the relevant market(s);
•
The
value of the requested report to shareholders;
•
The
company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and
•
The
company’s existing human rights standards relative to industry peers.
DWS’s policy is to generally vote
case-by-case on
requests for a report on company actions taken to strengthen policies and
oversight to prevent workplace sexual harassment, or a report on risks posed by a company’s failure to prevent workplace
sexual harassment, taking into account:
•
The
company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment;
•
Whether
the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual
harassment issues; and
•
The
company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers.
Weapons and Military Sales
DWS’s policy is to generally vote
against
reports on foreign military sales or offsets, taking into account
when such disclosures may involve sensitive
and confidential information. Moreover, companies must comply
with government controls and reporting on foreign military sales.
DWS’s policy is
to generally vote case-by-case on
shareholder proposals seeking a report on the renouncement of future
landmine production.
DWS’s policy is
to generally vote against
shareholder proposals requesting a report on the involvement, policies, and procedures
related to depleted uranium and nuclear weapons.
DWS’s policy is
to generally vote case-by-case on proposals that call for outright restrictions on foreign military sales.
DWS’s policy is
to generally vote for shareholder proposals asking companies to review and amend, if necessary, the company’s
code of conduct and statements of ethical criteria for military production related contract bids, awards and
execution.
DWS’s policy is to generally vote
case-by-case on
proposals requesting information on a company’s lobbying (including direct,
indirect, and grassroots lobbying) activities, policies, or procedures, considering:
•
The
company’s current disclosure of relevant lobbying policies, and management and board oversight;
•
The
company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage
in lobbying activities; and
•
Recent
significant controversies, fines, or litigation regarding the company’s lobbying-related activities.
DWS’s policy is to generally vote
for proposals requesting greater disclosure of a company's political contributions and
trade association spending policies and activities, considering:
•
The
company's policies, and management and board oversight related to its direct political contributions and payments
to trade associations or other groups that may be used for political purposes;
•
The
company's disclosure regarding its support of, and participation in, trade associations or other groups that may
make political contributions; and
•
Recent
significant controversies, fines, or litigation related to the company's political contributions or political activities.
DWS’s
policy is to generally vote against
proposals barring a company from making political contributions. Businesses are
affected by legislation at the federal, state, and local level; barring political contributions can put the company at a
competitive disadvantage.
DWS’s policy is
to generally vote against
proposals to publish in newspapers and other media a company's political contributions.
Such publications could present significant cost to the company without providing commensurate value to
shareholders.
Political Expenditures and Lobbying Congruency
DWS’s policy is to generally vote
case-by-case on
proposals requesting greater disclosure of a company’s alignment of
political contributions, lobbying and electioneering spending with a company’s publicly stated values and policies, unless
the terms of the proposal are unduly restrictive. Additionally, DWS will consider whether:
•
The
company's policies, management, board oversight, governance processes and level of disclosure related to direct
political contributions, lobbying activities, and payments to trade associations, political action committees, or
other groups that may be used for political purposes;
•
The
company’s disclosure regarding: the reasons for its support of candidates for public offices; the reasons for support
of and participation in trade associations or other groups that may make political contributions; and other political
activities;
•
Any
incongruencies identified between a company’s direct and indirect political expenditures and its publicly stated values
and priorities; and
•
Recent
significant controversies related to the company’s direct and indirect lobbying, political contributions or political
activities.
DWS’s policy is
to generally vote case-by-case on proposals requesting comparison of a company’s political spending to
objectives that can mitigate material risk for the company, such as limiting global warming.
DWS’s policy is to generally vote
against
proposals asking a company to affirm political nonpartisanship in the workplace, considering
whether:
•
There
are no recent, significant controversies, fines, or litigation regarding the company’s political contributions or
trade association spending; and
•
The
company has procedures in place to ensure that employee contributions to company-sponsored political action
committees (PACs) are strictly voluntary and prohibit coercion.
DWS’s policy is
to generally vote against
shareholder proposals calling for the disclosure of prior government service of
the company’s key executives and whether such service had
a bearing on the business of the company.
REGISTERED
INVESTMENT COMPANY PROXIES
DWS’s policy is to generally vote
case-by-case on the election of directors and trustees.
Closed End Fund - Unilateral Opt-In to Control Share
Acquisition Statutes
For closed-end management investment companies
(CEFs), DWS’s policy is to generally vote on a case-by-case basis for
nominating/governance committee members (or other directors on a case-by-case basis) at CEFs that have not provided
a compelling rationale for opting-in to a Control Share Acquisition Statute, nor submitted a by-law amendment to
a shareholder vote.
Converting Closed-end Fund to Open-end Fund
DWS’s policy is to generally vote
case-by-case on conversion proposals, considering the following factors:
•
Past
performance as a closed-end fund;
•
Market
in which the fund invests;
•
Measures
taken by the board to address the discount; and
•
Past
shareholder activism, board activity, and votes on related proposals.
DWS’s policy is to generally vote
case-by-case on proxy contests, considering the following factors:
•
Past
performance relative to its peers;
•
Market
in which the fund invests;
•
Measures
taken by the board to address the issues;
•
Past
shareholder activism, board activity, and votes on related proposals;
•
Strategy
of the incumbents versus the dissidents;
•
Independence
of directors;
•
Experience
and skills of director candidates;
•
Governance
profile of the company; and
•
Evidence
of management entrenchment.
Investment Advisory Agreements
DWS’s policy is to generally vote
case-by-case on investment advisory agreements, considering the following factors:
•
Proposed
and current fee schedules;
•
Fund
category/investment objective;
•
Performance
benchmarks;
•
Share
price performance as compared with peers;
•
Resulting
fees relative to peers; and
•
Assignments
(where the advisor undergoes a change of control).
Approving New Classes or Series of Shares
DWS’s policy is to generally vote
case-by-case on the establishment of new classes or series of shares.
Preferred Stock Proposals
DWS’s policy is to generally vote
case-by-case on the authorization for or increase in preferred shares, considering the
following factors:
•
Stated
specific financing purpose;
•
Possible
dilution for common shares; and
•
Whether
the shares can be used for antitakeover purposes.
DWS’s policy is to generally vote
case-by-case on policies under the Investment Advisor Act of 1940, considering the following
factors:
•
Potential
competitiveness;
•
Regulatory
developments;
•
Current
and potential returns; and
•
Current
and potential risk.
DWS’s policy is
to generally vote for these amendments as long as the proposed changes do not fundamentally alter the
investment focus of the fund and do comply with the current SEC interpretation.
Changing a Fundamental Restriction
to a Nonfundamental Restriction
DWS’s policy is to generally vote
case-by-case on proposals to change a fundamental restriction to a non-fundamental restriction,
considering the following factors:
•
The
fund's target investments;
•
The
reasons given by the fund for the change; and
•
The
projected impact of the change on the portfolio.
Change Fundamental Investment Objective to Nonfundamental
DWS’s policy is to generally vote
case-by-case on proposals to change a fund’s fundamental investment objective to non-fundamental.
DWS’s policy is to generally vote
case-by-case on name change proposals, considering the following factors:
•
Political/economic
changes in the target market;
•
Consolidation
in the target market; and
•
Current
asset composition.
Change in Fund's Subclassification
DWS’s policy is to generally vote
case-by-case on changes in a fund's sub-classification, considering the following factors:
•
Potential
competitiveness;
•
Current
and potential returns;
•
Risk
of concentration; and
•
Consolidation
in target industry.
Business Development Companies—Authorization to
Sell Shares of Common Stock at a Price below Net Asset Value
DWS’s policy is to generally vote
case-by-case on proposals authorizing the board to issue shares below Net Asset Value
(NAV) if:
•
The
proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders
approve the underlying proposal, as required under the Investment Company Act of 1940;
•
The
sale is deemed to be in the best interests of shareholders by (1) a majority of the company's independent directors
and (2) a majority of the company's directors who have no financial interest in the issuance; and
•
The
company has demonstrated responsible past use of share issuances by either:
•
Outperforming
peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or
•
Providing
disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts
to NAV and economic dilution to existing non-participating shareholders.
Disposition of Assets/Termination/Liquidation
DWS’s policy is to generally vote
case-by-case on proposals to dispose of assets, to terminate or liquidate, considering the
following factors:
•
Strategies
employed to salvage the company;
•
The
fund’s past performance;
•
The
terms of the liquidation.
Changes to the Charter Document
DWS’s policy is to generally vote
case-by-case on changes to the charter document, considering the following factors:
•
The
degree of change implied by the proposal;
•
The
efficiencies that could result;
•
The
state of incorporation; and
•
Regulatory
standards and implications.
Changing the Domicile of a Fund
DWS’s policy is to generally vote
case-by-case on re-incorporations, considering the following factors:
•
Regulations
of both states;
•
Required
fundamental policies of both states; and
•
The
increased flexibility available.
Authorizing the Board to Hire and Terminate Subadvisors
Without Shareholder Approval
DWS’s
policy is to generally vote case-by-case on proposals authorizing the board to hire or terminate subadvisors
without shareholder approval if the investment advisor
currently employs only one subadvisor.
DWS’s policy is to generally vote
case-by-case on distribution agreement proposals, considering the following factors:
•
Fees
charged to comparably sized funds with similar objectives;
•
The
proposed distributor’s reputation and past performance;
•
The
competitiveness of the fund in the industry; and
•
The
terms of the agreement.
DWS’s policy is to generally vote
case-by-case on the establishment of a master-feeder structure.
DWS’s policy is to generally vote
case-by-case on merger proposals, considering the following factors:
•
Resulting
fee structure;
•
Performance
of both funds;
•
Continuity
of management personnel; and
•
Changes
in corporate governance and their impact on shareholder rights.
Shareholder Proposals for Mutual Funds
Establish Director Ownership Requirement
DWS’s policy is to generally vote
case-by-case on shareholder proposals that mandate a specific minimum amount of
stock that directors must own in order to qualify as a director or to remain on the board.
Reimburse Shareholder for Expenses Incurred
DWS’s policy is to generally vote
case-by-case on shareholder proposals to reimburse proxy solicitation expenses. When
supporting the dissidents, vote for the reimbursement of the proxy solicitation expenses.
Terminate the Investment Advisor
DWS’s
policy is to generally vote case-by-case on proposals to terminate the investment advisor, considering the following
factors:
•
Performance
of the fund’s Net Asset Value (NAV);
•
The
fund’s history of shareholder relations; and
•
The
performance of other funds under the advisor’s management.
INTERNATIONAL PROXY VOTING
The above guidelines pertain
to issuers organized in the United States. Proxies solicited by other issuers are voted in
accordance with international guidelines or the recommendation of ISS and in accordance with applicable law and regulation.
Classification of Directors – U.S.
1.1.
Current
employee or current officer1
of the company or one of its affiliates2.
2.
Non-Independent
Non-Executive Director
2.1.
Director
identified as not independent by the board.
Controlling/Significant
Shareholder
2.2.
Beneficial
owner of more than 50 percent of the company's voting power (this may be aggregated if voting
power is distributed among more than one member of a group).
Current Employment
at Company or Related Company
2.3.
Non-officer
employee of the firm (including employee representatives).
2.4.
Officer1,
former officer, or general or limited partner of a joint venture or partnership with the company.
2.5.
Former
CEO of the company.3, 4
2.6.
Former
non-CEO officer1
of the company or an affiliate2
within the past five years.
2.7.
Former
officer1
of an acquired company within the past five years.4
2.8.
Officer1
of a former parent or predecessor firm at the time the company was sold or split off within the
past five years.
2.9.
Former
interim officer if the service was longer than 18 months. If the service was between 12 and 18
months, an assessment of the interim officer’s employment agreement will be made.5
2.10.
Immediate
family member6
of a current or former officer1
of the company or its affiliates2
within the last five years.
2.11.
Immediate
family member6
of a current employee of company or its affiliates2
where additional factors raise concern (which may include, but
are not limited to, the following: a director related to numerous
employees; the company or its affiliates employ relatives of numerous board members; or a
non-Section 16 officer in a key strategic role).
Professional,
Transactional, and Charitable Relationships
Director who (or whose immediate family
member6)
currently provides professional services7
in excess of the $10,000 per year to the company, an affiliate2
or an individual officer of the company or
2.12.
(an
affiliate; or who is (or whose immediate family member6
is) a partner, employee or controlling shareholder of, an organization
which provides services.
Director who (or whose immediate family
member6)
currently has any material transactional relationship8
with the company or its affiliates2.
2.13.
;
or who is (or whose immediate family member6
is) a partner in, or a controlling shareholder or an executive
officer of, an organization which has the material transactional relationship8
(excluding investments in the company through a private placement).
2.14.
Director
who (or whose immediate family member6)
is) a trustee, director, or employee of a charitable or non-profit
organization that receives material grants or endowments8
from the company or its affiliates2.
2.15.
Party
to a voting agreement9
to vote in line with management on proposals being brought to shareholder
vote.
2.16.
Has
(or an immediate family member6
has) an interlocking relationship as defined by the SEC involving
members of the board of directors or its Compensation Committee.10
2.17.
Founder11
of the company but not currently an employee.
2.18.
Director
with pay comparable to Named Executive Officers.
2.19.
Any
material12
relationship with the company.
3.1.
No
material12
connection to the company other than a board seat.
1
The definition of officer will generally follow that of a “Section
16 officer”
(officers subject to Section 16 of the Securities
and Exchange Act of 1934) and includes the chief executive, operating, financial, legal, technology, and accounting
officers of a company (including the president, treasurer, secretary, controller, or any vice president in charge
of a principal business unit, division, or policy function). Current interim officers are included in this category. For
private companies, the equivalent positions are applicable. A non-employee director serving as an officer due to statutory
requirements (e.g.,
corporate secretary) will generally be classified as a Non-Independent Non-Executive Director
under 2.19: “Any
material relationship with the company.”
However, if the company provides explicit disclosure that
the director is not receiving additional compensation exceeding $10,000 per year for serving in that capacity, then
the director will be classified as an Independent Director.
2
“Affiliate”
includes a subsidiary, sibling company, or parent company. 50 percent control ownership is used by the parent
company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer
(EMI) is considered an affiliate.
3 Includes
any former CEO of the company prior to the company’s initial public offering (IPO).
4
When there is a former CEO of a special purpose acquisition company
(SPAC) serving on the board of an acquired company,
DWS will generally classify such directors as independent unless determined otherwise taking into account the
following factors: the applicable listing standards determination of such director’s independence; any operating ties
to the firm; and the existence of any other conflicting relationships or related party transactions.
5
ISS will look at the terms of the interim officer’s employment
contract to determine if it contains severance pay, long-term
health and pension benefits, or other such standard provisions typically contained in contracts of permanent, non-temporary
CEOs. DWS will also consider if a formal search process was under way for a full-time officer at the time.
6
“Immediate
family member”
follows the SEC’s definition of such and covers spouses, parents, children, stepparents, step-children,
siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee
for director, executive officer, or significant shareholder of the company.
7
Professional services can be characterized as advisory in nature,
generally involve access to sensitive company information or
to strategic decision-making, and typically have a commission- or fee-based payment structure. Professional services generally
include but are not limited to the following: investment banking/financial advisory services, commercial banking (beyond
deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing
services, legal services, property management services, realtor services, lobbying services, executive search services,
and IT consulting services. The following would generally be considered transactional relationships and not professional
services: deposit services, IT tech support services, educational services, and construction services. The case
of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to
the associated materiality test) rather than a professional relationship. “Of
Counsel”
relationships are only considered immaterial
if the individual does not receive any form of compensation (in excess of $10,000 per year) from, or is a retired
partner of, the firm providing the professional service. The case of a company providing a professional service to
one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather
than a professional relationship. Insurance services and marketing services are assumed to be professional services
unless the company explains why such services are not advisory.
8
A material transactional relationship, including grants to non-profit
organizations, exists if the company makes annual payments
to, or receives annual payments from, another entity, exceeding the greater of: $200,000 or 5 percent of the
recipient’s gross revenues, for a company that follows NASDAQ listing standards; or the greater of $1,000,000 or
2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows
neither of the preceding standards, DWS will apply the NASDAQ-based materiality test. (The recipient is the party
receiving the financial proceeds from the transaction).
9
Dissident directors who are parties to a voting agreement pursuant
to a settlement or similar arrangement may be classified
as Independent Directors if an analysis of the following factors indicates that the voting agreement does not
compromise their alignment with all shareholders’ interests: the terms of the agreement; the duration of the standstill
provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director
nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions.
10
Interlocks include: executive officers serving as directors on
each other’s compensation or similar committees (or, in
the absence of such a committee, on the board); or executive officers sitting on each other’s boards and at least one
serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).
11
The operating involvement of the founder with the company will
be considered; if the founder was never employed by the company,
DWS may deem him or her an Independent Director.
12
For purposes of DWS’s director independence classification,
“material”
will be defined as a standard of relationship (financial,
personal or otherwise) that a reasonable person might conclude could potentially influence one’s objectivity in
the boardroom in a manner that would have a meaningful impact on an individual's ability to satisfy requisite fiduciary standards
on behalf of shareholders.
PART C. OTHER INFORMATION
| Item
28 |
Exhibits |
|
|
| |
(a) |
(1) |
Certificate
of Trust of DBX ETF Trust (the “Registrant” or the “Trust”) dated October 7, 2010. (Incorporated by reference
to the Trust’s Registration Statement, as filed with the Securities and Exchange Commission (the “SEC”) on October 25,
2010.) |
| |
|
(2) |
Agreement
and Declaration of Trust, dated as of October 7, 2010. (Incorporated by reference to Pre-Effective Amendment No. 1 to the Trust’s
Registration Statement, as filed with the SEC on February 9, 2011.) |
| |
(b) |
(1) |
By-Laws
of the Trust, dated October 7, 2010, as amended February 25, 2016 and November 14, 2017. (Incorporated by reference to Post-Effective
Amendment No. 397 to the Trust’s Registration Statement, as filed with the SEC on December 21, 2017.) |
| |
|
(2) |
Amendment
to the By-Laws, dated November 25, 2019. (Incorporated by reference to Post-Effective Amendment No. 460 to the Trust’s Registration
Statement, as filed with the SEC on December 19, 2019.) |
| |
(c) |
(1) |
Instruments defining the rights
of shareholders, including the relevant portions of: the Agreement and Declaration of Trust, dated as of October 7, 2010 (see Section
4.3). Referenced in exhibits (a)(1) through (a)(2) to this Item, above. |
| |
|
(2) |
Instruments defining the rights
of shareholders, including the relevant portions of the Amended and Restated By-Laws, dated November 25, 2019 (see Article 9). Referenced
in exhibits (b)(1) through (b)(2) to this Item, above. |
| |
(d) |
(1) |
Investment
Advisory Agreement, dated January 31, 2011, and amended as of August 10, 2021, with a schedule dated as of November 12, 2024, between
the Trust and DBX Advisors LLC. (Filed herein.) |
| |
|
(2) |
Amended
Investment Sub-Advisory Agreement dated August 15, 2013, as amended May 20, 2014, July 23, 2015, and February 14, 2017, between DBX Advisors
LLC and Harvest Global Investments Limited. (Incorporated by reference to Post-Effective Amendment No. 457 to the Trust’s Registration
Statement, as filed with the SEC on September 26, 2019.) |
| |
|
(3) |
Sub-Advisory
Agreement dated as of November 14, 2023, between DBX Advisors LLC and RREEF America L.L.C., with respect to Xtrackers RREEF Global Natural
Resources ETF. (Incorporated by reference to Post-Effective Amendment No. 506 to the Trust’s Registration Statement, as filed
with the SEC on January 24, 2024.) |
| |
|
|
|
|
| |
(e) |
(1) |
Distribution
Agreement, dated April 16, 2018, between the Registrant and ALPS Distributors, Inc. (Incorporated by reference to Post-Effective Amendment
No. 430 to the Trust’s Registration Statement, as filed with the SEC on September 25, 2018.) |
| |
|
(2) |
Amendment 24, dated as
of November 5, 2024, to the Distribution Agreement, dated April 16, 2018, between the Registrant and ALPS Distributors, Inc. (Filed
herein.) |
| |
(f) |
|
Not applicable. |
| |
(g) |
(1) |
Custody
Agreement, dated as of January 31, 2011, between the Registrant and The Bank of New York Mellon. (Incorporated by reference to Pre-Effective
Amendment No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
| |
|
(2) |
Amended
and Restated Supplement, Hong Kong – China – Stock Connect Service, dated October 18, 2018, to the Global Custody Agreement,
dated as of January 31, 2011, between the Registrant and The Bank of New York Mellon. (Incorporated by reference to Post-Effective
Amendment No. 457 to the Trust’s Registration Statement, as filed with the SEC on September 26, 2019.) |
| |
|
(3) |
Amended
Appendix A dated August 18, 2021, to the Amended and Restated Supplement to the Global Custody Agreement, Hong Kong – China –
Stock Connect Service, dated October 18, 2018, which amends the Global Custody Agreement dated as of January 31, 2011, between the Registrant
and The Bank of New York Mellon. (Incorporated by reference to Post-Effective Amendment No. 474 to the Trust’s Registration
Statement, as filed with the SEC on August 17, 2021.) |
| |
|
(4) |
Amendment, dated as of
November 5, 2024, to the Custody Agreement, dated January 31, 2011, between the Registrant and The Bank of New York Mellon. (Filed
herein.) |
| |
|
(5) |
Foreign
Custody Manager Agreement, dated January 31, 2011, between the Registrant and The Bank of New York Mellon. (Incorporated by reference
to Pre-Effective Amendment No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
| |
|
(6) |
Amendment, dated as of
November 5, 2024, to the Foreign Custody Manager Agreement, dated January 31, 2011, between the Registrant and The Bank of New York Mellon.
(Filed herein.) |
| |
(h) |
(1) |
Fund
Administration and Accounting Agreement, dated as of January 31, 2011, between the Registrant and The Bank of New York Mellon. (Incorporated
by reference to Pre-Effective Amendment No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
| |
|
(2) |
Form
of Exhibit A and Schedule II, as revised August 15, 2013 to the Fund Administration and Accounting Agreement, dated as of January 31,
2011, between the Registrant and The Bank of New York Mellon. (Incorporated by reference to Post-Effective Amendment No. 23 to the
Trust’s Registration Statement, as filed with the SEC on August 29, 2013.) |
| |
|
(3) |
First
Amendment, dated as of August 30, 2016, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the
Registrant and The Bank of New York Mellon. (Incorporated by reference to Post-Effective Amendment No. 457 to the Trust’s Registration
Statement, as filed with the SEC on September 26, 2019.) |
| |
|
(4) |
Second
Amendment, dated as of May 22, 2018, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the Registrant
and The Bank of New York Mellon. (Incorporated by reference to Post-Effective Amendment No. 457 to the Trust’s Registration
Statement, as filed with the SEC on September 26, 2019.) |
| |
|
(5) |
Third
Amendment, dated as of July 28, 2022, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the Registrant
and The Bank of New York Mellon. (Incorporated by reference to Post-Effective Amendment No. 486 to the Trust’s Registration
Statement, as filed with the SEC on September 27, 2022.) |
| |
|
(6) |
Amendment, dated as of
November 5, 2024, to the Third Amendment, dated as of July 28, 2022, to the Fund Administration and Accounting Agreement, dated as of
January 31, 2011, between the Registrant and The Bank of New York Mellon. (Filed herein.) |
| |
|
(7) |
Fourth
Amendment, dated as of November 27, 2023, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the
Registrant and The Bank of New York Mellon. (Incorporated by reference to Post-Effective Amendment No. 504 to the Trust’s Registration
Statement, as filed with the SEC on December 20, 2023.) |
| |
|
(8) |
Fifth
Amendment, dated as of February 15, 2024, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the
Registrant and The Bank of New York Mellon. (Incorporated by reference to Post-Effective Amendment No. 509 to the Trust’s Registration
Statement, as filed with the SEC on May 31, 2024.) |
| |
|
(9) |
Amendment, dated as of
November 5, 2024, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the Registrant and The Bank
of New York Mellon. (Filed herein.) |
| |
|
(10) |
Capital
Gains Tax Reporting Service Agreement, dated August 13, 2019, between the Registrant and The Bank of New York Mellon. (Incorporated
by reference to Post-Effective Amendment No. 457 to the Trust’s Registration Statement, as filed with the SEC on September 26, 2019.) |
| |
|
(11) |
Corporate
Services Agreement, dated as of July 6, 2016, between the Registrant and The Bank of New York Mellon. (Incorporated by reference to
Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(12) |
Amendment,
dated as of January 8, 2020, to the Corporate Services Agreement, dated as of July 6, 2016, between the Registrant and The Bank of New
York Mellon. (Incorporated by reference to Post-Effective Amendment No. 464 to the Trust’s Registration Statement, as filed
with the SEC on March 11, 2020.) |
| |
|
(13) |
Amendment, dated as
of November 5, 2024, to the Corporate Services Agreement, dated as of July 6, 2016, between the Registrant and The Bank of New York Mellon.
(Filed herein.) |
| |
|
(14) |
Transfer
Agency and Service Agreement, dated January 31, 2011, between the Registrant and The Bank of New York Mellon. (Incorporated by reference
to Pre-Effective Amendment No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
| |
|
(15) |
Amendment, dated as
of November 5, 2024 to the Transfer Agency and Service Agreement, dated January 31, 2011, between the Registrant and The Bank of New York
Mellon. (Filed herein.) |
| |
|
(16) |
Form
of Authorized Participation Agreement. (Incorporated by reference to Post-Effective Amendment No. 510 to the Trust’s Registration
Statement, as filed with the SEC on July 23, 2024.) |
| |
|
(17) |
Amended
and Restated Expense Limitation Agreement, effective as of May 8, 2024. (Incorporated by reference to Post-Effective Amendment No.
509 to the Trust’s Registration Statement, as filed with the SEC on May 31, 2024.) |
| |
|
(18) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Absolute Shares Trust, dated January 19, 2022. (Incorporated by reference
to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(19) |
Fund
of Funds Investment Agreement among DBX ETF Trust, GPS Funds I, GPS Funds II, and Savos Investments Trust, dated January 19, 2022.
(Incorporated by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June
17, 2022.) |
| |
|
(20) |
Amendment
dated October 20, 2022 to Fund of Funds Investment Agreement among DBX ETF Trust, GPS Funds I, GPS Funds II, and Savos Investments Trust,
for the purpose of removing Savos Investment Trust and its Series, dated January 19, 2022. (Incorporated by reference to Post-Effective
Amendment No. 489 to the Trust’s Registration Statement, as filed with the SEC on December 21, 2022.) |
| |
|
(21) |
Schedule B dated as
of October 15, 2024 to the Fund of Funds Investment Agreement among DBX ETF Trust, GPS Funds I, and GPS Funds II, dated January 19, 2022.
(Filed herein.) |
| |
|
(22) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Direxion Shares ETF Trust, dated January 19, 2022. (Incorporated by reference
to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(23) |
Fund
of Funds Investment Agreement among DBX ETF Trust and Eaton Vance Growth Trust and Eaton Vance Mutual Funds Trust, dated January 19, 2022.
(Incorporated by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June
17, 2022.) |
| |
|
(24) |
Fund
of Funds Investment Agreement between DBX ETF Trust and E-Valuator Funds Trust, dated January 19, 2022. (Incorporated by reference
to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(25) |
Fund
of Funds Investment Agreement among DBX ETF Trust and the Fidelity Trusts listed on Schedule A, dated January 19, 2022. (Incorporated
by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(26) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Fidelity Rutland Square Trust II, dated as of January 19, 2022. (Incorporated
by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(27) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Franklin Fund Allocator Series and Franklin ETF Trust, dated January 19, 2022.
(Incorporated by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June
17, 2022.) |
| |
|
(28) |
Fund
of Funds Investment Agreement between DBX ETF Trust, Goldman Sachs Trust, Goldman Sachs Variable Insurance Trust, Goldman Sachs Trust
II, Goldman Sachs ETF Trust, Goldman Sachs ETF Trust II, Goldman Sachs MLP and Energy Renaissance Fund, and Goldman Sachs Real Estate
Diversified Income Fund, dated January 19, 2022. (Incorporated by reference to Post-Effective Amendment No. 481 to the Trust’s
Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(29) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Horizon Funds, dated January 19, 2022. (Incorporated by reference to Post-Effective
Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(30) |
Fund
of Funds Investment Agreement between DBX ETF Trust and IndexIQ ETF Funds, dated January 19, 2022. (Incorporated by reference to Post-Effective
Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(31) |
Fund
of Funds Investment Agreement among DBX ETF Trust, the Invesco Growth Series, and the Invesco Investment Funds, dated January 19, 2022.
(Incorporated by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June
17, 2022.) |
| |
|
(32) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Janus Henderson – Clayton School Trust, dated January 19, 2022. (Incorporated
by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(33) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Janus Investment Fund, dated January 19, 2022. (Incorporated by reference
to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(34) |
Fund
of Funds Investment Agreement among DBX ETF Trust, John Hancock Variable Insurance Trust and John Hancock Funds II, dated January 19,
2022. (Incorporated by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the
SEC on June 17, 2022.) |
| |
|
(35) |
Fund
of Funds Investment Agreement among DBX ETF Trust and MainStay VP Funds Trust, and MainStay Funds Trust, dated January 19, 2022. (Incorporated
by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(36) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Morningstar Funds Trust, dated January 19, 2022. (Incorporated by reference
to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(37) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Voya Partners, Inc., dated January 19, 2022. (Incorporated by reference to
Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(38) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Highland Funds I, dated January 25, 2022. (Incorporated by reference to Post-Effective
Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(39) |
Fund
of Funds Investment Agreement among DBX ETF Trust, Exchange Traded Concepts Trust, and Exchange Listed Funds Trust, dated April 27, 2022.
(Incorporated by reference to Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June
17, 2022.) |
| |
|
(40) |
Schedule
B, dated as of November 15, 2023, to the Fund of Funds Investment Agreement among DBX ETF Trust, Exchange Traded Concepts Trust, and Exchange
Listed Funds Trust, dated April 27, 2022. (Incorporated by reference to Post-Effective Amendment No. 503 to the Trust’s Registration
Statement, as filed with the SEC on December 8, 2023.) |
| |
|
(41) |
Fund
of Funds Investment Agreement between DBX ETF Trust and The Lazard Funds, Inc., dated April 27, 2022. (Incorporated by reference to
Post-Effective Amendment No. 481 to the Trust’s Registration Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(42) |
Fund
of Funds Investment Agreement between DBX ETF Trust and Brinker Capital Destinations Trust, dated as of March 10, 2023. (Incorporated
by reference to Post-Effective Amendment No. 493 to the Trust’s Registration Statement, as filed with the SEC on May 24, 2023.) |
| |
|
(43) |
Fund
of Funds Investment Agreement between DBX ETF Trust, Deutsche DWS Asset Allocation Trust, Deutsche DWS Market Trust, and Deutsche DWS
Variable Series II, dated as of August 23, 2024. (Incorporated by reference to Post-Effective Amendment No. 512 to the Trust’s
Registration Statement, as filed with the SEC on September 26, 2024.) |
| |
|
(45) |
Schedule B, dated as
of December 12, 2024, to the Fund of Funds Investment Agreement between DBX ETF Trust, Deutsche DWS Asset Allocation Trust, Deutsche DWS
Market Trust, and Deutsche DWS Variable Series II, dated as of August 23, 2024. (Filed herein.) |
| |
(i) |
(1) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to Pre-Effective Amendment No. 2 to the Trust’s Registration
Statement, as filed with the SEC on May 11, 2011.) |
| |
|
(2) |
Opinion
of Bingham McCutchen LLP, relating to shares of the Xtrackers Harvest CSI 300 China A-Shares ETF (formerly, db X-trackers Harvest China
Fund). (Incorporated by reference to Post-Effective Amendment No. 23 to the Trust’s Registration Statement, as filed with the
SEC on August 29, 2013.) |
| |
|
(3) |
Opinion
of Morgan, Lewis & Bockius LLP, relating to shares of the Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (formerly, db X-trackers
Harvest China A-Shares Small Cap Fund). (Incorporated by reference to Post-Effective Amendment No. 79 to the Trust’s Registration
Statement, as filed with the SEC on April 7, 2014.) |
| |
|
(4) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to Post-Effective Amendment No. 430, as filed with the SEC on September
25, 2018.) |
| |
|
(5) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to Post-Effective Amendment No. 440, as filed with the SEC on December
21, 2018.) |
| |
|
(6) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to Post-Effective Amendment No. 446, as filed with the SEC on February
22, 2019.) |
| |
|
(7) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to Post-Effective Amendment No. 447, as filed with the SEC on March
5, 2019.) |
| |
|
(8) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to Post-Effective Amendment No. 452, as
filed with the SEC on April 10, 2019.) |
| |
|
(9) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to Post-Effective Amendment No. 461 to the Trust’s Registration
Statement, as filed with the SEC on January 9, 2020.) |
| |
|
(10) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to Post-Effective Amendment No. 465 to the Trust’s Registration
Statement, as filed with the SEC on May 11, 2020.) |
| |
|
(11) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to Post-Effective Amendment No. 472 to the Trust’s Registration
Statement, as filed with the SEC on January 25, 2021.) |
| |
|
(12) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 478 to the Trust’s Registration
Statement, as filed with the SEC on December 20, 2021.) |
| |
|
(13) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 481 to the Trust’s Registration
Statement, as filed with the SEC on June 17, 2022.) |
| |
|
(14) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 487 to the Trust’s Registration
Statement, as filed with the SEC on October 7, 2022.) |
| |
|
(15) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 488 to the Trust’s Registration
Statement, as filed with the SEC on October 21, 2022.) |
| |
|
(16) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 492 to the Trust’s Registration
Statement, as filed with the SEC on March 14, 2023.) |
| |
|
(17) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 493 to the Trust’s Registration
Statement, as filed with the SEC on May 24, 2023.) |
| |
|
(18) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 499 to the Trust’s Registration
Statement, as filed with the SEC on October 16, 2023.) |
| |
|
(19) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 500 to the Trust’s Registration
Statement, as filed with the SEC on October 24, 2023.) |
| |
|
(20) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 502 to the Trust’s Registration
Statement, as filed with the SEC on November 17, 2023.) |
| |
|
(21) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 503 to the Trust’s Registration
Statement, as filed with the SEC on December 8, 2023.) |
| |
|
(22) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 506 to the Trust’s Registration
Statement, as filed with the SEC on January 24, 2024.) |
| |
|
(23) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 509 to the Trust’s Registration
Statement, as filed with the SEC on May 31, 2024.) |
| |
|
(24) |
Opinion
and Consent of Counsel, Vedder Price P.C. (Incorporated by reference to Post-Effective Amendment No. 510 to the Trust’s Registration
Statement, as filed with the SEC on July 23, 2024.) |
| |
(j) |
|
Consent of Independent Registered Public Accounting Firm. (Filed herein.) |
| |
(k) |
|
Not applicable. |
| |
(l) |
|
Initial
Share Purchase Agreement between the Registrant and DBX Advisors LLC. (Incorporated by reference to Pre-Effective Amendment No. 2
to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
| |
(m) |
|
Not applicable. |
| |
(n) |
|
Not applicable. |
| |
(o) |
|
Reserved. |
| |
(p) |
(1) |
Code
of Ethics of the Registrant, dated May 11, 2023. (Incorporated by reference to Post-Effective Amendment No. 493 to the Trust’s
Registration Statement, as filed with the SEC on May 24, 2023.) |
| |
|
(2) |
Code
of Ethics – DWS Group (U.S. Registered Entities), dated April 24, 2023. (Incorporated by reference to Post-Effective Amendment
No. 493 to the Trust’s Registration Statement, as filed with the SEC on May 24, 2023.) |
Item 29. Persons controlled by or Under Common Control with
the Fund.
Not applicable.
Item 30. Indemnification.
Pursuant to Article
IX of the Registrant’s Agreement and Declaration of Trust, the Trust has agreed that no person who is or has been a Trustee, officer,
or employee of the Trust shall be subject to any personal liability whatsoever to any person, other than the Trust or its Shareholders,
in connection with the affairs of the Trust; and all persons shall look solely to the Trust property or property of a Series for satisfaction
of claims of any nature arising in connection with the affairs of the Trust or such Series.
Every note, bond, contract,
instrument, certificate, Share or undertaking and every other act or thing whatsoever executed or done by or on behalf of the Trust or
the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been executed or done only in or with respect
to their or his capacity as Trustees or Trustee and neither such Trustees or Trustee nor the Shareholders shall be personally liable thereon.
All Persons extending
credit to, contracting with or having any claim against the Trust or a Series shall look only to the assets of the Trust property or the
Trust property of such Series for payment under such credit, contract or claim; and neither the Trustees, nor any of the Trust’s
officers, employees or agents, whether past, present or future, shall be personally liable therefor.
No person
who is or has been a Trustee, officer or employee of the Trust shall be liable to the Trust or to any Shareholder for any action or failure
to act except for his or her own bad faith, willful misfeasance, gross negligence or reckless disregard of his or her duties involved
in the conduct of the individual’s office, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact
or law.
Without limiting the foregoing
limitations of liability, a Trustee shall not be responsible for or liable in any event for any neglect or wrongdoing of any officer,
employee, investment adviser, sub-adviser, principal underwriter, custodian or other agent of the Trust, nor shall any Trustee be responsible
or liable for the act or omission of any other Trustee (or for the failure to compel in any way any former or acting Trustee to redress
any breach of trust), except in the case of such Trustee’s own willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
Item 31. Business and Other Connections of Investment Manager.
With respect to each of
DBX Advisors LLC, RREEF America L.L.C., and Harvest Global Investments Limited (collectively, the “Advisers”), the response
to this Item will be incorporated by reference to the Advisers’ Uniform Applications for Investment Adviser Registration (“Form
ADV”) on file with the SEC. Each Adviser’s Form ADV may be obtained, free of charge, at the SEC’s website at www.adviserinfo.sec.gov.
Item 32. Principal Underwriters.
|
(a) |
ALPS Distributors, Inc. acts as the distributor for the Registrant and the following
investment companies: |
1290 Funds, 1WS Credit Income
Fund, abrdn ETFs, Accordant ODCE Index Fund, Alpha Alternative Assets Fund, ALPS Series Trust, Alternative Credit Income Fund, Apollo
Diversified Credit Fund, Apollo Diversified Real Estate Fund, AQR Funds, Axonic Alternative Income Fund, Axonic Funds, BBH Trust, Bluerock
High Income Institutional Credit Fund, Bluerock Total Income+ Real Estate Fund, Bridge Builder Trust, Cambria ETF Trust, Centre Funds,
CION Ares Diversified Credit Fund, Columbia ETF Trust, Columbia ETF Trust I, Columbia ETF Trust II, CRM Mutual Fund Trust, DBX ETF Trust,
ETF Series Solutions (Vident Series), Financial Investors Trust, Firsthand Funds, Flat Rock Core Income Fund, Flat Rock Opportunity Fund,
FS Credit Income Fund, FS Energy Total Return Fund, FS Multi-Alternative Income Fund, FS Series Trust, FS MVP Private Markets Fund, Goehring
& Rozencwajg Investment Funds, Goldman Sachs ETF Trust, Goldman Sachs ETF Trust II, Graniteshares ETF Trust, Hartford Funds Exchange-Traded
Trust, Heartland Group, Inc., IndexIQ Active ETF Trust, IndexIQ ETF Trust, Investment Managers Series Trust II (AXS-Advised Funds), Janus
Detroit Street Trust, Lattice Strategies Trust, Litman Gregory Funds Trust, Manager Directed Portfolios (Spyglass Growth Fund), Meridian
Fund, Inc., Natixis ETF Trust, Natixis ETF Trust II, Opportunistic Credit Interval Fund, PRIMECAP Odyssey Funds, Principal Exchange-Traded
Funds, RiverNorth Funds, RiverNorth Opportunities Fund, Inc., RiverNorth/DoubleLine Strategic Opportunity Fund, Inc., RiverNorth Opportunistic
Municipal Income Fund, Inc., RiverNorth Managed Duration Municipal Income Fund, Inc., RiverNorth Flexible Municipal Income Fund, Inc.,
RiverNorth Capital and Income Fund, Inc., RiverNorth Flexible Municipal Income Fund II, Inc., RiverNorth Managed Duration Municipal Income
Fund II, Inc., SPDR Dow Jones Industrial Average ETF Trust, SPDR S&P 500 ETF Trust, SPDR S&P MidCap 400 ETF Trust, Sprott Funds
Trust, Stone Ridge Trust, Stone Ridge Trust II, Stone Ridge Trust IV, Stone Ridge Trust V, Stone Ridge Trust VIII, The Arbitrage Fund,
Themes ETF Trust, Thrivent ETF Trust, USCF ETF Trust, Valkyrie ETF Trust II, Wasatch Funds, WesMark Funds, Wilmington Funds, X-Square
Balanced Fund, and X-Square Series Trust
(b) To the best of Registrant’s knowledge,
the directors and executive officers of ALPS Distributors, Inc., are as follows:
| Name* |
Position
with Underwriter |
Positions
with Fund |
| Stephen
J. Kyllo |
President,
Chief Operating Officer, Director, Chief Compliance Officer |
None |
| Brian
Schell ** |
Vice
President & Treasurer |
None |
| Eric
Parsons |
Vice
President, Controller and Assistant Treasurer |
None |
| Jason
White*** |
Secretary |
None |
| Richard
C. Noyes |
Senior
Vice President, General Counsel, Assistant Secretary |
None |
| Eric
Theroff^ |
Assistant
Secretary |
None |
| Adam
Girard^^ |
Tax Officer |
None |
| Liza
Price |
Vice
President, Managing Counsel |
None |
| Jed
Stahl |
Vice
President, Managing Counsel |
None |
| Terence
Digan |
Vice
President |
None |
| James
Stegall |
Vice
President |
None |
| Gary
Ross |
Senior
Vice President |
None |
| Hilary
Quinn |
Vice
President |
None |
| |
|
|
|
* Except as otherwise noted, the principal business address
for each of the above directors and executive officers is 1290 Broadway, Suite 1000, Denver, Colorado 80203.
** The principal business address for Mr. Schell is 100 South
Wacker Drive, 19th Floor, Chicago, IL 60606.
*** The principal business address for Mr. White is 4 Times
Square, New York, NY 10036.
^ The principal business address for Mr. Theroff is 1055
Broadway Boulevard, Kansas City, MO 64105
^^ The principal business address for Mr. Girard is
80 Lamberton Road, Windsor, CT 06095
Item 33. Location of Accounts and Records.
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
| Registrant |
DBX ETF Trust |
| |
100 Summer Street
Boston, MA 02110-2146
|
| Investment Advisor |
DBX Advisors LLC
875 Third Avenue
New York, NY 10022-6225 |
| |
|
| |
DBX Advisors LLC
100 Summer Street
Boston, MA 02110-2146 |
| |
|
| Sub-advisors |
Harvest Global Investments Limited
31/F, One Exchange Square,
8 Connaught Place
Central, Hong Kong |
| |
|
| |
RREEF America L.L.C.
222 South Riverside Plaza
Chicago, IL 60606-5808 |
| |
|
| Distributor |
ALPS Distributors, Inc.
1290 Broadway, Suite 1000
Denver, CO 80203-5603 |
| |
|
| Administrator, Transfer Agent and Custodian |
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286 |
| |
|
| Regulatory Administrator |
BNY Mellon Investment Servicing (US) Inc.
201 Washington Street
Boston, MA 02108-4403 |
| |
|
| Storage Vendor |
Iron Mountain Incorporated
1 Federal Street
Boston, MA 02110-2012 |
| |
|
| |
Iron Mountain Incorporated
12646 NW 115th Avenue
Medley, FL 33178-3179 |
| |
|
Item 34. Management Services.
There are no management related service contracts not discussed
in Part A or Part B.
Item 35. Undertakings.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of
this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of New York and the State of New York on
the 16th day of December 2024.
DBX ETF TRUST
By: /s/Arne
Noack
Arne
Noack*
President
and Chief Executive Officer
Pursuant to the requirements of
the Securities Act of 1933, this Post-Effective Amendment to its Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated:
| SIGNATURE |
TITLE |
DATE |
| |
|
|
| /s/Stephen
R. Byers |
|
|
| Stephen
R. Byers* |
Trustee and Chairman |
December 16, 2024 |
| |
|
|
| /s/George O. Elston |
|
|
| George O. Elston* |
Trustee |
December 16, 2024 |
| |
|
|
| /s/Diane Kenneally |
|
|
| Diane Kenneally |
Treasurer, Chief Financial Officer and
Controller |
December 16, 2024 |
| |
|
|
| /s/Arne Noack |
|
|
| Arne Noack* |
President and Chief Executive Officer |
December 16, 2024 |
| |
|
|
| /s/J. David Officer |
|
|
| J. David Officer* |
Trustee |
December 16, 2024 |
| |
|
|
*By: /s/Caroline Pearson
Caroline Pearson**
Assistant Secretary
DBX ETF TRUST
EXHIBIT INDEX
| |
Ex. Number |
Description |
| |
|
|
|
(d)(1) |
Investment Advisory Agreement, dated January 31, 2011, and amended as of August 10, 2021, with a schedule dated as of November 12, 2024,
between the Trust and DBX Advisors LLC. |
| |
|
|
|
(e)(2) |
Amendment 24, dated as of November 5, 2024, to the Distribution Agreement, dated April 16, 2018, between the Registrant and ALPS Distributors,
Inc. |
| |
|
|
|
(g)(4) |
Amendment, dated as of November 5, 2024, to the Custody Agreement, dated January 31, 2011, between the Registrant and The Bank of New
York Mellon. |
| |
|
|
|
(g)(6) |
Amendment, dated as of November 5, 2024, to the Foreign Custody Manager Agreement, dated January 31, 2011, between the Registrant and
The Bank of New York Mellon. |
| |
|
|
|
(h)(6) |
Amendment, dated as of November 5, 2024, to the Third Amendment, dated as of July 28, 2022, to the Fund Administration and Accounting
Agreement, dated as of January 31, 2011, between the Registrant and The Bank of New York Mellon. |
| |
|
|
|
(h)(9) |
Amendment, dated as of November 5, 2024, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the
Registrant and The Bank of New York Mellon. |
| |
|
|
|
(h)(13) |
Amendment, dated as of November 5 , 2024, to the Corporate Services Agreement, dated as of July 6, 2016, between the Registrant and The
Bank of New York Mellon. |
| |
|
|
|
(h)(15) |
Amendment, dated as of November 5, 2024 to the Transfer Agency and Service Agreement, dated January 31, 2011, between the Registrant and
The Bank of New York Mellon. |
| |
|
|
|
(h)(21) |
Schedule B dated as of October 15, 2024 to the Fund of Funds Investment Agreement among DBX ETF Trust, GPS Funds I, and GPS Funds II,
dated January 19, 2022. |
| |
|
|
|
(h)(45) |
Schedule B, dated as of December 12, 2024, to the Fund of Funds Investment Agreement between DBX ETF Trust, Deutsche DWS Asset Allocation
Trust, Deutsche DWS Market Trust, and Deutsche DWS Variable Series II, dated as of August 23, 2024. |
| |
|
|
|
(j) |
Consent of Independent Registered Public Accounting Firm. |
EXHIBIT
LIST FOR INTERACTIVE DATA FILES
| |
Ex. Number |
Description |
| |
|
|
|
EX-101.INS |
XBRL Instance Document – the instance document does not appear on the Interactive Data File because its XBRL tags are embedded within
the Inline XBRL document. |
|
EX-101.SCH |
XBRL Taxonomy Extension Schema Document |
| |
|
|
|
EX-101.CAL |
XBRL Taxonomy Extension Calculation Linkbase Document |
| |
|
|
|
EX-101.DEF |
XBRL Taxonomy Extension Definition Linkbase Document |
| |
|
|
|
EX-101.LAB |
XBRL Taxonomy Extension Label Linkbase Document |
| |
|
|
| |
EX-101.PRE |
XBRL Taxonomy Extension Presentation Linkbase Document |
