Form N-CSR NORTHERN LIGHTS FUND For: Oct 31
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securities and exchange commission
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form n-csr
certified shareholder report of registered management
investment companies
Investment Company Act file number 811-22549
Northern Lights Fund Trust II
(Exact name of registrant as specified in charter)
225 Pictoria Dr, Ste 450 Cincinnati, Ohio 45246
(Address of principal executive offices) (Zip code)
Kevin E. Wolf, Gemini Fund Services, LLC.
80 Arkay Drive, Suite 110., Hauppauge, NY 11788
(Name and address of agent for service)
Registrant's telephone number, including area code: 631-470-2600
Date of fiscal year end: 10/31
Date of reporting period: 10/31/19
Item 1. Reports to Stockholders.
 |
| F/m Investments European L/S Small Cap Fund |
| Institutional Class |
| BESMX |
| Investor Class |
| BESRX |
| Annual Report |
| October 31, 2019 |
| 1-844-322-8112 |
| www.fm-invest.com |
| Distributed by Northern Lights Distributors, LLC |
| Member FINRA |
Beginning on January 1, 2021, as permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s shareholder reports like this one will no longer be sent by mail, unless you specifically request paper copies of the reports. Instead, the reports will be made available on the Fund’s website www.fm-invest.com, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. You may elect to receive shareholder reports and other communications from the Fund electronically by contacting your financial intermediary (such as a broker-dealer or bank) or, if you are a direct investor, by following the instructions included with paper Fund documents that have been mailed to you.
Dear Shareholder,
On October 11, 2019, F/m Investments was appointed adviser to the F/m Investments European L/S Small Cap Fund (the “Fund”). F/m specializes in empowering boutique asset managers. We are excited to join SW Mitchell Capital, the Fund’s original and continuing sub-adviser, in the Fund’s next chapter. While the Fund has a new name, the Fund retains its long-time and highly experienced sub-adviser, coupled with the new and additional resources of F/m Investments as adviser.
Although we were the adviser for only a portion of this fiscal year, we have followed the Fund for some time and consulted with the sub-adviser in delivering this information.
For the 12-month period ending October 31, 2019, the Fund returned -7.69%, which lagged its index, the MSCI Europe Small Cap Net Return USD Index1, which returned 7.28%.
At the start of the fiscal year, European economies and markets faced multiple headwinds. As the year progressed, the headwinds began to shift and positive changes were gaining momentum across the Europe.
The prior headwinds faced by major economies and markets across Europe included the prolonged effects of an unresolved Brexit, Germany’s long-time aversion to fiscal stimulus (better known as schwarze Null or the black zero) which led to a technical recession, and labor protests and populist movements such as the gilets jaunes (yellow vests) in France and the populist Five Star movement in Italy.
As of this writing, positive economic events are emerging across Europe. Of greatest impact and surprise, Boris Johnson’s substantial Parliamentary election victory has set the stage for a conclusion to Brexit. Germany began a fiscal stimulus effort with a “green,” climate-friendly infrastructure program and has pledged further fiscal stimulus, with Holland following suit. French President Emmanuel Macron settled labor unrest by passing a multi-billion Euro stimulus package. Italy elected a new, more Eurocentric government. These developments have led to positive forecasts from a number of sources for UK and EU economic growth.
In parallel with economic trends, we believe the outlook for European equities, and small caps in particular, is improving.
European equities have been trading at significant and near historic discounts to their US counterparts. In recent years, European equity indices underperformed the US, widening the valuation discount. Moreover, discounts for small cap European stocks have been even more notable, as central bank policies of negative interest rates drove European-based global mega caps higher, often at the expense of domestically based firms, which are primarily small cap.
Europe’s reliance on monetary policy to lift economies, financial markets, and the Euro appears to have run its course. Going forward, fiscal policy will need to replace monetary policy to accelerate domestic economies across the continent. This trend is already underway, with European nations and governments taking over the role of driving economic recovery and growth in lieu of relying upon the European Central Bank or European Parliament. European small cap stocks may stand to benefit the most among equity sectors from domestically-focused stimulus.
Further, from a currency standpoint, the long bull market for the US dollar is poised to relax, adding more upside to European securities and small cap stocks on a US dollar basis.
Along with favorable economic developments and a more favorable environment for European small cap stocks, we believe the Fund is poised for potential recovery.
Over the course of its history, the Fund and its strategy have experienced periodic drawdowns, as Fund holdings have at times fallen out of favor. While the Fund has recently been in such a period, the Fund has recovered from such periods in the past. Each time, the sub-adviser remained disciplined and committed to the three pillars of their European small cap strategy: seek companies with good management, sound cash flow, and a catalyst to compound or unlock value (and the inverse for short positions). Over time, this
| 1 | MSCI Europe Small Net Return USD Index measures a basket of small capitalization stocks from developed European countries converted to US dollar and reinvesting after tax dividends. Investors are not able to invest directly in the indices referenced and unmanaged index returns do not reflect any fees, expenses, or sales charges. The referenced indices are shown for general market comparisons. |
1
discipline has generated “double alpha,” or cumulative positive alpha2 for both long and short positions. Moreover, returns in a recovery after a performance downdraft have been significantly positive. We continue to believe our defensive approach provides a balanced way to invest in the specialized opportunities of European small cap stocks.
On behalf of all of my colleagues, thank you for your continued investment in BESMX.
Sincerely,
Alexander Morris
The commentary represents the opinion of F/m Investments as of October 2019 and is subject to change based on market and other conditions. These opinions are not intended to be a forecast of future events, a guarantee of future results or investment advice. Any statistics contained here have been obtained from sources believed to be reliable, but the accuracy of this information cannot be guaranteed. The views expressed herein may change at any time subsequent to the date of issue hereof. The information provided is not to be construed as a recommendation or an offer to buy or sell or the solicitation of an offer to buy or sell any fund or security.
9102-NLD-12/20/2019
| 2 | Alpha is a measure of a security’s outperformance versus its benchmark. |
2
| F/m Investments European L/S Small Cap Fund |
| PORTFOLIO REVIEW (Unaudited) |
| October 31, 2019 |
The fund’s performance figures* for the periods ended October 31, 2019, compared to its benchmark:
| Annualized | Annualized | Annualized | ||
| One Year | Five Year | Since Inception ** | Since Inception *** | |
| F/m Investments European L/S Small Cap Fund Investor Class | (7.92)% | N/A | 0.11% | N/A |
| F/m Investments European L/S Small Cap Fund Institutional Class | (7.69)% | 1.58% | N/A | 7.16% |
| MSCI Europe Small Cap Index (a) | 7.28% | 6.96% | 5.78% | 3.51% |
Comparison of the Change in Value of a $50,000 Investment
| * | The Performance data quoted is historical. Past performance is no guarantee of future results. Current performance may be higher or lower than the performance data quoted. The principal value and investment return of an investment will fluctuate so that your shares, when redeemed, may be worth more or less than their original cost. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or on the redemptions of Fund shares. Returns greater than 1 year are annualized. The total operating expenses as stated in the fee table to the Fund’s prospectus dated March 1, 2019 is 4.00% and 4.30% for the Institutional Class and Investor Class. For performance information current to the most recent month-end, please call 1-844-322-8112. |
| ** | Inception date is December 30, 2015. |
| *** | Inception date is October 31, 2007. Performance data for Institutional Class shares includes the Fund’s predecessor hedge fund. |
| (a) | The MSCI Europe Small Cap Index captures small cap representation across the 15 Developed Markets countries in Europe. With 918 constituents, the index covers approximately 14% of the free float-adjusted market capitalization in the European equity universe. Index returns assume reinvestment of dividends. Investors may not invest in the Index directly; unlike the Fund’s returns, the Index does not reflect any fees or expenses. |
| Holdings By Industry/Asset Type (1) | % of Net Assets | |||
| Transportation | 11.0 | % | ||
| Retail | 9.7 | % | ||
| Money Market | 8.0 | % | ||
| Leisure Time | 7.6 | % | ||
| Software | 5.9 | % | ||
| Commercial Services | 5.1 | % | ||
| Diversified Financial Services | 5.0 | % | ||
| Engineering & Construction | 4.6 | % | ||
| Auto Parts & Equipment | 4.5 | % | ||
| Insurance | 3.5 | % | ||
| Other Assets Less Liabilities | 35.1 | % | ||
| 100.0 | % | |||
| (1) | Does not include securities sold short in which the fund invests. |
Please refer to the Portfolio of Investments in this annual report for a detailed analysis of the Fund’s holdings.
3
| F/m Investments European L/S Small Cap Fund |
| PORTFOLIO OF INVESTMENTS |
| October 31, 2019 |
| Shares | Fair Value | |||||||
| COMMON STOCK - 89.3% | ||||||||
| AIRLINES - 2.5% | ||||||||
| 5,210 | Wizz Air Holdings PLC * ^ | $ | 257,130 | |||||
| AUTO PARTS & EQUIPMENT - 4.5% | ||||||||
| 11,364 | CIE Automotive SA * ^ | 282,979 | ||||||
| 2,533 | MBB SE | 171,535 | ||||||
| 454,514 | ||||||||
| COMMERCIAL SERVICES - 5.1% | ||||||||
| 56,260 | IWG PLC ^ | 279,117 | ||||||
| 42,195 | Marlowe PLC | 242,972 | ||||||
| 522,089 | ||||||||
| DISTRIBUTION/WHOLESALE - 0.2% | ||||||||
| 2,547 | Fourlis Holdings SA * | 15,344 | ||||||
| DIVERSIFIED FINANCIAL SERVICES - 5.0% | ||||||||
| 44,446 | Banca Farmafactoring SpA ^ | 269,253 | ||||||
| 17,675 | St. James’s Place PLC | 238,092 | ||||||
| 507,345 | ||||||||
| ELECTRONICS- 0.1% | ||||||||
| 338 | Detection Technology Oy | 9,767 | ||||||
| ENGINEERING & CONSTRUCTION - 4.6% | ||||||||
| 22,821 | Instalco Intressenter AB | 252,980 | ||||||
| 10,345 | SPIE SA ^ | 218,133 | ||||||
| 471,113 | ||||||||
| FOOD - 2.1% | ||||||||
| 62,356 | Raisio Oyj | 217,746 | ||||||
| FOOD SERVICE - 3.3% | ||||||||
| 3,674 | DO & CO. AG ^ | 341,848 | ||||||
| HEALTHCARE - SERVICES - 2.1% | ||||||||
| 29,777 | Ambea AB | 217,278 | ||||||
| HOME BUILDERS - 2.7% | ||||||||
| 316,163 | Glenveagh Properties PLC * ^ | 277,949 | ||||||
| INSURANCE - 3.5% | ||||||||
| 39,250 | Lancashire Holdings Ltd. ^ | 361,367 | ||||||
| INTERNET - 2.1% | ||||||||
| 54,132 | Data Respons ASA | 215,203 | ||||||
| INVESTMENT COMPANIES - 2.9% | ||||||||
| 315,807 | Duke Royalty Ltd. | 178,991 | ||||||
| 220,000 | Stirling Industries PLC * # | 120,989 | ||||||
| 299,980 | ||||||||
| LEISURE TIME - 7.6% | ||||||||
| 90,645 | Gym Group PLC ^ | 306,139 | ||||||
| 14,159 | MIPS AB | 216,919 | ||||||
| 43,025 | On the Beach Group PLC | 249,533 | ||||||
| 772,591 | ||||||||
| LODGING - 2.3% | ||||||||
| 39,853 | Dalata Hotel Group PLC | 235,649 | ||||||
| MACHINERY - DIVERSIFIED - 2.7% | ||||||||
| 134 | Interroll Holding AG * ^ | 277,031 | ||||||
| OIL & GAS - 1.0% | ||||||||
| 38,716 | Northern Drilling Ltd. * | 101,205 | ||||||
| PACKAGING & CONTAINERS - 2.2% | ||||||||
| 20,027 | Zignago Vetro SpA | 227,900 | ||||||
| REAL ESTATE - 1.5% | ||||||||
| 4,048 | Corestate Capital Holding SA ^ | 150,840 | ||||||
| RETAIL - 9.7% | ||||||||
| 28,594 | Applegreen PLC | 177,418 | ||||||
| 237,631 | Brickability Group PLC * | 196,797 | ||||||
| 101,737 | City Pub Group PLC | 266,587 | ||||||
| 84,532 | Loungers PLC * | 216,034 | ||||||
| 202,158 | SiS Science in Sport PLC * | 132,104 | ||||||
| 988,940 | ||||||||
| SEMICONDUCTORS - 3.0% | ||||||||
| 314,350 | IQE PLC * ^ | 305,077 | ||||||
| SOFTWARE - 5.9% | ||||||||
| 37,642 | Codemasters Group Holdings PLC * | 110,812 | ||||||
| 9,165 | Frontier Developments PLC * | 129,506 | ||||||
| 65,016 | Team17 Group PLC * | 256,599 | ||||||
| 18,468 | Wandisco PLC * | 100,370 | ||||||
| 597,287 | ||||||||
| TOYS/GAMES/HOBBIES - 1.7% | ||||||||
| 25,449 | Embracer Group AB | 173,018 | ||||||
See accompanying notes to financial statements.
4
| F/m Investments European L/S Small Cap Fund |
| PORTFOLIO OF INVESTMENTS (Continued) |
| October 31, 2019 |
| Shares | Fair Value | |||||||
| COMMON STOCK (Continued) - 89.3% | ||||||||
| TRANSPORTATION - 11.0% | ||||||||
| 34,508 | BW Offshore Ltd. * ^ | $ | 263,098 | |||||
| 7,042 | Construcciones y Auxiliar de Ferrocarriles SA ^ | 316,221 | ||||||
| 258,412 | Eddie Stobart Logistics PLC # | 50,158 | ||||||
| 37,163 | Goodbulk Ltd. * # | 497,327 | ||||||
| 1,126,804 | ||||||||
| TOTAL COMMON STOCK (Cost - $9,131,850) | 9,125,015 | |||||||
| SHORT-TERM INVESTMENT - 8.0% | ||||||||
| MONEY MARKET FUND - 8.0% | ||||||||
| 815,723 | Fidelity Institutional Money Market Funds - Government Portfolio, Institutional Class, 2.31% ** | 815,723 | ||||||
| TOTAL SHORT-TERM INVESTMENT (Cost - $815,723) | ||||||||
| TOTAL INVESTMENTS - 97.3% (Cost - $9,947,573) | $ | 9,940,738 | ||||||
| SECURITIES SOLD SHORT - (27.1)% (Proceeds - $2,790,888) | (2,765,986 | ) | ||||||
| OTHER ASSETS LESS LIABILITIES - 29.8% | 3,043,306 | |||||||
| NET ASSETS - 100.0% | $ | 10,218,058 | ||||||
| SECURITIES SOLD SHORT - (27.1)% | ||||||||
| BUILDING MATERIALS - (1.6)% | ||||||||
| 17,756 | Marshalls PLC | 163,476 | ||||||
| CHEMICALS - (1.0)% | ||||||||
| 2,542 | Fuchs Petrolub SE | 102,521 | ||||||
| COMMERCIAL SERVICES - (1.8)% | ||||||||
| 17,731 | Aggreko PLC | 181,441 | ||||||
| DIVERSIFIED FINANCIAL SERVICES - (2.6)% | ||||||||
| 1,561 | Grenke AG | 147,769 | ||||||
| 5,323 | Hargreaves Lansdown PLC | 122,055 | ||||||
| 269,824 | ||||||||
| ELECTRONICS - (1.6)% | ||||||||
| 5,187 | Spectris PLC | 160,551 | ||||||
| ENEGRY ALTERNATE SOURCES - (1.2)% | ||||||||
| 8,630 | Siemens Gamesa Renewable Energy SA | 118,666 | ||||||
| FOOD - (2.6)% | ||||||||
| 914 | Kerry Group PLC | 110,536 | ||||||
| 2,845 | Viscofan SA | 154,194 | ||||||
| 264,730 | ||||||||
| HEALTHCARE-PRODUCTS - (1.3)% | ||||||||
| 3,051 | GN Store Nord A/S | 134,150 | ||||||
| HEALTHCARE-SERVICES - (2.5)% | ||||||||
| 3,750 | Korian SA * | 158,980 | ||||||
| 3,562 | NMC Health PLC | 100,619 | ||||||
| 259,599 | ||||||||
| LEISURE TIME - (1.6)% | ||||||||
| 14,884 | Technogym SpA | 164,061 | ||||||
| MEDIA - (1.0)% | ||||||||
| 12,095 | Pearson PLC | 106,771 | ||||||
| MISCELLANEOUS MANUFACTURING - (3.3)% | ||||||||
| 13,057 | IMI PLC | 169,465 | ||||||
| 3,438 | Stadler Rail AG * | 166,961 | ||||||
| 336,426 | ||||||||
| SEMICONDUCTORS - (3.4)% | ||||||||
| 2,574 | Melexis NV | 180,342 | ||||||
| 2,041 | u-blox Holding AG | 165,059 | ||||||
| 345,401 | ||||||||
| TRANSPORTATION - (1.6)% | ||||||||
| 57,839 | Royal Mail PLC | 158,369 | ||||||
| TOTAL SECURITIES SOLD SHORT (Proceeds - $2,790,888) | 2,765,986 | |||||||
PLC - Public Limited Company
| * | Non-income producing security. |
| ^ | All or a portion of these securities are held as collateral for securities sold short. |
| # | Fair valued security, the value of this security has been determined in good faith under the policies of the Board of Trustees. |
| ** | Money market fund; interest rate reflects effective yield on October 31, 2019. |
See accompanying notes to financial statements.
5
| F/m Investments European L/S Small Cap Fund |
| PORTFOLIO OF INVESTMENTS (Continued) |
| October 31, 2019 |
| Unrealized | ||||||||||||||||
| Foreign Currency | Settlement Date | Counterparty | Local Currency | U.S. Dollar Value | Appreciation/(Depreciation) | |||||||||||
| To Buy: | ||||||||||||||||
| Danish Krone | 11/14/2019 | Goldman Sachs | 835,877 | $ | 124,929 | $ | 1,376 | |||||||||
| Euro | 11/14/2019 | Goldman Sachs | 562,738 | 628,225 | 3,664 | |||||||||||
| Swiss Franc | 11/14/2019 | Goldman Sachs | 247,317 | 250,823 | 2,195 | |||||||||||
| Swiss Franc | 11/14/2019 | Goldman Sachs | 218,949 | 222,052 | 1,752 | |||||||||||
| $ | 1,226,029 | $ | 8,987 | |||||||||||||
| To Sell: | ||||||||||||||||
| British Pound | 11/14/2019 | Goldman Sachs | 1,631,980 | $ | 2,112,442 | $ | (48,079 | ) | ||||||||
| British Pound | 11/14/2019 | Goldman Sachs | 168,949 | 218,688 | (22 | ) | ||||||||||
| Euro | 11/14/2019 | Goldman Sachs | 2,473,545 | 2,761,400 | (33,815 | ) | ||||||||||
| Norwegian Krone | 11/14/2019 | Goldman Sachs | 9,785,363 | 1,065,851 | 3,648 | |||||||||||
| Swedish Krona | 11/14/2019 | Goldman Sachs | 5,149,411 | 534,775 | (10,215 | ) | ||||||||||
| $ | 6,693,156 | $ | (88,483 | ) | ||||||||||||
| Total | $ | (79,496 | ) | |||||||||||||
See accompanying notes to financial statements.
6
| F/m Investments European L/S Small Cap Fund |
| STATEMENT OF ASSETS AND LIABILITIES |
| October 31, 2019 |
| ASSETS | ||||
| Investment securities: | ||||
| At cost | $ | 9,947,573 | ||
| At value | $ | 9,940,738 | ||
| Cash at broker | 4,507,776 | |||
| Cash held for collateral at custodian | 183,539 | |||
| Dividends and interest receivable | 36,509 | |||
| Receivable for securities sold | 24,220 | |||
| Receivable for Fund shares sold | 4,221 | |||
| Prepaid expenses and other assets | 24,413 | |||
| TOTAL ASSETS | 14,721,416 | |||
| LIABILITIES | ||||
| Securities sold short (Proceeds - $2,790,888) | 2,765,986 | |||
| Due to Custodian - Foreign Currency (Cost - $1,346,046) | 1,350,778 | |||
| Payable for Fund shares redeemed | 143,948 | |||
| Payable for investments purchased | 114,688 | |||
| Unrealized depreciation on foreign currency contracts | 79,496 | |||
| Investment advisory fees payable | 5,364 | |||
| Dividends payable on securities sold short | 3,546 | |||
| Payable to related parties | 698 | |||
| Distribution (12b-1) fees payable | 333 | |||
| Accrued expenses and other liabilities | 38,521 | |||
| TOTAL LIABILITIES | 4,503,358 | |||
| NET ASSETS | $ | 10,218,058 | ||
| NET ASSETS CONSIST OF: | ||||
| Paid in capital | $ | 21,502,383 | ||
| Accumulated Loss | (11,284,325 | ) | ||
| NET ASSETS | $ | 10,218,058 | ||
| NET ASSET VALUE PER SHARE: | ||||
| Institutional Class: | ||||
| Net Assets | $ | 8,729,599 | ||
| Shares of beneficial interest outstanding ($0 par value, unlimited shares authorized) | 966,461 | |||
| Net asset value (Net Assets ÷ Shares Outstanding), offering price and redemption price per share (a) | $ | 9.03 | ||
| Investor Class: | ||||
| Net Assets | $ | 1,488,459 | ||
| Shares of beneficial interest outstanding ($0 par value, unlimited shares authorized) | 165,394 | |||
| Net asset value (Net Assets ÷ Shares Outstanding), offering price and redemption price per share (a) | $ | 9.00 | ||
| (a) | Redemptions made within 60 days of purchases may be assessed a redemption fee of 1.00%. |
See accompanying notes to financial statements.
7
| F/m Investments European L/S Small Cap Fund |
| STATEMENT OF OPERATIONS |
| For the Year Ended October 31, 2019 |
| INVESTMENT INCOME | ||||
| Dividends (net of foreign tax withheld of $83,915) | $ | 587,571 | ||
| Interest | 139,929 | |||
| TOTAL INVESTMENT INCOME | 727,500 | |||
| EXPENSES | ||||
| Investment advisory fees | 962,028 | |||
| Distribution (12b-1) fees: | ||||
| Investor Class | 3,623 | |||
| Dividends on securities sold short | 317,129 | |||
| Interest expense | 198,844 | |||
| Custodian fees | 97,135 | |||
| Administration fees | 67,582 | |||
| Registration fees | 39,473 | |||
| Trustees fees and expenses | 30,003 | |||
| Legal fees | 29,985 | |||
| Third party administrative servicing fees | 26,954 | |||
| Compliance officer fees | 22,001 | |||
| Audit fees | 19,100 | |||
| Printing expense | 8,023 | |||
| Insurance expense | 6,216 | |||
| Shareholder service fees - Investor Class | 725 | |||
| Other expenses | 6,120 | |||
| TOTAL EXPENSES | 1,834,941 | |||
| Less: Fees waived by the Advisor | (242,083 | ) | ||
| NET EXPENSES | 1,592,858 | |||
| NET INVESTMENT LOSS | (865,358 | ) | ||
| REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | ||||
| Net realized gain (loss) on: | ||||
| Investments | (15,276,400 | ) | ||
| Foreign currency contracts | 2,500,076 | |||
| Securities sold short | 4,701,625 | |||
| (8,074,699 | ) | |||
| Net change in unrealized appreciation (depreciation) on: | ||||
| Investments | 8,003,659 | |||
| Foreign currency contracts | (1,218,681 | ) | ||
| Foreign currency translations | (69,073 | ) | ||
| Securities sold short | (2,395,126 | ) | ||
| 4,320,779 | ||||
| NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS | (3,753,920 | ) | ||
| NET DECREASE IN NET ASSETS | $ | (4,619,278 | ) | |
See accompanying notes to financial statements.
8
| F/m Investments European L/S Small Cap Fund |
| STATEMENTS OF CHANGES IN NET ASSETS |
| For the | For the | |||||||
| Year Ended | Year Ended | |||||||
| October 31, 2019 | October 31, 2018 | |||||||
| FROM OPERATIONS | ||||||||
| Net investment loss | $ | (865,358 | ) | $ | (1,948,746 | ) | ||
| Net realized gain (loss) from investments, foreign currency contracts, and securities sold short | (8,074,699 | ) | 4,624,330 | |||||
| Net change in unrealized appreciation (depreciation) on investments, securities sold short, foreign currency contracts and foreign currency translations | 4,320,779 | (9,245,797 | ) | |||||
| Net decrease in net assets resulting from operations | (4,619,278 | ) | (6,570,213 | ) | ||||
| DISTRIBUTIONS TO SHAREHOLDERS | ||||||||
| Total Distributions Paid: | ||||||||
| Institutional Class | (4,332,627 | ) | (3,698,133 | ) | ||||
| Investor Class | (71,987 | ) | (25,767 | ) | ||||
| Net decrease in net assets resulting from distributions to shareholders | (4,404,614 | ) | (3,723,900 | ) | ||||
| FROM SHARES OF BENEFICIAL INTEREST | ||||||||
| Proceeds from shares sold: | ||||||||
| Institutional Class | 11,095,003 | 33,304,258 | ||||||
| Investor Class | 1,334,417 | 1,351,878 | ||||||
| Net asset value of shares issued in reinvestment of distributions: | ||||||||
| Institutional Class | 3,407,875 | 2,700,642 | ||||||
| Investor Class | 71,987 | 25,767 | ||||||
| Redemption fee proceeds: | ||||||||
| Institutional Class | 6,116 | 189 | ||||||
| Investor Class | 869 | 323 | ||||||
| Payments for shares redeemed: | ||||||||
| Institutional Class | (82,249,649 | ) | (9,926,213 | ) | ||||
| Investor Class | (1,150,915 | ) | (321,382 | ) | ||||
| Net increase (decrease) in net assets from shares of beneficial interest | (67,484,297 | ) | 27,135,462 | |||||
| TOTAL INCREASE (DECREASE) IN NET ASSETS | (76,508,189 | ) | 16,841,349 | |||||
| NET ASSETS | ||||||||
| Beginning of Year | 86,726,247 | 69,884,898 | ||||||
| End of Year | $ | 10,218,058 | $ | 86,726,247 | ||||
| SHARE ACTIVITY | ||||||||
| Institutional Class: | ||||||||
| Shares Sold | 1,170,894 | 2,923,852 | ||||||
| Shares Reinvested | 377,395 | 241,776 | ||||||
| Shares Redeemed | (8,784,764 | ) | (909,158 | ) | ||||
| Net increase (decrease) in shares of beneficial interest outstanding | (7,236,475 | ) | 2,256,470 | |||||
| Investor Class: | ||||||||
| Shares Sold | 143,293 | 119,230 | ||||||
| Shares Reinvested | 7,981 | 2,307 | ||||||
| Shares Redeemed | (123,270 | ) | (28,524 | ) | ||||
| Net increase in shares of beneficial interest outstanding | 28,004 | 93,013 | ||||||
See accompanying notes to financial statements.
9
| F/m Investments European L/S Small Cap |
| FINANCIAL HIGHLIGHTS |
| Per Share Data and Ratios for a Share of Beneficial Interest Outstanding Throughout Each Period |
| Institutional Class | ||||||||||||||||
| For the | For the | For the | For the | |||||||||||||
| Year Ended | Year Ended | Year Ended | Period Ended | |||||||||||||
| October 31, 2019 | October 31, 2018 | October 31, 2017 | October 31, 2016 (1) | |||||||||||||
| Net asset value, beginning of period | $ | 10.40 | $ | 11.67 | $ | 9.27 | $ | 10.00 | ||||||||
| Activity from investment operations: | ||||||||||||||||
| Net investment loss (2) | (0.17 | ) | (0.25 | ) | (0.21 | ) | (0.18 | ) | ||||||||
| Net realized and unrealized gain (loss) on investments | (0.63 | ) | (0.43 | ) | 2.61 | (0.55 | ) | |||||||||
| Total from investment operations | (0.80 | ) | (0.68 | ) | 2.40 | (0.73 | ) | |||||||||
| Less distributions from: | ||||||||||||||||
| Net investment income | (0.25 | ) | (0.31 | ) | — | — | ||||||||||
| Net realized gains | (0.32 | ) | (0.28 | ) | — | — | ||||||||||
| Total distributions | (0.57 | ) | (0.59 | ) | — | — | ||||||||||
| Paid-in-Capital From Redemption Fees | 0.00 | (3) | 0.00 | (3) | 0.00 | (3) | — | |||||||||
| Net asset value, end of period | $ | 9.03 | $ | 10.40 | $ | 11.67 | $ | 9.27 | ||||||||
| Total return (4) | (7.69 | )% | (6.18 | )% | 25.89 | % | (7.30 | )% (5) | ||||||||
| Net assets, at end of period (000’s) | $ | 8,730 | $ | 85,302 | $ | 69,368 | $ | 24,654 | ||||||||
| Ratio of gross expenses to average net assets (6,8) | 3.83 | % | 3.97 | % | 2.71 | % | 2.87 | % (7) | ||||||||
| Ratio of net expenses to average net assets (8) | 3.33 | % | 3.73 | % | 2.46 | % | 2.45 | % (7) | ||||||||
| Ratio of net investment loss to average net assets | (1.81 | )% | (2.24 | )% | (1.99 | )% | (2.18 | )% (7) | ||||||||
| Portfolio Turnover Rate | 141 | % | 194 | % | 154 | % | 168 | % (5) | ||||||||
| (1) | The Fund commenced operations on December 30, 2015. |
| (2) | Per share amounts calculated using the average shares method, which more appropriately presents the per share data for the period. |
| (3) | Represents less than $0.01 per share. |
| (4) | Total returns shown exclude the effect of applicable sales charges and redemption fees and assumes the reinvestment of distributions. |
| (5) | Not Annualized. |
| (6) | Represents the ratio of expenses to average net assets absent fee waivers and/or expense reimbursements by the Advisor. |
| (7) | Annualized. |
| (8) | Excluding dividends from securities sold short and interest expense, the ratio of expenses to average net assets would have been: |
| Before fees waived | 2.74 | % | 2.48 | % | 2.49 | % | 2.66 | % (7) | ||||||||
| After fees waived | 2.24 | % | 2.24 | % | 2.24 | % | 2.24 | % (7) | ||||||||
See accompanying notes to financial statements.
10
| F/m Investments European L/S Small Cap |
| FINANCIAL HIGHLIGHTS |
| Per Share Data and Ratios for a Share of Beneficial Interest Outstanding Throughout Each Period |
| Investor Class | ||||||||||||||||
| For the | For the | For the | For the | |||||||||||||
| Year Ended | Year Ended | Year Ended | Period Ended | |||||||||||||
| October 31, 2019 | October 31, 2018 | October 31, 2017 | October 31, 2016 (1) | |||||||||||||
| Net asset value, beginning of period | $ | 10.37 | $ | 11.66 | $ | 9.27 | $ | 10.00 | ||||||||
| Activity from investment operations: | ||||||||||||||||
| Net investment loss (2) | (0.17 | ) | (0.29 | ) | (0.27 | ) | (0.18 | ) | ||||||||
| Net realized and unrealized gain (loss) on investments | (0.66 | ) | (0.42 | ) | 2.66 | (0.55 | ) | |||||||||
| Total from investment operations | (0.83 | ) | (0.71 | ) | 2.39 | (0.73 | ) | |||||||||
| Less distributions from: | ||||||||||||||||
| Net investment income | (0.23 | ) | (0.30 | ) | — | — | ||||||||||
| Net realized gains | (0.32 | ) | (0.28 | ) | — | — | ||||||||||
| Total distributions | (0.55 | ) | (0.58 | ) | — | — | ||||||||||
| Paid-in-Capital From Redemption Fees | 0.01 | 0.00 | (3) | — | — | |||||||||||
| Net asset value, end of period | $ | 9.00 | $ | 10.37 | $ | 11.66 | $ | 9.27 | ||||||||
| Total return (4) | (7.92 | )% | (6.44 | )% | 25.78 | % | (7.30 | )% (5) | ||||||||
| Net assets, at end of period (000’s) | $ | 1,488 | $ | 1,425 | $ | 517 | $ | 0 | (8) | |||||||
| Ratio of gross expenses to average net assets (6,9) | 4.13 | % | 4.27 | % | 3.01 | % | 3.17 | % (7) | ||||||||
| Ratio of net expenses to average net assets (9) | 3.63 | % | 4.03 | % | 2.76 | % | 2.75 | % (7) | ||||||||
| Ratio of net investment loss to average net assets | (1.85 | )% | (2.56 | )% | (2.39 | )% | (2.48 | )% (7) | ||||||||
| Portfolio Turnover Rate | 141 | % | 194 | % | 154 | % | 168 | % (5) | ||||||||
| (1) | The Fund commenced operations on December 30, 2015. |
| (2) | Per share amounts calculated using the average shares method, which more appropriately presents the per share data for the period. |
| (3) | Represents less than $0.01 per share. |
| (4) | Total returns shown exclude the effect of applicable sales charges and redemption fees and assumes the reinvestment of distributions. |
| (5) | Not Annualized. |
| (6) | Represents the ratio of expenses to average net assets absent fee waivers and/or expense reimbursements by the Advisor. |
| (7) | Annualized. |
| (8) | Less than $1,000. |
| (9) | Excluding dividends from securities sold short and interest expense, the ratio of expenses to average net assets would have been: |
| Before fees waived | 3.04 | % | 2.78 | % | 2.79 | % | 2.96 | % (7) | ||||||||
| After fees waived | 2.54 | % | 2.54 | % | 2.54 | % | 2.54 | % (7) | ||||||||
See accompanying notes to financial statements.
11
| F/m Investments European L/S Small Cap Fund |
| NOTES TO FINANCIAL STATEMENTS |
| October 31, 2019 |
| 1. | ORGANIZATION |
The F/m Investments European L/S Small Cap Fund (the “Fund”), formerly known as the Balter European L/S Small Cap Fund, changed its name as of October 11, 2019. The Fund is a diversified series of shares of beneficial interest of Northern Lights Fund Trust II (the “Trust”), a statutory trust organized under the laws of the State of Delaware on August 26, 2010, and is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Fund commenced operations on December 30, 2015.
The investment objective of the Fund is to generate absolute returns by investing both long and short in European Companies. The Fund offers two classes of shares: Institutional Class shares and Investor Class shares. Each class of shares is offered at their net asset value. Each class of shares of the Fund has identical rights and privileges with respect to arrangements pertaining to shareholder servicing or distribution, class-related expenses, voting rights on matters affecting a single class of shares, and the exchange privilege of each class of shares. The Fund’s share classes differ in the fees and expenses charged to shareholders. The Fund’s income, expenses (other than class specific distribution fees) and realized and unrealized gains and losses are allocated proportionately each day based upon the relative net assets of each class.
| 2. | SIGNIFICANT ACCOUNTING POLICIES |
The following is a summary of significant accounting policies followed by the Fund in preparation of their financial statements. These policies are in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. The Fund is an investment companies and accordingly follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946 “Financial Services – Investment Companies”.
Securities valuation – Securities listed on an exchange are valued at the last reported sale price at the close of the regular trading session of the primary exchange on the business day the value is being determined, or in the case of securities listed on NASDAQ at the NASDAQ Official Closing Price (“NOCP”). In the absence of a sale such securities shall be valued at the mean between the current bid and ask prices on the day of valuation. Short-term debt obligations having 60 days or less remaining until maturity, at time of purchase may be valued at amortized cost. Forward foreign currency exchange contracts (‘forward contracts”) are valued at the forward rate. Investments values in currencies other than the U.S. dollar are converted to U.S. dollars using exchange rates obtained from pricing services. Investments in open-end investment companies are valued at net asset value.
The Fund may hold securities, such as private investments, interests in commodity pools, other non-traded securities or temporarily illiquid securities, for which market quotations are not readily available or are determined to be unreliable. These securities will be valued using the “fair value” procedures approved by the Board. The Board has delegated execution of these procedures to a fair value committee composed of one or more representatives from each of the (i) Trust, (ii) administrator, and (iii) advisor. The committee may also enlist third party consultants such as a valuation specialist at a public accounting firm, valuation consultant or financial officer of a security issuer on an as-needed basis to assist in determining a security-specific fair value. The Board has also engaged a third party valuation firm to attend valuation meetings held by the Trust, review minutes of such meetings and report to the Board on a quarterly basis. The Board reviews and ratifies the execution of this process and the resultant fair value prices at least quarterly to assure the process produces reliable results.
Fair Valuation Process – As noted above, the fair value committee is composed of one or more representatives from each of the (i) Trust, (ii) administrator, and (iii) advisor. The applicable investments are valued collectively via inputs from each of these groups. For example, fair value determinations are required for the following securities: (i) securities for which market quotations are insufficient or not readily available on a particular business day (including securities for which there is a short and temporary lapse in the provision of a price by the regular pricing source), (ii) securities for which, in the judgment of the advisor the prices or values available do not represent the fair value of the instrument. Factors which may cause the advisor to make such a judgment include, but are not limited to, the following: only a bid price or an asked price is available; the spread between bid and asked prices is substantial; the frequency of sales; the thinness of the market; the size of reported trades; and actions of the securities markets, such as the suspension or limitation of trading; (iii) securities determined to be
12
| F/m Investments European L/S Small Cap Fund |
| NOTES TO FINANCIAL STATEMENTS (Continued) |
| October 31, 2019 |
illiquid; (iv) securities with respect to which an event that will affect the value thereof has occurred (a “significant event”) since the closing prices were established on the principal exchange on which they are traded, but prior to a Fund’s calculation of its net asset value. Specifically, interests in commodity pools or managed futures pools are valued on a daily basis by reference to the closing market prices of each futures contract or other asset held by a pool, as adjusted for pool expenses. Restricted or illiquid securities, such as private investments or non-traded securities are valued via inputs from the advisor based upon the current bid for the security from two or more independent dealers or other parties reasonably familiar with the facts and circumstances of the security (who should take into consideration all relevant factors as may be appropriate under the circumstances). If the advisor is unable to obtain a current bid from such independent dealers or other independent parties, the fair value committee shall determine the fair value of such security using the following factors: (i) the type of security; (ii) the cost at date of purchase; (iii) the size and nature of the Fund’s holdings; (iv) the discount from market value of unrestricted securities of the same class at the time of purchase and subsequent thereto; (v) information as to any transactions or offers with respect to the security; (vi) the nature and duration of restrictions on disposition of the security and the existence of any registration rights; (vii) how the yield of the security compares to similar securities of companies of similar or equal creditworthiness; (viii) the level of recent trades of similar or comparable securities; (ix) the liquidity characteristics of the security; (x) current market conditions; and (xi) the market value of any securities into which the security is convertible or exchangeable.
The Fund utilizes various methods to measure the fair value of all of its investments on a recurring basis. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of input are:
Level 1 – Unadjusted quoted prices in active markets for identical assets and liabilities that the Fund has the ability to access.
Level 2 – Observable inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Level 3 – Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available, representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following tables summarize the inputs used as of October 31, 2019 for the Fund’s investments measured at fair value:
| Assets * | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Common Stock | $ | 8,456,541 | $ | 668,474 | $ | — | $ | 9,125,015 | ||||||||
| Money Market Funds | 815,723 | — | — | 815,723 | ||||||||||||
| Total | $ | 9,272,264 | $ | 668,474 | $ | — | $ | 9,940,738 | ||||||||
| Liabilities* | ||||||||||||||||
| Securities Sold Short | $ | 2,765,986 | $ | — | $ | — | $ | 2,765,986 | ||||||||
| Forward Currency Contracts | — | 79,496 | — | $ | 79,496 | |||||||||||
| Total | $ | 2,765,986 | $ | 79,496 | $ | — | $ | 2,845,482 | ||||||||
The Fund did not hold any Level 3 securities during the year.
There were no transfers into or out of Level 1 and Level 2 during the year. It is the Fund’s policy to recognize transfers into or out of Level 1 and Level 2 at the end of the reporting period.
| * | Refer to the Portfolio of Investments for industry classification. |
13
| F/m Investments European L/S Small Cap Fund |
| NOTES TO FINANCIAL STATEMENTS (Continued) |
| October 31, 2019 |
Security transactions and related income – Security transactions are accounted for on trade date. Interest income is recognized on an accrual basis. Discounts are accreted and premiums are amortized on securities purchased over the lives of the respective securities. Dividend income is recorded on the ex-dividend date. Realized gains or losses from sales of securities are determined by comparing the identified cost of the security lot sold with the net sales proceeds.
Dividends and distributions to shareholders – Dividends from net investment income, if any, are declared and paid annually. Distributable net realized capital gains, if any, are declared and distributed annually. Dividends from net investment income and distributions from net realized gains are recorded on ex dividend date and are determined in accordance with federal income tax regulations, which may differ from GAAP. These “book/tax” differences are considered either temporary (i.e., deferred losses, capital loss carry forwards) or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the composition of net assets based on their federal tax-basis treatment; temporary differences do not require reclassification. These reclassifications have no effect on net assets, results from operations or net asset value per share of the Fund.
Forward Currency Contracts – As foreign securities are purchased, a Fund generally enters into forward currency exchange contracts in order to hedge against foreign currency exchange rate risks. The market value of the contract fluctuates with changes in currency exchange rates. The contract is marked-to-market daily and the change in market value is recorded by a Fund as an unrealized gain or loss. As foreign securities are sold, a portion of the contract is generally closed and the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. A Fund may also enter into forward currency contracts as an investment strategy consistent with that Fund’s investment objective. Realized gains and losses from contract transactions are included as a component of net realized gains (losses) from investments and foreign currency in the Statements of Operations.
Foreign Currency Translations – The accounting records of the Fund is maintained in U.S. dollars. Investment securities and other assets and liabilities denominated in a foreign currency, and income receipts and expense payments are translated into U.S. dollars using the prevailing exchange rate at the London market close. Purchases and sales of securities are translated into U.S. dollars at the contractual currency rates established at the approximate time of the trade.
Short Sales – A “short sale” is a transaction in which the Fund sells a security it does not own but has borrowed in anticipation that the market price of that security will decline. The Fund is obligated to replace the security borrowed by purchasing it on the open market at a later date. If the price of the security sold short increases between the time of the short sale and the time the Fund replaces the borrowed security, the Fund will incur a loss, unlimited in size. Conversely, if the price declines, the Fund will realize a gain, limited to the price at which the Fund sold the security short. Certain cash and securities are held as collateral.
Federal income tax – It is the Fund’s policy to qualify as a regulated investment company by complying with the provisions of the Internal Revenue Code that are applicable to regulated investment companies and to distribute substantially all of its taxable income and net realized gains to shareholders. Therefore, no federal income tax provision is required. The Fund recognizes the tax benefits of uncertain tax positions only where the position is “more likely than not” to be sustained assuming examination by tax authorities. Management has analyzed the Fund’s tax positions and has concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions taken on returns filed for open tax years ended October 31, 2016 to October 31, 2018, or expected to be taken in the Fund’s October 31, 2019 year end tax returns. The Fund identifies its major tax jurisdictions as U.S. Federal and Ohio, and foreign jurisdictions where the Fund makes significant investments; however, the Fund is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next twelve months.
Expenses – Expenses of the Trust that are directly identifiable to a specific fund are charged to that fund. Expenses which are not readily identifiable to a specific fund are allocated in such a manner as deemed equitable, taking into consideration the nature and type of expense and the relative sizes of the funds in the Trust.
14
| F/m Investments European L/S Small Cap Fund |
| NOTES TO FINANCIAL STATEMENTS (Continued) |
| October 31, 2019 |
Indemnification – The Trust indemnifies its officers and Trustees for certain liabilities that may arise from the performance of their duties to the Trust. Additionally, in the normal course of business, the Fund enters into contracts that contain a variety of representations and warranties and which provide general indemnities. The Fund’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the risk of loss due to these warranties and indemnities appears to be remote.
| 3. | INVESTMENT TRANSACTIONS |
For the year ended October 31, 2019, cost of purchases and proceeds from sales of portfolio securities, other than short-term investments and securities sold short, amounted to the following:
| Purchases | Sales | |||||
| $ | 55,532,757 | $ | 113,925,724 | |||
| 4. | INVESTMENT ADVISORY AGREEMENT AND TRANSACTIONS WITH RELATED PARTIES |
As of October 11, 2019, F/m Investments LLC serves as the Fund’s investment advisor to the Fund. Prior to October 11, 2019 Balter Liquid Alternatives, LLC served as the Fund’s investment advisor to the Fund. Pursuant to an Investment Advisory Agreement with the Fund, the Advisor, under the oversight of the Board, directs the daily operations of the Fund and supervises the performance of administrative and professional services provided by others. As compensation for its services and the related expenses borne by the Advisor, the Fund pays the Advisor an investment advisory fee, computed and accrued daily and paid monthly, at an annual rate of 2.00%. The Advisor, on behalf of the Fund, has entered into a Sub-Advisory agreement with S.W. Mitchell Capital LLP and the Advisor compensates the Sub-Advisor out of the investment Advisory fee it receives from the Fund. For the year ended October 31, 2019, the Fund incurred advisory fees in the amount of $962,028. F/m Investments LLC earned advisory fees of $12,325 and Balter Liquid Alternatives LLC earned advisory fees of $949,703.
The Fund’s Advisor has contractually agreed to reduce its fees and/or absorb expenses of the Fund, until at least February 28, 2022 to ensure that Total Annual Fund Operating Expenses after fee waiver and/or reimbursement (excluding interest and tax expenses, dividends on short positions and Acquired Fund Fees and Expenses) for the Fund do not exceed 2.24% and 2.54% of the Fund’s average net assets, for Institutional Class and Investor Class shares, respectively; subject to possible recoupment from the Fund in future years on a rolling three year basis (within the three years after the fees have been waived or reimbursed) if such recoupment can be achieved within the foregoing expense limits. During the year ended October 31, 2019 the total amount of advisory fees waived was $242,083. F/m Investments LLC waived advisory fees in the amount of $8,713 which are subject to recapture and will expire on October 31, 2022. Balter Liquid Alternatives LLC waived advisory fees in the amount of $233,370 which are not subject to recapture. As of October 31, previously waived advisory fees by Balter Liquid Alternatives LLC totaling $397,889 are no longer subject to recapture.
Distributor – The distributor of the Fund is Northern Lights Distributors, LLC (the “Distributor”). The Board of Trustees of the Northern Lights Fund Trust II has adopted, on behalf of the Fund, the Trust’s Master Distribution and Shareholder Servicing Plan (the “Plan”), as amended, pursuant to Rule 12b-1 under the Investment Company Act of 1940, to pay for certain distribution activities and shareholder services. Under the Plan, the Fund may pay 0.25% per year of the average daily net assets of Investor Class shares for such distribution and shareholder service activities. For the year ended October 31, 2019, the Fund incurred distribution fees in the amount of $3,623.
In addition, certain affiliates of the Distributor provide services to the Fund(s) as follows:
Gemini Fund Services, LLC (“GFS”), an affiliate of the Distributor, provides administration, fund accounting, and transfer agent services to the Trust. Pursuant to separate servicing agreements with GFS, the Fund pays GFS customary fees for providing administration, fund accounting and transfer agency services to the Fund. Certain officers of the Trust are also officers of GFS, and are not paid any fees directly by the Fund for serving in such capacities.
Northern Lights Compliance Services, LLC (“NLCS”), an affiliate of GFS and the Distributor, provides a Chief Compliance Officer to the Trust, as well as related compliance services, pursuant to a consulting agreement between NLCS and the Trust. Under the terms of such agreement, NLCS receives customary fees from the Fund.
15
| F/m Investments European L/S Small Cap Fund |
| NOTES TO FINANCIAL STATEMENTS (Continued) |
| October 31, 2019 |
Blu Giant, LLC (“Blu Giant”), an affiliate of GFS and the Distributor, provides EDGAR conversion and filing services as well as print management services for the Fund on an ad-hoc basis. For the provision of these services, Blu Giant receives customary fees from the Fund.
On February 1, 2019, NorthStar Financial Services Group, LLC, the parent company of GFS and its affiliated companies including NLD, NLCS and Blu Giant (collectively, the “Gemini Companies”), sold its interest in the Gemini Companies to a third party private equity firm that contemporaneously acquired Ultimus Fund Solutions, LLC (an independent mutual fund administration firm) and its affiliates (collectively, the “Ultimus Companies”). As a result of these separate transactions, the Gemini Companies and the Ultimus Companies are now indirectly owned through a common parent entity, The Ultimus Group, LLC.
| 5. | DERIVATIVE TRANSACTIONS |
The following is a summary of the effect of derivative instruments on the Fund’s Statement of Assets and Liabilities as of October 31, 2019.
| Contract Type/Primary Risk Exposure | Statements of Assets and Liabilities | Value | ||||
| Foreign currency contracts/Currency Risk | Unrealized depreciation on foreign currency contracts | $ | 79,496 | |||
The following is a summary of the effect of derivative instruments on the Fund’s Statement of Operations for the year ended October 31, 2019.
| Change in Unrealized | ||||||||
| Contract type/ | Realized Gain/(Loss) | Appreciation/(Depreciation) | ||||||
| Primary Risk Exposure | On Foreign Currency Contracts | on Foreign Currency Contracts | ||||||
| Currency contracts/Currency risk | $ | 2,500,076 | $ | (1,218,681 | ) | |||
The notional value and contracts of the derivative instruments outstanding as of October 31, 2019 as disclosed in the Portfolio of Investments and the amounts realized and changes in unrealized gains and losses on derivative instruments during the year as disclosed above and within the Statement of Operations serve as indicators of the volume of derivative activity for the Fund.
Offsetting of Financial Assets and Derivative Assets
During the year ended October 31, 2019, the Fund was not subject to any master netting arrangements. The following table shows additional information regarding the offsetting of assets and liabilities at October 31, 2019 for the Fund.
| Liabilities: | Gross Amounts | Net Amounts | ||||||||||||||||||||||
| Gross Amounts | Offset in the | Presented in | ||||||||||||||||||||||
| of Recognized | Statements of | the Statements | ||||||||||||||||||||||
| Assets & | Assets & | of Assets & | Financial | Cash Collateral | ||||||||||||||||||||
| Description | Liabilities | Liabilities | Liabilities | Instruments | Pledged/Received | Net Amount | ||||||||||||||||||
| Unrealized depreciation on foreign currency contracts | $ | 79,496 | (1) | $ | — | $ | 79,496 | $ | — | $ | 79,496 | (2) | $ | — | ||||||||||
| Securities Sold Short | 2,765,986 | (1) | — | 2,765,986 | 2,765,986 | (2) | — | — | ||||||||||||||||
| $ | 2,845,482 | $ | — | $ | 2,845,482 | $ | 2,765,986 | $ | 79,496 | $ | — | |||||||||||||
| (1) | Unrealized depreciation on futures contracts, unrealized appreciation on swaps, futures options short at value, and securities sold short as presented in the Portfolio of Investments. |
| (2) | The amount is limited to the derivative liability balance and, accordingly, does not include excess collateral pledged. |
| 6. | CONTROL OWNERSHIP |
The beneficial ownership, either directly or indirectly, of more than 25% of the voting securities of a fund creates presumption of control of the fund, under Section 2(a)(9) of the 1940 Act. As of October 31, 2019, TD Ameritrade, Inc. held approximately 46.21% of the voting securities of the Fund for the benefit of others. The Fund has no knowledge as to whether all or any portion of the shares owned on record by TD Ameritrade, Inc. are also owned beneficially by any party who would be presumed to control the Fund.
16
| F/m Investments European L/S Small Cap Fund |
| NOTES TO FINANCIAL STATEMENTS (Continued) |
| October 31, 2019 |
| 7. | REDEMPTION FEES |
The Fund may assess a short-term redemption fee of 1.00% of the total redemption amount if a shareholder sells his shares after holding them for less than 60 days. The redemption fee is paid directly to the Fund. For the year ended October 31, 2019 the fund assessed redemption fees in the amount of $6,116 and $869 for the Institutional Class and Investor Class, respectively.
| 8. | AGGREGATE UNREALIZED APPRECIATION AND DEPRECIATION – TAX BASIS |
The identified cost of investments in securities owned by the Fund for federal income tax purposes, and its respective gross unrealized appreciation and depreciation at October 31, 2019, was as follows:
| Gross | Gross | Net Unrealized | ||||||||||||
| Tax | Unrealized | Unrealized | Appreciation | |||||||||||
| Cost | Appreciation | Depreciation | (Depreciation) | |||||||||||
| $ | 8,084,898 | $ | 957,427 | $ | (1,947,069 | ) | $ | (989,642 | ) | |||||
| 9. | DISTRIBUTIONS TO SHAREHOLDERS AND TAX COMPONENTS OF CAPITAL |
The tax character of distributions paid during the period ended October 31, 2019 and October 31, 2018 was as follows:
| Fiscal Year Ended | Fiscal Year Ended | |||||||
| October 31, 2019 | October 31, 2018 | |||||||
| Ordinary Income | $ | 4,404,614 | $ | 3,711,507 | ||||
| Long-Term Capital Gain | — | 12,393 | ||||||
| $ | 4,404,614 | $ | 3,723,900 | |||||
As of October 31, 2019, the components of accumulated earnings/ (deficit) on a tax basis were as follows:
| Undistributed | Undistributed | Post October Loss | Capital Loss | Other | Unrealized | Total | ||||||||||||||||||||
| Ordinary | Long-Term | and | Carry | Book/Tax | Appreciation/ | Accumulated | ||||||||||||||||||||
| Income | Gains | Late Year Loss | Forwards | Differences | (Depreciation) | Earnings/(Deficits) | ||||||||||||||||||||
| $ | 907,771 | $ | — | $ | — | $ | (11,196,146 | ) | $ | — | $ | (995,950 | ) | $ | (11,284,325 | ) | ||||||||||
At October 31, 2019, the Funds had capital loss carry forwards for federal income tax purposes available to offset future capital gains, as follows:
| Non-Expiring | Non-Expiring | CLCF | ||||||||||||||||
| Expiring | Short-Term | Long-Term | Total | Utilized | ||||||||||||||
| $ | — | $ | 9,969,494 | $ | 1,226,652 | $ | 11,196,146 | $ | — | |||||||||
The difference between book basis and tax basis accumulated net investment income/(loss), accumulated net realized gain/(loss), and unrealized appreciation/(depreciation) from investments is primarily attributable to the tax deferral of losses on wash sales, and the mark-to-market treatment of passive foreign investment companies, and foreign exchange contracts.
| 10. | NEW ACCOUNTING PRONOUNCEMENT |
In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-13, which changes certain fair value measurement disclosure requirements. The new ASU, in addition to other modifications and additions, removes the requirement to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and the policy for the timing of transfers between levels. For investment companies, the amendments are effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is allowed. At this time, management is evaluating the implications of the ASU and any impact on the financial statement disclosures.
17
| F/m Investments European L/S Small Cap Fund |
| NOTES TO FINANCIAL STATEMENTS (Continued) |
| October 31, 2019 |
| 11. | SUBSEQUENT EVENTS |
Subsequent events after the date of the Statement of Assets and Liabilities have been evaluated through the date the financial statements were issued. Management has determined that no events or transactions occurred requiring adjustment or disclosure in the financial statements.
18
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
| To the Board of Trustees |
| of Northern Lights Fund Trust II and |
| Shareholders of |
| F/m Investments European L/S Small Cap Fund |
Opinion on the Financial Statements
We have audited the accompanying statements of assets and liabilities of F/m Investments European L/S Small Cap Fund (formerly Balter European L/S Small Cap Fund) (the “Fund”), a series of Northern Lights Fund Trust II (the “Trust”), including the schedules of investments, as of October 31, 2019, and the related statements of operations for the year ended October 31, 2019, the statements of changes in net assets for each of the two years in the period then ended, the financial highlights for each of the three years in the period then ended and for the period December 30, 2015 (commencement of operations) to October 31, 2016, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of October 31, 2019, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended and for the period December 30, 2015 (commencement of operations) to October 31, 2016, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We have served as the auditor of one or more of the funds in the Trust since 2012.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of October 31, 2019 by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion.
TAIT, WELLER & BAKER LLP
Philadelphia, Pennsylvania
December 30, 2019
19
| F/m Investments European L/S Small Cap Fund |
| EXPENSE EXAMPLE (Unaudited) |
| October 31, 2019 |
As a shareholder of a Fund, you incur two types of costs: (1) transaction costs, including sales charges (loads) on purchases and redemptions; and redemption fees; (2) ongoing costs, including management fees; distribution and/or service (12b-1) fees; and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Funds and to compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period as noted below.
Actual Expenses
The “Actual Expenses” line in the table below provides information about actual account values and actual expenses. You may use the information below; together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the table under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The “Hypothetical” line in the table below provides information about hypothetical account values and hypothetical expenses based on the respective Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balances or expenses you paid for the period. You may use this information to compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as sales charges (loads). Therefore, the table is useful in comparing ongoing costs only, and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
| Beginning | Ending | Expenses Paid | Expense Ratio During | |||||||||||
| Account Value | Account Value | During Period | the Period | |||||||||||
| Actual | 5/1/19 | 10/31/19 | 5/1/19 – 10/31/19* | 5/1/19 – 10/31/19* | ||||||||||
| Institutional Class | $1,000.00 | $946.50 | $10.99 | 2.24% | ||||||||||
| Investor Class | $1,000.00 | $945.40 | $12.45 | 2.54% | ||||||||||
| Beginning | Ending | Expenses Paid | Expense Ratio During | |||||||||||
| Hypothetical ** | Account Value | Account Value | During Period | the Period | ||||||||||
| (5% return before expenses) | 5/1/19 | 10/31/19 | 5/1/19 – 10/31/19* | 5/1/19 – 10/31/19* | ||||||||||
| Institutional Class | $1,000.00 | $1,013.91 | $11.37 | 2.24% | ||||||||||
| Investor Class | $1,000.00 | $1,012.40 | $12.88 | 2.54% |
| * | Expenses are equal to the average account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by the number of days in the period (184) divided by the number of days in the fiscal year (365). |
| ** | The hypothetical example assumes that the Fund was in operation for the full six months ended October 31, 2019. |
20
| F/m Investments European L/S Small Cap Fund |
| SUPPLEMENTAL INFORMATION (Unaudited) |
| October 31, 2019 |
SHAREHOLDER MEETING
The Board of Trustees of Northern Lights Fund Trust II (the “Trust”) held a Special Meeting of the Shareholders of the F/m Investments European L/S Small Cap Fund (formerly, Balter European L/S Small Cap Fund) (the “Fund”), a series of the Trust, on October 10, 2019, for the purpose of approving an advisory agreement between the Trust, on behalf of the Fund, and F/m Investments, LLC (“Advisory Agreement”) and a sub-advisory agreement between F/m Investments, LLC and S.W. Mitchell Capital, LLP (“Sub-Advisory agreement”).
At the close of business July 31, 2019, the record date for the Special Meeting of Shareholders, there were outstanding 1,926,038 shares of beneficial interest of the Fund. Accordingly, shares represented in person and by proxy at the Special Meeting equaled 50.40% of the outstanding shares of the Fund. Therefore, a quorum was present for the Fund.
With respect to approval of the proposed Advisory Agreement the following votes were cast:
| For Approval: 739,379 shares voted |
| Against Approval: 20,591 shares voted |
| Abstained: 210,690 shares voted |
| With respect to approval of the proposed Sub-Advisory Agreement the following votes were cast: |
| For Approval: 739,379 shares voted |
| Against Approval: 20,591 shares voted |
| Abstained: 210,690 shares voted |
21
| F/m Investments European L/S Small Cap Fund |
| SUPPLEMENTAL INFORMATION (Unaudited) |
| October 31, 2019 |
FACTORS CONSIDERED BY THE TRUSTEES IN THE APPROVAL OF A NEW ADVISORY AGREEMENT AND NEW SUB-ADVISORY AGREEMENT
At a regular meeting (the “Meeting”) of the Board of Trustees (the “Board”) of Northern Lights Fund Trust II (the “Trust”) held on July 25-26, 2019, the Board, including each of the members of the Board who are not an “interested person” of the Trust (the “Independent Trustees”), considered the approval of the proposed New Advisory Agreement between the Trust and F/m Investments, LLC (“F/m”) on behalf of F/m Investments European L/S Small Cap Fund (formerly, Balter European L/S Small Cap Fund) (“F/m Investments European Small Cap”) (“New Advisory Agreement”). The Board also considered the approval of a new sub-advisory agreement between F/m and S.W. Mitchel Capital, LLP (“SWMC”) on behalf of F/m Investments European Small Cap (the “New Sub-Advisory Agreement” and together with the New Advisory Agreement, the “New Agreements”).
Based on their evaluation of the information provided by F/m and SWMC, as well as information provided by other Fund service providers, the Board, by a unanimous vote (including a separate vote of the Independent Trustees), approved the New Agreements with respect to F/m Investments European Small Cap.
In advance of the meeting, the Board requested and received materials to assist them in considering the New Agreements. The materials provided contained information with respect to the factors enumerated below, including the New Agreements, a memorandum prepared by the Independent Trustees’ outside legal counsel discussing in detail the Trustees’ fiduciary obligations and the factors they should assess in considering the approval of the New Agreements and comparative information relating to the advisory fees and other expenses of F/m Investments European Small Cap. The materials also included due diligence materials relating to F/m and SWMC, and each firm’s Form ADV, select financial information of F/m and SWMC, bibliographic information regarding F/m’s and SWMC’s key management and investment advisory personnel, and comparative fee information relating to F/m Investments European Small Cap as well as other pertinent information. At the Meeting, the Independent Trustees were advised by counsel that is experienced in Investment Company Act of 1940 matters and that is independent of fund management and met with such counsel separately from fund management.
The Board then reviewed and discussed the written materials that were provided by F/m in advance of the Meeting and deliberated on the proposed approval of the New Advisory Agreement with respect to F/m Investments European Small Cap. The Board relied upon the advice of independent legal counsel and their own business judgment in determining the material factors to be considered in evaluating the New Advisory Agreement and the weight to be given to each such factor. The conclusions reached by the Board were based on a comprehensive evaluation of all of the information provided and were not the result of any one factor. Moreover, each Trustee may have afforded different weight to the various factors in reaching his conclusions with respect to the New Advisory Agreement. In considering the proposed approval of the New Advisory Agreement with respect to F/m Investments European Small Cap, the Board reviewed and analyzed various factors that they determined were relevant, including the factors enumerated below.
New Advisory Agreement
Nature, Extent and Quality of Services. The Board reviewed materials provided by F/m related to the approval of the New Advisory Agreement, including its Form ADV, a description of the manner in which investment decisions are made and executed and a review of the personnel who will be performing services for F/m Investments European Small Cap, including the team of individuals that will primarily monitor and execute the investment process and will provide oversight of the sub-adviser, SWMC.
The Board then discussed the extent of F/m’s research capabilities, the quality of its compliance infrastructure and the experience of its fund management personnel. The Board considered F/m’s specific responsibilities in all aspects of the day-to-day management of F/m Investments European Small Cap, including F/m’s oversight of F/m Investments European Small Cap’s sub-adviser to ensure that the sub-adviser adheres to the Fund’s investment strategy. Additionally, the Board received satisfactory responses from F/m with respect to a series of important questions, including: whether F/m is involved in any lawsuits or pending regulatory actions; whether the management of other accounts would conflict with F/m’s management of F/m Investments European Small Cap; and whether F/m has procedures in place to adequately allocate trades among its respective clients, with the Board noting that F/m currently has no other clients.
The Board reviewed the descriptions provided by F/m of its practices for monitoring compliance with F/m Investments European Small Cap’s investment strategies and limitations and oversight of SWMC, noting that F/m’s chief compliance officer will
22
| F/m Investments European L/S Small Cap Fund |
| SUPPLEMENTAL INFORMATION (Unaudited) (Continued) |
| October 31, 2019 |
routinely review the sub-adviser’s performance of its duties with respect to the Fund to ensure compliance under F/m’s compliance program. The Board reviewed the sub-advisory arrangement and discussed F/m’s policies, procedures and overall compliance program with the CCO of the Trust. The Board noted that the CCO of the Trust had provided comments to F/m’s compliance manual, which representatives of F/m had stated to the Board would be adopted by F/m, and represented that subject to such revisions being made, F/m’s policies and procedures were reasonably designed to prevent violations of applicable securities laws. The Board also noted F/m’s representation that the prospectus and statement of additional information for F/m Investments European Small Cap accurately describe the investment strategies of the Fund. The Board then reviewed the capitalization of F/m based on financial information and other materials provided and discussed these with F/m, and concluded that F/m was sufficiently well-capitalized, or that its control persons or principals had the ability to make additional contributions in order to meet its obligations to F/m Investments European Small Cap.
The Board concluded that F/m had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures necessary to perform its duties under the New Advisory Agreement and that the nature, overall quality and extent of the management and oversight services to be provided by F/m were satisfactory.
Performance. The Board discussed the reports prepared by Broadridge and reviewed the performance of F/m Investments European Small Cap as compared to its Broadridge selected peer group, Morningstar category and benchmark for the one-year, three year and since-inception periods ended March 31, 2019. The Board noted that, as F/m would be a new investment adviser for F/m Investments European Small Cap, it had not been responsible for the prior performance of the Fund or oversight of the sub-adviser although F/m proposed to continue retaining SWMC as the Fund’s sub-adviser. The Board also noted that F/m, as a newly formed investment adviser, did not have its own track record to consider. Consequently, the Board did not consider performance to be a significant factor in its consideration of F/m, although it noted it would consider performance in its consideration of SWMC as sub-adviser.
Fees and Expenses. As to the costs of the services to be provided by F/m, the Board discussed the comparison of advisory fees and total operating expense data and reviewed F/m Investments European Small Cap’s proposed advisory fee and overall expenses compared to its peer group and Morningstar category as presented in the Broadridge Reports. The Board noted that although the advisory fee was the highest in its peer group, it was not the highest in its Morningstar category. The Board further noted that F/m would be responsible for paying the sub-adviser out of the advisory fee it receives from F/m Investments European Small Cap which contributes to the higher advisory fee being charged to the Fund. The Board also reviewed the proposed contractual arrangements for F/m Investments European Small Cap, which state that F/m has agreed to waive or limit its advisory fee and/or reimburse expenses at least until February 28, 2022 in order to limit net annual operating expenses, exclusive of certain fees, so as not to exceed 2.24% and 2.54% of the Fund’s average annual net assets for Institutional and Investor Class Shares, respectively, and the Board found such arrangements to be beneficial to F/m Investments European Small Cap’s shareholders. The Board further noted that the advisory fee and expense limitation agreement terms were identical in all material respects to those terms in place under the current advisory agreement and expense limitation agreement with Balter Liquid Alternatives, LLC (“BLA”) with respect to F/m Investments European Small Cap except for the term and effective date. The Board also noted that, while F/m’s parent company was paying an ongoing fee to BLA in connection with BLA’s support for F/m’s approval as adviser, such fee was not paid by F/m Investments European Small Cap and was to be paid out of F/m’s parent’s own resources. After further consideration, it was the consensus of the Board that, based on the experience and expertise of F/m’s personnel, and the services provided by F/m to F/m Investments European Small Cap, the advisory fee to be charged by F/m to the Fund was not unreasonable.
Profitability. The Board also considered the level of profits that could be expected to accrue to F/m with respect to F/m Investments European Small Cap based on break even and profitability reports and analyses reviewed by the Board and the selected financial information provided by F/m. After review and discussion, the Board concluded that, based on the services provided and the projected growth of F/m Investments European Small Cap, the anticipated profit from F/m’s relationship with the Fund was not excessive.
Economies of Scale. As to the extent to which F/m Investments European Small Cap will realize economies of scale as it grows, and whether the fee levels reflect these economies of scale for the benefit of investors, the Board discussed F/m’s expectations for growth of the Fund. After consideration, the Board concluded that any material economies of scale would not be achieved in the near term.
23
| F/m Investments European L/S Small Cap Fund |
| SUPPLEMENTAL INFORMATION (Unaudited) (Continued) |
| October 31, 2019 |
New Sub-Advisory Agreement
The Board then reviewed and discussed the written materials that were provided by SWMC in advance of the Meeting and deliberated on the New Sub-Advisory Agreement with respect to F/m Investments European Small Cap. The Board relied upon the advice of independent legal counsel and its own business judgment in determining the material factors to be considered in evaluating the New Sub-Advisory Agreement and the weight to be given to each such factor. The conclusions reached by the Board were based on a comprehensive evaluation of all of the information provided and were not the result of any one factor. Moreover, each Trustee may have afforded different weight to the various factors in reaching his conclusions with respect to the New Sub-Advisory Agreement. In considering the approval of the renewal of the New Sub-Advisory Agreement, the Board reviewed and analyzed various factors that they determined were relevant, including the factors enumerated below.
Nature, Extent and Quality of Services. As to the nature, quality and extent of the services to be provided by SWMC, the Board noted the experience of the portfolio management and research personnel of SWMC, including their experience in the investment field, education and industry credentials. The Board discussed the financial condition of SWMC and reviewed supporting materials. The Board reviewed the presentation materials prepared by SWMC describing its investment process. The Board received satisfactory responses from SWMC with respect to a series of important questions, including: whether SWMC was involved in any lawsuits or pending regulatory actions.
The Board discussed SWMC’s compliance structure and broker selection process and engaged in a discussion with the Trust’s chief compliance officer regarding SWMC’s business practices. The Board noted that the CCO of the Trust continued to represent that SWMC’s policies and procedures were reasonably designed to prevent violations of applicable securities laws. The Board also noted SWMC’s representation that the prospectus and statement of additional information for F/m Investments European Small Cap accurately describe the investment strategies of the Fund. In consideration of the compliance policies and procedures for SWMC included in the Board Materials, the Board concluded that SWMC had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to performing its duties under the New Sub-Advisory Agreement and that the nature, overall quality and extent of investment management services to be provided to F/m Investments European Small Cap were satisfactory.
Performance. As the sole sub-adviser to F/m Investments European Small Cap, the Board considered the Fund’s past performance as well as other factors relating to SWMC’s track record. The Board discussed the reports prepared by Broadridge and reviewed the performance of F/m Investments European Small Cap as compared to its Broadridge selected peer group, Morningstar category and benchmark for the one-year, three year and since-inception periods ended March 31, 2019. The Board noted that F/m Investments European Small Cap had underperformed its peer group median and Morningstar category median for each period and its benchmark, the MSCI Europe Small Cap Index (the MSCI Europe Small Cap”), for the three year and since inception periods but outperformed its benchmark for the one-year period. The Board noted the challenges facing the European market and that F/m Investments European Small Cap’s peer group consisted of long/short funds that were not as Europe-focused as F/m Investments European Small Cap. The Board then noted its discussion with F/m regarding the process F/m would use to monitor SWMC’s performance as well as the fact that recent performance, while lagging F/m Investments European Small Cap’s peer group, had improved against its benchmark outperforming the MSCI Europe Small Cap Index for the one-year period, and concluded that the performance track record of SWMC and F/m Investments European Small Cap was satisfactory and in-line with the Fund’s investment objective.
Fees and Expenses. As to the costs of the services to be provided by SWMC, the Board discussed the sub-advisory fee to be paid to SWMC. The Board considered that SWMC would be paid by F/m and not by F/m Investments European Small Cap. F/m confirmed to the Board that F/m was of the opinion that the sub-advisory fee to be paid to SWMC was reasonable in light of the quality of the services to be performed by it. The Board discussed the total fee expected to be paid to SWMC and noted that SWMC would receive no other compensation from F/m Investments European Small Cap or F/m except the sub-advisory fee earned pursuant to the New Sub-Advisory Agreement and payable by F/m. Based on the representations of F/m and the materials provided, the Board concluded that the sub-advisory fee to be paid to SWMC was not unreasonable.
Profitability. As to profits to be realized by SWMC, the Board reviewed the profitability analysis provided by SWMC. The Board noted that because the sub-advisory fee was to be paid by F/m, the overall advisory fee to be paid by F/m Investments European Small Cap will not be directly affected by the sub-advisory fee to be paid to SWMC. Consequently, the Board did not consider the profitability of SWMC to be a significant factor, although it concluded that the level of profit to be realized by SWMC was not excessive.
24
| F/m Investments European L/S Small Cap Fund |
| SUPPLEMENTAL INFORMATION (Unaudited) (Continued) |
| October 31, 2019 |
Economies of Scale. Because the sub-advisory fees are not paid by F/m Investments European Small Cap, the Board did not consider whether the sub-advisory fees should reflect any potential economies of scale that might be realized as the assets of the Fund increase. The Board did, however, recognize that any changes to the advisory fee received by F/m from F/m Investments European Small Cap may indirectly be reflected in the total amount of sub-advisory fees that would be available by F/m to pay SWMC.
Conclusion. The Board relied upon the advice of counsel, and their own business judgment in determining the material factors to be considered in evaluating the New Agreements and the weight to be given to each such factor. Having requested and received such information from F/m and SWMC as the Board believed to be reasonably necessary to evaluate the terms of each New Agreement, and as assisted by the advice of independent counsel, the Board, including a majority of the Independent Trustees, determined that, with respect to F/m Investments European Small Cap and of the New Agreements separately, (a) the terms of the respective New Agreement were reasonable; (b) the advisory fee or sub-advisory fee, as appropriate, were not unreasonable; and (c) the respective New Agreements were in the best interests of F/m Investments European Small Cap and its shareholders, as appropriate. In considering the approval of the New Agreements, the Board did not identify any one factor as all important, but rather considered these factors collectively and determined that approval of the New Agreements was in the best interests of F/m Investments European Small Cap and its shareholders as appropriate. Moreover, the Board noted that each Trustee may have afforded different weight to the various factors in reaching his conclusions with respect to each of the New Agreements.
25
| F/m Investments European L/S Small Cap Fund |
| SUPPLEMENTAL INFORMATION (Unaudited) |
| October 31, 2019 |
The Trustees and the officers of the Trust are listed below with their addresses, present positions with the Trust and principal occupations over at least the last five years. Unless otherwise noted, the address of each Trustee and Officer is 17645 Wright Street, Suite 200, Omaha, NE 68130.
Independent Trustees
| Name
and Year of Birth |
Position/Term
of Office* |
Principal
Occupation During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by Trustee*** |
Other
Directorships held by Trustee During the Past Five Years |
| Thomas
T. Sarkany 1946 |
Trustee Since October 2011
|
President, TTS Consultants, LLC (financial services) (since 2010).
|
1 | Director, Aquila Distributors; Trustee, Arrow ETF Trust; Trustee, Arrow Investments Trust; Trustee, Northern Lights Fund Trust IV |
| Anthony
H. Lewis 1946 |
Trustee Since May 2011 | Chairman and CEO of The Lewis Group USA (executive consulting firm) (since 2007). | 1 | Director, Member of the Compensation Committee and Member of the Risk Committee of Torotel Inc. (Magnetics, Aerospace and Defense), Trustee, Chairman of the Fair Valuation Committee and Member of the Audit Committee of the Wildermuth Endowment Strategy Fund |
| Keith
Rhoades 1948 |
Trustee Since May 2011 |
Retired since 2008. | 1 | NONE |
| Randal
D. Skalla 1962 |
Trustee Since May 2011 |
President, L5 Enterprises, Inc. (financial services company) (since 2001). |
1 | Board Member, Orizon Investment Counsel (financial services company) (from 2001 to 2017) |
26
| F/m Investments European L/S Small Cap Fund |
| SUPPLEMENTAL INFORMATION (Unaudited) (Continued) |
| October 31, 2019 |
Interested Trustees and Officers
| Name
and Year of Birth |
Position/Term
of Office* |
Principal
Occupation During the Past Five Years |
Number
of Portfolios in Fund Complex Overseen by Trustee*** |
Other
Directorships held by Trustee During the Past Five Years |
| Brian
Nielsen** 1972 |
Trustee Since May 2011 | Trustee (since 2011) of Northern Lights Fund Trust II; Special Projects Counsel of NorthStar Financial Services Group, LLC (from 2018 to 2019); General Counsel (from 2001 to 2014) and Secretary (from 2001 to 2018) of CLS Investments, LLC; General Counsel (from 2001 to 2014) and Secretary (from 2001 to 2018) of Orion Advisor Services, LLC; Manager (from 2012 to 2015), General Counsel and Secretary (from 2003 to 2018) of NorthStar Financial Services Group, LLC; CEO (from 2012 to 2018), General Counsel (from 2003 to 2014), Secretary (from 2003 to 2018) and Manager (from 2005 to 2018) of Northern Lights Distributors, LLC; Director, Secretary and General Counsel (from 2004 to 2018) of Constellation Trust Company; CEO (from 2015 to 2018), Manager (from 2008 to 2015), General Counsel and Secretary (from 2011 to 2018) of Northern Lights Compliance Services, LLC; General Counsel and Secretary (from 2011 to 2018) of Blu Giant, LLC; General Counsel (from 2012 to 2014) and Secretary (from 2012 to 2018) of Gemini Fund Services, LLC; Manager (from 2012 to 2018) of Arbor Point Advisors, LLC; General Counsel and Secretary (from 2013 to 2014) of Gemini Hedge Fund Services, LLC; General Counsel and Secretary (from 2013 to 2014) of Gemini Alternative Funds, LLC; Secretary and General Counsel of NorthStar Holdings, LLC (from 2013 to 2015); Director, Secretary and General Counsel of NorthStar CTC Holdings, Inc. (from 2015 to 2018) and Secretary and Chief Legal Officer (from 2003 to 2018) of AdvisorOne Funds. | 1 | Manager of Northern Lights Distributors, LLC (from 2005 to 2018); Manager of NorthStar Financial Services Group, LLC (from 2012 to 2015); Manager of Arbor Point Advisors, LLC (from 2012 to 2018); Director of Constellation Trust Company |
| Kevin
E. Wolf 80 Arkay Drive Hauppauge, NY 11788 1969 |
President Since January 2013 | Vice President of The Ultimus Group, LLC and Executive Vice President of Gemini Fund Services, LLC (since 2019), President, Gemini Fund Services, LLC (2012 - 2019) | N/A | N/A |
| Richard Malinowski 80 Arkay Drive. Hauppauge, NY 11788 1983 |
Secretary Since January 2018 | Senior Vice President Legal Administration, Gemini Fund Services, LLC (since April 2017); Vice President and Counsel (April 2016 to 2017) and AVP and Staff Attorney (September 2012 to March 2016). | N/A | N/A |
| Erik
Naviloff 80 Arkay Drive Hauppauge, NY 11788 1968 |
Treasurer Since January 2013 | Vice President of Gemini Fund Services, LLC (since 2011). | N/A | N/A |
| Emile
R. Molineaux 80 Arkay Drive Hauppauge, NY 11788 1962 |
Chief Compliance Officer and Anti Money Laundering Officer Since May 2011 | Senior Compliance Officer and CCO of Various clients of Northern Lights Compliance Services, LLC (since 2011). | N/A | N/A |
| * | The term of office for each Trustee and Officer listed above will continue indefinitely. |
| ** | Brian Nielsen is an “interested person” of the Trust as that term is defined under the 1940 Act, because of his former affiliation with Northern Lights Distributors, LLC (the Fund’s Distributor). |
| *** | As of October 31, 2019, the Trust was comprised of 20 active portfolios managed by unaffiliated investment advisers. The term “Fund Complex” applies only to the Fund and not to any other series of the Trust. The Fund does not hold itself out as related to any other series within the Trust for investment purposes, nor does it share the same investment adviser with any other series. |
The Fund's Statement of Additional Information ("SAI") includes additional information about the Trustees and is available free of charge, upon request, by calling toll-free at 1-844-322-8112.
27
Privacy Policy
Rev. May 2019
| FACTS | WHAT DOES NORTHERN LIGHTS FUND TRUST II (“NLFT II”) DO WITH YOUR PERSONAL INFORMATION? | |
| Why? | Financial companies choose how they share your personal information. Federal law gives consumers the right to limit some but not all sharing. Federal law also requires us to tell you how we collect, share, and protect your personal information. Please read this notice carefully to understand what we do. | |
| What? | The
types of personal information we collect and share depend on the product or service you have with us. This information can
include: | |
● Social Security number
● Employment information
● Account balances |
● Account transactions
● Income
● Investment experience | |
When you are no longer our customer, we continue to share your information as described in this notice. | ||
| How? | All financial companies need to share a customer’s personal information to run their everyday business - to process transactions, maintain customer accounts, and report to credit bureaus. In the section below, we list the reasons financial companies can share their customer’s personal information; the reasons NLFT II chooses to share; and whether you can limit this sharing. | |
| Reasons we can share your personal information | Does
NLFT II share? |
Can
you limit this sharing? |
For our everyday business purposes — such as to process your transactions, maintain your account(s), respond to court orders and legal investigations, or report to credit bureaus |
Yes | No |
For our marketing purposes — to offer our products and services to you |
Yes | No |
For joint marketing with other financial companies |
Yes | No |
For our affiliates’ everyday business purposes — information about your transactions and experiences |
Yes | No |
For our affiliates’ everyday business purposes — information about your creditworthiness |
No | We don’t share |
For nonaffiliates to market to you |
No | We don’t share |
| Questions? | Call 1-402-493-4603 |
28
| Who we are | ||
| Who is providing this notice? | Northern Lights Fund Trust II | |
| What we do | ||
| How does NLFT II protect my personal information? | To
protect your personal information from unauthorized access and use, we use security measures that comply with federal law. These
measures include computer safeguards and secured files and buildings. | |
| How does NLFT II collect my personal information? | We
collect your personal information, for example, when you | |
● open an account
● give us your income information
● provide employment information
|
● provide account information
● give us your contact information | |
| We also collect your personal information from others, such as credit bureaus, affiliates, or other companies. | ||
| Why can’t I limit all sharing? | Federal law gives you the right to limit only
● sharing for affiliates’ everyday business purposes—information about your creditworthiness
● affiliates from using your information to market to you
● sharing for nonaffiliates to market to you
State laws and individual companies may give you additional rights to limit sharing. | |
| Definitions | ||
| Affiliates | Companies related by common ownership or control. They can be financial and nonfinancial companies.
● Northern Lights Fund Trust II has no affiliates.
| |
| Nonaffiliates | Companies not related by common ownership or control. They can be financial and nonfinancial companies.
● NLFT II does not share with nonaffiliates so they can market to you. | |
| Joint marketing | A formal agreement between nonaffiliated financial companies that together market financial products and services to you.
● Our joint marketing partners include other financial service companies. | |
29
PROXY VOTING POLICY
Information regarding how the Fund voted proxies relating to portfolio securities for the most recent twelve month period ended June 30 as well as a description of the policies and procedures that the Fund uses to determine how to vote proxies is available without charge, upon request, by calling 1-844-322-8112 or by referring to the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.
PORTFOLIO HOLDINGS
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year on Form N-Q. Form N-Q is available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, DC (1-800-SEC-0330). The information on Form N-Q is available without charge, upon request, by calling 1-844-322-8112.
| INVESTMENT ADVISOR |
| F/m Investments LLC |
| 3050 K Street NW, Suite W-170 |
| Washington, DC 20007 |
| ADMINISTRATOR |
| Gemini Fund Services, LLC |
| 80 Arkay Dr., Suite 110 |
| Hauppauge, NY 11788 |
Item 2. Code of Ethics.
(a) As of the end of the period covered by this report, the registrant has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these individuals are employed by the registrant or a third party.
(b) For purposes of this item, “code of ethics” means written standards that are reasonably designed to deter wrongdoing and to promote:
| (1) | Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
| (2) | Full, fair, accurate, timely, and understandable disclosure in reports and documents that a registrant files with, or submits to, the Commission and in other public communications made by the registrant; |
| (3) | Compliance with applicable governmental laws, rules, and regulations; |
| (4) | The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and |
| (5) | Accountability for adherence to the code. |
(c) Amendments: During the period covered by the report, there have not been any amendments to the provisions of the code of ethics.
(d) Waivers: During the period covered by the report, the registrant has not granted any express or implicit waivers from the provisions of the code of ethics.
(e) The Code of Ethics is not posted on Registrant’ website.
(f) A copy of the Code of Ethics is attached as an exhibit.
Item 3. Audit Committee Financial Expert.
(a) The Registrant’s board of trustees has determined that Keith Rhoades is an audit committee financial expert, as defined in Item 3 of Form N-CSR. Mr. Rhoades is independent for purposes of this Item.
Item 4. Principal Accountant Fees and Services.
| (a) | Audit Fees |
| 2017 | 2018 | 2019 | ||||||||||
| F/m Investments European L/S Small Cap Fund | $ | 15,500 | $ | 15,000 | $ | 15,500 | ||||||
| (b) | Audit-Related Fees |
| 2017 | 2018 | 2019 | ||||||||||
| F/m Investments European L/S Small Cap Fund | None | None | None | |||||||||
| (c) | Tax Fees |
| 2017 | 2018 | 2019 | ||||||||||
| F/m Investments European L/S Small Cap Fund | $ | 3,100 | $ | 3,150 | $ | 3,250 | ||||||
Preparation of Federal & State income tax returns, assistance with calculation of required income, capital gain and excise distributions and preparation of Federal excise tax returns.
| (d) | All Other Fees |
| 2017 | 2018 | 2019 | ||||||||||
| F/m Investments European L/S Small Cap Fund | None | None | None | |||||||||
| (e) | (1) Audit Committee’s Pre-Approval Policies |
The registrant’s Audit Committee is required to pre-approve all audit services and, when appropriate, any non-audit services (including audit-related, tax and all other services) to the registrant. The registrant’s Audit Committee also is required to pre-approve, when appropriate, any non-audit services (including audit-related, tax and all other services) to its adviser, or any entity controlling, controlled by or under common control with the adviser that provides ongoing services to the registrant, to the extent that the services may be determined to have an impact on the operations or financial reporting of the registrant. Services are reviewed on an engagement by engagement basis by the Audit Committee.
| (2) | Percentages of Services Approved by the Audit Committee |
| F/m Investments European L/S Small Cap Fund | ||||||||||||
| 2017 | 2018 | 2019 | ||||||||||
| Audit-Related Fees: | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
| Tax Fees: | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
| All Other Fees: | 0.00 | % | 0.00 | % | 0.00 | % | ||||||
| (f) | During the audit of registrant's financial statements for the most recent fiscal year, less than 50 percent of the hours expended on the principal accountant's engagement were attributed to work performed by persons other than the principal accountant's full-time, permanent employees. |
| (g) | The aggregate non-audit fees billed by the registrant's accountant for services rendered to the registrant, and rendered to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the adviser that provides ongoing services to the registrant: |
| 2017 | 2018 | 2019 | ||||||||||
| F/m Investments European L/S Small Cap Fund | $ | 3,100 | $ | 3,150 | $ | 3,250 | ||||||
(h) The registrant's audit committee has considered whether the provision of non-audit services to the registrant's investment adviser (not including any sub-adviser whose role is primarily portfolio management and is subcontracted with or overseen by another investment adviser), and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant, that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X, is compatible with maintaining the principal accountant's independence.
Item 5. Audit Committee of Listed Companies. Not applicable to open-end investment companies.
Item 6. Schedule of Investments. Schedule of investments in securities of unaffiliated issuers is included under Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Funds. Not applicable to open-end investment companies.
Item 8. Portfolio Managers of Closed-End Management Investment Companies. Not applicable to open-end investment companies.
Item 9. Purchases of Equity Securities by Closed-End Funds. Not applicable to open-end investment companies.
Item 10. Submission of Matters to a Vote of Security Holders. None
Item 11. Controls and Procedures.
(a) Based on an evaluation of the Registrant’s disclosure controls and procedures as of a date within 90 days of filing date of this Form N-CSR, the principal executive officer and principal financial officer of the Registrant have concluded that the disclosure controls and procedures of the Registrant are reasonably designed to ensure that the information required in filings on Form N-CSR is recorded, processed, summarized, and reported by the filing date, including that information required to be disclosed is accumulated and communicated to the Registrant’s management, including the Registrant’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
(b) There were no significant changes in the Registrant’s internal control over financial reporting that occurred during the Registrant’s last fiscal half-year that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
Item 12. Disclosure of securities lending activities for closed-end management investment companies.
Not applicable to open-end investment companies.
Item 13. Exhibits.
(a)(1) Code of Ethics filed herewith.
(a)(3) Not applicable for open-end investment companies.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Northern Lights Fund Trust II
By (Signature and Title)
/s/ Kevin E. Wolf
Kevin E. Wolf, Principal Executive Officer/President
Date 1/7/20
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)
/s/Kevin E. Wolf
Kevin E. Wolf, Principal Executive Officer/President
Date 1/7/20
By (Signature and Title)
/s/ Erik Naviloff
Erik Naviloff, Principal Financial Officer/Treasurer
Date 1/7/20
Northern Lights Fund Trust II
CODE OF ETHICS
May 17, 2011
Northern Lights Fund Trust II (the “Trust”) and each of its series (the “Funds”) has adopted this Code of Ethics (the “Code”) in order to set forth guidelines and procedures that promote ethical practices and conduct by all of its Access Persons and to ensure that all Access Persons comply with the federal securities laws. Although this Code contains a number of specific standards and policies, there are four key principles embodied throughout the Code.
THE INTERESTS OF THE FUNDS MUST ALWAYS BE PARAMOUNT
Access Persons have a legal, fiduciary duty to place the interests of the Funds ahead of their own. In any decision relating to their personal investments, Access Persons must scrupulously avoid serving their own interests ahead of those of the Trust.
Access Persons may not take advantage of their relationship with the Funds
Access Persons should avoid any situation (unusual investment opportunities, perquisites and accepting gifts of more than token value from persons seeking to do business with the Funds) that might compromise, or call into question, the exercise of their fully independent judgment in the interests of the Funds.
All Personal Securities Transactions should avoid any actual, potential, or apparent conflicts of interest
Although all Personal Securities Transactions by Access Persons must be conducted in a manner consistent with this Code, the Code itself is based on the premise that Access Persons owe a fiduciary duty to the Funds, and should avoid any activity that creates an actual, potential, or apparent conflict of interest. This includes executing transactions through or for the benefit of a third party when the transaction is not in keeping with the general principles of this Code.
Access Persons must adhere to these general principles as well as comply with the specific provisions of this Code. Technical compliance with the Code and its procedures will not automatically prevent scrutiny of trades that show a pattern of abuse of an individual’s fiduciary duty to the Funds.
Access Persons must comply with all applicable laws
In both work-related and personal activities, Access Persons must comply with all applicable laws, including the federal securities laws.
Any violations of this Code should be reported promptly to the Chief Compliance Officer or his designee. Failure to do so will be deemed a violation of the Code.
DEFINITIONS
“Access Person” shall have the same meaning as set forth in Rule 17j-1 under the Investment Company Act of 1940, as amended (the “1940 Act”) and shall include:
1.
all officers and trustees (or persons occupying a similar status or performing a similar function) of the Funds;
2.
all officers and trustees (or persons occupying a similar status or performing a similar function) of the Advisers with respect to its corresponding series of the Trust
3.
any employee of the Trust or the Advisers (or of any company controlling or controlled by or under common control with the Trust or the Advisers) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of Covered Securities by the Funds, or whose functions relate to the making of any recommendations with respect to the purchase or sale; and
4.
any other natural person controlling, controlled by or under common control with the Trust or the Advisers who obtains information concerning recommendations made to the Funds with regard to the purchase or sale of Covered Securities by the Funds.
“Beneficial Ownership” means in general and subject to the specific provisions of Rule 16a-1(a)(2) under the Securities Exchange Act of 1934, as amended, having or sharing, directly or indirectly, through any contract arrangement, understanding, relationship, or otherwise, a direct or indirect “pecuniary interest” in the security.
“Chief Compliance Officer” means the Code of Ethics Compliance Officer of the Trust with respect to Trustees and officers of the Trust, or the CCO of the Advisers with respect to Advisers personnel.
“Code” means this Code of Ethics.
“Covered Security” means any Security, except (i) direct obligations of the U.S. Government, (ii) bankers’ acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements, and (iii) shares issued by open-end mutual Funds.
“Decision Making Access Person” means any Access Person who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by the Funds, or whose functions relate to the making of any recommendations with respect to such purchases or sales. Decision Makers typically are Advisers personnel.
“Funds” means series of the Trust.
“Immediate family” means an individual’s spouse, child, stepchild, grandchild, parent, stepparent, grandparent, siblings, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law and should include adoptive relationships. For purposes of determining whether an Access Person has an “indirect pecuniary interest” in securities, only ownership by “immediate family” members sharing the same household as the Access Person will be presumed to be an “indirect pecuniary interest” of the Access Person, absent special circumstances.
“Independent Trustees” means those Trustees of the Trust that would not be deemed an “interested person” of the Trust, as defined in Section 2(a)(19)(A) of the 1940 Act.
“Indirect Pecuniary Interest” includes, but is not limited to: (a) securities held by members of the person’s Immediate Family sharing the same household (which ownership interest may be rebutted); (b) a general partner’s proportionate interest in Fund securities held by a general or limited partnership; (c) a person’s right to dividends that is separated or separable from the underlying securities (otherwise, a right to dividends alone will not constitute a pecuniary interest in securities); (d) a person’s interest in securities held by the Trust; (e) a person’s right to acquire securities through the exercise or conversion of any derivative security, whether or not presently exercisable; and (f) a performance-related fee, other than an asset based fee, received by any broker, dealer, bank, insurance company, investment company, investment manager, Trustee, or person or entity performing a similar function, with certain exceptions.
“Pecuniary Interest” means the opportunity, directly or indirectly, to profit or share in any profit derived from a transaction in securities.
“Personal Securities Transaction” means any transaction in a Covered Security in which an Access Person has a direct or indirect Pecuniary Interest.
“Purchase or Sale of a Security” includes the writing of an option to purchase or sell a Security. A Security shall be deemed “being considered for Purchase or Sale” for the Trust when a recommendation to purchase or sell has been made and communicated by a Decision Making Access Person, and, with respect to the person making the recommendation, when such person seriously considers making such a recommendation. These recommendations are placed on the “Restricted List” until they are no longer being considered for Purchase or Sale, or until the Security has been purchased or sold.
“Restricted List” means the list of securities maintained by the Chief Compliance Officer in which trading by Access Persons is generally prohibited.
“Security” means any note, stock, treasury stock, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-Trust certificate, pre-organization certificate or subscription, transferable share, investment contract, voting-Trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, or, in general, an interest or instrument commonly know as “security”, or any certificate or interest or participation in temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase (including options) any of the foregoing.
“Advisers” means the Advisers to the Trust.
“Trust” means Northern Lights Fund Trust II.
PROHIBITED ACTIONS AND ACTIVITIES
A.
No Access Person shall purchase or sell directly or indirectly, any Covered Security in which he or she has, or by reason of such transaction acquires, any direct or indirect beneficial ownership and which he or she knows or should have known at the time of such purchase or sale;
(1)
is being considered for purchase or sale by a Fund, or
(2)
is being purchased or sold by a Fund.
B.
Decision-Making Access Persons may not participate in any initial public offering of Covered Securities in any account over which they exercise Beneficial Ownership. All other Access Persons must obtain prior written authorization from the Chief Compliance Officer or his designee prior to such participation;
C.
No Access Person may purchase a Covered Security in which by reason of such transaction they acquire Beneficial Ownership in a private placement of a Security, without prior written authorization of the acquisition by the Chief Compliance Officer or his designee;
D.
Access Persons may not accept any fee, commission, gift, or services, other than de minimus gifts, from any single person or entity that does business with or on behalf of the Trust;
E.
Decision-Making Access Persons may not serve on the board of directors of a publicly traded company without prior authorization from the Chief Compliance Officer or his designee based upon a determination that such service would be consistent with the interests of the Trust. If such service is authorized, procedures will then be put in place to isolate such Decision-Making Access Persons serving as directors of outside entities from those making investment decisions on behalf of the Trust.
Advanced notice should be given so that the Trust or Advisers may take such action concerning the conflict as deemed appropriate by the Chief Compliance Officer or his designee.
F.
Decision-Making Access Person may not execute a Personal Securities Transaction involving a Covered Security without authorization of the Chief Compliance Officer or such persons who may be designated by the Chief Compliance Officer from time to time.
G.
It shall be a violation of this Code for any Access Person, in connection with the purchase or sale, directly or indirectly, of any Covered Security held or to be acquired by a Fund:
a.
to employ any device, scheme or artifice to defraud the Trust;
b.
to make to the Trust any untrue statement of a material fact or to omit to state to the Trust a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
c.
to engage in any act, practice or course of business that operates or would operate as a fraud or deceit upon the Trust; or
d.
to engage in any manipulative practice with respect to the Trust.
EXEMPTED TRANSACTIONS
The provisions described above under the heading Prohibited Actions and Activities and the preclearance procedures under the heading Preclearance of Personal Securities Transactions do not apply to:
·
Purchases or Sales of Securities effected in any account in which an Access Person has no Beneficial Ownership;
·
Purchases or Sales of Securities which are non-volitional on the part the Access Person (for example, the receipt of stock dividends);
·
Purchase of Securities made as part of automatic dividend reinvestment plans;
·
Purchases of Securities made as part of an employee benefit plan involving the periodic purchase or company stock or mutual Funds; and
·
Purchases of Securities effected upon the exercise of rights issued by an issuer pro rata to all holders of a class of its Securities, to the extent such rights were acquired from such issuer, and sale of such rights so acquired.
PRECLEARANCE OF PERSONAL SECURITIES TRANSACTIONS
All Decision-Making Access Persons wishing to engage in a Personal Securities Transaction must obtain prior authorization of any such Personal Securities Transaction from the Chief Compliance Officer or such person or persons that the Chief Compliance Officer may from time to time designate to make such authorizations. Personal Securities Transactions by the Chief Compliance Officer shall require prior authorization from the President or Chief Executive Officer of the Trust (unless such person is also the Chief Compliance Officer), who shall perform the review and approval functions relating to reports and trading by the Chief Compliance Officer. The Trusts shall adopt the appropriate forms and procedures for implementing this Code of Ethics.
Any authorization so provided is effective until the close of business on the fifth trading day after the authorization is granted. In the event that an order for the Personal Securities Transaction is not placed within that time period, a new authorization must be obtained. If the order for the transaction is placed but not executed within that time period, no new authorization is required unless the person placing the order originally amends the order in any manner. Authorization for “good until canceled” orders is effective unless the order conflicts with a Trust order.
If a person wishing to effect a Personal Securities Transaction learns, while the order is pending, that the same Security is being considered for Purchase or Sale by a Fund, such person shall cancel the trade.
REPORTING AND MONITORING
The Chief Compliance Officer or such person or persons that the Chief Compliance Officer may from time to time designate shall monitor all personal trading activity of all Access Persons pursuant to the procedures established under this Code.
Disclosure of Personal Brokerage Accounts
Within ten days of the commencement of employment or at the commencement of a relationship with the Trust, all Access Persons, except Independent Trustees, are required to submit to the Chief Compliance Officer or his designee a report stating the names and account numbers of all of their personal brokerage accounts, brokerage accounts of members of their Immediate Family, and any brokerage accounts which they control or in which they or an Immediate Family member has Beneficial Ownership. Such report must contain the date on which it is submitted and the information in the report must be current as of a date no more than 45 days prior to that date. In addition, if a new brokerage account is opened during the course of the year, the Chief Compliance Officer or his designee must be notified immediately.
The information required by the above paragraph must be provided to the Chief Compliance Officer or his designee on an annual basis, and the report of such should be submitted with the annual holdings reports described below.
Each of these accounts is required to furnish duplicate confirmations and statements to the Chief Compliance Officer or his designee. These statements and confirms for each series of the Trust may be sent to the Advisers.
INITIAL HOLDINGS REPORT
Within ten days of becoming an Access Person (and with information that is current as of a date no more than 45 days prior to the date that the report was submitted), each Access Person, except Independent Trustees must submit a holdings report that must contain, at a minimum, the title and type of Security, and as applicable, the exchange ticker symbol or CUSIP number, number of shares, and principal amount of each Covered Security in which the Access Person has any direct or indirect Beneficial Ownership. This report must state the date on which it is submitted.
ANNUAL HOLDINGS REPORTS
All Access Persons, except Independent Trustees, must supply the information that is required in the initial holdings report on an annual basis, and such information must be current as of a date no more than 45 days prior to the date that the report was submitted. Such reports must state the date on which they are submitted.
QUARTERLY TRANSACTION REPORTS
All Access Persons shall report to the Chief Compliance Officer or his designee the following information with respect to transactions in a Covered Security in which such person has, or by reason of such transaction acquires, any direct or indirect Beneficial Ownership in the Covered Security:
·
The date of the transaction, the title, and as applicable the exchange ticker symbol or CUSIP number, interest rate and maturity date, number of shares, and the principal amount of each Covered Security;
·
The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
·
The price of the Covered Security at which the transaction was effected; and
·
The name of the broker, dealer, or bank with or through whom the transaction was effected.
·
The date the Access Person Submits the Report.
Reports pursuant to this section of this Code shall be made no later than 30 days after the end of the calendar quarter in which the transaction to which the report relates was effected, and shall include a certification that the reporting person has reported all Personal Securities Transactions required to be disclosed or reported pursuant to the requirements of this Code. Confirmations and Brokerage Statements sent directly to each Adviser’s address noted above is an acceptable form of a quarterly transaction report.
An Independent Trustee need only make a quarterly transaction report if he or she, at the time of the transaction, knew, or in the ordinary course of fulfilling his or her official duties as a Trustee, should have known that during the 15-day period immediately preceding or following the date of the transaction by the Independent Trustee, the Covered Security was purchased or sold by a Fund or was considered for purchase or sale by a Fund.
ENFORCEMENTS AND PENALTIES
The Chief Compliance Officer or his designee shall review the transaction information supplied by Access Persons. If a transaction appears to be a violation of this Code, the transaction will be reported to the Trusts Board of Trustees.
Upon being informed of a violation of this Code, the Trusts Board of Trustees may impose sanctions as it deems appropriate, including but not limited to, a letter of censure or suspension, termination of the employment of the violator, or a request for disgorgement of any profits received from a securities transaction effected in violation of this Code. The Trusts shall impose sanctions in accordance with the principle that no Access Person may profit at the expense of its clients. Any losses are the responsibility of the violator. Any profits realized on personal securities transactions in violation of the Code must be disgorged in a manner directed by the Board of Trustees.
Annually, the Chief Compliance Officer at each regular meeting of the Board shall issue a report on Personal Securities Transactions by Access Person. The report submitted to the board shall:
·
Summarize existing procedures concerning Personal Securities investing and any changes in the procedures made during the prior year;
·
Identify any violations of this Code and any significant remedial action taken during the prior year; and;
·
Identify any recommended changes in existing restrictions or procedures based upon the experience under the Code, evolving industry practices or developments in applicable laws and regulations.
ACKNOWLEDGMENT
The Trust must provide all Access Persons with a copy of this Code. Upon receipt of this Code, all Access Persons must do the following:
All new Access Persons must read the Code, complete all relevant forms supplied by the Chief Compliance Officer or his designee (including a written acknowledgement of their receipt of the Code), and schedule a meeting with the Chief Compliance Officer or his designee to discuss the provisions herein within two calendar weeks of employment.
Existing Access Persons who did not receive this Code upon hire, for whatever reason, must read the Code, complete all relevant forms supplied by the Chief Compliance Officer or his designee (including a written acknowledgement of their receipt of the Code), and schedule a meeting with the Chief Compliance Officer or his designee to discuss the provisions herein at the earliest possible time, but no later than the end of the current quarter.
All Access Persons must certify on an annual basis that they have read and understood the Code.
CERTIFICATIONS
I, Kevin E. Wolf, certify that:
1. I have reviewed this report on Form N-CSR of F/m Investments European L/S Small Cap Fund (a series of Northern Lights Fund Trust II);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: 1/7/20
/s/ Kevin E. Wolf
Kevin E. Wolf
Principal Executive Officer/President
I, Erik Naviloff, certify that:
1. I have reviewed this report on Form N-CSR of the F/m Investments European L/S Small Cap Fund (a series of Northern Lights Fund Trust II);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: 1/7/20
/s/ Erik Naviloff
Erik Naviloff
Principal Financial Officer/Treasurer
certification
Kevin E. Wolf, Principal Executive Officer/President, and Erik Naviloff, Principal Financial Officer/Treasurer of Northern Lights Fund Trust II (the “Registrant”), each certify to the best of his knowledge that:
1. The Registrant’s periodic report on Form N-CSR for the period ended October 31, 2019 (the “Form N-CSR”) fully complies with the requirements of Sections 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant.
| Principal Executive Officer/President | Principal Financial Officer/Treasurer | |
| Northern Lights Fund Trust II | Northern Lights Fund Trust II | |
| /s/ Kevin E. Wolf | /s/ Erik Naviloff | |
| Kevin E. Wolf | Erik Naviloff | |
| Date: 1/7/20 | Date: 1/7/20 |
A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Northern Lights Fund Trust II and will be retained by the Northern Lights Fund Trust II and furnished to the Securities and Exchange Commission (the “Commission”) or its staff upon request.
This certification is being furnished to the Commission solely pursuant to 18 U.S.C. § 1350 and is not being filed as part of the Form N-CSR filed with the Commission.
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